File No. 70-8953
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 2 TO THE
FORM U-1
APPLICATION AND DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
TUC HOLDING COMPANY
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201
(Name of companies filing this statement and
address of principal executive offices)
None
(Name of top registered holding company
parent of each applicant or declarant)
Robert A. Wooldridge, Esq. Erle Nye
Worsham, Forsythe & Wooldridge, President and Chief Executive
L.L.P. Texas Utilities Company
Energy Plaza, 30th Floor Energy Plaza
1601 Bryan Street 1601 Bryan Street
Dallas, Texas 75201 Dallas, Texas 75201
(Name and address of agents for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
Douglas W. Hawes, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-4513
TABLE OF CONTENTS
Page
Item 1 DESCRIPTION OF PROPOSED TRANSACTION . . . . . . . 2
A. Description of the Parties . . . . . . . . . . . 2
1. TUC . . . . . . . . . . . . . . . . . . . . . 2
2. ENSERCH . . . . . . . . . . . . . . . . . . . 5
3. The Company . . . . . . . . . . . . . . . . . 8
B. Description of the Mergers . . . . . . . . . . . 9
1. Background of the Mergers . . . . . . . . . . 9
2. The Merger Agreement . . . . . . . . . . . . 15
Item 2 FEES, COMMISSIONS AND EXPENSES . . . . . . . . . 20
Item 3 APPLICABLE STATUTORY PROVISIONS . . . . . . . . . 20
1. Section 10(b) . . . . . . . . . . . . . . . 22
a. Section 10(b)(1) . . . . . . . . . . . 22
b. Section 10(b)(2) -- Fairness of
Consideration . . . . . . . . . . . . . 35
c. Section 10(b)(2) -- Reasonableness of
Fees . . . . . . . . . . . . . . . . . 38
d. Section 10(b)(3) . . . . . . . . . . . 40
2. Section 10(c) . . . . . . . . . . . . . . . 43
a. Section 10(c)(1) . . . . . . . . . . . 44
b. Section 10(c)(2) . . . . . . . . . . . 66
3. Section 3(a)(1) . . . . . . . . . . . . . . 71
Item 4 REGULATORY APPROVALS . . . . . . . . . . . . . . 73
A. Antitrust . . . . . . . . . . . . . . . . . . . . 74
B. Texas Public Utility Regulation . . . . . . . . . 75
C. Other Federal Regulations . . . . . . . . . . . . 75
Item 5 PROCEDURES . . . . . . . . . . . . . . . . . . . 75
Item 6 EXHIBITS AND FINANCIAL STATEMENTS . . . . . . . . 76
A. Exhibits . . . . . . . . . . . . . . . . . . . . 76
B. Financial Statements . . . . . . . . . . . . . . 78
Item 7 INFORMATION AS TO ENVIRONMENTAL EFFECTS . . . . . 78
Pursuant to Sections 9(a)(2) and 10 of the Public Utility
Holding Company Act of 1935 (the "Act"), TUC Holding Company,
a Texas corporation (the "Company"), hereby requests that the
Securities and Exchange Commission (the "Commission")
authorize the acquisition, as described herein, of all of the
issued and outstanding common stock of (i) Texas Utilities
Company, a Texas corporation ("TUC"), and a holding company
with two subsidiaries that are electric utility companies, as
defined in Section 2(a)(3) of the Act, and (ii) ENSERCH
Corporation, a Texas corporation ("ENSERCH"), which, among
other things, operates as a gas utility company as defined in
Section 2(a)(4) of the Act, all pursuant to the terms of the
Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") dated as of April 13, 1996, by and among TUC,
ENSERCH, and the Company, which is fifty percent owned by TUC
and fifty percent owned by ENSERCH. The Merger Agreement
provides for the Merger of TUC Merger Corp., a wholly owned
subsidiary of the Company, with and into TUC, with TUC to be
the surviving corporation (the "TUC Merger"), and ENSERCH
Merger Corp., a wholly owned subsidiary of the Company, with
and into ENSERCH with ENSERCH to be the surviving corporation
(the "ENSERCH Merger," together with the TUC Merger, the
"Mergers"). As a result of the Mergers, TUC and ENSERCH will
become wholly owned subsidiaries of the Company and the
Company will change its name to Texas Utilities Company. The
Company also hereby requests that the Commission issue an
order pursuant to Section 3(a)(1) of the Act declaring it
exempt it from all provisions of the Act except Section
9(a)(2) following consummation of the Mergers.
Item 1. DESCRIPTION OF PROPOSED TRANSACTION
A. Description of the Parties
1. TUC
TUC was organized in 1945 and is currently a public utility
holding company exempt from all provisions of the Act except
Section 9(a)(2) by order of the Commission under Section
3(a)(1).<F1> TUC owns all of the issued and outstanding
common stock of two public utility companies as defined under
the Act: (i) Texas Utilities Electric Company ("TU
Electric"), a Texas corporation engaged in the generation,
purchase, transmission, distribution and sale of electric
energy in the north central, eastern and western parts of
Texas, an area with a population estimated at 5,280,000, and
(ii) Southwestern Electric Service Company ("SESCO"), a Texas
corporation engaged in the purchase, transmission,
distribution and sale of electric energy in ten counties in
the eastern and central parts of Texas with a population
estimated at 125,000. TU Electric and SESCO are each subject
to regulation as a public utility with respect to retail
electric rates and other matters by the Public Utility
Commission of Texas (the "PUCT") and by certain municipalities
with regard to their rates. In addition, TU Electric is
subject to regulation by the Nuclear Regulatory Commission
(the "NRC") under the Atomic Energy Act of 1954, as amended,
in connection with its ownership of the Comanche Peak nuclear
generating facility.
____________________
<F1> Texas Utilities Company, HCAR No. 9786 (April 5, 1950);
Texas Utilities Company, HCAR No. 25826 (June 15, 1993).
TUC's non-utility subsidiaries, all of which are
Texas corporations unless otherwise indicated, are as
follows:
(a) Texas Utilities Australia Pty. Ltd., an
Australian limited liability company ("TU Australia") in 1995
acquired the common stock of Eastern Energy Limited, a foreign
utility company as defined in Section 33 of the Act, which is
engaged in the purchase, distribution and sale of electric
energy to approximately 475,000 customers in the area of
Melbourne, Australia. Eastern Energy is subject to regulation
by the Office of the Regulator General of the State of
Victoria;
(b) Texas Utilities Fuel Company ("Fuel
Company") owns a natural gas pipeline system, acquires, stores
and delivers fuel gas and provides other fuel services at cost
for the generation of electric energy by TU Electric;
(c) Texas Utilities Mining Company owns,
leases and operates fuel production facilities for the surface
mining and recovery of lignite at cost for the generation of
electric energy by TU Electric;
(d) Texas Utilities Services Inc. ("TU
Services") provides financial, accounting, information
technology, customer service, procurement, personnel and other
administrative services at cost to TUC system companies. TU
Services acts as transfer agent, registrar and dividend paying
agent with respect to the common stock of TUC and the
preferred stock and preferred securities of TU Electric, and
as agent for participants under TUC's Automatic Dividend
Reinvestment and Common Stock Purchase Plan;
(e) Texas Utilities Properties Inc. owns,
leases and manages real and personal properties, primarily
TUC's corporate headquarters;
(f) Texas Utilities Communications Inc., a
Delaware corporation ("TU Communications"), was organized to
provide access to advanced telecommunications technology,
primarily for the TUC system's expected expansion of the
energy services business;
(g) Basic Resources Inc. was organized for the
purpose of developing natural resources, primarily energy
sources and other business opportunities; and
(h) Chaco Energy Company is a New Mexico
corporation which currently leases extensive coal reserves in
that State.
The common stock, without par value, of TUC
("TUC Common Stock") is listed on the New York Stock Exchange
("NYSE"), the Chicago Stock Exchange and the Pacific Stock
Exchange. As of March 31, 1996, there were 225,841,037 shares
of TUC Common Stock outstanding.
For the year ended December 31, 1995, TUC's
operating revenues on a consolidated basis were approximately
$5.64 billion, of which approximately $5.61 billion was
derived from TU Electric's and SESCO's electric operations.
Consolidated assets of TUC and its subsidiaries at December
31, 1995 were approximately $21.5 billion, of which
approximately $17.7 billion consists of identifiable utility
property, plant and equipment.
A more detailed summary of information
concerning TUC and its subsidiaries is contained in TUC's
Annual Report on Form 10-K for the year ended December 31,
1995 and TUC's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996 and June 30, 1996, which are incorporated
herein by reference as Exhibits H-1, H-3 and H-5,
respectively.
2. ENSERCH
ENSERCH, an integrated company focused on natural
gas, is the successor to a company organized in 1909 for the
purpose of providing natural-gas service to north Texas.
Through its Lone Star Gas Company division ("Lone Star"),
ENSERCH is a gas utility company that purchases and
distributes natural gas to over 1.3 million residential,
commercial, industrial and electric-generation customers in
approximately 550 cites and towns, including the Dallas/Fort
Worth Metroplex. Lone Star is subject to regulation with
respect to rates charged to customers for gas delivered
outside incorporated cities and towns and with respect to
certain other corporate matters by the Texas Railroad
Commission (the "Railroad Commission"). Rates within
incorporated cities and towns in Texas are subject to the
original jurisdiction of the local city council with appellate
review by the Railroad Commission. Lone Star also provides
consulting services with respect to gas distribution.
ENSERCH's non-utility operations are as follows:
(a) Enserch Exploration, Inc. ("EEX"), 83.4%
of whose outstanding common stock is currently directly or
indirectly owned by ENSERCH, is engaged in the exploration
for, and the development, production and sale of, natural gas
and crude oil. Pursuant to the terms of the Preliminary
Merger and the Distribution (as described below), EEX will not
become part of the TUC holding company system;
(b) Lone Star Energy Company ("LSEC") and its
wholly-owned subsidiary Lone Star Energy Plant Operations,
Inc. ("LSEPO"), both Texas corporations wholly-owned by
ENSERCH, are engaged in the compressed natural gas business
and own and operate four thermal energy plants providing
heating and cooling to institutional customers. Prior to the
consummation of the Mergers, LSEC will be liquidated and,
pursuant to the terms of the Preliminary Merger and the
Distribution (as described below), LSEPO, the successor to
EEX, will be spun-off such that neither LSEC nor LSEPO will
become part of the TUC holding company system;
(c) Lone Star Pipeline Company, a division of
ENSERCH, owns a natural gas pipeline in Texas and is engaged
in the gathering, processing and marketing of natural gas.
Lone Star Pipeline is regulated with respect to gas
transportation rates by the Railroad Commission;
(d) Enserch Processing Company, a division of
ENSERCH, is engaged in the processing of natural gas for the
recovery of natural gas liquids;
(e) Enserch Energy Services, Inc., a wholly-
owned subsidiary of ENSERCH, is a marketer of natural gas and
natural gas services primarily in the northeast, midwest and
west coast;
(f) Enserch Development Corporation is a
division of ENSERCH which is engaged in development activities
relating to independent electric power generation projects,
and;
(g) Fleet Star of Texas, L.C. ("Fleet Star")
and TRANSTAR Technologies, Inc. ("TRANSTAR"), both of which
are 50% owned by ENSERCH, are engaged in compressed natural
gas businesses. Fleet Star owns public natural gas fueling
stations and TRANSTAR provides turnkey natural gas vehicle
conversions and related services.
The common stock, currently par value $4.45 per
share,<F2> of ENSERCH ("ENSERCH Common Stock")is listed on
the NYSE, the Chicago Stock Exchange and the London Stock
Exchange. As of March 15, 1996, there were 68,626,602 shares
of ENSERCH Common Stock outstanding.
____________________
<F2> In order to facilitate the Distribution, ENSERCH is asking
for shareholder approval to change the par value of the
ENSERCH Common Stock to $.01 per share.
For the year ended December 31, 1995, ENSERCH's
operating revenues on a consolidated basis were approximately
$1.9 billion, of which approximately $887 million was
attributable to natural gas distribution activities and
approximately $220 million to oil and gas exploration and
production. Consolidated assets of ENSERCH and its
subsidiaries at December 31, 1995 were $3.4 billion, of which
approximately $948 million consists of gas distribution
property, plant and equipment and $2.6 billion consists of oil
and gas exploration and production property, plant and
equipment.
A more detailed summary of information concerning
ENSERCH and its subsidiaries is contained in ENSERCH's Annual
Report on Form 10-K for the year ended December 31, 1995 and
ENSERCH's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1996 and June 30, 1996 which are incorporated
herein by reference as Exhibits H-2, H-4 and H-6,
respectively.
3. The Company
The Company was formed under the laws of Texas to
become a holding company for TUC and ENSERCH following the
Mergers and for the purpose of facilitating the Mergers. The
Company's authorized capital stock will consist of 500,000,000
shares of common stock, without par value (the "Company Common
Stock"), and 50,000,000 shares of preferred stock, $25 par
value per share. The Company will have no operations prior
to the Mergers other than those contemplated by the Merger
Agreement to accomplish the Mergers. Prior to the Mergers,
the Company will form the following two wholly owned
subsidiaries:
a. TUC Merger Corp. will be formed as a Texas
corporation solely for the purpose of facilitating the TUC
Merger. TUC Merger Corp. will not have any operations other
than the activities contemplated by the Merger Agreement
necessary to accomplish the TUC Merger.
b. ENSERCH Merger Corp. will be formed as a Texas
corporation solely for the purpose of facilitating the ENSERCH
Merger. ENSERCH Merger Corp. will not have any operations
other than the activities contemplated by the Merger Agreement
necessary to accomplish the ENSERCH Merger.
B. Description of the Mergers
1. Background of the Mergers
During the early 1990's, management of ENSERCH in
its continuing efforts to enhance shareholder value developed
a plan to establish ENSERCH as an integrated natural gas
company engaged in natural gas and oil exploration and
production, natural gas pipeline transmission, natural gas
gathering, natural gas liquids processing, natural gas
marketing, natural gas distribution and electric power
generation. In furtherance of this objective, several non-
core businesses were divested and EEX was converted from a
partnership into a corporation. Internal organization changes
were also undertaken to sharpen the focus of the business
units. Despite these changes, management continued to believe
that ENSERCH's share price did not fully reflect its
underlying values, and was concerned that ENSERCH's
capitalization restricted its ability to finance investment
needed to support ongoing activities and to take full
advantage of available opportunities without impairing the
rating of its public debt. Management was also monitoring the
trends toward consolidation in the electric utility industry,
vertical integration in the natural gas industry, and the
potential for consolidation and integration of the natural gas
and electric utility industries.
On November 29, 1995, Mr. Erle Nye, President
and Chief Executive of TUC, informally approached Mr. David W.
Biegler, Chairman, President and Chief Executive Officer of
ENSERCH, following a Dallas Chamber of Commerce meeting, to
discuss trends in the natural gas and electric utility
industries and public speculation concerning the future of
ENSERCH. Mr. Nye indicated that TUC would be interested in
discussing the possibility of a business combination with
ENSERCH and/or Mr. Biegler's joining TUC management.
Between November 1995 and January 1996, ENSERCH
management continued to evaluate various strategic
alternatives. ENSERCH management also had internal
discussions regarding ENSERCH's financial performance and
prospects and the developments in the electric and gas utility
industries. ENSERCH management continued to believe that
ENSERCH's share price did not fully reflect its underlying
values, including the value of its investment in EEX, despite
the public offering of EEX Common Stock in September 1995. In
January 1996, ENSERCH management determined to explore more
intensively potential strategic alternatives. During the same
period, Mr. Nye considered further the possibility of a
transaction with ENSERCH, sought advice from TUC's regular
corporate counsel, Worsham, Forsythe & Wooldridge, L.L.P., and
contacted the investment banking firm of Barr Devlin & Co.
Incorporated ("Barr Devlin") to provide assistance.
At a meeting on January 25, 1996, Mr. Biegler
informed Mr. Nye of his intention to recommend to the ENSERCH
Board a process to better define a strategic plan for ENSERCH.
Mr. Biegler indicated that he expected business combinations
would be among the alternatives considered. Mr. Nye made it
clear at this meeting that TUC had no interest in EEX and,
therefore, any transaction TUC might propose should not
include ENSERCH's ownership interest in EEX. ENSERCH
management engaged Covington & Burling, which had acted as
counsel to ENSERCH for many years, to advise it in connection
with the development of the plan. On or about February 1,
1996, Deloitte & Touche Consulting Group was retained by TUC
to assist management in its identification of potential
synergies that might be realized from a possible transaction
with ENSERCH.
On February 15, 1996, Mr. Biegler telephoned
Mr. Nye to inform him of the decision of the ENSERCH Board at
its meeting on February 13, 1996 to commence a process which
could lead to consideration of possible business combinations
and that Morgan Stanley would be engaged as ENSERCH's
financial advisor for this purpose. Mr. Nye indicated that
TUC remained interested in considering making a proposal and
would begin to finalize its evaluation.
On February 16, 1996, the TUC Board met for its
regular quarterly board meeting at which representatives of
Worsham, Forsythe & Wooldridge, L.L.P., and Barr Devlin were
in attendance and discussed various matters related to a
possible transaction with ENSERCH. Possible corporate
structures for a transaction, required approvals, strategic
rationale, ENSERCH and its operations, and preliminary
financial analyses were discussed. TUC's management, with the
assistance of Deloitte & Touche Consulting Group, also
discussed with the Board management's preliminary view of
potential synergies resulting from a possible transaction. On
several occasions between February 16 and February 24, Mr.
Biegler and Mr. Nye spoke by telephone about the process by
which the two companies would consider a business combination
proposal. During the month of March 1996, the special
committee of the ENSERCH Board (the "ENSERCH Special
Committee"), which was established to develop a strategic plan
for ENSERCH, met twice to discuss the strategic alternative
available to ENSERCH.
On March 1, 1996, TUC formally retained Barr
Devlin as its financial advisor with respect to a prospective
transaction. On March 14, 1996, TUC retained the firms of
LeBoeuf, Lamb, Greene & MacRae, L.L.P. and Reid & Priest LLP
to provide additional legal assistance and tax advice. On
March 19, 1996, Morgan Stanley began discussions with Barr
Devlin. The preliminary discussions focused on confirming the
general views of the principals and negotiation of a
confidentiality agreement. On March 20, 1996, ENSERCH and TUC
executed a confidentiality agreement in which TUC undertook to
keep confidential all information provided by ENSERCH in
connection with TUC's review of a possible transaction. TUC
also agreed not to make any offer regarding a possible
business combination or to participate in any proxy
solicitation involving ENSERCH without the prior written
consent of the ENSERCH Board.
At ENSERCH's regular Board Meeting on March 26,
1996, Mr. Biegler and the ENSERCH Special Committee reported
to the ENSERCH Board on the status of the activities of the
ENSERCH Special Committee and Morgan Stanley. Following the
ENSERCH Board meeting, in a discussion with one of the
directors, Mr. Biegler learned that another company had a
possible interest in a business combination with ENSERCH. The
chairman of the other company subsequently telephoned to
request a meeting with Mr. Biegler, which was scheduled for
April 9, 1996.
At a meeting on March 27, 1996, Mr. Biegler
advised Mr. Nye of the possible interest by the other company.
Mr. Nye reported that he had heard rumors of the other
company's interest in ENSERCH and stated that TUC would not
look favorably upon a bidding contest. Mr. Nye expressed
willingness to devote additional resources to consideration of
a possible business combination with ENSERCH.
ENSERCH retained additional outside counsel to
assist it in connection with a possible business combination -
- Skadden, Arps, Slate, Meagher & Flom; Jackson & Walker,
L.L.P., and King & Spalding. TUC retained S. S. Swiger, a
former officer and controller of TUC, to provide further
assistance on financial and accounting matters.
The ENSERCH Special Committee met again on
April 4, 1996 with Mr. Biegler and other senior officers of
ENSERCH. Mr. Biegler reported on the status of the
discussions with TUC and the upcoming meeting with the
chairman of the other company. During this period Morgan
Stanley and Barr Devlin were discussing valuation of ENSERCH
and certain other issues relating to the feasibility of a
combination. Between March 27 and April 4, 1996, Mr. Biegler
and Mr. Nye spoke several times to discuss facilitating TUC's
preliminary due diligence investigation of ENSERCH but did not
discuss substantive terms of a transaction.
On April 4 and 5, 1996, members of management
of ENSERCH and TUC met to respond to TUC's questions arising
from its preliminary due diligence investigation. The
prospects for the various ENSERCH businesses and issues
pertinent to each were discussed. At this same time Morgan
Stanley and Barr Devlin shared their views on valuation
parameters. On April 5, 6 and 8, 1996, Morgan Stanley met
with senior ENSERCH management to discuss issues relating to a
possible combination with TUC.
On April 9, 1996, Mr. Biegler met with the
chairman of the other company. The trends in the electric and
gas utility industries were discussed. The other chairman
indicated interest in discussing a negotiated business
combination with ENSERCH provided EEX was first divested, but
presented no offer. Mr. Biegler indicated he was not in a
position to provide any information and could make no
commitments, but he would respond in due course. Mr. Biegler
reported this meeting to the ENSERCH Special Committee and the
ENSERCH Board.
On April 9, 1996, a special meeting of the
Board of Directors of TUC regarding the proposed acquisition
took place, at which Mr. S.S. Swiger and representatives of
Worsham, Forsythe & Wooldridge, LLP, Deloitte & Touche
Consulting Group and Barr Devlin were present. Items
discussed included the strategic benefits of a gas company
acquisition, the history and background of ENSERCH, an
overview of ENSERCH's businesses, a description of the
potential transaction, financial and synergy analyses,
evaluations based on a discounted cash flow analysis, market
valuation of similar companies, and a range of potential
purchase prices. Barr Devlin provided an oral opinion on the
range of conversion ratios that would be fair from a financial
point of view to TUC and the holders of TUC Common Stock. Mr.
Nye later agreed upon a conversion ratio with ENSERCH within
the range discussed by Barr Devlin. At such meeting, the
Board, by resolution, authorized Mr. Farrington, the Chairman
of TUC, and Mr. Nye to enter into the transaction if a price
in the recommended range would be accepted by ENSERCH.
The ENSERCH Special Committee, senior
management of TUC and ENSERCH and the representatives of TUC
and ENSERCH met numerous times over the first two weeks of
April 1996 to discuss potential terms of the proposed
transaction. On April 13, 1996, the ENSERCH Board met and
approved the Merger Agreement and the Merger Agreement was
signed. On April 15, 1996, the Merger Agreement was publicly
announced.
2. The Merger Agreement
The Merger Agreement provides that TUC and
ENSERCH shall cause the Company to form two subsidiaries, TUC
Merger Corp. and ENSERCH Merger Corp. TUC Merger Corp. shall
be merged with and into TUC, with TUC as the surviving
corporation and ENSERCH Merger Corp. shall be merged with and
into ENSERCH, with ENSERCH as the surviving corporation. As a
result of the Mergers, TUC and ENSERCH will become
subsidiaries of the Company, and TUC would become an
intermediate holding company over TU Electric and SESCO. The
Merger Agreement is incorporated herein by reference as
Exhibit B-1. In the Mergers:
- Each issued and outstanding share of TUC Common
Stock (other than any shares of TUC Common Stock
owned by TUC, any subsidiary of TUC, ENSERCH or any
subsidiary of ENSERCH, all of which will be
cancelled without consideration and will cease to
exist), will be converted into one share of Company
Common Stock.
- Each issued and outstanding share of ENSERCH Common
Stock, together with the associated rights (the
"ENSERCH Rights") to purchase, in certain specified
circumstances, interests in ENSERCH voting
preference stock or, in other specified
circumstances, shares of ENSERCH Common Stock,
pursuant to the terms of the Rights Agreement
between ENSERCH and Harris Trust Company of New
York, as Rights Agent thereunder, dated as of March
26, 1996 (other than any shares of ENSERCH Common
Stock owned by ENSERCH, any subsidiary of ENSERCH,
TUC or any subsidiary of TUC, all of which will be
cancelled without consideration and will cease to
exist), will be converted into that number of shares
of Company Common Stock obtained by dividing $8.00
by the average closing sales price of TUC Common
Stock as reported on the New York Stock Exchange
Consolidated Transactions Tape on each of the 15
consecutive trading days preceding the fifth trading
day prior to the consummation of the Mergers (the
"Average TUC Price"); provided, however, in no event
will the Average TUC Price be deemed to be less than
$35.625 or more than $43.625.
- Each share of capital stock of the Company issued
and outstanding immediately prior to the Mergers
will be cancelled without consideration and will
cease to exist.
Upon consummation of the Mergers, each certificate
representing shares of TUC Common Stock or ENSERCH Common
Stock issued and outstanding prior to the Mergers will
represent instead, in the case of TUC Common Stock, the shares
of, and, in the case of ENSERCH Common Stock, the right to
receive the shares of, Company Common Stock (and cash in lieu
of a fractional shares if any) into which those issued and
outstanding shares will be converted. The ratio for
converting TUC Common Stock into Company Common Stock is
referred to hereinafter as the "TUC Conversion Ratio," and the
ratio for converting ENSERCH Common Stock into Company Common
Stock is referred to hereinafter as the "ENSERCH Conversion
Ratio," together with the TUC Conversion Ratio, the
"Conversion Ratios." Any shares of the adjustable rate
cumulative preferred stock series E and the adjustable rate
cumulative preferred stock series F of ENSERCH (the "ENSERCH
Preferred Stock") that remain outstanding at the time of
consummation of the Mergers shall remain outstanding preferred
stock of ENSERCH. The 6 3/8% convertible subordinated
debentures due 2002 issued by ENSERCH (the "ENSERCH
Convertible Debentures") outstanding at the time of the
Mergers shall remain outstanding convertible debentures of
ENSERCH. ENSERCH shall take such action as may be necessary
so that, after the consummation of the Mergers, the ENSERCH
Convertible Debentures shall be convertible in accordance with
their terms only for shares of Company Common Stock and the
Company shall authorize and reserve for issuance, or otherwise
provide, a sufficient number of shares of Company Common Stock
for delivery upon conversion of the then outstanding ENSERCH
Convertible Debentures. In connection with the Mergers, the
Company will change its name to Texas Utilities Company.
The Merger Agreement provides that immediately prior
to the consummation of the Mergers, EEX will be merged (the
"Preliminary Merger") with and into LSEPO, which in the
Preliminary Merger will change its name to Enserch
Exploration, Inc. ("New EEX"). Subsequent to the Preliminary
Merger and prior to the consummation of the Mergers, ENSERCH
will make a pro rata distribution to the shareholders of
ENSERCH (the "Distribution") of all of the outstanding shares
of Common Stock of New EEX owned by ENSERCH. Pursuant to the
Distribution, each shareholder of ENSERCH will receive a
distribution of approximately 1.5 shares of New EEX common
stock, par value $.01 per share for each one share of ENSERCH
common stock held by such shareholder.
Based upon the Average TUC Price which would have
been applicable had the Mergers been consummated on April 12,
1996 and the number of shares of TUC Common Stock and ENSERCH
Common Stock outstanding on such date, each ENSERCH
shareholder would have received pursuant to the Mergers 0.20
of a share of Company Common Stock for each share of ENSERCH
Common Stock held by such shareholder and TUC and ENSERCH
shareholders would have held approximately 94.3 percent and
5.7 percent, respectively, of the 239,571,542 aggregate number
of shares of Company Common Stock that would have been
outstanding immediately after consummation of the Mergers.
The Mergers are subject to customary closing
conditions, including the receipt of the requisite approval of
the holders of TUC and ENSERCH Common Stock (which occurred on
November 15, 1996) and all necessary governmental approvals,
including approval of the Commission.
The Mergers are designed to qualify as a tax-free
transactions under Section 351 of the Internal Revenue Code of
1986, as amended (the "IRC"). The Mergers will be accounted
for by the purchase method.
It should also be noted that pursuant to the Stock
Option Agreement dated as of April 13, 1996, by and between
ENSERCH and TUC (the "Stock Option Agreement"), ENSERCH has
granted TUC the right (the "Option"), to purchase, under
certain circumstances relating to a Business Combination (as
defined in the Stock Option Agreement) proposal by a third
party, up to 3,363,570 authorized but unissued shares of
ENSERCH Common Stock, subject to adjustment (which represents
4.9% of the outstanding common stock of ENSERCH on March 31,
1996), at $16.375 per share. The exercise of the Option is
subject to certain conditions set forth in the Merger
Agreement relating to Business Combination proposals by third
parties and rights of termination. Because the Option does
not create a "present right to vote" it is not a voting
security within the meaning of Section 2(a)(17) of the Act and
its grant was therefore not jurisdictional under Section
9(a)(2) of the Act.
Item 1 FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses of the Company
expected to be paid or incurred, directly or indirectly, in
connection with the transactions described above are estimated
as follows:
Commission filing fee
relating to Application
on Form U-1 . . . . . . . . . . . . . . . . . . . $2,000
Commission filing fee for the
Joint Proxy/Registration Statement
on Form S-4 . . . . . . . . . . . . . . . . 3,412,959.40
Legal Fees . . . . . . . . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . . . . . . . . *
Total . . . . . . . . . . . . . . . . . . . *
*To be filed by amendment.
Item 2 APPLICABLE STATUTORY PROVISIONS
The following sections of the Act are directly or
indirectly applicable to the proposed Mergers: Sections
9(a)(2) and 10. To the extent other sections of the Act or
the Commission's rules thereunder are deemed applicable to the
Mergers, such sections and rules should be considered to be
set forth in this Item 3.
Section 9(a)(2) makes it unlawful, without approval
of the Commission under Section 10, "for any person ... to
acquire, directly or indirectly, any security of any public
utility company, if such person is an affiliate ... of such
company and of any other public utility or holding company, or
will by virtue of such acquisition become such an affiliate."
Because the Company will, by virtue of the proposed
transaction, become an affiliate of TUC and its two public
utility subsidiaries, TU Electric and SESCO, as well as an
affiliate of ENSERCH, Section 9(a)(2) requires approval by the
Commission of the proposed transaction under Section 10. The
Company believes that the proposed transaction meets the
requirements of Sections 9(a)(2) and 10.
In reviewing this transaction, it is important to
remember that, as recognized throughout Commission decisions
and in the comprehensive report issued by the Division of
Investment Management in June 1995 entitled "The Regulation of
Public-Utility Holding Companies," (the "Report"), the framers
of the Act understood the need and intended for the Act to be
interpreted in a flexible manner, taking into account changes
in the nature of the utility industry over time.<F3>
While the parties believe that the requested authorization is
well within existing precedent, changes in the industry make
the case for the transaction even more compelling. For
example, one change that the Commission has recently
explicitly recognized is that "the utility industry is
evolving towards a broadly based energy-related
business.<F4> As will be discussed in greater detail
below, this fundamental evolution influences not only the
appropriate notion of what a utility system consists of, but
also affects the value of benefits gained by becoming a full
energy services utility system.
____________________
<F3> In addition to the Report, see Consolidated Natural Gas
Company, HCAR No. 26512 (April 30, 1996) (the "CNG Order");
Unitil Corporation, HCAR No. 25524 (Apr. 24, 1992).
<F4> See, CNG Order. See also, Unitil Corp., HCAR No. 26527 (May
31, 1996).
1. Section 10(b)
Section 10(b) provides that, if the
requirements of Section 10(f) are satisfied, the Commission
shall approve an acquisition under Section 9(a) unless:
(1) such acquisition will tend towards
interlocking relations or the concentration of control of
public utility companies, of a kind or to an extent
detrimental to the public interest or the interests of
investors or consumers;
(2) in case of the acquisition of securities
or utility assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever paid, to be
given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair relation
to the sums invested in or the earning capacity of the utility
assets to be acquired or the utility assets underlying the
securities to be acquired; or
(3) such acquisition will unduly complicate
the capital structure of the holding company system of the
applicant or will be detrimental to the public interest or the
interests of investors or consumers or the proper functioning
of such holding company system.
a. Section 10(b)(1)
The Company believes that the Mergers will not tend
towards interlocking relationships or concentrations of
control that would be detrimental to the public interest or
the interest of investors of consumers because (i) following
the Mergers, TU Electric and SESCO will remain subject to
regulation by the PUCT and various municipalities, and Lone
Star will remain subject to regulation by the Railroad
Commission and various municipalities, which bodies operate
pursuant to regulations specifically designed to protect the
public interest and the interests of consumers, (ii) the
combination of Lone Star with the TUC utility system will not
increase the size of the system dramatically, and following
the Mergers, the Company will be a utility holding company
comparable or smaller in size to other utility holding
companies that the Commission has approved, (iii) because of
the nearly total absence of cross elasticity of demand as
explained below, TU Electric and SESCO have few occasions to
compete directly with Lone Star; and TU Electric and SESCO,
and Lone Star, each operate in competitive markets which will
not change as a result of the Mergers, (iv) there will be
limited interlocking relations following consummation of the
Mergers, and, (v) as a result of the Mergers, the Company
expects to achieve significant savings and expects to be able
to compete more effectively in the evolving utility industry,
both of which will benefit consumers and ratepayers and are in
the public interest.
First, all of the operating utilities will be
subject to regulation with respect to rates and other
corporate matters by regulatory bodies in Texas, which
function to protect the interest of consumers and the public
interest. TU Electric and SESCO are currently, and following
the Mergers will remain, subject to the jurisdiction of the
PUCT and certain municipalities with regard to their rates.
In addition, certain corporate activities by TU Electric and
SESCO are also, and will remain, subject to regulation by the
PUCT. Lone Star is regulated by the Railroad Commission and
550 municipalities with respect to its rates and the Railroad
Commission also has jurisdiction over certain corporate
activities of ENSERCH. The level of regulatory authority over
ENSERCH and Lone Star will not be affected by the
Mergers.<F5> Indeed, as set forth in Exhibit D-1 hereto,
the principal body with regulatory jurisdiction over ENSERCH,
the Railroad Commission, has indicated to the Commission that
it has no objection to the Mergers, and that it will rely on
its existing authority to protect the interests of ratepayers
subject to its jurisdiction. At a recent conference on
industry restructuring, Pat Woods, Chairman of the PUCT,
characterized this transaction as "the wave of the future."
Similarly, in reference to the proposed Merger, Commissioner
Massey of the Federal Energy Regulatory Commission stated
"[t]his, I'm sure, is just the beginning of mergers such as
these between the two industries ... [g]as companies need
electric expertise and markets; electric companies need gas
expertise and markets."<F6> Judging by the reaction of the
key regulatory bodies, it seems clear that the utility system
created by the Mergers is one that regulators believe is
becoming more commonplace and is one that will be subject to
multiple forms of regulation, each of which is designed to
protect the interests of concerned parties under the Act.
_____________________
<F5> The only area of regulation over the utilities that is
likely to be affected by the Mergers is affiliate
transactions, since all of the utilities will have new
affiliates. Pursuant to Section 5.06 of the Gas Utility
Regulatory Act of Texas, in making rate decisions, the
Railroad Commission and the municipalities have jurisdiction
over, and must consider that:
payment to affiliated interests for costs of any
services, or any property right or thing or for
interest expense may not be used to establish just and
reasonable rates for gas utility service ... except to
the extent the regulatory authority shall find such
payment to be reasonable and necessary for each item or
class of items as determined by the regulatory
authority.
Similarly, the PUCT has "jurisdiction over affiliated
interests having transactions with public utilities under
the jurisdiction of the commission to the extent of access
to all accounts and records of such affiliated interests
relating to such transactions," (Public Utility Regulatory
Act of 1955, Section 1.271) and may take such information
into account when setting rates for the electric utilities.
<F6> "Commissioners Mull Impact of Electric Rules on Gas", Inside
FERC, May 6, 1996, p.5.
As mentioned above, the Mergers are not detrimental
to the public interest or the interest of investors or
consumers as they will not result in a significant increase in
the size of the utility system at issue, and will create a
system that is comparable to other utility systems. As of
June 30, 1996, TUC had assets of $21.6 billion, while for the
year ended December 31, 1995, TUC had operating revenues of
$5.6 billion and 2.33 million utility customers. As of
June 30, 1996, ENSERCH had assets of $3.4 billion, while for
the year ended December 31, 1995, ENSERCH had operating
revenues of $1.9 billion, and approximately 1.28 million
utility customers. On a pro forma basis, giving effect to the
distribution, (i) as of June 30, 1996, the combined assets of
the Company would have totaled approximately $24 billion; and
(ii) for the year ended December 31, 1995, the Company would
have had combined operating revenues would have totaled
approximately $7.4 billion and approximately 2.78 million
utility customers.<F7> The Commission has approved
acquisitions involving similar sized operating utilities (see
Entergy Corp., HCAR No. 25952 (Dec. 17, 1993) approving the
acquisition of Gulf States Utilities, with combined assets at
time of acquisition in excess of $21 billion; The Southern
Company, HCAR No. 24579 (Feb. 12, 1988) approving the
acquisition of Savannah Electric and Power Company to create a
system with assets of $20 billion and 3.25 million customers)
and has not found the size of other existing holding companies
of similar size to be problematic.<F8>
____________________
<F7> As a result of their overlapping service territory, the
combined entity is expected to have only 450,000 additional
utility customers added to the number of customers presently
served by the TUC system.
<F8> The Southern Company System, for example, has assets of
approximately $27 billion and revenues of approximately $8.3
billion, while American Electric Power has assets of
approximately $15.7 billion, revenues of approximately $5.5
billion and approximately 2.9 million utility customers.
Entergy, which as a result of its acquisition of Gulf States
Utilities Company provides service in the State of Texas,
currently has approximately 2.4 million utility customers.
The Mergers will not have a detrimental effect on
competition in Texas. After the Mergers, the TUC companies
and Lone Star will operate in the same competitive
environments in which they operate today, for several reasons.
First, there is little substitution between gas and
electricity as energy sources in most industrial and
commercial applications. Technically, gas cannot be
substituted for electricity on an instantaneous basis because
most industrial and commercial processes are energy-specific.
Thermal processes most often employ natural gas, while motor
and machine driven processes employ electricity. Where an
industrial or commercial application permits the use of either
fuel, the substitution of one fuel for another requires
equipment investment and other expense that does not allow
substitution in response to small but significant price
changes. Most often, the choice of fuel is dictated by
numerous considerations in addition to fuel prices, such as
quality control, safety and environmental concerns.
The limited substitutability between gas and
electricity in industrial and commercial settings is evident
from the following:
- In the first seven months of 1996, for example, TU
Electric identified revenues equal to only 0.18% of
its $3.1 billion in 1995 sales to non-residential
customers to be at risk from natural gas
competition.
- Eighty percent of the industrial consumption of
natural gas in the South Census Region is used for
process heat and as boiler fuel, while less than 10%
of industrial consumption of electricity in this
Region is used for process heat.
- Eighty-five percent of the electricity consumed by
industrial customers in TU Electric's service area
is used for machine drive, lighting,
electrotechnology and space cooling. There is
virtually no gas substitution for lighting,
electrotechnology and space cooling; and only 3% of
gas consumption by industrial customers is used for
machine drive.
- Gas is not a substitute for electricity in 85-90% of
the electricity sales made to commercial customers.
Lighting, office equipment, motors and refrigeration
account for almost 46% of TU's electricity sales to
commercial end-users. Natural gas is not a
substitute for commercial lighting or office
equipment applications, and is only rarely used in
commercial motors and refrigeration. Space cooling
accounts for 41% of TU's sales to commercial
customers. Only 1.9% of TU's non-residential
customers use natural gas for space cooling.
- Gas and electricity may be substituted in commercial
space heating, water heating and cooking, which
constitute only 10% of TU Electric's commercial
electricity sales. However, because product choice
is made in connection with equipment installation or
replacement, small but significant changes in price
result in only limited product substitution.
For residential users, natural gas cannot be
substituted for electricity in cooling, lighting,
refrigeration, and most household appliances. The amount of
fuel used for residential cooking is very small, and the
choice of equipment tends to be dictated by personal
preference rather than by fuel price. Residential customers
choose fuel sources for heating based on many factors,
including equipment prices, reliability, service, the size of
the home, perceptions of energy efficiency and matters of
comfort, convenience and aesthetics, not on relative fuel
prices.
Second, electric rates in Texas are regulated and
set by the PUCT. Gas rates, on the other hand, are set by the
Railroad Commission or by the municipalities served. Ample
regulatory authority exists to protect against any possible
abuse, including any discriminatory or anticompetitive
behavior.
Third, the TUC companies do not have exclusive
franchises in all parts of their service territories. Non-
investor-owned electric utilities in Texas, primarily
organized as rural cooperatives, hold certificates of
convenience and necessity in areas overlapping the
certificated service areas of the State's investor-owned
utilities. A number of these electric entities compete
directly with the TUC system. In significant areas within the
TUC companies retail service territories, other suppliers are
also certificated to provide electric service. Approximately
45 other electric suppliers hold certificates of convenience
and necessity for areas that overlap portions of TU Electric s
service territory. Competition from other providers of
electric power, not from providers of natural gas, represents
the market constraint on the price of electricity.
For example, while a residential customer can use
natural gas for only limited applications, such as heating and
cooking, an electric supplier that competes with one of the
TUC companies is in a position to capture the residential
customer's entire household load. In the case of a multiple
home development, a competing electric cooperative can win the
load of the entire development from the TUC companies.
Approximately 30 percent of new residential lots developed in
TU Electric's service territory are in multi-certificated
areas. Because TU Electric applies the same rate schedules to
its entire residential customer base, it would run the risk of
losing significant load in these multi-certificated areas if
it sought to impose an increase in rates in singly-
certificated areas.
Fourth (and conversely), there is competition in the
retail market for industrial and commercial customers of
natural gas in Texas, both because natural gas utilities in
Texas do not have exclusive territories, and because gas is
transported in Texas on an open-access basis. There are at
least 56 other gas delivery systems or marketers in Lone
Star's service area. Suppliers of natural gas in Texas must
also compete with other fossil fuels, including oil, propane,
coal, and petroleum coke, which can be employed in some of the
thermal applications for which natural gas is used.
There are over 140 intrastate gas pipeline operators
doing business in Texas. Any pipeline company with
transmission lines moving through a Lone Star service area can
construct delivery lines to connect with industrial customers
in a short span of time. There are no regulatory hurdles to
constructing intrastate pipelines in Texas, since, generally,
the only prerequisite to the construction of new facilities is
the purchase of a right-of-way. The relatively flat
geographic terrain of the TUC companies' service territories
also poses few obstacles to pipeline construction.
In addition, most pipelines in Texas, including Lone
Star, transport gas for their industrial and commercial
customers on an open access basis, which effectively permits
retail competition for these customers by pipelines, gas
marketers, brokers, producers, as well as the local
distribution companies. These customers can purchase gas from
as many as 600 independent marketing companies which currently
participate in the expanding spot market.
Following the Mergers, the TUC companies will face
the same competitive forces from other electric suppliers as
prior to the Mergers, just as Lone Star will face the same
competitive forces it faces today. Because these utilities
competitive behavior is shaped by competition with their
respective energy peers, and because the TUC companies and
Lone Star rarely engage in direct competition in any event,
the Mergers will have no adverse effect on competition in a
manner or to an extent detrimental to the public interest or
the interests of investors or consumers.
The Commission should also note that TUC and ENSERCH
filed Premerger Notification and Report Forms on July 1, 1996
with the Antitrust Division of the Department of Justice (the
"DOJ") and the Federal Trade Commission pursuant to the Hart-
Scott-Rodino Act (the "HSR Act"). DOJ requested additional
information from both TUC and ENSERCH. The parties have
complied with these requests. The applicable waiting periods
under the HSR Act expired on October 17.
With regard to interlocking relations, any merger,
by its nature, results in new links between theretofore
unrelated companies. However, these links are not the types
of interlocking relationships targeted by Section 10(b)(1),
which was primarily aimed at preventing business combinations
unrelated to operating synergies. Although the Merger
Agreement does not make any provision with regard to the
senior management of the Company following the Mergers, it is
expected that the Company's board of directors will consist of
those members of the TUC board serving as such at the
consummation of the Mergers and that the Company's management
will be identical to the management of TUC upon the
consummation of the Mergers, except that David W. Biegler, who
will remain Chief Executive Officer and President of ENSERCH,
will also become an officer of the Company, reporting directly
to the chief executive of the Company and William T.
Satterwhite, Senior Vice-President and General Counsel of
ENSERCH will become an officer of the Company. Michael E.
Rescoe, the Senior Vice-President, Finance and Chief Financial
Officer of ENSERCH, will become an officer of TU Services.
This combination of existing TUC and ENSERCH management is
necessary to integrate ENSERCH fully into the TUC system, will
help the Company realize the expected synergies from the
Mergers and will therefore be in the public interest and the
interests of investors and consumers. Forging such relations
is beneficial to the protected interests under the Act and
thus is not prohibited by Section 10(b)(1).
Finally, Section 10(b)(1) is intended to avoid "an
excess of concentration and bigness" while preserving the
"opportunities for economies of scale, the elimination of
duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations"
afforded by the coordination of local utilities into an
integrated system. American Electric Power Co., 46 SEC 1299,
1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and
combinations at which the Act was specifically directed."
Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968). As
discussed below, the TUC-ENSERCH strategic alliance will not
create a "huge, complex, and irrational system," but rather
will afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and
consumers. American Electric Power Co., 46 SEC 1299, 1307
(1978). More recent pronouncements of the Commission confirm
that size alone is not determinative. Thus, in Centerior
Energy Corp., HCAR No. 24073 (April 29, 1986), the Commission
stated flatly that a "determination of whether to prohibit
enlargement of a system by acquisition is to be made on the
basis of all the circumstances, not on the basis of size
alone." In addition, in its the Report, the Division
recommended that the Commission approach its analysis on
merger and acquisition transactions in a flexible manner with
emphasis on whether the Merger creates an entity subject to
effective regulation and is beneficial for shareholders and
customers, as opposed to focusing on rigid, mechanical
tests.<F9>
____________________
<F9> Report at 73-4.
By virtue of the Mergers, the Company will be in a
position to realize the "opportunities for economies of scale,
the elimination of duplicate facilities . . . and generally
more efficient operations" described by the Commission in
American Electric Power Co. 46 SEC 1299, 1309. Among other
things, the Mergers are also expected to create significant
operational and administrative economies and efficiencies
through combined meter reading, meter testing and billing
operations as well as customer service operations, savings in
facility maintenance and emergency work coordination, and
other administrative and general savings. In addition, as a
result of the Mergers, the Company is expected to be better
positioned to remain competitive as the utility industry
evolves. These factors should prove beneficial to the
interests of investors and consumers as well as the public
interest in general. These expected economies and
efficiencies from the combined operations of TUC and ENSERCH,
as well as the competitive position of the Company in the
future, are described in greater detail under Item 3.2 below.
For these reasons, the Mergers will not "tend toward
interlocking relations or the concentration of control" of
public utility companies, of a kind or to the extent
detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
b. Section 10(b)(2) -- Fairness of Consideration
Section 10(b)(2) requires the Commission to
determine whether the consideration to be given to the holders
of TUC Common Stock and ENSERCH Common Stock in connection
with the Mergers is reasonable and whether it bears a fair
relation to investment in and earning capacity of the utility
assets underlying the securities being acquired. In its
determinations as to whether or not a price meets such
standard, the Commission has considered whether the price was
decided as the result of arms length negotiations,<F10>
whether each parties' Board of Directors has approved the
purchase price,<F11> the opinions of investment
bankers<F12> and the earnings, dividends, book and market
value of the shares of, the company to be acquired.<F13>
____________________
<F10> In the Matter of American Natural Gas Company, HCAR No.
15620 (Dec. 12, 1966).
<F11> Consolidated Natural Gas Company, HCAR No. 25040 (Feb.
14, 1990).
<F12> Id.
<F13> In the Matter of Northeast Utilities, HCAR No. 15448
(Apr. 13, 1966).
The fairness of the consideration involved in the
Mergers is thus evidenced by the fact that the Conversion
Ratios are the product of extensive and vigorous arms-length
negotiations between TUC and ENSERCH and the Merger Agreement
was approved by the Boards of Directors of TUC and ENSERCH
acting in accordance with their fiduciary duties to
shareholders. These negotiations were preceded by thoughtful
analysis and evaluation of the assets, liabilities and
business prospects of each of the respective companies and
involved careful due diligence by both parties. See Company
Registration Statement on Form S-4 (incorporated by reference
as Exhibit C-1 hereto).
In addition, nationally-recognized investment
bankers for each of TUC and ENSERCH have reviewed extensive
information concerning the companies and analyzed the
respective Conversion Ratios employing a variety of valuation
methodologies, and have opined that the TUC Conversion Ratio
is fair, from a financial point of view, to the holders of TUC
Common Stock and that the ENSERCH Conversion Ratio is fair,
from a financial point of view, to the holders of ENSERCH
Common Stock. The TUC investment bankers' opinion is attached
as Annex III to the Company's Registration Statement on Form
S-4 and is described on pages 40-44 of the Form S-4
(incorporated by reference as Exhibit C-1 hereto). The
ENSERCH investment bankers' opinion is attached as Annex IV to
TUC's Registration Statement on Form S-4 and is described on
pages 44-48 of the Form S-4 (incorporated by reference as
Exhibit C-2 hereto).
Finally, a comparative analysis of the values of TUC
Common Stock and ENSERCH Common Stock demonstrates the
fairness of the Conversion Ratios.
TUC ENSERCH
High Low Divid- High Low Divid-
ends ends
1993
First $ 4 3/8 $41 5/8 $ .76 $ 19 $ 14 $ .05
Quarter
Second 47 44 1/4 .77 19 16 .05
Quarter
Third 49 3/4 45 1/2 .77 22 17 1/2 .05
Quarter
Fourth 47 42 1/4 .77 21 1/4 15 1/2 .05
Quarter
1994
First $43 1/8 $36 1/2 $ .77 $ 19 $ 12 $ .05
Quarter
Second 38 29 1/8 .77 15 1/4 12 .05
Quarter
Third 34 1/8 29 5/8 .77 16 1/2 13 .05
Quarter
Fourth 34 1/8 30 3/4 .77 15 12 .05
Quarter
1995
First $ 35 $30 1/8 $ .77 $ 15 $ 12 $ .05
Quarter
Second 36 1/8 31 5/8 .77 18 14 .05
Quarter
Third 35 32 5/8 .77 18 15 .05
Quarter
Fourth 41 1/4 34 1/4 .77 18 14 1/4 .05
Quarter
1996
First $42 7/8 $38 7/8 $ .50 $16 3/4 $ 14 $ .05
Quarter
Second 42 3/4 38 1/2 .50 22 1/8 15 7/8 .05
Quarter
On April 12, 1996, the last full trading day before
the public announcement of the execution and delivery of the
Merger Agreement, the closing price per share on the NYSE
Consolidated Tape of (i) TUC Common Stock was $39.625,
(ii) ENSERCH Common Stock was $16.375 and (iii) common stock
of EEX was $10.125, adjusted for the Distribution, a ratio of
1 to 0.16.
In light of these opinions and an analysis of all
relevant factors, including the benefits that may be realized
as a result of the Mergers, the Company believes that the
Conversion Ratios fall within the range of reasonableness, and
the consideration for the Mergers bears a fair relation to the
sums invested in, and the earning capacity of, the utility
assets of TUC and ENSERCH, respectively.
c. Section 10(b)(2) -- Reasonableness of Fees
The Company believes that the overall fees,
commissions and expenses incurred and to be incurred in
connection with the Mergers are reasonable and fair in light
of the size and complexity of the Mergers relative to other
transactions and the anticipated benefits of the Mergers to
the public, investors and consumers; that they are consistent
with recent precedent; and that they meet the standards of
Section 10(b)(2).
As set forth in Item 2 of this Application/
Declaration, TUC and ENSERCH together expect to incur a
combined total of approximately $45 million in fees<F14>,
commissions and expenses in connection with the Mergers. By
contrast, Cincinnati Gas & Electric Company and PSI Resources
incurred $47.12 million in fees in connection with their
reorganization as subsidiaries of CINergy and Northeast
Utilities incurred $46.5 million in fees and expenses in
connection with its acquisition of Public Service of New
Hampshire -- which amounts were all approved as reasonable by
the Commission. See CINergy, HCAR No. 26146 (Oct. 21, 1994);
Northeast Utilities, HCAR No. 25548 (June 3, 1992).
____________________
<F14> This number is a preliminary estimate only, and will be
updated as necessary.
With respect to financial advisory fees, TUC and
ENSERCH believe that the fees payable to their investment
bankers are fair and reasonable for similar reasons.
Pursuant to the terms of Barr Devlin and Company,
Incorporated's ("Barr Devlin") engagement, TUC has agreed to
pay Barr Devlin for its services in connection with the
Mergers: (i) a financial advisory retainer fee of $50,000 per
quarter; (ii) a financial advisory progress fee of $2,257,500
payable upon execution of the Merger Agreement; (iii) a second
financial advisory progress fee of $967,500 payable upon
shareholder approval of the Merger Agreement; and (iv) a
transaction fee of $6,450,000 payable upon consummation of the
Mergers. All financial advisory retainer fees payable during
the term of the engagement, the financial advisory progress
fee and an additional $500,000 would be credited against any
transaction fee payable to Barr Devlin.
Pursuant to the engagement letter between ENSERCH
and Morgan Stanley & Co. Incorporated ("Morgan Stanley")
ENSERCH has agreed to pay Morgan Stanley the following
amounts: (i) an advisory fee estimated to be between $250,000
and $500,000 in the event the Mergers are not consummated and,
(ii) if the Mergers are consummated, a total fee equal to
approximately $11,400,000 (against which any previously paid
fees would be credited).
The investment banking fees of TUC and ENSERCH
reflect the competition of the marketplace, in which
investment banking firms actively compete with each other to
act as financial advisors to merger partners.
TUC has agreed to reimburse Barr Devlin for its out-
of-pocket expenses, including fees and expenses of legal
counsel and other advisors engaged with the consent of TUC,
and to indemnify Barr Devlin against certain liabilities,
including liabilities under the federal securities laws,
relating to or arising out of its engagement.
ENSERCH has agreed to reimburse Morgan Stanley for
its out-of-pocket expenses, including fees and expenses of
legal counsel and other advisors engaged with the consent of
ENSERCH, and to indemnify Morgan Stanley against certain
liabilities, including liabilities under the federal
securities laws, relating to or arising out of its engagement.
d. Section 10(b)(3)
Section 10(b)(3) requires the Commission to
determine whether the Mergers will unduly complicate the
Company's capital structure or will be detrimental to the
public interest, the interests of investors or consumers or
the proper functioning of the Company's system.
Capital structure: The corporate capital structure
of the Company after the Mergers will not be unduly
complicated and will be substantially similar to capital
structures approved by the Commission in other orders. See,
e.g., CINergy, HCAR No. 26146 (Oct. 21, 1994); Centerior
Energy Corp., HCAR No. 24073 (April 29, 1986); Midwest
Resources, et al., HCAR No. 25159 (Sept. 26, 1990); Entergy
Corp., HCAR No. 25952 (Dec. 17, 1993); Northeast Utilities,
HCAR No. 25548 (June 3, 1992).
In the Mergers, the shareholders of TUC and ENSERCH
will receive Company Common Stock. The Company will own 100%
of the common stock of TUC and ENSERCH and there will be no
minority common stock interest remaining in TUC or its
subsidiaries or ENSERCH or its remaining subsidiaries. The
shares of ENSERCH Preferred Stock that remain outstanding at
the time of the consummation of the Mergers will remain
outstanding shares of ENSERCH Preferred Stock. The ENSERCH
Convertible Debt Securities that are outstanding at the time
of the consummation of the Mergers will likewise remain
outstanding but will become convertible into shares of Company
Common Stock in lieu of ENSERCH Common Stock. The only voting
securities of the Company which will be publicly held after
the Mergers will be Company Common Stock. The only class of
voting securities of the Company's direct and indirect non-
utility subsidiaries will be common stocks and, in all but two
cases, all issued and outstanding shares of such common stock
will be held by the Company or a subsidiary of the Company.
The Company will hold, through ENSERCH, 50% interests in Fleet
Star and TRANSTAR. This corporate structure is similar to the
structure in the Entergy/Gulf States merger previously
approved by the Commission. See Energy Corporation, HCAR No.
25952 (Dec. 17, 1993).
Set forth below are summaries of the historical
capital structure of TUC and ENSERCH as of June 30, 1996 and
the pro forma consolidated capital structure of ENSERCH after
the Distribution and TUC after the Mergers as of June 30,
1996:
TUC and ENSERCH Historical Capital Structures
(In Millions)
TU ENSERCH
Common Stock Equity $ 5,827.8 $ 742.8
Preferred Stock not subject to
mandatory redemption 489.7 175.0
Preferred Stock subject to mandatory
redemption 250.8 0
Long Term Debt 8,971.7 965.0
TU Electric Obligated, Mandatorily
Redeemable Preferred Securities of
Trusts 381.7 0
ENSERCH Convertible Subordinated
Debentures 0 90.8
ENSERCH Mandatorily Redeemable
Preferred Securities of Subsidiary
of EEX 0 150.0
ENSERCH Minority Interest in
Subsidiaries 0 157.6
Total $15,921.7 $2,281.2
Pro Forma Consolidated Capital Structure
(In Millions)
Common Stock Equity $ 6,376.2
Preferred Stock Not Subject To Mandatory Redemption 664.7
Preferred Stock Subject To Mandatory Redemption 250.8
Long Term Debt 9,784.2
TU Electric Obligated, Mandatorily Redeemable 381.7
Preferred Securities of Trust
Total $ 17,457.6
The Company's pro forma consolidated common equity to total
capitalization ratio of 36.5% comfortably exceeds the
"traditionally acceptable 30% level." Northeast Utilities, 47
SEC Docket at 1279, 1284 (1990).
Protected interests: As set forth more fully in
Item 3.a.1.ii. (Efficiencies and Economies), Item 3.d.2.
(Integrated Public Utility System) and elsewhere in this
Application/Declaration, the Mergers are expected to result in
substantial cost savings and synergies, and will integrate and
improve the efficiency of the parties utility system. The
Mergers will therefore be in the public interest and the
interests of investors and consumers, and will not be
detrimental to the proper functioning of the resulting holding
company system.
2. Section 10(c)
Section 10(c) of the Act provides that,
notwithstanding the provisions of Section 10(b), the
Commission shall not approve:
(1) an acquisition of securities or
utility assets, or of any other interest, which is
unlawful under the provisions of Section 8 or is
detrimental to the carrying out of the provisions of
Section 11; or
(2) the acquisition of securities or
utility assets of a public utility or holding company
unless the Commission finds that such acquisition will
serve the public interest by tending towards the
economical and the efficient development of an integrated
public utility system . . . .
a. Section 10(c)(1)
Section 10(c)(1) requires that the proposed
acquisition not be "unlawful under the provisions of Section
8" or "detrimental to the carrying out of the provisions of
Section 11." Section 8, by its terms, only applies to
registered holding companies and thus the Mergers cannot be
unlawful under Section 8 of the Act. However, even if applied
to exempt holding companies, the Mergers would not be unlawful
as there is no state law, regulation or policy against
combination companies. Section 11 of the Act relates to the
simplification of holding company systems, and, as discussed
in further detail below, by its terms also only applies to
registered holding companies. Section 11(b)(1), which
contains the principal elements of Section 11's simplification
standard, specifically mandates that the Commission require
each registered holding company to limit the operations of the
holding company system to a single integrated public utility
system.
The term "integrated public-utility system" is
defined in Section 2(a)(29) to mean:
As applied to electric utility companies,
a system consisting of one or more units
of generating plants and/or transmission
lines and/or distributing facilities,
whose utility companies are physically
interconnected or capable of physical
interconnection and which under normal
conditions may be economically operated as
a single interconnected and coordinated
system confined in its operations to a
single area or region, in one or more
states, not so large as to impair
(considering the state of the art and the
area or region affected) the advantage of
localized management, efficient operation,
and the effectiveness of regulation;
and
As applied to gas utility companies, a
system consisting of one or more gas
utility companies which are so located and
related that substantial economies may be
effectuated by being operated as a single
coordinated system confined in its
operations to a single area or region, in
one or more states, not so large as to
impair (considering the state of the art
and the area or region affected) the
advantages of localized management,
efficient operation, and the effectiveness
of regulation: Provided, that gas utility
companies deriving natural gas from a
common source of supply may be deemed to
be included in a single area or region.
As the Commission and its staff have previously
noted, in connection with an acquisition by an exempt holding
company section 10(c) mandates that such acquisition not be
detrimental to the carrying out of the provisions of
Section 11 but does not require that the acquisition meet the
strict integration standards of Section 11(b)(1) as would be
required of a registered holding company. Thus, the principal
issue under Section 10(c) with regard to the Mergers is
whether the creation of an exempt holding company system from
the merger of an electric system and a gas system is
detrimental to Section 11. First, it should be noted that on
its face the Act does not prohibit ownership by an exempt
holding company (or even, for that matter, by a registered
holding company) of both electric and gas utility properties
although it does not contain a definition of integrated
utility in the context of a combination company.<F15>
Second, existing Commission precedent clarifies that section
10(c)(1) does not require that the resulting exempt holding
company constitute a single integrated system. In In the
Matter of Gaz Metropolitain et al, HCAR No. 26170 (Nov. 23,
1994), the Commission considered and approved a section 10
application where the resulting exempt holding company would
own two gas utilities which, although geographically
contiguous, would not constitute a single integrated system
within the meaning of the Act.<F16> In issuing this
order, the Commission specifically stated that
Section 10(c)(1)'s requirement that the acquisition not be
"detrimental" to the carrying out the provisions of Section 11
does not mandate that the latter section's integration
requirement be met. Exempt holding companies are not directly
subject to Section 11(b)(1)'s integration standards,"<F17>
and also indicated in the past that acquisitions may be approved
even if the combined system will not be a single integrated
system. <F18> Thus, subject to certain conditions discussed below,
it is consistent with the provisions of the Act for the Commission
to approve an application under section 10 where the resulting exempt
holding company system contains an integrated electric system
and an integrated gas system.
____________________
<F15> Union Electric Company, 45 SEC 489 (1974) ("Nowhere
does the Act ban combination systems in so many
words.")
<F16> The definition of integrated system with respect to a
gas utility requires that the system be located in one
or more states (defined as a state of the United
States) and, in this case, one of the utilities in the
system was located in Canada. Therefore, although
integrated, the system would arguably not be a single
integrated system.
<F17> See also Division of Investment Management, The
Regulation of Public-Utility Holding Companies (June
1995) 65-66 (the "Division Report") ("Section 11's
integration provisions apply only to registered holding
companies.").
<F18> Citing Union Electric Company, 45 SEC. 489 (1974) at
495, n. 20; Eastern Gas and Fuel Associates, 30 SEC.
834, 848 (1950).
Section 10 does require that the transaction, and
the resulting holding company system, be consistent with the
basic principles of section 11 of the Act, which is often
referred to as the heart of the Act.<F19> In analyzing
whether or not a transaction would be detrimental to the
carrying out of the provisions of Section 11, it is important
to focus on the purpose of Section 11, which according to
legislative history, is to:
Break-down dangerous and unnecessary
nation-wide financing interlockings in the
essentially local operating utility
business, ... to reduce utility
enterprises to a size and power which can
be successfully regulated by local and
Federal regulatory commissions, ... to
confine the operations and the interest of
each public utility system to the actual
utility business of a given
region.<F20>
This overarching concern of the Act clearly focuses on the
need to concentrate the geographic scope of the system to a
reasonable (as determined by a variety of factors, including
technological developments) geographic area to ensure that
its management will be sensitive, and accountable, to a given
region, that there will be adequate local regulation of the
holding company system and that the holding company structure
is beneficial to the operating utilities.<F21> Thus, in
connection with a section 10 application where the resulting
system will be an exempt holding company and the applicants
can demonstrate that adequate regulatory authority exists to
protect local ratepayers, that the resulting system is a
coherent system not one where great and irrational distances
divide the operating utilities<F22> and there are
benefits to be gained by at least one of the operating
utilities as a result of the transaction, the transaction is
not detrimental to the provisions and policies of section 11.
Indeed, in the Gaz Metropolitain case, the Commission took
specific note of the fact that the two systems were in a
geographically concentrated area, that the Vermont regulators
had expressed their belief that they could protect the public
interest in Vermont after the consummation of the transaction
and that the Vermont system had experienced and could be
expected to continue to experience significant savings as a
result of its association with the holding company system. As
discussed below, following the Mergers, the Company will meet
all of the above criteria in a similar manner.
____________________
<F19> See, Division Report at 60.
<F20> S. Rep. No. 651, 74th Cong., 1st Sess. 11 (1935).
<F21> "An operating system whose management is confined in
its interest, its energies and its profits to the
needs, the problems, and the service of one regional
community is likely to serve that community better."
S. Rep. No. 651, 74th Cong., 1st Sess. 12 (1935)
<F22> The holding company system involved in Electric Bond
and Share Company, 33 SEC 21 (1952), for example, which
had operating utilities located in China, Mexico, nine
Central and South American countries, Texas, Louisiana
and Mississippi was found to be violative of the basic
principles of section 11 at that point in time.
Additionally, the Commission has in the past found
that combination gas and electric exempt holding companies are
consistent with the requirements and policies of the Act.
Indeed, when first interpreting the Act, the Commission stated
that even registered holding companies systems could consist
of an electric utility and a gas utility consistent with the
provisions of Section 11.<F23> However, the Commission
reversed its position with respect to registered holding
companies shortly, and at a later point in one decision with
respect to exempt holding companies, requiring that registered
holding company systems and, for a brief period, new exempt
holding company systems be limited to either an electric or a
gas system.<F24> The Commission's position with respect
to exempt holding companies was apparently based largely on
policy concerns existing at the time of those decisions and by
1974 when those policy concerns had dissipated, the Commission
returned to its former position, allowing the creation of
combination exempt holding company systems as not detrimental
to Section 11.<F25> In 1988, the Commission decided two
important cases in this area, Dominion Resources<F26> and
WPL Holdings.<F27> In Dominion Resources an exempt
combination company was permitted to acquire a gas utility.
Pursuant to section 10, the Commission expressly held that
"the provisions of Section 11 are not applicable to exempt
holding companies such as DRI." The holding was not merely
that section 11 by its terms applies only to registered
holding companies, but in that context, the meaning of the
holding was that such an acquisition did not violate section
10(c). Moreover, since DRI did not acquire any new electric
properties, there was no direct effect upon its electric
system, as is also the case in a pure gas/electric
combination. Furthermore, in WPL Holdings the SEC stated that
"we do not believe that the pro-competitive thrust of the Act
expresses an absolute Federal policy against combination gas
and electric operations." Since the Union Electric case, and
especially since 1988, the Commission has issued a number of
orders authorizing the creation and/or continued exemption of
new or larger combination exempt holding company systems
whether through the formation of a new holding
company<F28> or via the acquisition of a gas and/or
electric company by an existing combination system.<F29>
Throughout this period, the Commission's decisions focused on
whether "both the electric and gas operations that [the
holding company] proposes to acquire constitute an integrated
public-utility system"<F30> consistent with the analysis
that should be applied in the present case. In other words,
the policies and basic protections that animate section 11
(deference to state regulatory authority with respect to
combination companies, provided the resulting holding company
system in any case will not be the type of system that the Act
was designed to prevent and that needs additional regulation
under the Act) apply to exempt holding company acquisitions,
although a strict reading of the section is not required.
The decisions discussed above make clear that:
these [section 11(b)(1) and section 10(c)] statutory
standards have not been so administered by us with
respect to holding companies subject to exemption
under section 3(a). We have accordingly granted
exemptions to holding companies with combined
electric and gas operations. Nor have we withheld
approval under section 10 solely because the holding
company would be engaged in both utility businesses,
if the holding company, as enlarged or extended by
the acquisition, qualified for an exemption under
section 3(a).<F31>
____________________
<F23> American Water Works and Electric Co., 2
SEC 972 (1937).
<F24> Columbia Gas & Electric Corp., 8 SEC 493 (1941)
(limiting registered holding company to only gas
operations); Illinois Power Co., 44 SEC 190 (1970)
(requiring exempt holding company to divest gas
operations).
<F25> Union Electric Company, 45 SEC 489 (1974).
<F26> Dominion Resources, Inc., HCAR No. 24618 (April 5, 1988)
<F27> WPL Holdings, HCAR No. 24590 (February 26, 1988)
<F28> See e.g., CIPSCO Incorporated, HCAR No., 25152 (Sept.
18, 1990) (authorizing acquisition and granting
exemption for the formation of new holding company over
existing combination utility and electric utility);
Illinova Corporation, HCAR No. 26054 (May 18, 1994)
(authorizing formation of holding company and granting
exemption for holding company over existing combination
utility and electric utility); WPS Resources
Corporation, HCAR No. 26101 (Aug. 10, 1994)
(authorizing formation and exemption for holding
company over existing combination and electric
utility); SIGCORP, Inc., HCAR No. 26431 (Dec. 14, 1995)
(authorizing formation and granting exemption for
holding company over existing combination utility and
two gas utilities).
<F29> See e.g., IE Industries, Inc., HCAR No. 25325 (June 3,
1991) (authorizing acquisition of large electric
utility by a holding company with a combination utility
subsidiary); NIPSCO Industries, Inc., HCAR No. 25470
(Feb. 2, 1992) (authorizing acquisition of gas utility
by holding company with existing combination utility
subsidiary); NIPSCO Industries, Inc., HCAR No. 25766
(March 25, 1993) (authorizing acquisition of gas
utility by holding company with existing combination
and gas utility subsidiaries); Southern Indiana Gas and
Electric Company, HCAR No. 26075 (June 30, 1994)
(authorizing acquisition of gas utility by combination
utility company with a gas utility subsidiary).
<F30> CIPSCO Incorporated, HCAR No. 25152 (Sept. 18, 1990).
<F31> In the Matter of Estacado, Inc., HCAR No. 21106 (June
19, 1979).
It should be noted that because of the "unless and
except" clause of section 3, through which the Commission has
historically incorporated other elements of the Act where it
felt it was important from the point of view of investors,
consumers and the public interest,<F32> the exemption
orders of the Commission approving combination company
exemptions are really indistinguishable from the acquisition
decisions under section 9 and 10. Thus, if the acquisition of
a gas system by an electric or combination company as in
Dominion Resources (discussed above) was against the policy of
the Act, the Commission would not approve an exemption merely
because the transaction was structured so as not to create a
second bite.
____________________
<F32> See, Hawes, Utility Holding Companies, Section 3.04[5].
Likewise, no distinction should be made between
decisions of the Commission under section 10 of the Act
approving an acquisition by a newly formed holding company of
electric and gas utilities that previously operated together
in a non-holding company structure and those approving the
acquisition by a newly formed holding company of previously
independent electric and gas utility companies. The end
result of both of these transactions is identical; namely a
new combination holding company to be approved under the
standards of section 10 of the Act. There is a tradition
under the Act of focusing on the intended result of corporate
organizations and structuring when interpreting the
Act<F33> and it would not be logical to treat the instant
application different from one that could be filed if, for
example, an electric utility company were to acquire a gas
utility company as its "first bite," claim an exemption under
section 3(a)(1), and immediately apply for Commission approval
under sections 9(a)(2) and 10 to create a holding company and
reorganize such that the electric utility and the gas utility
(then under common control) were all separate subsidiaries of
the newly formed holding company. What would justify the
Commission in approving an exemption for a new holding company
if combination companies were per se against the policy of the
Act? The Commission by approving such transaction would be
allowing a holding company to be created which offended a
basic policy of the Act. The purpose of the Act is to
regulate the creation and existence of public utility holding
companies and neither the language of the Act nor any policy
imperative indicates that these types of new exempt holding
companies should be treated differently under sections 8 and
11. The substantive conclusion of the transaction should
prevail over the particular form it may assume.
____________________
<F33> Association of Massachusetts Consumers v. SEC, 516 F.2d
711 (DC Cir., 1975); In the Matter of National Propane
Corp., HCAR No. 20684 (Aug. 24, 1978); SCANA
Corporation, SEC No-Action Letter (June 14, 1990);
Wisconsin Energy Corporation, SEC No-Action Letter
(Dec. 17, 1993).
Furthermore, given the significant evidence that
combination gas and electric systems within registered holding
companies is permissible under the Act provided that such
combinations are authorized by the relevant state regulatory
commissions, it follows a fortiori that combination exempt
holding companies are permissible absent violation of state
law. Specifically, Section 8 of the Act provides that:
[w]henever a State law prohibits, or
requires approval or authorization of, the
ownership or operation by a single company
of the utility assets of an electric
utility company and a gas utility company
serving substantially the same territory,
it shall be unlawful for a registered
holding company, or any subsidiary company
thereof . . . (1) to take any step,
without the express approval of the state
commission of such state, which results in
its having a direct or indirect interest
in an electric utility company and a gas
company serving substantially the same
territory; or (2) if it already has any
such interest, to acquire, without the
express approval of the state commission,
any direct or indirect interest in an
electric utility company or gas utility
company serving substantially the same
territory as that served by such companies
in which it already has an interest.
On its face, the section indicates that, with the
approval of the relevant state utility commissions, even
registered holding company systems can include both electric
and gas utility systems. A careful reading of the section
indicates that the thrust of the section is to preclude the
use by registered holding companies of separate gas and
electric utility companies with overlapping service
territories in order to circumvent any state law restrictions
on the ownership of gas and electric assets by the same
company. Thus, two types of combination registered holding
companies are implicitly acceptable under the statute absent
such state objection -- a registered holding company system
that includes combination companies and a system that includes
separate gas and electric companies. Over time the Commission
has emphasized different aspects of section 8 and its
interplay with section 11 with respect to registered systems
-- initially allowing registered holding companies to own both
gas and electric systems under section 8, then focusing on a
stricter interpretation of section 11 making such combination
companies more difficult.
In its early decisions, the Commission adhered to
the concept that the decision as to whether to allow
combination registered holding companies is one that states
should make (although the Commission might have to implement
it in certain cases) and, where such systems were permissible,
the role of the Commission was to ensure that both such
systems are integrated as defined in the Act. In In the
Matter of American Water Works and Electric Company,
Incorporated, 2 SEC 972 (1937), the Commission approved the
applicant's voluntary reorganization plan under Section 11(e)
of the Act and permitted the newly reorganized registered
holding company to retain its electric and its gas operations,
specifically noting that while the Act does not contain a
definition of single integrated utility in the context of a
combination company:
We believe, however, that it is proper to
regard such a combined property as a
single integrated system, provided that
all of the electric properties are
integrated and all of the properties, both
gas and electric, are in fairly close
geographic proximity and are so related
that substantial economies may be
effectuated by their coordination under
common control. The question of public
policy as to the common ownership of gas
and electric facilities in the same
territory is apparently left by the
statute to the decision of the
states.<F34>
Thus, since the combination company did not violate state
policy, there was no need for the Commission to exercise
jurisdiction to implement state policy. By the early 1940's,
however, the Commission switched its focus to section 11 and
adopted a narrow interpretation of the standards contained
therein as the controlling factor with regard to combination
registered holding companies.<F35> During this period,
the Commission noted that with respect to registered holding
companies, "we think, Section 8 does not control the problem
of whether electric and gas utilities may be operated within a
single integrated system ... Section 8 expresses the policy
that the state law shall control acquisitions of properties
which may result in combined operations, whereas Section 11 is
concerned with retentions of property."<F36> Similarly,
the Supreme Court addressed the interplay between Section 8
and 11 of the Act in its decision Securities and Exchange
Commission v. New England Electric System ("NEES"), 384 U.S.
176 (1966). In this decision, the Court noted:
To some extent, local policy was expected
to govern, with Section 8 serving to
prevent circumvention of that policy ...
At the same time, Section 11 was expected
to assist in imposing restrictions with
regard to the combination of gas and
electricity in one system. Discussing the
interplay between Section 8 and
Section 11, the Senate Committee noted
that Section 8 only applied to future
acquisitions [and] "the policy upon which
this section was based was essential in
any Federal legislation in utility holding
companies; it did not think that the
section should make it unlawful to retain
(up to the time that section 11 may
require divestment) interests in
businesses in which the companies were
lawfully engaged on the date of enactment
of this title."<F37>
____________________
<F34> In the matter of American Water Works and Electric
Company, Incorporated, 2 SEC at 983, n.3.
<F35> See, e.g., In the Matter of Columbia Gas & Electric
Corporation, 8 SEC 443 at 463 (1941); In the Matter of
United Gas Improvement Company, HCAR No. 2692 (April
15, 1941); Securities and Exchange Commission v. New
England Electric System, 384 U.S. 176 (1966).
<F36> In the Matter of Columbia Gas & Electric Corporation, 8
SEC 443 (1941).
<F37> Id., at 183 n.14. The dissenting opinion in this case
specifically disputed this decision, noting that "the
House and Senate Committees in identical language
expressly stated that common ownership of competing
forms of energy was a field which is essentially a
question of state policy; the present Section 8 was
enacted to support this approach by using federal power
to limit common ownership only where it is contrary to
state law." Id. at 190 (Harlan dissenting).
Thus, with respect to registered holding companies, the
acquisition of utility assets to create a combination system
must not violate any state regulation in order to be approved
under the Act. In order to retain the combination system,
section 11 policies must be examined with, as demonstrated
below, sensitivity towards the overall goal of the Act of
limiting holding company systems to those that can be
adequately regulated on the state level. In connection with
exempt holding company acquisitions, although neither
section 8 nor section 11 are on their face directly
applicable, the Commission has considered the general policies
of these sections in the context of the retention of
combination systems, and long given primacy to the concept
that:
competition in the field of distribution
of gas and electric energy is essentially
a question of state policy. The
considered conclusions of the local
authorities, deriving their power from
specific state legislation, should be
given great weight in determining whether
the public interest would be adversely
affected by the retention of combined
operations. In the absence of a
compelling showing in the record to the
contrary, we would not be warranted in
rejecting the appraisal of such
authorities that the local public interest
... is served by retention of the combined
operations.<F38>
Indeed, significant evidence exists that the Commission has
discretion to apply this policy in both the registered and
exempt holding company context. As the Commission noted in
its Union Electric decision, the Supreme Court's NEES decision
discussed above attached "great weight ... to [the
Commission's] expertise in the administration of the
Act."<F39> The NEES decision therefore leaves the
Commission free to apply its expertise to administer the Act
in light of changes in legal, regulatory and economic
circumstances which were not foreseen at the time of the NEES
decisions, including market and regulatory changes which have
"substantially changed" since the time of the enactment of the
Act. As discussed in detail below, the current restructuring
of the industry with an emphasis on complete energy services
is as "substantial" a change as has occurred since that which
was imposed by the adoption of the Act.
____________________
<F38> Id. at 8 (citations omitted). Again, the fact that the
holding cited herein involved the creation of a new
holding company over an existing combination system
should not affect its applicability in this case as,
again, the purpose of the Act is to regulate public
utility holding companies to the extent necessary. We
believe that the policy of deference to state
regulations with respect to exempt holding companies
should be followed in all instances where the resulting
holding company will be exempt from registration under
the Act precisely because it is subject to adequate
state regulation and geographically confined.
<F39> 45 SEC at 509 n.77.
A review of the legislative history of Section 8
clarifies that even combination registered holding companies
are permissible in certain circumstances. In its report, the
Senate Committee on Interstate Commerce noted that the
provision in Section 8 concerning combination companies "is
concerned with competition in the field of distribution of gas
and electric energy - a field which is essentially a question
of State policy, but which becomes a proper subject of Federal
action where the extra-State device of a holding company is
used to circumvent state policy." The Report of the Committee
on Interstate Commerce, S. Rep. No. 621 at 31 (1935). In
addition, attached to the above-referenced committee report is
the Report of the National Power Policy Committee on Public-
Utility Holding Companies,<F40> which sets forth a
recommended policy that: "Unless approval of a State
commission can be obtained the commission should not permit
the use of the holding-company form to combine a gas and
electric utility serving the same territory where local law
prohibits their combination in a single entity." This does
not prohibit combination registered companies where such
approvals can be obtained, but is consistent with the general
policy of the Act that local regulators are in the best
position to assess the needs of their communities.<F41>
The Act was never intended to supplant local regulation but,
rather, was intended to create conditions under which local
regulation was possible.
____________________
<F40> The National Power Policy Committee was a committee
appointed by President Franklin D. Roosevelt consisting
of representatives from various government departments
concerned with power problems and instructed to report
to Congress on the coordination of government policy
relating to such problems. Its members were Harold L.
Ickes, Frank R. McNinch, Elwood Mead, T.W. Norcross,
Morris L. Cooke, Robert E. Healy, David E. Lilienthal
and Edward M. Markham.
<F41> Section 21 of the Act, which further codifies this
legislative intent, states: "Nothing in [the Act]
shall affect . . . the jurisdiction of any other
commission, board, agency, or officer of . . . any
State, or political subdivision of any State, over any
person, security, or contract, insofar as such
jurisdiction does not conflict with any provision of
[the Act] . . . ." The legislative history reveals
that Section 21 of the Act was further intended "to
insure the autonomy of state commissions [and] nothing
in the [Act] shall exempt any public utility from
obedience to the requirements of state regulatory law."
The Report of the Committee on Interstate Commerce, S.
Rep. No. 621 at 10 (1935).
Turning to the facts of the proposed Mergers, it is
clear that TUC and ENSERCH currently operate as integrated
utility systems and the combined system will not be detrimental
to the carrying out of section 11. The TUC electric system meets
the standards of Section 2(a)(29)(A) as TU Electric and SESCO are
physically interconnected and operate as a coordinated system in
the State of Texas, as the Commission held in 1993 when TUC
obtained authorization from the Commission to acquire SESCO
pursuant to the standards of Section 9(a)(2) and 10 of the Act
and both are subject to the jurisdiction of the
PUCT.<F42> Further, TUC has not acquired any utility
operations since that time which would affect the analysis
made in that order. The ENSERCH system meets the standards of
Section 2(a)(29)(B) as it operates, and after the Mergers will
continue to operate, exclusively in the State of Texas, is and
will continue to be effectively regulated by the Railroad
Commission and the local councils, and, following the Mergers,
will continue to operate as a separate subsidiary with its own
management for certain operations. Nevertheless, the entire
system will be operated as a coordinated system in that there
will be centralized planning (including planning of utility
operations), accounting, billing, customer service and
corporate reporting services provided by the Company. Thus,
following consummation of the Mergers, the Company system will
consist of a large integrated electric utility system and a
smaller integrated gas utility system which together will
operate on a coordinated basis offering services to customers
in the same area (see Exhibit E-2 hereto for a map depicting
the service territories of TUC and ENSERCH).
____________________
<F42> Texas Utilities Company, HCAR No. 25826 (June 15,
1993).
The Company system following the Mergers will, in
fact, be quite similar to the combination exempt holding
companies whose formation or expansion the Commission has
approved in the past under section 10.<F43> The only
difference between the instant case and the prior decisions of
the Commission with respect to acquisitions is the fact that
the Company will be acquiring a pure electric system (TUC) and
a pure gas system (Enserch) that were not previously operated
under the same holding company. However, it would be a
strange result indeed if such an acquisition could not meet
the standards of section 10(c) when an acquisition of a
combination system or a pure gas or electric system by an
existing combination system as well as the acquisition of an
existing combination system (which might include separate
combination and gas and electric utility subsidiaries) by a
newly formed holding company would result in the same
structure and would meet such test. As noted above with
respect to Dominion Resources, when a combination company
combines with either an electric or a gas utility the effect
with respect to one of the two systems created is the same as
with a pure electric/pure gas combination. Neither the
language of the Act nor any policy reason supports such a
distinction, especially when it is clear that the Mergers will
not be detrimental to the carrying out of the provisions of
section 11 inasmuch as the Company will carry out its utility
operations predominantly within the State of Texas, will be
subject to adequate regulatory authority in that state and
will not be the type of nationwide, complex system that
section 11 was designed to prevent. Moreover, the Company
will be an exempt holding company and, once again, "exempt
holding companies have generally been permitted to retain or
acquire combination systems so long as combined ownership of
gas and electric operations is permitted by state law and is
supported by the interested regulatory authorities,"<F44>
and Texas law does not prohibit combination gas and electric
utility companies. The fact that the Company will be an
exempt holding company and the transaction is subject to the
Act's more lenient standard with regard to electric and gas
combinations coupled with the fact that the Company's utility
operations will be located exclusively in the same geographic
region within the State of Texas and the Railroad Commission
has specifcially stated that it does not object to a
combination system leads to the conclusion that the Mergers
should be authorized under the Act.
____________________
<F43> See supra notes 28 and 29.
<F44> Report at 74. See also In the Matter of Northern
States Power Company, HCAR No. 12655 (Sept. 16, 1954);
Delmarva Power & Light Co., 46 SEC. 710 (1976); WPL
Holdings, HCAR No. 24590 (Feb. 26, 1988).
Finally, as is made clear by the history of
interpretations under sections 8, 10 and 11 of the Act,
another factor that must be included in any section 10 and
section 11 analysis is current industry conditions. As the
Division of Investment Management noted in the Report, "the
SEC must continue to respond flexibly to the legislative,
regulatory and technological changes that are transforming the
structure and shape of the utility industry,"<F45>
especially since "Section 11 does not impose 'rigid concepts'
but rather creates a 'flexible' standard designed to
accommodate changes in the electric utility
industry,"<F46> and such concerns have influenced
Commission decisions under the Act, and under section 10 in
particular, in the past.<F47> Specifically, the major
parties in the utility industry, including utility companies,
exempt holding companies, registered holding companies and
related entities, are presently in the midst of restructurings
designed to permit them to become complete "energy services
companies,"<F48> offering customers across the nation an
array of fuels to meet their complete energy needs through a
"one-stop" energy company, an industry shift that the
Commission has expressly recognized.<F49> Thus, the
traditional model of a vertically integrated gas or electric
utility company is becoming obsolete and evidence continues to
mount that the model utility company of the near future will
be the one-stop energy company.<F50> With this industry
evolution in mind, it becomes clear that the Mergers provide
TUC with the most efficient basis for entering into natural
gas operations, both as a local distribution company and as a
gas marketer with experienced management, and provide ENSERCH
with greater financial and other resources, allowing both
companies to remain competitive with the developing complete
energy services companies. Combined, TUC and ENSERCH can
offer their customers a choice of fuels (gas and/or
electricity) to meet their energy needs at competitive prices
in the most economical and efficient manner.
____________________
<F45> Report at 70.
<F46> Report at 75.
<F47> See Union Electric Company, 45 SEC 489 (1974); UNITIL
Corp. HCAR No. 25524 (Apr. 24, 1992), and Mississippi
Valley Generating Co., 36 SEC 159 (1955).
<F48> For example, Enron Corp. and NGC Corp., which have
significant gas and power marketing operations, have
announced that they are expanding their operations,
concluding that "customers in the future will want
energy services, not a specific fuel." Inside FERC,
February 23, 1996. Similarly, some registered utility
holding companies currently provide both electric and
gas utility services to their customers (See CINergy
Corp. HCAR 26146 (Oct. 21, 1994), and others are
expanding into the energy services business, e.g.,
Consolidated Natural Gas, a registered holding company,
has formed a subsidiary to offer customers multiple
fuel options and related energy services. See CNG
Order. Finally, recent announcements relating to the
acquisition of Portland General Corporation, an
electric utility holding company, by Enron Corporation,
a large gas pipeline and electric and gas marketer, the
acquisition of NorAm Energy, Inc., a gas utility
company, by Houston Industries, Inc., an electric
utility holding company, and the acquisition of
PanEnergy Corp., a large pipeline company by Duke Power
Company, an electric utility and an electric utility
holding company, all demonstrate that market forces are
pushing for the convergence of electric and gas
operations in one corporate entity; namely, a full
service utility company.
<F49> See, CNG Order.
<F50> In announcing the merger of Pacific Enterprises, a gas
utility holding company and Enova Corp., a combination
holding company with primary emphasis on electric
operations, the senior executives from the two
companies stressed that "winners in the competitive
[utility] industry in the future will have to offer
customers a comprehensive suite of energy products and
services. Companies that do not are bound to become
niche players." and "ours is becoming a BTU business."
The Energy Daily, October 16, 1996.
Finally, the Mergers will not be detrimental to the
carrying out of Section 11(b)(1)'s provision that registered
holding companies be limited to an integrated public utility
system and "such other [non-utility] businesses as are
reasonably incidental or economically necessary or appropriate
thereto." The Commission has not applied "the prohibitions of
Section 11(b)(1) against retention of unregulated non-utility
businesses by exempt holding companies to the same extent as
registered holding companies,"<F51> and has generally
only tried to ensure that the resulting holding company system
will be predominantly a utility company.<F52> Given that
the Company's utility operations after the Mergers and the
prior Distribution, will account for approximately $6.6
billion of its $7.4 billion in operating revenues and $23.4
billion of its $23.8 billion in assets, it is clear the
Company system will be primarily an operating utility and all
of the system's non-utility operations will consist of energy-
related or supportive businesses.
____________________
<F51> Wisconsin Energy Corporation, HCAR 24267 (Dec. 18,
1986).
<F52> Id.
b. Section 10(c)(2)
The other component to section 10 analysis requires
that the acquisition tend towards the economical and
efficient development of an integrated public-utility system.
The Commission has stated in several cases, including in the
Gaz Metropolitain case, the most recent decision in this area,
that under section 10(c)(2) an exempt holding company may
consist of more than one integrated system.<F53> In
essence, section 10(c)(2) requires that (i) each utility
system within the exempt holding company system be an
integrated system and (ii) the acquisition tend toward the
economical and efficient development of an integrated system.
The economies and efficiencies expected to result to accrue to
the ENSERCH and TUC systems as a result of the Mergers are
sufficient to satisfy the standards of section 10(c)(2). In
addition to the identified synergy savings, other benefits
from the Mergers that cannot be quantified should be taken
into account in this analysis, as "specific dollar forecasts
of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not
precisely quantifiable."<F54>
____________________
<F53> The United Gas Improvement Company, 9 SEC 52 (1941), Union
Electric Company, 45 SEC 489 (1974) and In the Matter of Gaz
Metropolitan et al., HCAR No. 26170 (November 23, 1994). In
Gaz Metropolitan, the Commission has explicitly stated [W]e
have indicated in the past that acquisitions may be approved
even if the combined system will not be a single integrated
system. Section 10(c)(2) requires only that the acquisition
tend towards the economical and the efficient development
of an integrated public-utility system (emphasis added).
<F54> Centerior Energy Corp., HCAR No. 24073 (April 29,
1986).
TUC and ENSERCH estimate that the nominal dollar
value of synergies resulting from the Mergers will be not less
than $850 million over the first ten year period after
consummation of the Mergers which will enhance both the gas
system and the electric system to be acquired and lead to more
efficient and economical utility operations.<F55> The
parties continue to explore and refine which areas of their
operations will be the source of such synergies following the
Mergers. At this point in time, it is expected that the
savings amount mentioned above will largely result from the
fact that the service territories of TUC and ENSERCH overlap
in various areas and therefore the Company will be able to
streamline many operations when it functions as a single
system, such as: (i) meter reading operations - TUC and
ENSERCH currently maintain separate meter reading operations
and as a result of their overlapping territory, these
operations can be combined into a single, more efficient
system; (ii) meter repair and testing facilities - TUC and
ENSERCH as a combined entity will be able to organize these
operations into a single more economical operation; (iii)
billing systems - the combination of the separate TUC and
ENSERCH billing systems will allow the two companies to
capture synergy savings in this area; (iv) computer systems -
the combined TUC system will need fewer computers and back-up
computers than TUC and ENSERCH operating separately; in fact
the TUC system has excess capacity and it is expected that
ENSERCH can be added to the TUC system such that it is
utilized more efficiently, resulting in savings to the
combined system; (v) customer service operations - TUC and
ENSERCH both currently have call centers located in Dallas and
Waco, Texas and following the Mergers, the Company will only
require one call center in both cities; and (vi) emergency
restoration coordination - the Company should be able to
respond more quickly and efficiently to distribution
interruptions with a combined work force. Also included in the
savings number are administrative savings that are expected to
result from TU Services' provision of corporate services such
as accounting and reporting for ENSERCH, which should both
allow ENSERCH to obtain these services at a lower cost and
permit more efficient use of TU Services' existing operations.
Other general savings are also expected to result from the
Mergers.
____________________
<F55> WPL Holdings, Inc., HCAR No. 25377 (Sept. 18, 1991)
("Thus, in reviewing an application under this
Section [10(c)(2)], the Commission may recognize not
only benefits resulting from combination utility
assets, but also financial and organizational
economies and efficiencies.")
In addition to these areas of savings, it is very
important that the Commission note and consider the benefits
of the Mergers that are not quantifiable and thus not included
in the saving number mentioned above, but which will allow the
Company to provide the most efficient services and operations
in the changing utility industry, such as the following:
- Enhanced Customer Service and Operational
Efficiencies. By coordinating and integrating
certain operations of TUC's and ENSERCH's utility
businesses to take advantage of the companies'
overlapping service territories, the Company will be
able to provide its customers with enhanced service
and choice. The Company intends to assist its
customers in managing their total energy service
requirements in the most efficient manner. The
Mergers should offer greater convenience to
customers who, in most cases, will be able to
conduct all their energy business with one system.
- Maintenance of Competitive Rates. TUC and ENSERCH
should be able to meet the challenges of the
increasingly competitive pricing environment in the
utility industry more effectively than either
company could on a stand-alone basis. The Mergers
should create the opportunity for potential benefits
for customers in the form of lower rates over the
long term than could be achieved if the companies
operated independently, and for shareholders in the
form of greater financial strength and financial
flexibility.
- Coordination of Diversification Programs. TUC and
ENSERCH each have complementary non-utility
operations and, as a combined and financially
stronger company, should be able to manage and
pursue these operations more efficiently and
effectively.
- Better Utilization of Resources. The joint
engineering, siting and construction of facilities
should reduce costs and minimize environmental
disruption.
The savings discussed above, which result from a transaction
that provides the most efficient means for TUC and Enserch to
become full service utilities providing the operations that
the evolving market demands, are entirely consistent with the
savings that the Commission has found sufficient in connection
with other examinations under Section 10(c)(2). For example,
in WPL Holdings, the Commission noted benefits resulting from:
a structure that could more effectively
address the growing national competition
in the energy industry, refocus various
utility activities, facilitate selective
diversification into nonutility
businesses, ... and provide additional
flexibility for financing,<F56>
many of which benefits are echoed in the Mergers. Moreover,
in this age of the complete energy services utility company,
the fact that the Mergers will save the companies significant
amounts in adapting operationally to the new marketplace takes
on added importance.
____________________
<F56> HCAR No. 25096 (1990).
It should be noted that the Mergers are consistent
with the provisions of Section 10(f) of the Act which require
that the Commission may not approve an acquisition unless it
appears to the Commission that such state laws as may apply in
respect of such acquisition have been complied with.
Section 10(f) which, unlike Section 8, applies directly to
exempt holding companies and involves the issue of complying
with all aspects of state regulation that apply to the
transaction, not just whether or not state regulators have
adequate regulatory authority over a combination system, is
satisfied in this case.<F57> Indeed, it is a condition
to consummation of the Mergers that all applicable state
regulations be complied with. Although neither the PUCT nor
the Railroad Commission must approve the Transaction, they
will continue to have jurisdiction over the TUC and Enserch
systems, respectively, and the Railroad Commission has
specifically informed the Commission that it does not object
to the Mergers.
____________________
<F57> It should be noted that the terms of section 10(f)
reinforce the fact that the policy of the Act is to
supplement, not supplant, state and local
regulation.
3. Section 3(a)(1)
The Company requests that the Commission issue an
order under Section 3(a)(1) declaring that the Company is
exempt from all provisions of the Act except Section 9(a)(2).
Section 3(a)(1) of the Act provides that the Commission may
issue the above-requested order to a holding company, if:
such holding company, and every subsidiary
company thereof which is a public utility
company from which such holding company
derives, directly or indirectly, any
material part of its income, are
predominantly intrastate in character and
carry on their business substantially in a
single State in which such holding company
and every such subsidiary company thereof
are organized.
The Company and its three public utility subsidiaries
following the Mergers (TU Electric, SESCO and ENSERCH) will
all be Texas corporations operating wholly in the State of
Texas (in the case of TU Electric and SESCO) or almost
entirely in the State of Texas (in the case of ENSERCH) and
therefor meet the latter half of the Section 3(a)(1) test.
With regard to the first half of the test, in
determining whether a company's operations are "predominantly
intrastate in character," the Commission has primarily
examined the amount of revenues derived by that entity from
out-of-state activities,<F58> but has also considered
out-of-state service area, customers, property, generation and
sales.<F59>
____________________
<F58> See Commonwealth Edison Company, 28 SEC 172, 173
(1948); Yankee Atomic Energy Company, 36 SEC 552,
567 (1955). The focus of these Section 3(a)(1)
orders is on the "predominantly intrastate"
requirement of the exemption.
<F59> See Wisconsin Electric Power Company, 28 SEC 906
(1948). Again, the focus of this Section 3(a)(1)
order is on the "predominantly intrastate"
requirement.
In the case of the public utility system to be owned
by the Company following the Mergers, as of December 31, 1995,
all of the system's net utility plant and all of its utility
customers would have been located in the State of Texas, while
less than 1% of the system's consolidated revenues would have
been from operations outside Texas. These amounts are well
within the existing range of orders issued by the Commission
under Section 3(a)(1),<F60> and, indeed are similar to
the numbers for the TUC system prior to the Mergers, which
system has received a Section 3(a)(1) order from the
Commission already.
Again, the fact that the Mergers will result in a
combination electric utility and gas utility system does not
effect the Company's eligibility for a Section 3(a)(1) order
as the Commission has on numerous occasions in the past issued
such orders to combination exempt holding companies.<F61>
As the Commission has noted
We have recognized in previous cases that
exempt holding companies ... are not held
to strict compliance with the single-
integrated public utility standard of
Section 11(b)(1) "unless and except" less
than full compliance with the standard
would be "detrimental to the public
interest or the interest of investors or
consumers ... the interests sought to be
protected from detriment in section 3(a)
... would be appropriately protected by
effective regulation at the state and
local level."<F62>
____________________
<F60> See supra note 29.
<F61> See, e.g., CIPSCO Incorporated, HCAR No. 25152
(Sept. 18, 1990); WPL Holdings, Inc., HCAR No. 25096
(May 25, 1990).
<F62> WPL Holdings, HCAR No. 24590 (Feb. 26, 1988). See
also, In the Matter of Wisconsin Electric Power
Company and Wisconsin Natural Gas Company, HCAR. No.
24267 (Dec. 18, 1986) ("The Commission has for many
years granted exemptions under section 3(a)(1) to
companies conducting combined gas and electric
operations. Competition between the two modes of
energy was regarded as 'essentially a question of
state policy'").
As indicated by the Texas regulatory bodies, both
officially and in speeches, the Mergers are not detrimental to
the public interest or the interest of consumers. Moreover,
the boards of directors of each company, in exercising their
fiduciary duties and upon the opinion of their financial
advisers, determined that the consideration to be received in
the Mergers is fair to both companies shareholders. Each set
of shareholders must also approve the separate Mergers by a
two-thirds vote in order to consummate the transaction. Thus,
it is clear that the Mergers are not detrimental to the
interests of investors.
Item 3 REGULATORY APPROVALS
Set forth below is a summary of the regulatory
approvals that TUC and ENSERCH have obtained or expect to
obtain in connection with the Mergers.
A. Antitrust
The HSR Act and the rules and regulations thereunder
provide that certain transactions (including the Mergers) may
not be consummated until certain information has been
submitted to the DOJ and the FTC; and specified HSR Act
waiting period requirements have been satisfied. TUC and
ENSERCH submitted their respective Notification and Report
Forms and all required information to the DOJ and FTC on July
1, 1996. On July 30, 1996, TUC and ENSERCH received requests
for additional information from the DOJ. Prior to the
expiration of the initial waiting period, the DOJ made a
request for additional information with respect to the
Mergers, to which the parties each responded. The DOJ has
allowed the extended waiting period to expire, leaving the
parties free of any further regulatory constraints under the
HSR statute.
The expiration of the HSR Act waiting period does
not preclude the Antitrust Division or the FTC from
challenging the Mergers on antitrust grounds; however, the
Company believes that the Mergers will not violate Federal
antitrust laws. If the Mergers are not consummated within
twelve months after the expiration or earlier termination of
the initial HSR Act waiting period, TUC and ENSERCH would be
required to submit new information to the Antitrust Division
and the FTC, and a new HSR Act waiting period would have to
expire or be earlier terminated before the Mergers could be
consummated.
B. Texas Public Utility Regulation
The Texas Railroad Commission, which has jurisdiction
over gas utilities in the State of Texas, has indicated that
it has no opposition to the ENSERCH Merger, that it will rely
on existing authority and resources to protect the public
interest and ratepayers subject to its jurisdiction, including
ratepayers who are customers of ENSERCH, and that there is no
hindrance under Texas natural gas utility regulatory law to
consummation of the ENSERCH Merger. The PUCT does not have
jurisdiction over approval of the Mergers.
C. Other Federal Regulations
Other than the approval of the Commission under the Act,
no other federal regulatory entity must approve the
Mergers.<F63> However, under the Merger Agreement,
consummation of the Mergers is conditioned upon consummation
of the Distribution, which is itself conditioned upon receipt
of a ruling from the Internal Revenue Service (the "IRS") to
the effect that the Distribution will result in no taxable
gain to TUC or ENSERCH of their respective shareholders. On
June 12, 1996, ENSERCH submitted a request for such a ruling
from the IRS.
____________________
<F63> Although the Company believes that the approval of
the Nuclear Regulatory Commission (the "NRC") is not
required, TU Electric, as the licensee of a
jurisdictional plant, has notified the NRC of the
Mergers and the NRC is reviewing the matter.
Item 4 PROCEDURES
On November 15, 1996, the Commission issued the
requisite notice under Rule 23 with respect to the filing of
this Application/Declaration.
It is submitted that a recommended decision by a
hearing or other responsible officer of the Commission is not
needed for approval of the proposed Mergers. The Division of
Investment Management may assist in the preparation of the
Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on
which it is to become effective.
Item 5 EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
A-1 Restated Articles of Incorporation of the
Company (filed as Annex VIII to the
Registration Statement on Form S-4 on
September 20, 1996 (Registration No. 333-
12391), and incorporated herein by reference).
A-2 Bylaws of the Company (filed as Annex IX to the
Registration Statement on Form S-4 on
September 20, 1996 (Registration No. 333-
12391), and incorporated herein by reference).
B-1 Amended and Restated Agreement and Plan of
Merger (filed as Annex I to the Registration
Statement on Form S-4 on September 20, 1996
(Registration No. 333-12391), and incorporated
herein by reference).
C-1 Registration Statement of the Company on Form
S-4 (filed on September 20, 1996 (Registration
No. 333-12391) and incorporated herein by
reference).
C-2 Joint Proxy Statement and Prospectus of TUC and
ENSERCH (included in Exhibit C-1).
D-1 Letter of the Railroad Commission of Texas.
(previously filed)
D-2 Affidavit of Robert M. Spann (previously
filed).
E-1 Map of service areas of TU Electric, SESCO and
ENSERCH (filed under cover of Form SE).
F-1 Opinion of counsel (to be filed by amendment).
F-2 Past-tense opinion of counsel (to be filed by
amendment).
G-1 Opinion of Barr Devlin & Co. Incorporated
(filed as Annex III to the Registration
Statement on Form S-4 on September 20, 1996
(Registration No. 333-12391), and incorporated
herein by reference).
G-2 Opinion of Morgan Stanley & Co. Incorporated
(filed as Annex III to the Registration
Statement on Form S-4 on September 20, 1996
(Registration No. 333-12391), and incorporated
herein by reference).
H-1 Annual Report of TUC on Form 10-K for the year
ended December 31, 1995 (filed on March 5,
1996) (File No. 1-3591) and incorporated herein
by reference).
H-2 Annual Report of ENSERCH on Form 10-K for the
year ended December 31, 1995 (filed on March
27, 1996) (File No. 1-3183) and incorporated
herein by reference).
H-3 TUC Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (filed on May 15,
1996) (File No. 1-3591) and incorporated herein
by reference).
H-4 ENSERCH Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996 (filed on May 14,
1996) (File No. 1-3183) and incorporated herein
by reference).
H-5 TUC Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (Filed on August 8,
1996) (File No. 1-3591) and incorporated
herein by reference.
H-6 ENSERCH Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996 (Filed on August
12, 1996) (Filed No. 1-3183) and incorporated
herein by reference.
H-7 TUC Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Filed on
November 8, 1996) (File No. 1-3591) and
incorporated herein by reference.
H-8 ENSERCH Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (Filed on
November 14, 1996) (Filed No. 1-3183) and
incorporated herein by reference.
B. Financial Statements
FS-1 TUC Holding Company Unaudited Pro Forma
Condensed Consolidated Balance Sheets as of
December 31, 1995 and June 30, 1996 (see
Registration Statement on Form S-4 of TUC
(Exhibit C-1 hereto) at p. 82-83).
FS-2 TUC Holding Company Unaudited Pro Forma
Condensed Consolidated Statements of Income for
the year ended December 31, 1996 and the six
months ended June 30, 1996. (See Registration
Statement on Form S-4 of TUC (Exhibit C-1
hereto) at pp. 84-85).
FS-3 TUC Consolidated Balance Sheet as of December
31, 1995 (see Annual Report of TUC on Form 10-K
for the year ended December 31, 1995 (Exhibit
H-1 hereto).
FS-4 TUC Consolidated Statements of Income for its
last three fiscal years (see Annual Report of
TUC on Form 10-K for the year ended December
31, 1995 (Exhibit H-1 hereto).
FS-7 ENSERCH Consolidated Balance Sheet as of
December 31, 1995 (see Annual Report of ENSERCH
on Form 10-K for the year ended December 31,
1995 (Exhibit H-2 hereto).
FS-8 ENSERCH Consolidated Statement of Income for
its last three fiscal years (see Annual Report
of ENSERCH on Form 10-K for the year ended
December 31, 1995 (Exhibit H-2 hereto).
Item 6 INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Mergers involve neither a "major federal action"
nor "significantly affects the quality of the human
environment" as those terms are used in Section 102(2)(C) of
the National Environmental Policy Act, 42 U.S.C. Sec. 4321 et
seq. The Commission's declaration of the effectiveness of the
Company's Registration Statement on Form S-4, the expiration
of the applicable waiting period under the HSR Act, Railroad
Commission Review, and Commission approval of this
Application/Declaration. Consummation of the Mergers will not
result in changes in the operations of TUC or ENSERCH that
would have any impact on the environment. No federal agency
is preparing an environmental impact statement with respect to
this matter.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this application and declaration to be signed on its
behalf by the undersigned thereunto duly authorized.
TUC HOLDING COMPANY
By: /s/ H. Jarrell Gibbs
Name: H. Jarrell Gibbs
Title: President
Date: December 19, 1996
