File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, L.L.P. President and
Chief Executive
Energy Plaza, 30th FLoor Texas Utilities
Company
1601 Bryan Street Energy Plaza
Dallas, Texas 75201 1601 Bryan Street
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) . . . . . . . . . . . . 68
3. Section 3(a)(1) . . . . . . . . . . . . . . . 74
Item 4 REGULATORY APPROVALS . . . . . . . . . . . . . . . 76
A. Antitrust . . . . . . . . . . . . . . . . . . . . . 77
B. Texas Public Utility Regulation . . . . . . . . . . 78
C. Other Federal Regulations . . . . . . . . . . . . . 78
Item 5 PROCEDURES . . . . . . . . . . . . . . . . . . . . 78
Item 6 EXHIBITS AND FINANCIAL STATEMENTS . . . . . . . . . 79
A. Exhibits . . . . . . . . . . . . . . . . . . . . . 79
B. Financial Statements . . . . . . . . . . . . . . . 81
Item 7 INFORMATION AS TO ENVIRONMENTAL EFFECTS . . . . . . 81
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 1DESCRIPTION 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
____________________
<F1> Texas Utilities Company, HCAR No. 9786 (April 5, 1950);
Texas Utilities Company, HCAR No. 25826 (June 15, 1993).
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.
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
____________________
<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.
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.
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 % 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 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 2 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 3 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
____________________
<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).
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
____________________
<F4> See, CNG Order. See also, Unitil Corp., HCAR No. 26527 (May
31, 1996).
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.
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
-------------------------
<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.
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
---------------------------
<F6> "Commissioners Mull Impact of Electric Rules on Gas", Inside
FERC, May 6, 1996, p.5.
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.
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
____________________
<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.
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>
---------------------------
<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
____________________
<F10> In the Matter of American Natural Gas Company, HCAR No.
15620 (Dec. 12, 1966).
of Directors has approved the purchase price,<F11> the
-------------------
<F11> Consolidated Natural Gas Company, HCAR No. 25040 (Feb.
14, 1990).
opinions of investment bankers<F12> and the earnings,
-------------------
<F12> Id.
__
dividends, book and market value of the shares of, the company to
be acquired.<F13>
-------------------
<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 Divi
ends dends
1993
First Quarter $4 3/8 $41 5/8 $ .76 $ 19 $ 14 $ .05
Second Quarter 47 44 1/4 .77 19 16 .05
Third Quarter 49 3/4 45 1/2 .77 22 17 1/2 .05
Fourth Quarter 47 42 1/4 .77 21 1/4 15 1/2 .05
1994
First Quarter $43 1/8 $36 1/2 $ .77 $ 19 $ 12 .05
Second Quarter 38 29 1/8 .77 15 1/4 12 .05
Third Quarter 34 1/8 29 5/8 .77 16 1/2 13 .05
Fourth Quarter 34 1/8 30 3/4 .77 15 12 .05
1995
First Quarter $35 $30 1/8 $.77 $ 15 $ 12 $ .05
Second Quarter 36 1/8 31 5/8 .77 18 14 .05
Third Quarter 35 32 5/8 .77 18 15 .05
Fourth Quarter 41 1/4 34 1/4 .77 18 14 1/4 .05
1996
First Quarter $42 7/8 $38 7/8 $ .50 $ 16 3/4 $ 14 $ .05
Second Quarter 42 3/4 38 1/2 .50 22 1/8 15 7/8 .05
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
____________________
<F14> This number is a preliminary estimate only, and will be
updated as necessary.
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).
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 recently noted,
Section 10(c)(1) does not require that exempt holding companies
meet the strict integration standards of Section 11(b)(1) but
that acquisitions by exempt holding companies not be detrimental
to the carrying out of the provisions of Section 11.<F15>
-------------------
<F15> See Gaz Metropolitan et al., HCAR No. 26170 (Nov. 23,
1994) ("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."); Division
of Investment Management, The Regulation of Public-
Utility Holding Companies (June 1995) 65-66
("Section 11's integration provisions apply only to
registered holding companies.")
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.<F16>
____________________
<F16> S. Rep. No. 651, 74th Cong., 1st Sess. 11 (1935).
This overarching concern of the Act with local management
sensitive, and accountable, to a given region provides some
insight into the integrated utility system requirements of the
Act as it addresses the same concern, that management remain
focused on a coordinated utility system limited in geographic
scope.<F17>
------------------
<F17> "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)
The principal issue under Section 10(c)(1) 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.<F18> When first
-------------------
<F18> Union Electric Company, 45 SEC 489 (1974) ("Nowhere
does the Act ban combination systems in so many
words.")
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.<F19>
--------------------
<F19> American Water Works and Electric Co., 2
SEC 972 (1937).
However, the Commission later reversed its position with respect
to registered holding companies and, in one decision with respect
to exempt holding companies, requiring that registered holding
company systems and new exempt holding company systems be limited
to either an electric or a gas system, although, as to registered
systems, retention of a second utility system was permitted in
certain circumstances based on the provisions of
Section 11(b)(1)(A),(B) and (C) (the "ABC Clauses").<F20>
------------------
<F20> 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).
The Commission's rejection of the American Water Works
precedent with respect to registered holding companies was based
on a policy concern existing at that time which preferred the
separation of the management of gas utility operations from the
management of electric utility operations. This policy was based
on the belief that gas utilities benefitted from having a
separate management focusing their entire energy on the gas
business, as opposed to being part of a combination company where
management allegedly tended to focus on electric utility
operations at the expense of gas utility operations.<F21>
____________________
<F21> See In the Matter of the Philadelphia Company, 28 SEC
35, 48 (1948); In the Matter of the North American
Company, 18 SEC 169, 179-80 (1950).
In other words, there was a perception of internal management
competition between gas and electric operations that could be
detrimental to the gas operations and, in turn, to consumers,
especially with respect to registered holding companies to which
section 11 specifically applies and which by definition, were
structured in a manner that previously had escaped adequate local
regulation and accountability. In reversing its position, the
Commission looked back at the American Water Works decision and
distinguished it by stating that it could be viewed as a
permissible retention under the ABC Clauses<F22> in order to
-------------------
<F22> Columbia Gas & Electric Corporation, 8 SEC 443 (1941).
give effect to its policy concerns. Exempt holding companies,
however, were not subject to the same strict application of
section 11 at first.<F23> This dichotomy is understandable
------------------
<F23> Eastern Gas and Fuel Associates, 30 SEC 834 (1950).
as exempt holding companies by definition did not need an
additional layer of regulation and were likely geographically
limited. In 1970, the Commission did temporarily reverse its
position with respect to exempt holding companies following the
Supreme Court's decision regarding a registered holding company
in Securities and Exchange Commission v. New England Electric
System, 384 U.S. 176 (1966) which decision placed heavy emphasis
on the then-perceived need to separate electric and gas utility
operations. As a result of the Supreme Court decision, the
Commission believed it needed to consider the policy concern in
its decisions regarding exempt holding companies.<F24> By
----------------------
<F24> In the Matter of Illinois Power Company, HCAR 16574
(Jan. 2 1970) ("the Supreme Court's statements in our
view reflect an approach to interpretation of the Act
in an area of competition between gas and electric
companies which transcends the precise issues before
the court in the NEES case").
1974, however, the Commission returned to its former position,
allowing the creation of combination exempt holding company
systems as not detrimental to Section 11.<F25> Union
<F25> Union Electric Company, 45 SEC 489 (1974).
Electric was a 1974 transition case in which the Commission began
its move back toward its prior position with respect to exempt
holding companies, although the Commission did not object to some
level of analysis under Section 11(b)(1) and the ABC Clauses to
determine whether or not Union Electric could acquire a
combination company, it clearly recognized that "Section 11(b)(1)
is inapplicable to exempt holding companies. So the A-B-C
Clauses are not directly applicable. In our view, however, they
do apply by analogy."<F26> While the Commission did not
----------------
<F26> Id.
make a formal finding in this case as to whether the standards
were met and instead reserved jurisdiction over the issue of
retention of both electric and gas properties, it did note that
its policy focus had shifted since 1970 given changes in the
industry (namely, the energy crisis). Thus, the Commission's
return to its former position with respect to exempt holding
companies was largely prompted by a change in industry
conditions. The advent of the energy crisis changed the focus of
utility management and it became clear to the Commission that its
earlier concern of one form of energy receiving a priority at the
expense of another was no longer likely to occur given economic
reality.
In 1988, the Commission decided two important cases in
this area, Dominion Resources<F27> and WPL
-------------------
<F27> Dominion Resources, Inc., HCAR No. 24618 (April 5,
1988)
Holdings.<F28> In Dominion Resources an exempt combination
-------------------
<F28> WPL Holdings, HCAR No. 24590 (February 26, 1988)
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." In that context, the meaning of the holding was that such
an acquisition did not violate section 10(c). The holding was
not merely stating the fact that section 11 by its terms applies
only to registered holding companies. 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<F29> or via
-------------------
<F29> 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).
the acquisition of a gas and/or electric company by an existing
combination system.<F30> Throughout this period, the
-------------------
<F30> 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).
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"<F31>
------------------
<F31> CIPSCO Incorporated, HCAR No. 25152 (Sept. 18, 1990).
consistent with the analysis that should be applied in the
present case. In other words, the policies and basic protections
that animate sections 8 and 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 those sections
is not required.
In certain decisions, however, principally those
involving registered holding companies where it is clear that a
strict section 11 standard is applicable and the initial
transition cases after 1974 with regard to exempt holding
companies, the Commission has not made a clear distinction
between the application of section 10(c)(1) in the context of a
registered holding company system as opposed to an exempt holding
company system. Thus, cases such as In the Matter of Columbia
Gas & Electric Corporation, 8 SEC 493 (1941); Philadelphia Co.,
28 SEC 35 (1948), Electric Bond and Share Company 33 SEC 35
(1952), Union Electric Company, 45 SEC 489 (1974) and Delmarva
Power and Light Company, HCAR No. 19717 (Oct. 19, 1976), contain
broad language regarding "the close interrelationship between
Sections 9, 10 and 11, with Sections 9 and 10 providing for
Commission scrutiny and prohibition of acquisitions offending the
integration and simplification objectives of Section 11 of the
Act."<F32> They do not, however, clearly state how these
------------------
<F32> Electric Bond and Share Company, 33 SEC 35 (1952).
standards should be applied to exempt holding companies and do
note that "Section 10 provides a practical means of preventing an
acquisition of an interest which could not be retained under
Section 11 and if acquired would only create a situation
requiring either new or further proceedings under
Section 11."<F33> In the case at hand, as will be discussed
-----------------
<F33> Id.
below, the resulting holding company system would not be
detrimental to the carrying out of the provisions of section 11
or detrimental to the public interest or the interests of
investors or consumers and thus would not necessitate additional
action under section 11 since even under the most extreme
interpretations, the gas distribution assets would be retainable
under the ABC Clauses. Moreover, the Commission's many other
decisions 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).<F34>
____________________
<F34> 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,<F35> the exemption orders of the
-------------------
<F35> See, Hawes, Utility Holding Companies, 3.04[5].
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.
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<F36> and it would not be logical to treat the instant
----------------------
<F36> 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).
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.
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.<F37>
--------------------
<F37> In the matter of American Water Works and Electric
Company, Incorporated, 2 SEC at 983, n.3.
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.<F38> During this period, the Commission noted
-------------------
<F38> 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).
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."<F39> Similarly, the Supreme Court addressed the
------------------
<F39> In the Matter of Columbia Gas & Electric Corporation, 8
SEC 443 (1941).
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."<F40>
____________________
<F40> 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.<F41>
----------------------
<F41> 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.
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."<F42> The NEES decision
---------------
<F42> 45 SEC at 509 n.77.
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 as
"substantially changed" 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.
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,<F43> which sets forth a recommended policy that:
------------------
<F43> 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.
"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.<F44> The
------------------
<F44> 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).
Act was never intended to supplant local regulation but, rather,
was intended to create conditions under which local regulation
was possible. Thus, the fact that the company is an exempt
holding company and is subject to a more lenient standard with
regard to electric and gas combinations coupled with the facts
that the Company's utility operations will be located exclusively
in the same area in Texas and the Railroad Commission does not
object to a combination system leads to the conclusion that the
Mergers should be authorized under the Act.
Turning to the facts of the proposed Mergers, it is
clear that TUC and ENSERCH currently operate as integrated
utility systems and, combined, will operate with the requisite
level of coordination so as to constitute an integrated exempt
system. 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.<F45> Further, TUC
------------------------
<F45> Texas Utilities Company, HCAR No. 25826 (June 15,
1993).
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 coordinated 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).
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.<F46> The only difference between the
-------------------
<F46> See supra notes 29 and 30.
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,"<F47> and Texas law does not prohibit
____________________
<F47> Report at 74. See also In the Matter of Northern
States Power Company, HCAR No. 12655 (Sept. 16, 1954);
Delmarva Power & Light Co., 46 S.E.C. 710 (1976); WPL
Holdings, HCAR No. 24590 (Feb. 26, 1988).
combination gas and electric utility companies.
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,"<F48> especially since
------------------
<F48> Report at 70.
"Section 11 does not impose 'rigid concepts' but rather creates a
'flexible' standard designed to accommodate changes in the
electric utility industry,"<F49> and such concerns have
-------------------
<F49> Report at 75.
influenced Commission decisions under the Act, and under
Section 10 in particular, in the past.<F50> Specifically,
------------------
<F50> 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).
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,"<F51> offering customers across the
----------------
<F51> For example, Panhandle Eastern Corp. has recently
changed its name to PanEnergy Corp. to "reflect the
company's expanding scope of energy services beyond the
traditional interstate natural gas pipeline business.
(Reuters, April 24, 1996), and Enron Corp. and NGC
Corp., which have significant gas and power marketing
operations, are expanding their operations, concluding
that "customers in the future will want energy
services, not a specific fuel." Inside FERC,
February 23, 1996. 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, and the
acquisition of NorAm Energy, Inc., a gas utility
company, by Houston Industries, Inc., 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.
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. 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.<F52> With this industry evolution in mind, it
-------------------
<F52> 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.
becomes clear that the Mergers provide TUC with the most
efficient basis for entering into the 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. Thus, the Mergers tend toward the development of an
efficient integrated utility system, especially given current
concepts of complete utility systems. Further, even if the ABC
Clauses are applied by analogy to the Mergers, the gas system of
Enserch would be retainable by the Company. Clearly traditional
retention analysis under the ABC Clauses cannot be undertaken in
this case as it has always involved analysis of the results of
divesting an existing additional system, whereas this case
involves the opposite transaction. Nevertheless, it is clear
that in the absence of the Mergers, the estimated $850 million in
quantifiable economies discussed below would be lost; more
importantly, since both companies believe they will benefit from
expanding their energy options and operations, without the
Mergers the opportunity costs that would be lost as each company
attempted to develop such alternatives in a different manner, are
substantial. Additionally, it should be noted that the local
distribution system of Enserch is not functioning independently
presently, but is combined with a large oil and gas exploration
and production company (EEX) that accounts for approximately 15%
of the total revenues and 54% of the total assets of the combined
company and the Enserch Board of Directors determined, in the
exercise of its fiduciary duties, that Enserch's gas operations
could not be operated in the most successful manner by remaining
either in its current structure or becoming independent.
Following the Mergers, the gas system would be located entirely
within the State of Texas and would be managed from, and
regulated by, such state. Thus, the combination system would be
retainable even under the policies of the ABC Clauses.
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,"<F53> and has generally only
________________
<F53> Wisconsin Energy Corporation, HCAR 24267 (Dec. 18,
1986).
tried to ensure that the resulting holding company system will be
predominantly a utility company.<F54> Given that the
------------------
<F54> Id.
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.
b. Section 10(c)(2)
Section 10(c)(2) requires that an acquisition not be
approved unless the Commission finds that:
[S]uch acquisition will serve the public
interest by tending towards the economical
and efficient development of an integrated
public-utility system.
The Commission has stated in several cases, including 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.<F55> Therefore, section 10(c)(2) in essence
-----------------
<F55> 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)."
requires that (1) each utility system in the exempt holding
company be an integrated system and (2) that the acquisition tend
toward the economical and efficient development of an integrated
system. As demonstrated above, the electric and gas systems of
the Company will each be integrated. Additionally, the economies
and efficiencies expected to result from 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."<F56>
------------------
<F56> 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.<F57> The parties continue to
-------------------
<F57> 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.")
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 certain areas and therefore the Company
will be able 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.
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,<F58>
----------------
<F58> HCAR No. 25096 (1990).
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.
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.<F59> Indeed,
-----------------
<F59> It should be noted that the terms of section 10(f) do
reinforce the fact that the policy of the Act is to
supplement, not supplant, state and local regulation.
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.
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,<F60> but has also considered out-of-state
____________________
<F60> 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.
service area, customers, property, generation and
sales.<F61>
------------------
<F61> 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),<F62> and, indeed are similar to the
-----------------
<F62> See supra note 29.
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.<F63> As the
------------------
<F63> See, e.g., CIPSCO Incorporated, HCAR No. 25152 (Sept.
18, 1990); WPL Holdings, Inc., HCAR No. 25096 (May 25,
1990).
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."<F64>
------------------
<F64> WPL Holdings, HCAR No. 24590 (Feb. 26, 1988). See
also, In the Matter of Wisconsin Electric Power Co.
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 4 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.<F65> However, under the Merger Agreement,
-----------------
<F65> 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.
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.
Item 5 PROCEDURES
The Commission is respectfully requested to issue and
publish not later than November 8, 1996 the requisite notice
under Rule 23 with respect to the filing of this Applica-
tion/Declaration, such notice to specify a date not later than
December 3, 1996 by which comments may be entered and a date not
later than December 4, 1996 as the date after which an order of
the Commission granting and permitting this Application/Declara-
tion to become effective may be entered by the Commission.
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 6 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.
D-2 Affidavit of Robert M. Spann (to be filed by
amendment).
E-1 Map of service areas of TU Electric, SESCO and
ENSERCH. (to be filed by amendment).
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, 1995 (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.
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 7 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: November 6, 1996
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
, 1996
TUC Holding Company (70- )
TUC Holding Company (the "Company"), Energy Plaza, 1601
Bryan Street, Dallas, Texas 75201, a Texas corporation not
currently subject to the Act, has filed an application-
declaration on Form U-1 under sections 9(a)(2), 10 and 3(a)(1) of
the Act.
Pursuant to the terms of the Amended and Restated Merger
Agreement dated as of April 13, 1996 (the "Merger Agreement")
among Texas Utilities Company ("TUC"), ENSERCH Corporation
("ENSERCH") and the Company, the Company proposes to acquire all
of the outstanding common stock of TUC, a Texas public-utility
holding company exempt from registration under section 3(a)(1) of
the Act pursuant an order of the Commission, and ENSERCH, a gas
public-utility company organized and operating as a utility
exclusively in the State of Texas. TUC currently has two
electric utility subsidiaries, Texas Utilities Electric Company
("TU Electric") and Southwestern Electric Service Company
("SESCO"), both of which are organized and operate as public
utilities exclusively in the State of Texas. The transaction
would be effected through the mergers (the "Mergers") of two
newly formed transitory subsidiaries of the Company with and into
TUC and ENSERCH, respectively. As a result of the Mergers, the
Company would be a public-utility holding company as defined in
section 2(a)(7) of the Act with three public utility subsidiaries
(TU Electric, SESCO and ENSERCH). The Company has also requested
an order of exemption under section 3(a)(1) from all provisions
of the Act except section 9(a)(2).
TUC was organized in 1945 as a public utility holding
company. TUC owns all of the outstanding common stock of TU
Electric, which is engaged in the generation, purchase,
transmission, distribution and sale of electric energy in morth
central, eastern and western parts of Texas, as area with a
population estimated at 5,280,000. In 1993, TUC acquired all of
the outstanding common stock of SESCO, which is 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. 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, plan and
equipment. As of March 31, 1996, there were 225,841,037 shares
of TUC Common Stock outstanding.
ENSERCH is an integrated company focused on natural gas
and, through its Loan Star Gas Company division ("Lone Star"), 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 cities and
towns, including the Dallas/Fort Worth Metroplex. 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, plan and equipment and $2.6 billion consists of oil and
gas exploration and production property, plant and equipment. As
of March 15, 1996, there were 68,626,602 shares of ENSERCH Common
Stock outstanding.
The Company was formed under the laws of Texas for purposes
of facilitating the Mergers. At present, the common stock of the
Company is owned equally by TUC and ENSERCH.
Upon consummation of the Mergers: (1) each issued and
outstanding share of TUC common stock (other than any shares
owned by TUC, any subsidiary of TUC, ENSERCH or and subsidiary of
ENSERCH, all of which will be cancelled without consideration and
will cease to exist) will be converted into the right to receive
one share of Company common stock, without par value; (2) each
issued and outstanding share of ENSERCH common stock, together
with the associated rights, (other than any shares owned by
ENSERCH, any subsidiary of ENSERCH, TUC or and 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");
however the Average TUC Price will not be deemed to be less than
%35.625 or more than $43.625; and (3) all shares of capital stock
of the Company issued and outstanding immediately prior to the
transaction will be cancelled. The Company states that the
Mergers are expected to be tax-free to TUC and ENSERCH
shareholders. Based on the capitalization of TUC and ENSERCH on
April 12, 1996, the shareholders of TUC and ENSERCH would own
securities representing approximately 94.3% and 5.7%,
respectively, of the outstanding voting power of the Company.
The Mergers are subject to customary closing
conditions, including the receipt of the requisite approvals of
the shareholders of TUC and ENSERCH. The shareholders meetings
with respect to the Mergers are scheduled to be held on November
15, 1996. Consummation of the Mergers is also subject to receipt
of certain rulings and opinions relating to federal income tax
issues and the expiration of the review period under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976, the latter of
which has occurred. The Mergers do not require the approval of
either the Texas Utility Commission (the "PUCT"), which regulates
electric utilities in Texas, or the Texas Railroad Commission
(the "Railroad Commission"), which regulates gas utilities in
Texas. However, the Mergers will not affect the authority of the
PUCT over the operations of TU Electric or SESCO or the authority
of the Railroad Commission over the operations of Lone Star. The
Railroad Commission has indicated to the Commission that it has
no objection to the Mergers and will rely on its existing
authority to protect the interests of ratepayers subject to its
jurisdiction.
The Company states that following the Mergers, it will be
entitled to an exemption from all provisions of the Act except
section 9(a)(2) because it and each of its public utility
subsidiaries from which it derives a material part of its income
will be predominantly intrastate in character and will carry on
their utility businesses substantially within the State of Texas.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
