File No. 70-8953
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 4 TO THE
FORM U-1
APPLICATION AND DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
TUC HOLDING COMPANY
Energy Plaza
1601 Bryan Street
Dallas, Texas 75201
(Name of companies filing this statement and
address of principal executive offices)
None
(Name of top registered holding company
parent of each applicant or declarant)
Robert A. Wooldridge, Esq. Erle Nye
Worsham, Forsythe & President and Chief Executive
Wooldridge, L.L.P. Texas Utilities Company
Energy Plaza, 30th Floor Energy Plaza
1601 Bryan Street 1601 Bryan Street
Dallas, Texas 75201 Dallas, Texas 75201
(Name and address of agents for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
Douglas W. Hawes, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-4513
TABLE OF CONTENTS
Page
Item 1 DESCRIPTION OF PROPOSED TRANSACTION . . . . . . . . . . . . . . . 2
A. Description of the Parties . . . . . . . . . . . . . . . . . . . 2
1. TUC . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. ENSERCH . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3. The Company . . . . . . . . . . . . . . . . . . . . . . . . . 8
B. Description of the Mergers . . . . . . . . . . . . . . . . . . . 9
1. Background of the Mergers . . . . . . . . . . . . . . . . . . 9
2. The Merger Agreement . . . . . . . . . . . . . . . . . . . 15
Item 2 FEES, COMMISSIONS AND EXPENSES . . . . . . . . . . . . . . . . 20
Item 3 APPLICABLE STATUTORY PROVISIONS . . . . . . . . . . . . . . . . 20
1. Section 10(b) . . . . . . . . . . . . . . . . . . . . . . 22
a. Section 10(b)(1) . . . . . . . . . . . . . . . . . . 23
b. Section 10(b)(2) -- Fairness of
Consideration 35
c. Section 10(b)(2) -- Reasonableness of
Fees . . . . . . . . . . . . . . . . . . . . . . . . 38
d. Section 10(b)(3) . . . . . . . . . . . . . . . . . . 40
2. Section 10(c) . . . . . . . . . . . . . . . . . . . . . . 43
a. Section 10(c)(1) . . . . . . . . . . . . . . . . . . 44
b. Section 10(c)(2) . . . . . . . . . . . . . . . . . . 66
3. Section 3(a)(1) . . . . . . . . . . . . . . . . . . . . . 71
Item 4 REGULATORY APPROVALS . . . . . . . . . . . . . . . . . . . . . 74
A. Antitrust . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
B. Texas Public Utility Regulation . . . . . . . . . . . . . . . . 75
C. Other Federal Regulations . . . . . . . . . . . . . . . . . . . 75
Item 5 PROCEDURES . . . . . . . . . . . . . . . . . . . . . . . . . . 75
Item 6 EXHIBITS AND FINANCIAL STATEMENTS . . . . . . . . . . . . . . . 76
A. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
B. Financial Statements . . . . . . . . . . . . . . . . . . . . . 78
Item 7 INFORMATION AS TO ENVIRONMENTAL EFFECTS . . . . . . . . . . . . 78
Pursuant to Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act"), TUC Holding Company, a Texas corporation
(the "Company"), hereby requests that the Securities and Exchange Commission
(the "Commission") authorize the acquisition, as described herein, of all of
the issued and outstanding common stock of (i) Texas Utilities Company, a
Texas corporation ("TUC"), and a holding company with two subsidiaries that
are electric utility companies, as defined in Section 2(a)(3) of the Act, and
(ii) ENSERCH Corporation, a Texas corporation ("ENSERCH"), which, among other
things, operates as a gas utility company as defined in Section 2(a)(4) of
the Act, all pursuant to the terms of the Amended and Restated Agreement and
Plan of Merger (the "Merger Agreement") dated as of April 13, 1996, by and
among TUC, ENSERCH, and the Company, which is fifty percent owned by TUC and
fifty percent owned by ENSERCH. The Merger Agreement provides for the Merger
of TUC Merger Corp., a wholly owned subsidiary of the Company, with and into
TUC, with TUC to be the surviving corporation (the "TUC Merger"), and ENSERCH
Merger Corp., a wholly owned subsidiary of the Company, with and into ENSERCH
with ENSERCH to be the surviving corporation (the "ENSERCH Merger," together
with the TUC Merger, the "Mergers"). As a result of the Mergers, TUC and
ENSERCH will become wholly owned subsidiaries of the Company and the Company
will change its name to Texas Utilities Company. The Company also hereby
requests that the Commission issue an order pursuant to Section 3(a)(1) of
the Act declaring it exempt it from all provisions of the Act except Section
9(a)(2) following consummation of the Mergers.
Item 1 DESCRIPTION OF PROPOSED TRANSACTION
A. Description of the Parties
1. TUC
TUC was organized in 1945 and is currently a public utility holding
company exempt from all provisions of the Act except Section 9(a)(2) by order
of the Commission under Section 3(a)(1).<F1> TUC owns all of the issued
and outstanding common stock of two public utility companies as defined under
the Act: (i) Texas Utilities Electric Company ("TU Electric"), a Texas
corporation engaged in the generation, purchase, transmission, distribution
and sale of electric energy in the north central, eastern and western parts
of Texas, an area with a population estimated at 5,890,000, 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 126,900. At December 31, 1996, TU Electric and SESCO provided
utility service to approximately 2,432,135 customers. TU Electric and SESCO
are each subject to regulation as a public utility with respect to retail
electric rates and other matters by the Public Utility Commission of Texas
(the "PUCT") and by certain municipalities with regard to their rates. In
addition, TU Electric is subject to regulation by the Nuclear Regulatory
Commission (the "NRC") under the Atomic Energy Act of 1954, as amended, in
connection with its ownership of the Comanche Peak nuclear generating
facility.
____________________
<F1> Texas Utilities Company, HCAR No. 9786 (April 5, 1950);
Texas Utilities Company, HCAR No. 25826 (June 15, 1993).
TUC's non-utility subsidiaries, all of which are Texas corporations
unless otherwise indicated, are as follows:
(a) Texas Utilities Australia Pty. Ltd., an Australian
limited liability company ("TU Australia") in 1995 acquired the common stock
of Eastern Energy Limited, a foreign utility company as defined in Section 33
of the Act, which is engaged in the purchase, distribution and sale of
electric energy to approximately 481,000 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 February 28, 1997, there were
224,602,557 shares of TUC Common Stock outstanding.
For the year ended December 31, 1996, TUC's operating revenues
on a consolidated basis were approximately $6.55 billion, of which
approximately $6.08 billion was derived from TU Electric's and SESCO's
electric operations. Consolidated assets of TUC and its subsidiaries at
December 31, 1996 were approximately $21.4 billion, of which approximately
$18.9 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, 1996, which is incorporated herein by reference as
Exhibit H-1.
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 cities 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"), a Texas corporation
and a wholly owned subsidiary of ENSERCH, is engaged in the compressed
natural gas business and owns and operates four thermal energy plants
providing heating and cooling to institutional customers. LSEC's wholly
owned subsidiary, Lone Star Plant Operations, Inc. ("LSEPO") operates and
maintains, under long term contracts, three cogeneration facilities. 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, is
engaged in owning and operating interconnected natural-gas transmission
lines, underground storage reservoirs, compressor stations and related
properties, all within Texas. Lone Star Pipeline is regulated with respect
to gas transportation rates by the Railroad Commission;
(d) Enserch Processing, Inc., a subsidiary of ENSERCH, is
engaged in the gathering and 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 $.01 per share, of ENSERCH
("ENSERCH Common Stock")is listed on the NYSE, the Chicago Stock Exchange and
the London Stock Exchange. As of December 31, 1996, there were 70,280,262
shares of ENSERCH Common Stock outstanding.
For the year ended December 31, 1996, ENSERCH's operating revenues
on a consolidated basis were approximately $2.1 billion, of which
approximately $895 million was attributable to natural gas distribution
activities and approximately $331 million to oil and gas exploration and
production. Consolidated assets of ENSERCH and its subsidiaries at December
31, 1996 were $3.7 billion, of which approximately $655 million consists of
gas distribution property, plant, equipment and other identifiable assets and
$1.9 billion consists of oil and gas exploration and production property,
plant and equipment and other identifiable assets.
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, June 30, 1996 and September 30, 1996 which
are incorporated herein by reference as Exhibits H-2, H-4, H-6 and H-8
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.
On a pro forma basis, as of and for the year ended December 31,
1996, the combined utility revenues of TUC and ENSERCH were $6,936,993,000,
the combined utility assets of TUC and ENSERCH were $19,576,104,000 and the
combined number of utility customers of the two companies was 2,747,719.
B. Description of the Mergers
1. Background of the Mergers
During the early 1990's, management of ENSERCH in its continuing
efforts to enhance shareholder value developed a plan to establish ENSERCH as
an integrated natural gas company engaged in natural gas and oil exploration
and production, natural gas pipeline transmission, natural gas gathering,
natural gas liquids processing, natural gas marketing, natural gas
distribution and electric power generation. In furtherance of this
objective, several non-core businesses were divested and EEX was converted
from a partnership into a corporation. Internal organization changes were
also undertaken to sharpen the focus of the business units. Despite these
changes, management continued to believe that ENSERCH's share price did not
fully reflect its underlying values, and was concerned that ENSERCH's
capitalization restricted its ability to finance investment needed to support
ongoing activities and to take full advantage of available opportunities
without impairing the rating of its public debt. Management was also
monitoring the trends toward consolidation in the electric utility industry,
vertical integration in the natural gas industry, and the potential for
consolidation and integration of the natural gas and electric utility
industries.
On November 29, 1995, Mr. Erle Nye, President and Chief
Executive of TUC, informally approached Mr. David W. Biegler, Chairman,
President and Chief Executive Officer of ENSERCH, following a Dallas Chamber
of Commerce meeting, to discuss trends in the natural gas and electric
utility industries and public speculation concerning the future of ENSERCH.
Mr. Nye indicated that TUC would be interested in discussing the possibility
of a business combination with ENSERCH and/or Mr. Biegler's joining TUC
management.
Between November 1995 and January 1996, ENSERCH management
continued to evaluate various strategic alternatives. ENSERCH management
also had internal discussions regarding ENSERCH's financial performance and
prospects and the developments in the electric and gas utility industries.
ENSERCH management continued to believe that ENSERCH's share price did not
fully reflect its underlying values, including the value of its investment in
EEX, despite the public offering of EEX Common Stock in September 1995. In
January 1996, ENSERCH management determined to explore more intensively
potential strategic alternatives. During the same period, Mr. Nye considered
further the possibility of a transaction with ENSERCH, sought advice from
TUC's regular corporate counsel, Worsham, Forsythe & Wooldridge, L.L.P., and
contacted the investment banking firm of Barr Devlin & Co. Incorporated
("Barr Devlin") to provide assistance.
At a meeting on January 25, 1996, Mr. Biegler informed Mr. Nye
of his intention to recommend to the ENSERCH Board a process to better define
a strategic plan for ENSERCH. Mr. Biegler indicated that he expected
business combinations would be among the alternatives considered. Mr. Nye
made it clear at this meeting that TUC had no interest in EEX and, therefore,
any transaction TUC might propose should not include ENSERCH's ownership
interest in EEX. ENSERCH management engaged Covington & Burling, which had
acted as counsel to ENSERCH for many years, to advise it in connection with
the development of the plan. On or about February 1, 1996, Deloitte & Touche
Consulting Group was retained by TUC to assist management in its
identification of potential synergies that might be realized from a possible
transaction with ENSERCH.
On February 15, 1996, Mr. Biegler telephoned Mr. Nye to inform
him of the decision of the ENSERCH Board at its meeting on February 13, 1996
to commence a process which could lead to consideration of possible business
combinations and that Morgan Stanley would be engaged as ENSERCH's financial
advisor for this purpose. Mr. Nye indicated that TUC remained interested in
considering making a proposal and would begin to finalize its evaluation.
On February 16, 1996, the TUC Board met for its regular
quarterly board meeting at which representatives of Worsham, Forsythe &
Wooldridge, L.L.P., and Barr Devlin were in attendance and discussed various
matters related to a possible transaction with ENSERCH. Possible corporate
structures for a transaction, required approvals, strategic rationale,
ENSERCH and its operations, and preliminary financial analyses were
discussed. TUC's management, with the assistance of Deloitte & Touche
Consulting Group, also discussed with the Board management's preliminary view
of potential synergies resulting from a possible transaction. On several
occasions between February 16 and February 24, Mr. Biegler and Mr. Nye spoke
by telephone about the process by which the two companies would consider a
business combination proposal. During the month of March 1996, the special
committee of the ENSERCH Board (the "ENSERCH Special Committee"), which was
established to develop a strategic plan for ENSERCH, met twice to discuss the
strategic alternative available to ENSERCH.
On March 1, 1996, TUC formally retained Barr Devlin as its
financial advisor with respect to a prospective transaction. On March 14,
1996, TUC retained the firms of LeBoeuf, Lamb, Greene & MacRae, L.L.P. and
Reid & Priest LLP to provide additional legal assistance and tax advice. On
March 19, 1996, Morgan Stanley began discussions with Barr Devlin. The
preliminary discussions focused on confirming the general views of the
principals and negotiation of a confidentiality agreement. On March 20,
1996, ENSERCH and TUC executed a confidentiality agreement in which TUC
undertook to keep confidential all information provided by ENSERCH in
connection with TUC's review of a possible transaction. TUC also agreed not
to make any offer regarding a possible business combination or to participate
in any proxy solicitation involving ENSERCH without the prior written consent
of the ENSERCH Board.
At ENSERCH's regular Board Meeting on March 26, 1996, Mr.
Biegler and the ENSERCH Special Committee reported to the ENSERCH Board on
the status of the activities of the ENSERCH Special Committee and Morgan
Stanley. Following the ENSERCH Board meeting, in a discussion with one of
the directors, Mr. Biegler learned that another company had a possible
interest in a business combination with ENSERCH. The chairman of the other
company subsequently telephoned to request a meeting with Mr. Biegler, which
was scheduled for April 9, 1996.
At a meeting on March 27, 1996, Mr. Biegler advised Mr. Nye of
the possible interest by the other company. Mr. Nye reported that he had
heard rumors of the other company's interest in ENSERCH and stated that TUC
would not look favorably upon a bidding contest. Mr. Nye expressed
willingness to devote additional resources to consideration of a possible
business combination with ENSERCH.
ENSERCH retained additional outside counsel to assist it in
connection with a possible business combination -- Skadden, Arps, Slate,
Meagher & Flom; Jackson & Walker, L.L.P., and King & Spalding. TUC retained
S. S. Swiger, a former officer and controller of TUC, to provide further
assistance on financial and accounting matters.
The ENSERCH Special Committee met again on April 4, 1996 with
Mr. Biegler and other senior officers of ENSERCH. Mr. Biegler reported on
the status of the discussions with TUC and the upcoming meeting with the
chairman of the other company. During this period Morgan Stanley and Barr
Devlin were discussing valuation of ENSERCH and certain other issues relating
to the feasibility of a combination. Between March 27 and April 4, 1996, Mr.
Biegler and Mr. Nye spoke several times to discuss facilitating TUC's
preliminary due diligence investigation of ENSERCH but did not discuss
substantive terms of a transaction.
On April 4 and 5, 1996, members of management of ENSERCH and
TUC met to respond to TUC's questions arising from its preliminary due
diligence investigation. The prospects for the various ENSERCH businesses
and issues pertinent to each were discussed. At this same time Morgan
Stanley and Barr Devlin shared their views on valuation parameters. On April
5, 6 and 8, 1996, Morgan Stanley met with senior ENSERCH management to
discuss issues relating to a possible combination with TUC.
On April 9, 1996, Mr. Biegler met with the chairman of the
other company. The trends in the electric and gas utility industries were
discussed. The other chairman indicated interest in discussing a negotiated
business combination with ENSERCH provided EEX was first divested, but
presented no offer. Mr. Biegler indicated he was not in a position to
provide any information and could make no commitments, but he would respond
in due course. Mr. Biegler reported this meeting to the ENSERCH Special
Committee and the ENSERCH Board.
On April 9, 1996, a special meeting of the Board of Directors
of TUC regarding the proposed acquisition took place, at which Mr. S.S.
Swiger and representatives of Worsham, Forsythe & Wooldridge, LLP, Deloitte &
Touche Consulting Group and Barr Devlin were present. Items discussed
included the strategic benefits of a gas company acquisition, the history and
background of ENSERCH, an overview of ENSERCH's businesses, a description of
the potential transaction, financial and synergy analyses, evaluations based
on a discounted cash flow analysis, market valuation of similar companies,
and a range of potential purchase prices. Barr Devlin provided an oral
opinion on the range of conversion ratios that would be fair from a financial
point of view to TUC and the holders of TUC Common Stock. Mr. Nye later
agreed upon a conversion ratio with ENSERCH within the range discussed by
Barr Devlin. At such meeting, the Board, by resolution, authorized Mr.
Farrington, the Chairman of TUC, and Mr. Nye to enter into the transaction if
a price in the recommended range would be accepted by ENSERCH.
The ENSERCH Special Committee, senior management of TUC and
ENSERCH and the representatives of TUC and ENSERCH met numerous times over
the first two weeks of April 1996 to discuss potential terms of the proposed
transaction. On April 13, 1996, the ENSERCH Board met and approved the
Merger Agreement and the Merger Agreement was signed. On April 15, 1996, the
Merger Agreement was publicly announced.
2. The Merger Agreement
The Merger Agreement provides that TUC and ENSERCH shall cause
the Company to form two subsidiaries, TUC Merger Corp. and ENSERCH Merger
Corp. TUC Merger Corp. shall be merged with and into TUC, with TUC as the
surviving corporation and ENSERCH Merger Corp. shall be merged with and into
ENSERCH, with ENSERCH as the surviving corporation. As a result of the
Mergers, TUC and ENSERCH will become subsidiaries of the Company, and TUC
would become an intermediate holding company over TU Electric and SESCO. The
Merger Agreement is incorporated herein by reference as Exhibit B-1. In the
Mergers:
- Each issued and outstanding share of TUC Common Stock (other than
any shares of TUC Common Stock owned by TUC, any subsidiary of TUC,
ENSERCH or any subsidiary of ENSERCH, all of which will be
cancelled without consideration and will cease to exist), will be
converted into one share of Company Common Stock.
- Each issued and outstanding share of ENSERCH Common Stock, together
with the associated rights (the "ENSERCH Rights") to purchase, in
certain specified circumstances, interests in ENSERCH voting
preference stock or, in other specified circumstances, shares of
ENSERCH Common Stock, pursuant to the terms of the Rights Agreement
between ENSERCH and Harris Trust Company of New York, as Rights
Agent thereunder, dated as of March 26, 1996 (other than any shares
of ENSERCH Common Stock owned by ENSERCH, any subsidiary of
ENSERCH, TUC or any subsidiary of TUC, all of which will be
cancelled without consideration and will cease to exist), will be
converted into that number of shares of Company Common Stock
obtained by dividing $8.00 by the average closing sales price of
TUC Common Stock as reported on the New York Stock Exchange
Consolidated Transactions Tape on each of the 15 consecutive
trading days preceding the fifth trading day prior to the
consummation of the Mergers (the "Average TUC Price"); provided,
however, in no event will the Average TUC Price be deemed to be
less than $35.625 or more than $43.625.
- Each share of capital stock of the Company issued and outstanding
immediately prior to the Mergers will be cancelled without
consideration and will cease to exist.
Upon consummation of the Mergers, each certificate representing
shares of TUC Common Stock or ENSERCH Common Stock issued and outstanding
prior to the Mergers will represent instead, in the case of TUC Common Stock,
the shares of, and, in the case of ENSERCH Common Stock, the right to receive
the shares of, Company Common Stock (and cash in lieu of a fractional shares
if any) into which those issued and outstanding shares will be converted.
The ratio for converting TUC Common Stock into Company Common Stock is
referred to hereinafter as the "TUC Conversion Ratio," and the ratio for
converting ENSERCH Common Stock into Company Common Stock is referred to
hereinafter as the "ENSERCH Conversion Ratio," together with the TUC
Conversion Ratio, the "Conversion Ratios." Any shares of the adjustable rate
cumulative preferred stock series E and the adjustable rate cumulative
preferred stock series F of ENSERCH (the "ENSERCH Preferred Stock") that
remain outstanding at the time of consummation of the Mergers shall remain
outstanding preferred stock of ENSERCH. The 6 3/8% convertible subordinated
debentures due 2002 issued by ENSERCH (the "ENSERCH Convertible Debentures")
outstanding at the time of the Mergers shall remain outstanding convertible
debentures of ENSERCH. ENSERCH shall take such action as may be necessary so
that, after the consummation of the Mergers, the ENSERCH Convertible
Debentures shall be convertible in accordance with their terms only for
shares of Company Common Stock and the Company shall authorize and reserve
for issuance, or otherwise provide, a sufficient number of shares of Company
Common Stock for delivery upon conversion of the then outstanding ENSERCH
Convertible Debentures. In connection with the Mergers, the Company will
change its name to Texas Utilities Company.
The Merger Agreement provides that immediately prior to the
consummation of the Mergers, EEX will be merged (the "Preliminary Merger")
with and into LSEPO, which in the Preliminary Merger will change its name to
Enserch Exploration, Inc. ("New EEX"). Subsequent to the Preliminary Merger
and prior to the consummation of the Mergers, ENSERCH will make a pro rata
distribution to the shareholders of ENSERCH (the "Distribution") of all of
the outstanding shares of Common Stock of New EEX owned by ENSERCH. Pursuant
to the Distribution, each shareholder of ENSERCH will receive a distribution
of approximately 1.5 shares of New EEX common stock, par value $.01 per share
for each one share of ENSERCH common stock held by such shareholder.
Based upon the Average TUC Price which would have been applicable
had the Mergers been consummated on April 12, 1996 and the number of shares
of TUC Common Stock and ENSERCH Common Stock outstanding on such date, each
ENSERCH shareholder would have received pursuant to the Mergers 0.20 of a
share of Company Common Stock for each share of ENSERCH Common Stock held by
such shareholder and TUC and ENSERCH shareholders would have held
approximately 94.3 percent and 5.7 percent, respectively, of the 239,571,542
aggregate number of shares of Company Common Stock that would have been
outstanding immediately after consummation of the Mergers.
The Mergers are subject to customary closing conditions, including
the receipt of the requisite approval of the holders of TUC and ENSERCH
Common Stock (which occurred on November 15, 1996) and all necessary
governmental approvals, including approval of the Commission.
The Mergers are designed to qualify as a tax-free transactions
under Section 351 of the Internal Revenue Code of 1986, as amended (the
"IRC"). The Mergers will be accounted for by the purchase method.
It should also be noted that pursuant to the Stock Option Agreement
dated as of April 13, 1996, by and between ENSERCH and TUC (the "Stock Option
Agreement"), ENSERCH has granted TUC the right (the "Option"), to purchase,
under certain circumstances relating to a Business Combination (as defined in
the Stock Option Agreement) proposal by a third party, up to 3,363,570
authorized but unissued shares of ENSERCH Common Stock, subject to adjustment
(which represents 4.9% of the outstanding common stock of ENSERCH on March
31, 1996), at $16.375 per share. The exercise of the Option is subject to
certain conditions set forth in the Merger Agreement relating to Business
Combination proposals by third parties and rights of termination. Because
the Option does not create a "present right to vote" it is not a voting
security within the meaning of Section 2(a)(17) of the Act and its grant was
therefore not jurisdictional under Section 9(a)(2) of the Act.
Item 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 for the
Joint Proxy/Registration Statement $3,412,959.40
on Form S-4
Stock Exchange Listing Fees 880,000.00
Legal Fees 7,900,000.00
Investment Banker Fees 21,075,000.00
Accounting Fees 465,000.00
Miscellaneous, including
consulting, proxy solicitation and 3,500,000.00
general merger expenses
Total $37,232,959.40
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.<F2> While the parties believe that the requested
authorization is well within existing precedent, changes in the industry make
the case for the transaction even more compelling. For example, one change
that the Commission has recently explicitly recognized is that "the utility
industry is evolving towards a broadly based energy-related business.<F3>
As will be discussed in greater detail below, this fundamental evolution
influences not only the appropriate notion of what a utility system consists
of, but also affects the value of benefits gained by becoming a full energy
services utility system.
____________________
<F2> 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).
<F3> See, CNG Order. See also, Unitil Corp., HCAR No. 26527 (May
31, 1996).
1. Section 10(b)
Section 10(b) provides that, if the requirements of
Section 10(f) are satisfied, the Commission shall approve an acquisition
under Section 9(a) unless:
(1) such acquisition will tend towards interlocking relations
or the concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interests of investors or
consumers;
(2) in case of the acquisition of securities or utility
assets, the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly, in
connection with such acquisition is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of the utility
assets to be acquired or the utility assets underlying the securities to be
acquired; or
(3) such acquisition will unduly complicate the capital
structure of the holding company system of the applicant or will be
detrimental to the public interest or the interests of investors or consumers
or the proper functioning of such holding company system.
a. Section 10(b)(1)
The Company believes that the Mergers will not tend towards
interlocking relationships or concentrations of control that would be
detrimental to the public interest or the interest of investors of consumers
because (i) following the Mergers, TU Electric and SESCO will remain subject
to regulation by the PUCT and various municipalities, and Lone Star will
remain subject to regulation by the Railroad Commission and various
municipalities, which bodies operate pursuant to regulations specifically
designed to protect the public interest and the interests of consumers, (ii)
the combination of Lone Star with the TUC utility system will not increase
the size of the system dramatically, and following the Mergers, the Company
will be a utility holding company comparable or smaller in size to other
utility holding companies that the Commission has approved, (iii) because of
the nearly total absence of cross elasticity of demand as explained below, TU
Electric and SESCO have few occasions to compete directly with Lone Star; and
TU Electric and SESCO, and Lone Star, each operate in competitive markets
which will not change as a result of the Mergers, (iv) there will be limited
interlocking relations following consummation of the Mergers, and, (v) as a
result of the Mergers, the Company expects to achieve significant savings and
expects to be able to compete more effectively in the evolving utility
industry, both of which will benefit consumers and ratepayers and are in the
public interest.
First, all of the operating utilities will be subject to regulation
with respect to rates and other corporate matters by regulatory bodies in
Texas, which function to protect the interest of consumers and the public
interest. TU Electric and SESCO are currently, and following the Mergers
will remain, subject to the jurisdiction of the PUCT and certain
municipalities with regard to their rates. In addition, certain corporate
activities by TU Electric and SESCO are also, and will remain, subject to
regulation by the PUCT. Lone Star is regulated by the Railroad Commission
and 550 municipalities with respect to its rates and the Railroad Commission
also has jurisdiction over certain corporate activities of ENSERCH. The
level of regulatory authority over ENSERCH and Lone Star will not be affected
by the Mergers.<F4> Indeed, as set forth in Exhibit D-1 hereto, the
principal body with regulatory jurisdiction over ENSERCH, the Railroad
Commission, has indicated to the Commission that it has no objection to the
Mergers, and that it will rely on its existing authority to protect the
interests of ratepayers subject to its jurisdiction. At a recent conference
on industry restructuring, Pat Woods, Chairman of the PUCT, characterized
this transaction as "the wave of the future." Similarly, in reference to the
proposed Merger, Commissioner Massey of the Federal Energy Regulatory
Commission stated "[t]his, I'm sure, is just the beginning of mergers such as
these between the two industries ... [g]as companies need electric expertise
and markets; electric companies need gas expertise and markets."<F5>
Judging by the reaction of the key regulatory bodies, it seems clear that the
utility system created by the Mergers is one that regulators believe is
becoming more commonplace and is one that will be subject to multiple forms
of regulation, each of which is designed to protect the interests of
concerned parties under the Act.
____________________
<F4> 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.
<F5> "Commissioners Mull Impact of Electric Rules on Gas", Inside
FERC, May 6, 1996, p.5.
As mentioned above, the Mergers are not detrimental to the public
interest or the interest of investors or consumers as they will not result in
a significant increase in the size of the utility system at issue, and will
create a system that is comparable to other utility systems. As of June 30,
1996, TUC had assets of $21.6 billion, while for the year ended December 31,
1995, TUC had operating revenues of $5.6 billion and 2.33 million utility
customers. As of June 30, 1996, ENSERCH had assets of $3.4 billion, while
for the year ended December 31, 1995, ENSERCH had operating revenues of $1.9
billion, and approximately 1.28 million utility customers. On a pro forma
basis, giving effect to the distribution, (i) as of June 30, 1996, the
combined assets of the Company would have totaled approximately $24 billion;
and (ii) for the year ended December 31, 1995, the Company would have had
combined operating revenues would have totaled approximately $7.4 billion and
approximately 2.78 million utility customers.<F6> The Commission has
approved acquisitions involving similar sized operating utilities (see
Entergy Corp., HCAR No. 25952 (Dec. 17, 1993) approving the acquisition of
Gulf States Utilities, with combined assets at time of acquisition in excess
of $21 billion; The Southern Company, HCAR No. 24579 (Feb. 12, 1988)
approving the acquisition of Savannah Electric and Power Company to create a
system with assets of $20 billion and 3.25 million customers) and has not
found the size of other existing holding companies of similar size to be
problematic.<F7>
____________________
<F6> 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.
<F7> 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.<F8>
____________________
<F8> 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,<F9> whether each parties' Board of Directors has approved
the purchase price,<F10> the opinions of investment bankers<F11>
and the earnings, dividends, book and market value of the shares of, the
company to be acquired.<F12>
____________________
<F9> In the Matter of American Natural Gas Company, HCAR No.
15620 (Dec. 12, 1966).
<F10> Consolidated Natural Gas Company, HCAR No. 25040 (Feb.
14, 1990).
<F11> Id.
<F12> 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 Dividends High Low Dividends
____ ___ _________ ____ ___ _________
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 $37.2
million in fees, commissions and expenses in connection with the Mergers. By
contrast, Cincinnati Gas & Electric Company and PSI Resources incurred $47.12
million in fees in connection with their reorganization as subsidiaries of
CINergy and Northeast Utilities incurred $46.5 million in fees and expenses
in connection with its acquisition of Public Service of New Hampshire --
which amounts were all approved as reasonable by the Commission. See
CINergy, HCAR No. 26146 (Oct. 21, 1994); Northeast Utilities, HCAR No. 25548
(June 3, 1992).
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 664.7
Redemption
Preferred stock Subject To Mandatory Redemption 250.8
Long Term Debt 9,784.2
TU Electric Obligated, Mandatorily Redeemable 381.7
Preferred Securities of Trust
Total $17,457.6
The Company's pro forma consolidated common equity to total capitalization
ratio of 36.5% comfortably exceeds the "traditionally acceptable 30% level."
Northeast Utilities, 47 SEC Docket at 1279, 1284 (1990).
Protected interests: As set forth more fully in Item 3.a.1.ii.
(Efficiencies and Economies), Item 3.d.2. (Integrated Public Utility System)
and elsewhere in this Application/Declaration, the Mergers are expected to
result in substantial cost savings and synergies, and will integrate and
improve the efficiency of the parties utility system. The Mergers will
therefore be in the public interest and the interests of investors and
consumers, and will not be detrimental to the proper functioning of the
resulting holding company system.
2. Section 10(c)
Section 10(c) of the Act provides that, notwithstanding
the provisions of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or
of any other interest, which is unlawful under the provisions of Section
8 or is detrimental to the carrying out of the provisions of Section 11;
or
(2) the acquisition of securities or utility assets of a
public utility or holding company unless the Commission finds that such
acquisition will serve the public interest by tending towards the
economical and the efficient development of an integrated public utility
system . . . .
a. Section 10(c)(1)
Section 10(c)(1) requires that the proposed acquisition not be
"unlawful under the provisions of Section 8" or "detrimental to the carrying
out of the provisions of Section 11." Section 8, by its terms, only applies
to registered holding companies and thus the Mergers cannot be unlawful under
Section 8 of the Act. However, even if applied to exempt holding companies,
the Mergers would not be unlawful as there is no state law, regulation or
policy against combination companies. Section 11 of the Act relates to the
simplification of holding company systems, and, as discussed in further
detail below, by its terms also only applies to registered holding companies.
Section 11(b)(1), which contains the principal elements of Section 11's
simplification standard, specifically mandates that the Commission require
each registered holding company to limit the operations of the holding
company system to a single integrated public utility system.
The term "integrated public-utility system" is defined in
Section 2(a)(29) to mean:
As applied to electric utility companies, a system
consisting of one or more units of generating plants
and/or transmission lines and/or distributing facilities,
whose utility companies are physically interconnected or
capable of physical interconnection and which under
normal conditions may be economically operated as a
single interconnected and coordinated system confined in
its operations to a single area or region, in one or more
states, not so large as to impair (considering the state
of the art and the area or region affected) the advantage
of localized management, efficient operation, and the
effectiveness of regulation;
and
As applied to gas utility companies, a system consisting
of one or more gas utility companies which are so located
and related that substantial economies may be effectuated
by being operated as a single coordinated system confined
in its operations to a single area or region, in one or
more states, not so large as to impair (considering the
state of the art and the area or region affected) the
advantages of localized management, efficient operation,
and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common
source of supply may be deemed to be included in a single
area or region.
As the Commission and its staff have previously noted, in
connection with an acquisition by an exempt holding company section 10(c)
mandates that such acquisition not be detrimental to the carrying out of the
provisions of Section 11 but does not require that the acquisition meet the
strict integration standards of Section 11(b)(1) as would be required of a
registered holding company. Thus, the principal issue under Section 10(c)
with regard to the Mergers is whether the creation of an exempt holding
company system from the merger of an electric system and a gas system is
detrimental to Section 11. First, it should be noted that on its face the
Act does not prohibit ownership by an exempt holding company (or even, for
that matter, by a registered holding company) of both electric and gas
utility properties although it does not contain a definition of integrated
utility in the context of a combination company.<F13> Second, existing
Commission precedent clarifies that section 10(c)(1) does not require that
the resulting exempt holding company constitute "a single integrated system."
In In the Matter of Gaz Metropolitain et al, HCAR No. 26170 (Nov. 23, 1994),
the Commission considered and approved a section 10 application where the
resulting exempt holding company would own two gas utilities which, although
geographically contiguous, would not constitute a single integrated system
within the meaning of the Act.<F14> In issuing this order, the
Commission specifically stated that "Section 10(c)(1)'s requirement that the
acquisition not be "detrimental" to the carrying out the provisions of
Section 11 does not mandate that the latter section's integration requirement
be met. Exempt holding companies are not directly subject to
Section 11(b)(1)'s integration standards,"<F15> and also "indicated in
the past that acquisitions may be approved even if the combined system will
not be a single integrated system."<F16> Thus, subject to certain
conditions discussed below, it is consistent with the provisions of the Act
for the Commission to approve an application under section 10 where the
resulting exempt holding company system contains an integrated electric
system and an integrated gas system.
____________________
<F13> Union Electric Company, 45 SEC 489 (1974) ("Nowhere
does the Act ban combination systems in so many
words.")
<F14> The definition of integrated system with respect to a
gas utility requires that the system be located in one
or more states (defined as a state of the United
States) and, in this case, one of the utilities in the
system was located in Canada. Therefore, although
integrated, the system would arguably not be a single
integrated system.
<F15> See also Division of Investment Management, The
Regulation of Public-Utility Holding Companies (June
1995) 65-66 (the "Division Report") ("Section 11's
integration provisions apply only to registered holding
companies.").
<F16> Citing Union Electric Company, 45 SEC. 489 (1974) at
495, n. 20; Eastern Gas and Fuel Associates, 30 SEC.
834, 848 (1950).
Section 10 does require that the transaction, and the resulting
holding company system, be consistent with the basic principles of section 11
of the Act, which is often referred to as the "heart" of the Act.<F17>
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.<F18>
This overarching concern of the Act clearly focuses on the need to
concentrate the geographic scope of the system to a reasonable (as determined
by a variety of factors, including technological developments) geographic
area to ensure that it's management will be sensitive, and accountable, to a
given region, that there will be adequate local regulation of the holding
company system and that the holding company structure is beneficial to the
operating utilities.<F19> Thus, in connection with a section 10
application where the resulting system will be an exempt holding company and
the applicants can demonstrate that adequate regulatory authority exists to
protect local ratepayers, that the resulting system is a coherent system not
one where great and irrational distances divide the operating
utilities<F20> and there are benefits to be gained by at least one of
the operating utilities as a result of the transaction, the transaction is
not detrimental to the provisions and policies of section 11. Indeed, in the
Gaz Metropolitain case, the Commission took specific note of the fact that
the two systems were in a geographically concentrated area, that the Vermont
regulators had expressed their belief that they could protect the public
interest in Vermont after the consummation of the transaction and that the
Vermont system had experienced and could be expected to continue to
experience significant savings as a result of its association with the
holding company system. As discussed below, following the Mergers, the
Company will meet all of the above criteria in a similar manner.
____________________
<F17> See, Division Report at 60.
<F18> S. Rep. No. 651, 74th Cong., 1st Sess. 11 (1935).
<F19> "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)
<F20> The holding company system involved in Electric Bond
and Share Company, 33 SEC 21 (1952), for example, which
had operating utilities located in China, Mexico, nine
Central and South American countries, Texas, Louisiana
and Mississippi was found to be violative of the basic
principles of section 11 at that point in time.
Additionally, the Commission has in the past found that combination
gas and electric exempt holding companies are consistent with the
requirements and policies of the Act. Indeed, when first interpreting the
Act, the Commission stated that even registered holding companies systems
could consist of an electric utility and a gas utility consistent with the
provisions of Section 11.<F21> However, the Commission reversed its
position with respect to registered holding companies shortly, and at a later
point in one decision with respect to exempt holding companies, requiring
that registered holding company systems and, for a brief period, new exempt
holding company systems be limited to either an electric or a gas
system.<F22> The Commission's position with respect to exempt holding
companies was apparently based largely on policy concerns existing at the
time of those decisions and by 1974 when those policy concerns had
dissipated, the Commission returned to its former position, allowing the
creation of combination exempt holding company systems as not detrimental to
Section 11.<F23> In 1988, the Commission decided two important cases in
this area, Dominion Resources<F24> and WPL Holdings.<F25> In
Dominion Resources an exempt combination company was permitted to acquire a
gas utility. Pursuant to section 10, the Commission expressly held that "the
provisions of Section 11 are not applicable to exempt holding companies such
as DRI." The holding was not merely that section 11 by its terms applies
only to registered holding companies, but in that context, the meaning of the
holding was that such an acquisition did not violate section 10(c).
Moreover, since DRI did not acquire any new electric properties, there was no
direct effect upon its electric system, as is also the case in a pure
gas/electric combination. Furthermore, in WPL Holdings the SEC stated that
"we do not believe that the pro-competitive thrust of the Act expresses an
absolute Federal policy against combination gas and electric operations."
Since the Union Electric case, and especially since 1988, the Commission has
issued a number of orders authorizing the creation and/or continued exemption
of new or larger combination exempt holding company systems whether through
the formation of a new holding company<F26> or via the acquisition of a
gas and/or electric company by an existing combination system.<F27>
Throughout this period, the Commission's decisions focused on whether "both
the electric and gas operations that [the holding company] proposes to
acquire constitute an integrated public-utility system"<F28> consistent
with the analysis that should be applied in the present case. In other
words, the policies and basic protections that animate section 11 (deference
to state regulatory authority with respect to combination companies, provided
the resulting holding company system in any case will not be the type of
system that the Act was designed to prevent and that needs additional
regulation under the Act) apply to exempt holding company acquisitions,
although a strict reading of the section is not required.
The decisions discussed above make clear that:
these [section 11(b)(1) and section 10(c)] statutory standards have
not been so administered by us with respect to holding companies
subject to exemption under section 3(a). We have accordingly
granted exemptions to holding companies with combined electric and
gas operations. Nor have we withheld approval under section 10
solely because the holding company would be engaged in both utility
businesses, if the holding company, as enlarged or extended by the
acquisition, qualified for an exemption under section
3(a).<F29>
____________________
<F21> American Water Works and Electric Co., 2
SEC 972 (1937).
<F22> 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).
<F23> Union Electric Company, 45 SEC 489 (1974).
<F24> Dominion Resources, Inc., HCAR No. 24618 (April 5,
1988)
<F25> WPL Holdings, HCAR No. 24590 (February 26, 1988)
<F26> 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).
<F27> 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).
<F28> CIPSCO Incorporated, HCAR No. 25152 (Sept. 18, 1990).
<F29> 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,<F30> the exemption
orders of the Commission approving combination company exemptions are really
indistinguishable from the acquisition decisions under section 9 and 10.
Thus, if the acquisition of a gas system by an electric or combination
company as in Dominion Resources (discussed above) was against the policy of
the Act, the Commission would not approve an exemption merely because the
transaction was structured so as not to create a second bite.
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<F31> and it would not be
logical to treat the instant application different from one that could be
filed if, for example, an electric utility company were to acquire a gas
utility company as its "first bite," claim an exemption under section
3(a)(1), and immediately apply for Commission approval under sections 9(a)(2)
and 10 to create a holding company and reorganize such that the electric
utility and the gas utility (then under common control) were all separate
subsidiaries of the newly formed holding company. What would justify the
Commission in approving an exemption for a new holding company if combination
companies were per se against the policy of the Act? The Commission by
approving such transaction would be allowing a holding company to be created
which offended a basic policy of the Act. The purpose of the Act is to
regulate the creation and existence of public utility holding companies and
neither the language of the Act nor any policy imperative indicates that
these types of new exempt holding companies should be treated differently
under sections 8 and 11. The substantive conclusion of the transaction
should prevail over the particular form it may assume.
____________________
<F30> See, Hawes, Utility Holding Companies, Section 3.04[5].
<F31> Association of Massachusetts Consumers v. SEC, 516 F.2d
711 (DC Cir., 1975); In the Matter of National Propane
Corp., HCAR No. 20684 (Aug. 24, 1978); SCANA
Corporation, SEC No-Action Letter (June 14, 1990);
Wisconsin Energy Corporation, SEC No-Action Letter
(Dec. 17, 1993).
Furthermore, given the significant evidence that combination gas
and electric systems within registered holding companies is permissible under
the Act provided that such combinations are authorized by the relevant state
regulatory commissions, it follows a fortiori that combination exempt holding
companies are permissible absent violation of state law. Specifically,
Section 8 of the Act provides that:
[w]henever a State law prohibits, or requires approval or
authorization of, the ownership or operation by a single
company of the utility assets of an electric utility
company and a gas utility company serving substantially
the same territory, it shall be unlawful for a registered
holding company, or any subsidiary company thereof . . .
(1) to take any step, without the express approval of the
state commission of such state, which results in its
having a direct or indirect interest in an electric
utility company and a gas company serving substantially
the same territory; or (2) if it already has any such
interest, to acquire, without the express approval of the
state commission, any direct or indirect interest in an
electric utility company or gas utility company serving
substantially the same territory as that served by such
companies in which it already has an interest.
On its face, the section indicates that, with the approval of the
relevant state utility commissions, even registered holding company systems
can include both electric and gas utility systems. A careful reading of the
section indicates that the thrust of the section is to preclude the use by
registered holding companies of separate gas and electric utility companies
with overlapping service territories in order to circumvent any state law
restrictions on the ownership of gas and electric assets by the same company.
Thus, two types of combination registered holding companies are implicitly
acceptable under the statute absent such state objection -- a registered
holding company system that includes combination companies and a system that
includes separate gas and electric companies. Over time the Commission has
emphasized different aspects of section 8 and its interplay with section 11
with respect to registered systems -- initially allowing registered holding
companies to own both gas and electric systems under section 8, then focusing
on a stricter interpretation of section 11 making such combination companies
more difficult.
In its early decisions, the Commission adhered to the concept that
the decision as to whether to allow combination registered holding companies
is one that states should make (although the Commission might have to
implement it in certain cases) and, where such systems were permissible, the
role of the Commission was to ensure that both such systems are integrated as
defined in the Act. In In the Matter of American Water Works and Electric
Company, Incorporated, 2 SEC 972 (1937), the Commission approved the
applicant's voluntary reorganization plan under Section 11(e) of the Act and
permitted the newly reorganized registered holding company to retain its
electric and its gas operations, specifically noting that while the Act does
not contain a definition of single integrated utility in the context of a
combination company:
We believe, however, that it is proper to regard such a
combined property as a single integrated system, provided
that all of the electric properties are integrated and
all of the properties, both gas and electric, are in
fairly close geographic proximity and are so related that
substantial economies may be effectuated by their
coordination under common control. The question of
public policy as to the common ownership of gas and
electric facilities in the same territory is apparently
left by the statute to the decision of the
states.<F32>
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.<F33> During this period, the Commission noted that
with respect to registered holding companies, "we think, Section 8 does not
control the problem of whether electric and gas utilities may be operated
within a single integrated system ... Section 8 expresses the policy that the
state law shall control acquisitions of properties which may result in
combined operations, whereas Section 11 is concerned with retentions of
property."<F34> Similarly, the Supreme Court addressed the interplay
between Section 8 and 11 of the Act in its decision Securities and Exchange
Commission v. New England Electric System ("NEES"), 384 U.S. 176 (1966). In
this decision, the Court noted:
To some extent, local policy was expected to govern, with
Section 8 serving to prevent circumvention of that policy
... At the same time, Section 11 was expected to assist
in imposing restrictions with regard to the combination
of gas and electricity in one system. Discussing the
interplay between Section 8 and Section 11, the Senate
Committee noted that Section 8 only applied to future
acquisitions [and] "the policy upon which this section
was based was essential in any Federal legislation in
utility holding companies; it did not think that the
section should make it unlawful to retain (up to the time
that section 11 may require divestment) interests in
businesses in which the companies were lawfully engaged
on the date of enactment of this title."<F35>
____________________
<F32> In the matter of American Water Works and Electric
Company, Incorporated, 2 SEC at 983, n.3.
<F33> 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).
<F34> In the Matter of Columbia Gas & Electric Corporation, 8
SEC 443 (1941).
<F35> 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.<F36>
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."<F37> The
NEES decision therefore leaves the Commission free to apply its expertise to
administer the Act in light of changes in legal, regulatory and economic
circumstances which were not foreseen at the time of the NEES decisions,
including market and regulatory changes which have "substantially changed"
since the time of the enactment of the Act. As discussed in detail below,
the current restructuring of the industry with an emphasis on complete energy
services is as "substantial" a change as has occurred since that which was
imposed by the adoption of the Act.
____________________
<F36> 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.
<F37> 45 SEC at 509 n.77.
A review of the legislative history of Section 8 clarifies that
even combination registered holding companies are permissible in certain
circumstances. In its report, the Senate Committee on Interstate Commerce
noted that the provision in Section 8 concerning combination companies "is
concerned with competition in the field of distribution of gas and electric
energy - a field which is essentially a question of State policy, but which
becomes a proper subject of Federal action where the extra-State device of a
holding company is used to circumvent state policy." The Report of the
Committee on Interstate Commerce, S. Rep. No. 621 at 31 (1935). In addition,
attached to the above-referenced committee report is the Report of the
National Power Policy Committee on Public-Utility Holding
Companies,<F38> which sets forth a recommended policy that: "Unless
approval of a State commission can be obtained the commission should not
permit the use of the holding-company form to combine a gas and electric
utility serving the same territory where local law prohibits their
combination in a single entity." This does not prohibit combination
registered companies where such approvals can be obtained, but is consistent
with the general policy of the Act that local regulators are in the best
position to assess the needs of their communities.<F39> The Act was
never intended to supplant local regulation but, rather, was intended to
create conditions under which local regulation was possible.
Turning to the facts of the proposed Mergers, it is clear that TUC
and ENSERCH currently operate as integrated utility systems and the combined
system will not be detrimental to the carrying out of section 11. The TUC
electric system meets the standards of Section 2(a)(29)(A) as TU Electric and
SESCO are physically interconnected and operate as a coordinated system in
the State of Texas, as the Commission held in 1993 when TUC obtained
authorization from the Commission to acquire SESCO pursuant to the standards
of Section 9(a)(2) and 10 of the Act and both are subject to the jurisdiction
of the PUCT.<F40> Further, TUC has not acquired any utility operations
since that time which would affect the analysis made in that order. The
ENSERCH system meets the standards of Section 2(a)(29)(B) as it operates, and
after the Mergers will continue to operate, exclusively in the State of
Texas, is and will continue to be effectively regulated by the Railroad
Commission and the local councils, and, following the Mergers, will continue
to operate as a separate subsidiary with its own management for certain
operations. Nevertheless, the entire system will be operated as a
coordinated system in that there will be centralized planning (including
planning of utility operations), accounting, billing, customer service and
corporate reporting services provided by the Company. Thus, following
consummation of the Mergers, the Company system will consist of a large
integrated electric utility system and a smaller integrated gas utility
system which together will operate on a coordinated basis offering services
to customers in the same area (see Exhibit E-2 hereto for a map depicting the
service territories of TUC and ENSERCH).
____________________
<F38> 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.
<F39> 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).
<F40> Texas Utilities Company, HCAR No. 25826 (June 15,
1993).
The Company system following the Mergers will, in fact, be quite
similar to the combination exempt holding companies whose formation or
expansion the Commission has approved in the past under section 10.<F41>
The only difference between the instant case and the prior decisions of the
Commission with respect to acquisitions is the fact that the Company will be
acquiring a pure electric system (TUC) and a pure gas system (Enserch) that
were not previously operated under the same holding company. However, it
would be a strange result indeed if such an acquisition could not meet the
standards of section 10(c) when an acquisition of a combination system or a
pure gas or electric system by an existing combination system as well as the
acquisition of an existing combination system (which might include separate
combination and gas and electric utility subsidiaries) by a newly formed
holding company would result in the same structure and would meet such test.
As noted above with respect to Dominion Resources, when a combination company
combines with either an electric or a gas utility the effect with respect to
one of the two systems created is the same as with a pure electric/pure gas
combination. Neither the language of the Act nor any policy reason supports
such a distinction, especially when it is clear that the Mergers will not be
detrimental to the carrying out of the provisions of section 11 inasmuch as
the Company will carry out its utility operations predominantly within the
State of Texas, will be subject to adequate regulatory authority in that
state and will not be the type of nationwide, complex system that section 11
was designed to prevent. Moreover, the Company will be an exempt holding
company and, once again, "exempt holding companies have generally been
permitted to retain or acquire combination systems so long as combined
ownership of gas and electric operations is permitted by state law and is
supported by the interested regulatory authorities,"<F42> and Texas law
does not prohibit combination gas and electric utility companies. The fact
that the Company will be an exempt holding company and the transaction is
subject to the Act's more lenient standard with regard to electric and gas
combinations coupled with the fact that the Company's utility operations will
be located exclusively in the same geographic region within the State of
Texas and the Railroad Commission has specifically stated that it does not
object to a combination system leads to the conclusion that the Mergers
should be authorized under the Act.
____________________
<F41> See supra notes 28 and 29.
<F42> Report at 74. See also In the Matter of Northern
States Power Company, HCAR No. 12655 (Sept. 16, 1954);
Delmarva Power & Light Co., 46 SEC. 710 (1976); WPL
Holdings, HCAR No. 24590 (Feb. 26, 1988).
Finally, as is made clear by the history of interpretations under
sections 8, 10 and 11 of the Act, another factor that must be included in any
section 10 and section 11 analysis is current industry conditions. As the
Division of Investment Management noted in the Report, "the SEC must continue
to respond flexibly to the legislative, regulatory and technological changes
that are transforming the structure and shape of the utility
industry,"<F43> especially since "Section 11 does not impose `rigid
concepts' but rather creates a 'flexible' standard designed to accommodate
changes in the electric utility industry,"<F44> and such concerns have
influenced Commission decisions under the Act, and under section 10 in
particular, in the past.<F45> Specifically, the major parties in the
utility industry, including utility companies, exempt holding companies,
registered holding companies and related entities, are presently in the midst
of restructurings designed to permit them to become complete "energy services
companies,"<F46> offering customers across the nation an array of fuels
to meet their complete energy needs through a "one-stop" energy company, an
industry shift that the Commission has expressly recognized.<F47> 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.<F48> With this industry evolution in mind, it becomes clear
that the Mergers provide TUC with the most efficient basis for entering into
natural gas operations, both as a local distribution company and as a gas
marketer with experienced management, and provide ENSERCH with greater
financial and other resources, allowing both companies to remain competitive
with the developing complete energy services companies. Combined, TUC and
ENSERCH can offer their customers a choice of fuels (gas and/or electricity)
to meet their energy needs at competitive prices in the most economical and
efficient manner.
____________________
<F43> Report at 70.
<F44> Report at 75.
<F45> 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).
<F46> For example, Enron Corp. and NGC Corp., which have
significant gas and power marketing operations, have
announced that they are expanding their operations,
concluding that "customers in the future will want
energy services, not a specific fuel." Inside FERC,
February 23, 1996. Similarly, some registered utility
holding companies currently provide both electric and
gas utility services to their customers (See CINergy
Corp. HCAR 26146 (Oct. 21, 1994), and others are
expanding into the energy services business, e.g.,
Consolidated Natural Gas, a registered holding company,
has formed a subsidiary to offer customers multiple
fuel options and related energy services. See CNG
Order. Finally, recent announcements relating to the
acquisition of Portland General Corporation, an
electric utility holding company, by Enron Corporation,
a large gas pipeline and electric and gas marketer, the
acquisition of NorAm Energy, Inc., a gas utility
company, by Houston Industries, Inc., an electric
utility holding company, and the acquisition of
PanEnergy Corp., a large pipeline company by Duke Power
Company, an electric utility and an electric utility
holding company, all demonstrate that market forces are
pushing for the convergence of electric and gas
operations in one corporate entity; namely, a full
service utility company.
<F47> See, CNG Order.
<F48> In announcing the merger of Pacific Enterprises, a gas
utility holding company and Enova Corp., a combination
holding company with primary emphasis on electric
operations, the senior executives from the two
companies stressed that "winners in the competitive
[utility] industry in the future will have to offer
customers a comprehensive suite of energy products and
services. Companies that do not are bound to become
niche players." and "ours is becoming a BTU business."
The Energy Daily, October 16, 1996.
Finally, the Mergers will not be detrimental to the carrying out of
Section 11(b)(1)'s provision that registered holding companies be limited to
an integrated public utility system and "such other [non-utility] businesses
as are reasonably incidental or economically necessary or appropriate
thereto." The Commission has not applied "the prohibitions of
Section 11(b)(1) against retention of unregulated non-utility businesses by
exempt holding companies to the same extent as registered holding
companies,"<F49> and has generally only tried to ensure that the
resulting holding company system will be predominantly a utility
company.<F50> Given that the Company's utility operations after the
Mergers and the prior Distribution, will account for approximately $6.6
billion of its $7.4 billion in operating revenues and $23.4 billion of its
$23.8 billion in assets, it is clear the Company system will be primarily an
operating utility and all of the system's non-utility operations will consist
of energy-related or supportive businesses.
____________________
<F49> Wisconsin Energy Corporation, HCAR 24267 (Dec. 18,
1986).
<F50> Id.
b. Section 10(c)(2)
The other component to section 10 analysis requires that the
acquisition tend "towards the economical and efficient development of an
integrated public-utility system." The Commission has stated in several
cases, including in the Gaz Metropolitain case, the most recent decision in
this area, that under section 10(c)(2) an exempt holding company may consist
of more than one integrated system.<F51> In essence, section 10(c)(2)
requires that (i) each utility system within the exempt holding company
system be an integrated system and (ii) the acquisition tend toward the
economical and efficient development of an integrated system. The economies
and efficiencies expected to result to accrue to the ENSERCH and TUC systems
as a result of the Mergers are sufficient to satisfy the standards of section
10(c)(2). In addition to the identified synergy savings, other benefits from
the Mergers that cannot be quantified should be taken into account in this
analysis, as "specific dollar forecasts of future savings are not necessarily
required; a demonstrated potential for economies will suffice even when these
are not precisely quantifiable."<F52>
____________________
<F51> 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)."
<F52> 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<F53> which will
enhance both the gas system and the electric system to be acquired and lead
to more efficient and economical utility operations.<F54> The parties
continue to explore and refine which areas of their operations will be the
source of such synergies following the Mergers. At this point in time, it is
expected that the savings amount mentioned above will largely result from the
fact that the service territories of TUC and ENSERCH overlap in various areas
and therefore the Company will be able to streamline many operations when it
functions as a single system, such as: (i) meter reading operations - TUC and
ENSERCH currently maintain separate meter reading operations and as a result
of their overlapping territory, these operations can be combined into a
single, more efficient system; (ii) meter repair and testing facilities - TUC
and ENSERCH as a combined entity will be able to organize these operations
into a single more economical operation; (iii) billing systems - the
combination of the separate TUC and ENSERCH billing systems will allow the
two companies to capture synergy savings in this area; (iv) computer systems
- the combined TUC system will need fewer computers and back-up computers
than TUC and ENSERCH operating separately; in fact the TUC system has excess
capacity and it is expected that ENSERCH can be added to the TUC system such
that it is utilized more efficiently, resulting in savings to the combined
system; (v) customer service operations - TUC and ENSERCH both currently have
call centers located in Dallas and Waco, Texas and following the Mergers, the
Company will only require one call center in both cities; and (vi) emergency
restoration coordination - the Company should be able to respond more quickly
and efficiently to distribution interruptions with a combined work force.
Also included in the savings number are administrative savings that are
expected to result from TU Services' provision of corporate services such as
accounting and reporting for ENSERCH, which should both allow ENSERCH to
obtain these services at a lower cost and permit more efficient use of TU
Services' existing operations. Other general savings are also expected to
result from the Mergers.
____________________
<F53> The before tax present value of this synergies value is
$505 million.
<F54> WPL Holdings, Inc., HCAR No. 25377 (Sept. 18, 1991)
("Thus, in reviewing an application under this
Section [10(c)(2)], the Commission may recognize not
only benefits resulting from combination utility
assets, but also financial and organizational economies
and efficiencies.")
In addition to these areas of savings, it is very important that
the Commission note and consider the benefits of the Mergers that are not
quantifiable and thus not included in the saving number mentioned above, but
which will allow the Company to provide the most efficient services and
operations in the changing utility industry, such as the following:
- Enhanced Customer Service and Operational Efficiencies. By
coordinating and integrating certain operations of TUC's and
ENSERCH's utility businesses to take advantage of the companies'
overlapping service territories, the Company will be able to
provide its customers with enhanced service and choice. The
Company intends to assist its customers in managing their total
energy service requirements in the most efficient manner. The
Mergers should offer greater convenience to customers who, in most
cases, will be able to conduct all their energy business with one
system.
- Maintenance of Competitive Rates. TUC and ENSERCH should be able
to meet the challenges of the increasingly competitive pricing
environment in the utility industry more effectively than either
company could on a stand-alone basis. The Mergers should create
the opportunity for potential benefits for customers in the form of
lower rates over the long term than could be achieved if the
companies operated independently, and for shareholders in the form
of greater financial strength and financial flexibility.
- Coordination of Diversification Programs. TUC and ENSERCH each
have complementary non-utility operations and, as a combined and
financially stronger company, should be able to manage and pursue
these operations more efficiently and effectively.
- Better Utilization of Resources. The joint engineering, siting and
construction of facilities should reduce costs and minimize
environmental disruption.
The savings discussed above, which result from a transaction that provides
the most efficient means for TUC and Enserch to become full service utilities
providing the operations that the evolving market demands, are entirely
consistent with the savings that the Commission has found sufficient in
connection with other examinations under Section 10(c)(2). For example, in
WPL Holdings, the Commission noted benefits resulting from:
a structure that could more effectively address the
growing national competition in the energy industry,
refocus various utility activities, facilitate selective
diversification into nonutility businesses, ... and
provide additional flexibility for financing,<F55>
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.<F56> Indeed, it is a condition to consummation
of the Mergers that all applicable state regulations be complied with.
Although neither the PUCT nor the Railroad Commission must approve the
Transaction, they will continue to have jurisdiction over the TUC and Enserch
systems, respectively, and the Railroad Commission has specifically informed
the Commission that it does not object to the Mergers.
____________________
<F55> HCAR No. 25096 (1990).
<F56> It should be noted that the terms of section 10(f)
reinforce the fact that the policy of the Act is to
supplement, not supplant, state and local regulation.
3. Section 3(a)(1)
The Company requests that the Commission issue an order under
Section 3(a)(1) declaring that the Company is exempt from all provisions of
the Act except Section 9(a)(2). Section 3(a)(1) of the Act provides that the
Commission may issue the above-requested order to a holding company, if:
such holding company, and every subsidiary company
thereof which is a public utility company from which such
holding company derives, directly or indirectly, any
material part of its income, are predominantly intrastate
in character and carry on their business substantially in
a single State in which such holding company and every
such subsidiary company thereof are organized.
The Company and its three public utility subsidiaries following the Mergers
(TU Electric, SESCO and ENSERCH) will all be Texas corporations operating
wholly in the State of Texas (in the case of TU Electric and SESCO) or almost
entirely in the State of Texas (in the case of ENSERCH) and therefor meet the
latter half of the Section 3(a)(1) test.
With regard to the first half of the test, in determining whether a
company's operations are "predominantly intrastate in character," the
Commission has primarily examined the amount of revenues derived by that
entity from out-of-state activities,<F57> but has also considered out-
of-state service area, customers, property, generation and sales.<F58>
____________________
<F57> 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.
<F58> 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),<F59> and, indeed are similar to the numbers for the TUC system
prior to the Mergers, which system has received a Section 3(a)(1) order from
the Commission already.
Again, the fact that the Mergers will result in a combination
electric utility and gas utility system does not effect the Company's
eligibility for a Section 3(a)(1) order as the Commission has on numerous
occasions in the past issued such orders to combination exempt holding
companies.<F60> As the Commission has noted
We have recognized in previous cases that exempt holding
companies ... are not held to strict compliance with the
single-integrated public utility standard of Section
11(b)(1) "unless and except" less than full compliance
with the standard would be "detrimental to the public
interest or the interest of investors or consumers ...
the interests sought to be protected from detriment in
section 3(a) ... would be appropriately protected by
effective regulation at the state and local
level."<F61>
____________________
<F59> See supra note 29.
<F60> See, e.g., CIPSCO Incorporated, HCAR No. 25152 (Sept.
18, 1990); WPL Holdings, Inc., HCAR No. 25096 (May 25,
1990).
<F61> WPL Holdings, HCAR No. 24590 (Feb. 26, 1988). See
also, In the Matter of Wisconsin Electric Power Company
and Wisconsin Natural Gas Company, HCAR. No. 24267
(Dec. 18, 1986) ("The Commission has for many years
granted exemptions under section 3(a)(1) to companies
conducting combined gas and electric operations.
Competition between the two modes of energy was
regarded as `essentially a question of state policy'").
As indicated by the Texas regulatory bodies, both officially and in
speeches, the Mergers are not detrimental to the public interest or the
interest of consumers. Moreover, the boards of directors of each company, in
exercising their fiduciary duties and upon the opinion of their financial
advisers, determined that the consideration to be received in the Mergers is
fair to both companies shareholders. Each set of shareholders must also
approve the separate Mergers by a two-thirds vote in order to consummate the
transaction. Thus, it is clear that the Mergers are not detrimental to the
interests of investors.
Item 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
On November 29, 1996, the NRC issued an order relating to the
Mergers, which order is filed herewith as Exhibit D.3. Other than the
approval of the Commission under the Act and as previously set forth, no
other federal regulatory entity must approve the Mergers. However, under the
Merger Agreement, consummation of the Mergers is conditioned upon
consummation of the Distribution and receipt of a ruling from the Internal
Revenue Service (the "IRS") to the effect that the Distribution will result
in no taxable gain to ENSERCH or its shareholders. On February 28, 1997, the
IRS issued such ruling.
Item 5 PROCEDURES
On November 15, 1996, the Commission issued the requisite notice
under Rule 23 with respect to the filing of this Application/Declaration.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
proposed Mergers. The Division of Investment Management may assist in the
preparation of the Commission's decision. There should be no waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
Item 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.
(previously filed)
D-2 Affidavit of Robert M. Spann (previously filed).
D-3 Order of the Nuclear Regulatory Commission (previously filed).
E-1 Map of service areas of TU Electric, SESCO and ENSERCH
(previously filed).
F-1 Opinion of counsel (previously filed).
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, 1996 (filed on March 13, 1997) (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 Withdrawn.
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 Withdrawn.
H-6 ENSERCH Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996 (Filed on August 12, 1996) (Filed No. 1-3183)
and incorporated herein by reference.
H-7 Withdrawn.
H-8 ENSERCH Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996 (Filed on November 14, 1996) (Filed No. 1-
3183) and incorporated herein by reference.
B. Financial Statements
FS-1 TUC Holding Company Unaudited Pro Forma Condensed Consolidated
Balance Sheets as of December 31, 1995 and June 30, 1996 (see
Registration Statement on Form S-4 of TUC (Exhibit C-1 hereto)
at p. 82-83).
FS-2 TUC Holding Company Unaudited Pro Forma Condensed Consolidated
Statements of Income for the year ended December 31, 1996 and
the six months ended June 30, 1996. (See Registration
Statement on Form S-4 of TUC (Exhibit C-1 hereto) at pp. 84-
85).
FS-3 TUC Consolidated Balance Sheet as of December 31, 1995 (see
Annual Report of TUC on Form 10-K for the year ended December
31, 1996 (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, 1996 (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: March 18, 19970
