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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1/A
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AMENDMENT NO. 1
TO
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Houston Industries Incorporated and
Houston Lighting & Power Company
Houston Industries Plaza
1111 Louisiana, 47th Floor
Houston, TX 77002-5231
(Name of company filing this statement
and address of principal executive offices)
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None
(Name of top registered holding company
parent of each applicant or declarant)
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Hugh Rice Kelly
Senior Vice President and General Counsel
Houston Industries Incorporated
Houston Industries Plaza
1111 Louisiana, 47th Floor
Houston, TX 77002-5231
(Names and addresses of agent for service)
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The Commission is also requested to send
copies of any communications in connection with
this matter to:
James R. Doty Stephen A. Massad
Baker & Botts, L.L.P. Baker & Botts, L.L.P.
The Warner One Shell Plaza
1299 Pennsylvania Avenue, N.W. 910 Louisiana Street
Washington, D.C. 20004-2400 Houston, TX 77002-4995
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Houston Industries Incorporated and Houston Lighting & Power Company
are filing this Amendment No. 1 in order to revise the list of exhibits set
forth in Item 6 of this Form and to file certain additional exhibits with the
Securities and Exchange Commission.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
Exhibits
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Exhibit A: Agreement and Plan of Merger (attached as Appendix A to the Form S-4
Registration Statement attached as Exhibit B hereto)*
Exhibit B: Form S-4 Registration Statement of HI (Commission File
Number 1-7629) and HL&P (Commission File Number 1-3187), filed
on September 4, 1996*
Exhibit C: 1995 State-by-State Gross Operating Utility Revenues*
Exhibit D: Notice pursuant to 17 C.F.R. ss. 250.23(f)*
Exhibit E: Certain Orders of State Regulators:
E.1. Order, dated November 6, 1996, of the Arkansas Public Service
Commission conditionally approving the Merger
E.2. Final Order, dated October 15, 1996, of the Corporation
Commission of the State of Oklahoma approving the Merger
E.3. Final Order Approving Merger Transaction, dated December 11,
1996, of the Public Service Commission of the State of
Mississippi
E.4. Letter of Non-Opposition to the Merger, dated December 23,
1996, of the Louisiana Public Service Commission
Exhibit F: Opinion of Counsel**
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* Previously filed.
** Not applicable.
2
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned thereunto duly authorized.
Date: January 15, 1997 Houston Industries Incorporated
By: /s/ HUGH RICE KELLY
-----------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
Houston Lighting & Power Company
By: /s/ HUGH RICE KELLY
-----------------------------------
Hugh Rice Kelly
Executive Vice President, General Counsel
and Corporate Secretary
3
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EXHIBIT INDEX
Exhibit A: Agreement and Plan of Merger (attached as Appendix A to the Form S-4
Registration Statement attached as Exhibit B hereto)*
Exhibit B: Form S-4 Registration Statement of HI (Commission File
Number 1-7629) and HL&P (Commission File Number 1-3187), filed
on September 4, 1996*
Exhibit C: 1995 State-by-State Gross Operating Utility Revenues*
Exhibit D: Notice pursuant to 17 C.F.R. ss. 250.23(f)*
Exhibit E: Certain Orders of State Regulators:
E.1. Order, dated November 6, 1996, of the Arkansas Public Service
Commission conditionally approving the Merger
E.2. Final Order, dated October 15, 1996, of the Corporation
Commission of the State of Oklahoma approving the Merger
E.3. Final Order Approving Merger Transaction, dated December 11,
1996, of the Public Service Commission of the State of
Mississippi
E.4. Letter of Non-Opposition to the Merger, dated December 23,
1996, of the Louisiana Public Service Commission
Exhibit F: Opinion of Counsel**
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* Previously filed.
** Not applicable.
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ARKANSAS PUBLIC SERVICE COMMISSION
IN THE MATTER OF THE JOINT APPLICATION )
OF HOUSTON INDUSTRIES INCORPORATED, )
HOUSTON LIGHTING & POWER COMPANY, HI )
MERGER, INC. AND ARKLA, A DIVISION OF ) DOCKET NO. 96-286-U
NORAM ENERGY CORPORATION, FOR APPROVAL ) ORDER NO. 7
OF AN AGREEMENT PROVIDING FOR THE MERGER )
OF NORAM ENERGY CORPORATION WITH HOUSTON )
INDUSTRIES INCORPORATED, ET AL. )
O R D E R
On September 6, 1996, Houston Industries Incorporated ("HI"), Houston
Lighting & Power Company ("HL&P"), and HI Merger, Inc. ("HI Merger")
(collectively referred to as "HI Applicants") and Arkla, a division of NorAm
Energy Corp. ("NorAm"), pursuant to the provisions of Ark. Code Ann. ss.23-3-301
et seq., filed a Join Application requesting Commission approval of an agreement
by which NorAm will be merged with HI Applicants. In support of the Joint
Application, HI Applicants also filed on September 6, 1996, the prepared Direct
Testimony of Mr. Stephen C. Schaeffer, Executive Vice President of HL&P, on
behalf of HI Applicants.
HI, incorporated in Texas in 1976, is a publicly-owned holding company
operating principally in the electric utility business. HI currently has two
principal subsidiaries: HL&P and HI Energy. HI's regulated subsidiary, HL&P, was
founded in 1901 and is currently the nation's ninth-largest electric utility in
terms of kilowatt-hour sales. HL&P provides electric service to 1.5 million
customers in a 5,000 square mile service area in Texas which includes the City
of Houston. As a member of the Electric Reliability Council of Texas (ERCOT)
operating solely within the State
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of Texas, HL&P is regulated by the Texas Public Utility Commission ("TPUC")
under the Texas Public Utility Regulatory Act ("PURA") but is not regulated by
the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act.
HI's unregulated subsidiary, HI Energy, pursues foreign utility privatizations
and the development of unregulated domestic and foreign power generation
projects. HI Merger is a Delaware Corporation organized solely for the purpose
of serving as an acquisition vehicle. HI Applicants' principal place of business
and headquarters is located in Houston, Texas.
Arkla is a natural gas distribution division of NorAm Energy
Corporation, serving approximately 425,000 residential, commercial and
industrial customers through facilities located in 59 counties in Arkansas. As
such, Arkla is a public utility within the meaning of Ark. Code Ann. ss.23-1-101
(Supp. 1991), and is subject to the jurisdiction of this Commission. Arkla also
serves residential, commercial and industrial customers in Oklahoma, Louisiana
and Texas and is, accordingly, regulated as well by the respective Public
Utility Commissions of Oklahoma and Louisiana and the Railroad Commission of
Texas. Arkla's principal place of business and headquarters is located in Little
Rock, Arkansas, and Shreveport, Louisiana. NorAm is a Delaware corporation with
its headquarters located in Houston, Texas.
In addition to its Arkla division, NorAm also provides natural gas
distribution services in Mississippi, Louisiana and Texas through its Entex
division and in Minnesota through its Minnegasco division. Combined, the three
divisions serve nearly 3 million customers in six states.
The Agreement and Plan of Merger, between HI Applicants and NorAm sets
forth a primary plan and two alternative plans that could occur in the event
that certain issues related to the Public
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Utility Holding Company Act of 1935 ("PUHCA") are not resolved as anticipated by
HI Applicants. Under the primary plan of merger ("the Expected Structure"), HI
and HL&P would be combined into a single company with HL&P as the surviving
company to be renamed Houston Industries Incorporated ("Houston"). NorAm would
become a first tier wholly-owned subsidiary of Houston. Arkla, which is
currently a division of NorAm, would continue to operate as a division of NorAm.
HI and NorAm have filed at the United States Securities and Exchange Commission
("SEC") an application for an order determining that the public utility holding
company resulting from the Expected Structure, i.e. Houston, will be an exempt
public utility holding company under Section 3(a)(2) of PUHCA.
Although NorAm and HI Applicants anticipate that Houston will qualify
for the exemption, the Merger Agreement describes two alternative plans that
could be implemented in the event that the exemption is not granted or if PUHCA
is amended or repealed before the merger is concluded. However, by the Joint
Application, HI Applicants are not requesting approval of the alternative merger
plans. HI Applicants are currently seeking approval only for the Expected
Structure.
HI will pay $16 per share or approximately $2.5 billion to acquire all
of the outstanding NorAm stock. Each NorAm stockholder will be entitled to elect
to receive either cash or Houston common stock; however, elections may be
prorated so that approximately 50% will be paid in cash and approximately 50%
will be paid in Houston stock.
The proposed merger does not seek any changes in the rates charged by
Arkla to its customers, or in any of its existing policies with respect to
service, employees, operations, financing, accounting, capitalization,
depreciation, or other matters affecting the public interest or utility
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operations. Further, under the Expected Structure proposal there will be no
encumbrance of Arkla's utility property. Arkla will continue to maintain its
books in accordance with all requirements of the Arkansas Public Service
Commission.
In addition to the approval of the SEC and this Commission, HI
Applicants and NorAm must also apply for and secure the approval of the merger
from the Public Utility Commissions of Oklahoma, Louisiana, Minnesota and
Mississippi. NorAm and/or the HI Applicants are also required to make certain
filings with the FERC and the Nuclear Regulatory Commission ("NRC").
In order to consummate the merger, the parties to the Merger Agreement
must obtain the approval of this Commission pursuant to Ark. Code Ann.
ss.23-3-301 et. seq. and the Commission's rules and regulations. Ark. Code
Ann. ss.23-3-306 requires that a "Statement" be filed with the Commission
containing all of the applicable information specified by Ark. Code Ann.
ss.23-3-307. Such Statement was filed by HI Applicants as Exhibit "E" to the
Joint Application.
HI Applicants assert that they are proper and appropriate entities to
own the capital stock of NorAm, and that the transaction proposed in the Merger
Agreement will not adversely affect Arkla's utility operations or Arkla's
customers in Arkansas and will not result in any of the potentially adverse
effects described in Ark. Code Ann. ss.23-3-301 or Ark. Code Ann. ss.23-3-310.
HI Applicants assert that their employees and managers are competent and
qualified persons in the utility industry and they intend for Arkla to continue
to provide gas distribution service in Arkansas in accordance with the rules and
regulations of this Commission and in an effective and efficient manner.
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HI Applicants further state that both HI Applicants and NorAm wish to
consummate the proposed transaction at the earliest possible time and that
review by this Commission is requested on an expedited basis to be concluded as
soon as possible but, in any event, within the time frames provided for in Ark.
Code Ann. ss.23-3-311. Certified copies of the resolutions of the Boards of
Directors of HI, HL&P, HI Merger and NorAm, approving the merger, were attached
as exhibits to the Joint Application. Ark. Code Ann. ss.23-3-311 requires that a
public hearing be commenced within thirty (30) days after the filing of the
Joint Application. Accordingly, Order No. 1, entered on September 6, 1996,
scheduled a public hearing to consider the Joint Application for October 7,
1996. Order No. 1 further directed HI Applicants to publish notice of the
pendency of the Joint Application and public hearing in the Arkansas
Democrat-Gazette on two consecutive days at least fifteen (15) days prior to the
scheduled public hearing. According to a Proof of Publication filed in this
docket on September 12, 1996, the required notice was published on September 11
and 12, 1996, as directed.
A public hearing was conducted by the Commission on October 7, 1996, as
scheduled. Parties appearing before the Commission were Arkla, HI Applicants,
the Arkansas Gas Consumers ("AGC"), and the General Staff of the Commission
("Staff"). Testimony was presented by Mr. Schaeffer on behalf of HI Applicants
and by Mr. Toby L. Reese on behalf of the Staff. No witnesses were called by
Arkla or AGC. Although AGC presented no testimony, counsel for AGC announced at
the close of the public hearing that "AGC will not oppose the approval of the
merger."
Mr. Schaeffer testified that the proposed merger is a strategic merger
not driven by the potential for near-term cost savings. By combining the
expertise of HI and NorAm in their
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respective sectors in the energy industry, Mr. Schaeffer asserts that both HI
and NorAm will be better positioned to take advantage of the rapidly evolving
changes in the energy industry and to provide innovative and cost effective
service to their merged gas and electric customers. Furthermore, HI believes
that the merger offers it and its stockholders the benefits of additional retail
distribution customers, NorAm's growing wholesale trading organization, and
NorAm's international business strategy which complements its own. NorAm
believes that the merger with HI, a company with greater financial strength and
flexibility, is the best alternative for achieving its strategic objectives, and
enhancing its value for its stockholders.
Although Mr. Schaeffer anticipates some near-term "modest" cost
savings, he also expects virtually all of such savings during the first three
years after the merger to be offset by costs necessary to achieve them. Mr.
Schaeffer further testified that a rate increase would not be sought as a result
of the merger and that no attempt would be made to recover in rates any of the
acquisition premium to be paid in connection with the merger. Also, HI
Applicants' response to Staff Interrogatory TLR-12(B) advises that if the
proposed merger is executed, Houston's subsidiaries and affiliates " . . . will
not seek to recover any of the acquisition premium through services or goods
provided or to be provided to Arkla." Moreover, Mr. Schaeffer stated that HI was
"committed to holding the line on the allocation of corporate overheads to the
various [public] utilities."
However, in regard to the payment of severance benefits and the
expenses associated with preparing for and carrying out the Merger Agreement, HI
Applicants and Arkla have not provided the same level of assurance. Although
responses to Staff Interrogatories TLR-30 and TLR-2(D) indicate that these costs
and expenses will have "no current effect on Arkla customers", HI
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Applicants and Arkla have reserved the right to argue in future cases that all
or part of these expenses should be considered reasonable and prudent expenses.
In addition to the referenced strategic factors, Mr. Schaeffer
testified that the combined companies would have a much stronger balance sheet
which would benefit both Arkla and its customers. With combined assets of $17.6
billion, Mr. Schaeffer asserts that the merged companies will have greater
financial capability than NorAm currently has and, therefore, should be able to
support innovative customer initiatives while continuing to meet traditional
utility standards of reliability at a reasonable cost to their customers.
Mr. Schaeffer also testified that the merger would not substantially
lessen competition and that HI has no existing operations in Arkansas and that
no fundamental changes are expected in Arkla's Arkansas operations as a result
of the merger.
Mr. Reese testified that his review of the Joint Application focused,
in particular, on the Joint Application's compliance with the provisions of Ark.
Code Ann. ss.23-3-306 and ss.23-3-307 as to the filing of the required Statement
and the contents of that Statement, and on the provisions of Ark. Code Ann.
ss.23-3-310 regarding the statutory grounds for disapproval of the proposed
merger. Mr. Reese concludes that the Joint Application, as filed, substantially
complies with the provisions of these sections of the Arkansas Code.
Mr. Reese further testified that, based upon HI Applicants' and Arkla's
responses to Staff's interrogatories, the Commission will have access to the
books and records of HI Applicants and Arkla and their affiliates and
subsidiaries with respect to matters relating to Arkansas rates; that proper
accounting procedures will continue to be employed to protect against
cross-subsidization
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of non-regulated businesses by Arkla's customers; and that HI Applicants and
Arkla and their significant subsidiaries and affiliates will continue to
maintain their books in a manner consistent with generally accepted accounting
principles and, where appropriate, consistent with the FERC Uniform System of
Accounts.
The responses to these interrogatories also affirm that HI Applicants
and Arkla will make available to testify in Commission proceedings knowledgeable
witnesses necessary for Arkla to satisfy its burden of proof with respect to
non-regulated business transactions that have an effect on Arkla's retail rates;
that Arkla will continue to be staffed with an appropriate management team; and
that the HI Applicants commit to make financial resources available to allow
Arkla to satisfy its utility obligations.
On cross-examination of Mr. Reese by counsel for AGC, Mr. Reese further
testified as follows regarding the importance of this Commission's continuing
ability to fully review Arkla's relationships, dealings and transactions with
its affiliates:
Q. Mr. Reese, do you think the Staff would consider it detrimental to
the public interest if this merger were approved and this Commission
could not fully review Arkla's relationships, dealings and
transactions with affiliates?
A. Well, based upon information that was provided in the joint
application and in response to certain Staff interrogatories, the
company has indicated to us or the applicants have indicated to us that
we will be provided with what information that we need to carry out our
duties.
Q. I understand that, but if the company had not provided those
assurances, would you consider that to be detrimental to the public
interest? If -- let me restate that. Would you consider it to be
detrimental to the public interest if Arkla did not provide information
so that this Commission could review Arkla's dealings with its
affiliates?
A. Yes, I would. (TR. 56)
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On cross-examination of Mr. Schaeffer by counsel for AGC, Mr. Schaeffer
reiterated HI's prior assurances that HI would continue to provide this
Commission with access to information concerning affiliate relationships of
Arkla if the proposed merger was approved by the Commission.
Ark. Code Ann. ss.23-3-310 essentially requires that the Commission
approve the proposed merger unless the Commission affirmatively finds that one
or more of the adverse conditions enumerated therein will exist if the merger is
consummated. If the Commission finds that one or more of the adverse conditions
would exist if the merger is consummated, then the Commission must disapprove
the merger. Ark. Code Ann. ss.23-3-310 provides as follows:
23-3-310. GROUNDS FOR DISAPPROVAL.
The Commission shall approve any merger or other acquisition
of control referred to in ss.23-3-306 unless, after a public hearing
thereon, it finds that one (1) or more of the following conditions will
exist if the merger or other acquisition of control is consummated, in
which event it shall disapprove the merger or acquisition of control
and the merger or acquisition of control shall not be consummated:
(1) The acquisition of control would adversely affect the
contractual obligations of the domestic public utility or of any person
controlling the domestic public utility or the ability or commitment to
continue to render the same level of service to its customers that the
domestic public utility is currently rendering;
(2) The effect of the merger or other acquisition of control
would be substantially to lessen competition in the furnishing of
public utility service in this state;
(3) The financial condition of any acquiring party is such as
might jeopardize the financial stability of the domestic public utility
or any person controlling the domestic public utility or would
otherwise prejudice the interest of the domestic public utility's
customers;
(4) The plans or proposals which an acquiring party has to
liquidate the public utility or any such controlling person, to sell
its assets or a substantial part thereof, or to consolidate or merge it
with any person, or to make any other material change in its investment
policy, business or corporate structure, or management would be
detrimental to the customers of the domestic public utility and not in
the public interest; or
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(5) The competence, experience, and integrity of those persons
who would control the operation of the domestic public utility are such
that it would not be in the interest of its customers and the public to
permit the merger or other acquisition of control.
Based upon his review of all the information contained in the Joint
Application and exhibits thereto, the testimony of Mr. Schaeffer, and the
responses to Staff's interrogatories, Mr. Reese testified that he had not found
any "information which would indicate that any of the conditions outlined in
Ark. Code Ann. ss.23-3-310 will exist if the proposed merger is consummated."
Accordingly, Mr. Reese concluded that he could "find no basis for disapproval."
In addition to the specified information which must be provided to
the Commission pursuant to Ark. Code Ann. ss.23-3-307, the Commission has the
power to require the submission of "[a]ny" additional information which the
Commission may by rule or regulation prescribe as necessary or appropriate for
the protection of ratepayers of the domestic public utility or in the public
interest." Ark. Code Ann. ss.23-3-307 (a) (10) (Emphasis added). Ark. Code Ann.
ss.23-3-305 further provides that the Commission "shall have power to perform
any and all acts, and to prescribe, issue, make, amend, and rescind any orders,
rules, and regulations which it may find necessary or appropriate to carry out
the provisions of this subchapter." (Emphasis added). Ark. Code Ann. ss.23-2-301
also provides that "[t]he Commission is vested with the power and jurisdiction,
and it is made its duty, to supervise and regulate every public utility . . .
and to do all things, whether specifically designated in this act, that may be
necessary or expedient in the exercise of such power and jurisdiction, or in the
discharge of its duty." (Emphasis added).
Based upon the record that has been assembled to date in this
proceeding, the Commission cannot categorically find and conclude that none of
the adverse conditions enumerated in Ark. Code
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Ann. ss.23-3-310 will exist if the proposed merger is consummated. One condition
which the Commission must find will not exist is that the proposed merger "would
be detrimental to the customers of the domestic public utility and not in the
public interest . . .." Ark. Code Ann. ss.23-3-310 (4). Further, Ark. Code Ann.
ss.23-3-301(b) (4) makes it clear that the General Assembly of Arkansas intended
for the Commission to satisfy itself that the proposed merger will not " [b]e
detrimental to the customers of the domestic public utility and not be in the
public interest . . .."
As the record now exists, the Commission finds no evidence that any of
the adverse consequences set forth in Ark. Code Ann. ss.23-3-310 will exist if
the proposed merger is consummated. However, the record is not complete at this
time. Still outstanding are the required regulatory approvals of the Public
Utility Commissions of Louisiana, Mississippi, and Minnesota, the SEC, and the
FERC. The Public Utility Commission of Oklahoma has issued its order approving
the proposed merger and a copy of said order has been filed in the record of
this proceeding.
It is conceivable, although not necessarily anticipated by this
Commission, that the various applications related to the proposed merger now
pending in Louisiana, Mississippi, Minnesota and before the SEC and FERC could
be resolved in ways that might be detrimental or unfair to Arkla's Arkansas
ratepayers. Therefore, this Commission is obligated to withhold final
"unconditional" approval of the proposed merger until it has had an opportunity
to review and consider the final resolution of all such applications.
Accordingly, HI Applicants, NorAm and Arkla are hereby directed to file
in this proceeding any and all documents, agreements, orders, etc. that are
necessary to properly reflect the totality of
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all terms and conditions upon which final resolution of said applications is
based by the Public Utility Commissions of Louisiana, Mississippi, and Minnesota
and the SEC and FERC.
In the interim, and based solely upon the record as it now exists, this
Commission finds and orders as follows:
1. The Arkansas Public Service Commission has jurisdiction over this
matter and the parties to this proceeding pursuant to Ark. Code Ann.
ss.23-3-301 et seq., and the Commission's Rules of Practice and Procedure.
2. But for the Commission's reservations set forth hereinabove, the
Joint Application, as filed, substantially complies with the provisions of
Ark. Code Ann. ss.ss.23-3-306, 23-3-307 and 23-3-310.
3. Accordingly, the Expected Structure of the proposed merger, as set
forth in the Joint Application, is hereby approved on a conditional basis
pending this Commission's review and consideration of the final resolution of
related proceedings pending before the Public Utility Commissions of Louisiana,
Mississippi, and Minnesota and the SEC and FERC.
4. Approval of the Expected Structure of the proposed merger is further
conditioned upon the continued compliance by HI Applicants, Houston, NorAm and
Arkla with the various regulatory assurances referenced hereinabove and as
otherwise contained in the record of this proceeding.
5. This Commission will issue an appropriate final order in this
proceeding pending its review and consideration of the necessary documents to
be filed in this docket reflecting the final
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resolution of the related proceedings pending before the Public Utility
Commissions of Louisiana, Mississippi and Minnesota and the SEC and FERC.
6. The record of this proceeding shall remain open for the purposes
set forth hereinabove.
BY ORDER OF THE COMMISSION.
This 6th day of November, 1996.
/s/ Sam I. Bratton, Jr.
--------------------------------
Sam I. Bratton, Jr., Chairman
/s/ Patricia S. Qualls
--------------------------------
Patricia S. Qualls, Commissioner
/s/ Julius D. Kearney
--------------------------------
Julius D. Kearney, Commissioner
/s/ Shellie Jackson Casting
---------------------------
Jan Sanders
Secretary of the Commission
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BEFORE THE CORPORATION COMMISSION OF THE STATE OF OKLAHOMA
IN THE MATTER OF THE )
JOINT APPLICATION OF HOUSTON )
INDUSTRIES INCORPORATED, HOUSTON )
LIGHTING & POWER COMPANY, HI MERGER, )
INC. AND ARKLA, A DIVISION OF ) CAUSE NO. PUD 960000264
NORAM ENERGY CORP., )
FOR APPROVAL OF AN AGREEMENT )
PROVIDING FOR THE MERGER OF ) ORDER NO. 406074
NORAM ENERGY CORP. WITH )
HOUSTON INDUSTRIES INCORPORATED, ET AL. )
HEARING: October 9, 1996 before Robert E. Goldfield
Administrative Law Judge
APPEARANCES: Scott E. Rozzell, Attorney
Houston Industries Incorporated
Houston Lighting & Power Company
HI Merger, Inc.
Kathleen D. Alexander, Kenny W. Henderson and
Cody B. Waddell, Attorneys
Arkla, a division of NorAm Energy Corp.
Rick D. Chamberlain and Mickey S. Moon,
Assistant Attorneys General
Office of the Attorney General, State of
Oklahoma
Maribeth D. Snapp, Deputy General Counsel
Public Utility Division, Oklahoma Corporation
Commission
FINAL ORDER
BY THE COMMISSION:
The Corporation Commission of the State of Oklahoma ("Commission")
being regularly in session and the undersigned Commissioners being present and
participating, there comes on for consideration the Joint Application of Houston
Industries Incorporated ("HI"), Houston Lighting and Power Company ("HL&P"), HI
Merger, Inc. ("HI Merger") (collectively referred to as "HI Applicants") and
Arkla, a division of NorAm Energy Corp. ("Arkla"), seeking approval of an
agreement providing for the merger of NorAm Energy Corp. ("NorAm") with the HI
Applicants.
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PUD 960000264
Final Order
Page 2
PROCEDURAL HISTORY
On September 9, 1996, HI, HL&P, HI Merger and Arkla (collectively
referred to as "the Applicants") filed their Joint Application notifying the
Commission that the Applicants had entered into an agreement by which NorAm
would be merged with HI Applicants, and requesting that the Oklahoma Corporation
Commission issue an order granting such consents, approvals and authorizations
as might be required by Okla. Stat. Ann. tit 17 ss. 191.1 et. seq., and the
Commission's rules and regulations, to permit HI Applicants and NorAm to
consummate the transactions contemplated by the August 11, 1996 Agreement and
Plan of Merger between the Applicants ("Merger Agreement"). The Joint
Application further requested that the Commission authorize notice of hearing by
publication, in lieu of notice by mail.
On September 9, 1996, simultaneously with the filing of the
Application, Applicants filed the prepared Direct Testimony of Stephen C.
Schaeffer, Executive Vice President - Shared Services and Finance & Regulatory
Affairs with HL&P, in support of the Application.
On September 9, 1996, the Applicants also filed a Joint Motion for
Protective Order in anticipation of receipt of data requests from Staff and/or
the Attorney General, seeking a protective order limiting access to and
restricting the use of information and documents falling within certain stated
categories.
On September 13, 1996, the Commission issued Order No. 405193 directing
that due and proper notice pursuant to the provisions of Title 17 ss. 191.6 be
served by publication in a legal newspaper in the county seat of the location of
each of the district offices of Arkla, a division of NorAm Energy Corp. and in
newspapers of statewide general circulation published in Tulsa and Oklahoma
Counties.
On September 17, 1996, a Notice of Hearing was filed, setting the Cause
for hearing before the Administrative Law Judge, Robert E. Goldfield, on October
9, 1996, at 9:30 a.m.
On September 25, 1996, the Commission entered Order No. 405486,
granting intervention to the Attorney General of the State of Oklahoma.
On September 26, 1996, the Commission issued Order No. 405528, setting
forth a procedural schedule providing for: (1) direct testimony of the PUD Staff
and the Attorney General to be filed on September 27, 1996; (2) rebuttal
testimony to be filed by the Applicants on October 4, 1996; and, (3) a hearing
on the merits at 9:30 a.m. on October 9, 1996.
On September 26, 1996, the Commission issued Order No. 405529
granting the Applicants' Joint Motion for Protective Order specific to
Applicant's answers to Staff Data Request No. 14.
On September 27, 1996, Staff filed the prefiled testimony of Robert C.
Thompson, CPA, reflecting Staff's review and analysis of the Joint Application
and stating that Staff did not oppose the proposed merger. The Attorney General
did not prefile testimony and the Applicants filed no rebuttal testimony.
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PUD 960000264
Final Order
Page 3
On October 9, 1996, upon due and lawful notice, the public hearing on
the Application was held before the ALJ.
SUMMARY OF EVIDENCE
At hearing, Mr. Schaeffer was called to testify on behalf of the
Applicants, and Mr. Thompson was called to testify on behalf of Staff. Each of
their respective prefiled testimonies were introduced into evidence and all of
the parties were provided with appropriate opportunities for cross-examination.
An exhibit list was prepared, and all items enumerated on the exhibit list were
admitted into evidence, including the Joint Application and all exhibits
thereto.
The Joint Application and Exhibits thereto, as well as the prefiled
testimony of Mr. Schaeffer, reflect that HI was incorporated in Texas in 1976
and is a public utility holding company involved in the electric utility and
unregulated energy business in the United States and in foreign markets. HI
currently has two principal subsidiaries: HL&P and HI Energy. HI's regulated
subsidiary, HL&P, was founded in 1901 and is currently the nation's
ninth-largest electric utility in terms of kilowatt-hour sales. HL&P provides
electric service to 1.5 million customers in a 5,000 square mile service area
which includes Houston, the nation's fourth-largest city. As a member of the
Electric Reliability Council of Texas ("ERCOT") operating solely within the
State of Texas, HL&P is regulated by the Texas Public Utility Commission under
the Texas Public Utility Regulatory Act, but is not regulated by the Federal
Energy Regulatory Commission under the Federal Power Act. HI's unregulated
subsidiary, HI Energy, pursues foreign utility privatizations and the
development of unregulated domestic and foreign power generation projects. HI
Merger is a Delaware Corporation organized solely for the purpose of serving as
an acquisition vehicle.
Arkla is a natural gas distribution division of NorAm Energy Corp.,
operating over 2,600 miles of distribution main and serving approximately
111,000 residential, commercial, and industrial customers through facilities
located in 35 counties and 96 communities in Oklahoma. As such, Arkla is a
public utility within the meaning of Okla. Stat.
Ann. tit 17 ss. 151, and is subject to the jurisdiction of the Commission.
The Joint Application states that the Merger Agreement sets forth a
primary plan for the merger and two alternatives that could occur in the event
that certain issues related to the Public Utility Holding Company Act of 1935
("PUCHA") are not resolved as expected. Under the primary form of the merger
("the Expected Structure"), HI and HL&P would be combined into a single company
with the surviving company to be renamed Houston Industries Incorporated
("Houston"). NorAm would then become a first tier wholly-owned subsidiary of
Houston. Arkla, which is currently a division of NorAm, would continue to
operate as a division of NorAm. By way of the Joint Application in this
proceeding, Applicants are seeking approval of the Expected Structure only and
are not seeking approval of either of the alternative forms of the merger.
In his testimony, Mr. Schaeffer explained the details of the proposed
merger and outlined what the effects of the merger would be on Arkla.
Mr.Schaeffer testified that the merger in question is a strategic merger
and that, as a
<PAGE> 4
PUD 960000264
Final Order
Page 4
result of the merger, both HI and NorAm expect to be better positioned to take
advantage of whatever changes occur in the energy industry in the future and to
be better positioned to provide innovative and cost effective service to their
respective gas and electric customers. Regarding the effects of the merger on
Arkla and the grounds for disapproval of the merger under the provisions of
Okla. Stat. Ann. tit 17 ss. 191.5, Mr. Schaeffer's testimony can be summarized
as follows:
1. Arkla will honor all of its contractual commitments and the merger
will not adversely affect Arkla's contractual rights or
obligations.
2. The merger will have no substantial effect on Arkla's Oklahoma
operations. Following the merger, Arkla will operate in Oklahoma in
substantially the same way it operates today.
3. The merger will not adversely affect Arkla's ability or commitment
to continue to provide the same level of service to its customers
that it currently provides. In fact, the applicants hope that
customer service can actually be enhanced as each company takes
advantage of the best practices of its new affiliates.
4. The merger will not substantially lessen competition in the
furnishing of public utility service in Oklahoma. HI currently has
no operations in Oklahoma and no fundamental changes are expected
in Arkla's Oklahoma operations as a result of the merger.
5. HI's financial condition will not jeopardize Arkla's financial
stability or otherwise prejudice the interest of Arkla's customers.
In fact, the combined company will possess greater financial
capabilities than NorAm currently has.
6. Other than the merger described in the Merger Agreement, HI has no
plans to liquidate Arkla, to sell its assets, or a substantial part
thereof, or to consolidate or merge it, or to make any other
material change in its investment policy, business or corporate
structure, or management. The merger does not seek any changes in
any of Arkla's policies with respect to service, employees,
operations, financing, accounting, capitalization, depreciation, or
other matters affecting the public interest or utility operations.
Arkla will continue to maintain its books and records in accordance
with all requirements of the Oklahoma Corporation Commission.
7. HI as a company and HI's management have the competence, experience
and integrity to support a finding that the merger is consistent
with the public interest and in the interest of Arkla's customers.
Mr. Schaeffer further committed that the Applicants would not seek a
rate increase as a result of the merger and that neither HL&P nor any of the
NorAm utilities will seek to recover in rates any of the acquisition premium
being paid in this transaction.
Mr. Thompson testified on behalf of Staff that he had reviewed the
Joint Application and found that all of the information required to be provided
by Okla. Stat. Ann. tit 17 ss. 191.3 was attached to the application as
exhibits. Mr. Thompson then addressed each of the individual grounds for
disapproval of the merger, as set forth in Okla. Stat. Ann. tit 17 ss. 191.5,
and testified that, based upon the information provided to Staff, none of the
stated grounds for disapproval
<PAGE> 5
PUD 960000264
Final Order
Page 5
are present in the case of the proposed merger. Mr. Thompson testified that,
based upon Staff's review and the information available to him at the time of
his review, he had no reason to believe that the proposed merger was not in the
public interest. Mr. Thompson, therefore, testified that Staff did not oppose
approval of the proposed merger.
Mr. Thompson did, however, testify that the Commission should
continue to monitor Arkla to be certain that Arkla's Oklahoma jurisdictional
ratepayers receive their fair share of any benefits of the merger, and that
Arkla's Oklahoma jurisdictional ratepayers are not asked to pay higher rates
than would have otherwise been fair and reasonable if the merger had not
occurred. Mr. Thompson also testified that Staff had been assured by the
Applicants that the merger would have no impact on any of Arkla's ongoing
commitments pursuant to the stipulation approved by Order No. 388659 in Cause
No. 940000354. Mr. Thompson testified that Staff would continue to monitor the
progress of the merger as it proceeds to make certain that these issues are not
impacted.
FINDINGS OF FACT AND CONCLUSIONS OF LAW
The Commission, upon proper evaluation of the record of the hearing on
the merits before the ALJ, makes the following findings:
The Commission finds that it has jurisdiction pursuant to Article IX,
Sec. 18 of the Oklahoma Constitution, Okla. Stat. Ann. tit 17 ss. 151, Okla.
Stat. Ann. tit 17 ss. 152 and Okla. Stat. Ann. tit 17 ss. 191.1 et. seq.
The Commission finds that the Applicants have complied with the
requirements set forth in Okla. Stat. Ann. tit 17 ss. 191.1 et. seq. for
approval of the proposed merger, including notice of hearing in the manner
authorized by the Commission in Order No. 405193, issued in this Cause on
September 13, 1996.
The Commission finds that none of the potential adverse consequences
designated as grounds for disapproval of the application in Okla. Stat. Ann.
tit 17 ss. 191.5 are present in the case of the proposed merger.
The Commission further finds that Staff and Arkla should work together
to develop a reporting process to facilitate the monitoring activities described
in the prefiled testimony of Mr. Robert C. Thompson.
The Commission further finds that the Joint Application should be
granted and that the Expected Structure of the merger should be approved as
provided for in the Merger Agreement.
ORDER
IT IS THEREFORE THE ORDER OF THE CORPORATION COMMISSION of the State
of Oklahoma that the relief requested in the Joint Application filed in this
Cause on September 9, 1996, is hereby granted and the Expected Structure of
the Merger as set forth in the Merger Agreement is hereby approved.
IT IS FURTHER ORDERED that Staff and Arkla shall work together to
develop a reporting process to facilitate the monitoring activities described in
the prefiled testimony of Mr. Robert C. Thompson, which was Exhibit 15 in the
record herein.
<PAGE> 6
IT IS FURTHER ORDERED that such approval extends only to the Expected
Structure of the merger as set forth in the Merger Agreement, as discussed
above. If, for any reason, the merger is not completed under the Expected
Structure, Applicants are directed to seek further approval from the Commission
prior to proceeding with either of the alternative forms of the merger provided
for in the Merger Agreement.
CORPORATION COMMISSION OF OKLAHOMA
/s/ Cody L. Graves
--------------------------
CODY L. GRAVES, Chairman
/s/ Bob Anthony
--------------------------
BOB ANTHONY, Vice Chairman
/s/ Ed Apple
--------------------------
ED APPLE, Commissioner
DONE AND PERFORMED THIS 15th day of October, 1996, BY ORDER OF THE
COMMISSION:
/s/ Charlotte W. Flanagan
--------------------------
CHARLOTTE W. FLANAGAN, Secretary
REPORT OF THE ADMINISTRATIVE LAW JUDGE
The foregoing Findings and Order are the Report and Recommendations
of the Administrative Law Judge.
/s/ Robert E. Goldfield October 10, 1996
--------------------------- -------------------
Robert E. Goldfield Date
Administrative Law Judge
<PAGE> 1
BEFORE THE PUBLIC SERVICE COMMISSION
OF THE STATE OF MISSISSIPPI
IN THE MATTER OF THE
JOINT APPLICATION BY
ENTEX, NORAM ENERGY CORP.,
HOUSTON INDUSTRIES INCORPORATED,
HOUSTON LIGHTING AND POWER COMPANY
AND HI MERGER, INC. FOR APPROVAL
OF A MERGER TRANSACTION
DOCKET NO. 96-UA-0438
FINAL ORDER APPROVING MERGER TRANSACTION
THIS DAY this cause came on for decision before the Public Service
Commission of the State of Mississippi ("Commission") on the Joint Application
of Entex, a Division of NorAm Energy Corp. ("Entex"), NorAm Energy Corp.
("NorAm"), Houston Industries Incorporated ("HI"), Houston Lighting & Power
Company ("HL&P") and HI Merger, Inc. (collectively referred to hereinafter as
"Applicants") for the approval of an agreement and plan of merger ("Merger
Agreement") entered into among HI, HL&P, HI Merger, Inc. and NorAm ("Parties")
on August 11, 1996.
Due and proper notice of the filing of the application and notice of
the time and place of hearing was given by publication in newspapers having
general circulation in the Mississippi counties wherein the facilities and
service areas of Entex are located, including publication of such notice to the
public in the Clarion Ledger, a daily newspaper published at the seat of
government at Jackson, Hinds County, Mississippi. Proofs of Publication have
been filed with this Commission in the above-styled and numbered cause.
-1-
<PAGE> 2
On October 17, 1996, Entergy Mississippi, Inc. ("Entergy Mississippi")
filed its motion to intervene in the above-styled and numbered cause and, on
October 21, 1996, this Commission entered its order allowing the intervention of
Entergy Mississippi in said cause.
On October 31, 1996, this Commission entered its Scheduling Order.
Under the terms and conditions of said Scheduling Order, Entergy Mississippi was
required to file all direct testimony and rebuttal testimony on or before
November 25, 1996. The Applicants had previously filed, with their joint
application, the direct testimony of Stephen C. Schaeffer in support of said
application.
On November 5, 1996, this Commission entered its order setting this
cause for special hearing Wednesday, the 11th day of December, 1996.
On December 5, 1996, Entergy Mississippi filed its Motion to Withdraw
its Intervention, and said Motion has been granted. There being no other
intervenors, this matter is now before this Commission as an uncontested case.
This Commission, having considered the Joint Application and the
exhibits thereto, including the prefiled testimony of Stephen C. Schaeffer in
support of said application, and upon recommendation of the Public Utilities
Staff, after its review, that the Joint Application be approved, finds as
follows:
I.
NorAm is a corporation organized and existing pursuant to the laws of
the State of Delaware, qualified to do business and doing business in a number
of states, including the State of Mississippi. A true and correct copy of
NorAm's Charter of Incorporation and its Certificate of Authority to do business
in Mississippi were heretofore filed with the Commission and are by reference
made a part hereof. NorAm's principal executive offices are located at 1600
Smith Street, 32nd Floor, Houston,
-2-
<PAGE> 3
Texas 77002. Through its Arkla, Entex and Minnegasco gas distribution divisions,
NorAm is the nation's third-largest natural gas distribution utility in terms of
number of customers, providing service to over 2.7 million customers in six
states. NorAm operates interstate natural gas pipeline facilities through NorAm
Gas Transmission Company and Mississippi River Transmission Corporation; natural
gas gathering systems in Oklahoma, Louisiana, Arkansas and Texas; and engages in
various other energy-related businesses, including natural gas and electric
wholesale trading, gas storage, wholesale electric services and unregulated
retail energy services to industrial and large commercial customers.
Entex operates a natural gas distribution business in Louisiana,
Mississippi and Texas. Within Mississippi, Entex serves approximately 116,000
customers, primarily in the southern half of Mississippi. Entex's principal
Mississippi offices are located at 216 Woodgate Drive, Brandon, Mississippi
39043. Entex is a public utility within the meaning of Public Utility Laws of
the State of Mississippi and its intrastate business and property in this state
is subject to the jurisdiction of the Commission.
II.
HI and HL&P are organized and existing pursuant to the laws of the
State of Texas. HI is a holding company operating principally in the electric
utility business. HL&P is a wholly-owned subsidiary and is the principal
subsidiary of HI, is engaged in the generation, transmission, distribution and
sale of electric energy. HL&P is the nation's ninth largest electric utility in
terms of kilowatt-hour sales and serves approximately 1.5 million residential,
commercial, and industrial customers. HL&P's service area covers a 5,000-square
mile area on the Texas Gulf Coast, including Houston (the nation's fourth
largest city). HL&P is regulated by the Texas Public Utility
-3-
<PAGE> 4
Commission. Houston Industries Energy, Inc. ("HI Energy"), another subsidiary of
HI, participates in unregulated domestic and foreign power generation projects
and invests in the privatization of foreign electric utilities. None of said
entities do business in Mississippi. HI Merger, Inc. ("Merger Sub") is a
wholly-owned subsidiary of HI, founded in August 1996 to facilitate the merger.
HI, HL&P and Merger Sub are referred to collectively in this Order as the "HI
Applicants". The HI Applicants' principal offices are located at Houston
Industries Plaza, 1111 Louisiana Street, Houston, Texas 77002.
III.
The Merger Agreement was entered into on August 11, 1996. The Merger
Agreement provides that under the expected form of the merger (Expected
Structure), HI and HL&P will be combined into a single company with HL&P as the
surviving company to be renamed Houston Industries Incorporated ("Houston").
NorAm will become a wholly owned subsidiary of Houston. Under the Expected
Structure, Entex (as well as Arkla and Minnegasco, the other existing NorAm gas
distribution divisions) will continue to operate as divisions of NorAm. HI and
NorAm have filed at the United States Securities and Exchange Commission ("SEC")
an application for an order determining that the public utility holding company
resulting from the Expected Structure will be an exempt public utility holding
company under section 3(a)(2) of the Public Utility Holding Company Act of 1935
("PUHCA"). They expect the exemption will be granted.
IV.
Under the terms of the Merger Agreement, HI will pay approximately $2.5
billion for NorAm common stock and equivalents. HI will pay $16.00 for each
NorAm common share outstanding, approximately 50% of the aggregate consideration
for the NorAm Common Stock will be paid in
-4-
<PAGE> 5
cash and approximately 50% in HI common stock. The details of how this payment
will be made are set forth at length in Article II of the Merger Agreement. None
of NorAm's $1.4 billion debt will be retired in connection with the
transactions.
V.
The merger will not result in any fundamental change in the operations
of Entex or the provision of natural gas service to Mississippi customers. Entex
will continue to maintain its Mississippi offices and provide Mississippi
regulators unimpeded access at those offices to its respective books and records
and other information needed to fulfill their constitutional and statutory
responsibilities. Decisions regarding operations will generally remain with
Entex. The employees of Entex are very familiar with Entex's public utility
operation in Mississippi and with the company's Mississippi customers. As is
currently the case with NorAm, Entex will continue to conduct its own planning
and budgeting subject to corporate approval.
VI.
By combining, HI and NorAm will achieve a dramatic increase in the
financial resources backing service by both enterprises. With combined assets of
approximately $17.6 billion and a strong combined balance sheet, the combined
companies should be able to support innovative customer initiatives while
continuing to meet traditional utility standards of reliability and reasonable
cost.
In addition to increased financial strength, combining the gas
expertise of NorAm and electric expertise of HI will allow both companies to be
more efficient and effective participants in their markets directly benefiting
the customers of Entex.
-5-
<PAGE> 6
The merger will also help prepare the Companies for this future.
Consequently, Mississippi ratepayers will ultimately benefit from the strategic
advantages of the merger.
VII.
In many cases involving mergers, acquisitions and exchanges of
property, transactions occur at a price greater than the book cost of the assets
involved. The resulting acquisition premium can then become a significant issue
in future rate cases, if the regulated utility seeks to recover it from
ratepayers. In the proposed merger, HI will pay a premium over book value for
NorAm as a whole. However, no acquisition adjustment to rate base or expenses
has been requested in this case and nothing herein shall be construed as
granting such adjustment. In fact, in his prefiled direct testimony, Mr.
Schaeffer committed that none of the Applicants would seek to recover in rates
any of the acquisition premium being paid in this transaction. This commitment
ensures that the customers of Entex in Mississippi will not bear any of the
acquisition premium.
VIII.
There are no significant near-term cost savings projected from the
merger transaction, so there is little opportunity to generate near-term rate
reductions, as in mergers between electric utilities with adjoining service
territories. However, to the extent that there are savings that result from the
merger, the ratepayers of Mississippi will benefit because such savings will
help Entex maintain its current rates and charges at the levels which were
approved by this Commission in its final order entered in the rate case filed by
Entex on May 17, 1996 in MPSC Docket No. 96-UA- 0202.
-6-
<PAGE> 7
IX.
The merger should improve the financial condition of NorAm because the
combined company will possess greater financial flexibility than NorAm currently
has. The merger should also maintain or improve the quality of service to
customers of Entex. Following the merger, Entex will remain a division of NorAm.
Entex will retain its name and separate identity and will continue to maintain
the level of service it now provides with no adverse effect on operations. The
merger does not seek any changes in any of the policies of Entex with respect to
service, employees, operations, financing, accounting, capitalization,
depreciation or any other matters affecting the public interest or utility
operations.
X.
This Commission specifically finds that the merger is consistent with
the public interest; that the Applicants are fit and able properly to perform
the public utility services authorized by NorAm's certificates and are ready,
willing and able to continue to provide safe, reliable and adequate service to
the utility's ratepayers. This Commission also finds that the transaction
proposed is in good faith, and, after completion of the merger, Entex will
continue to be fit and able properly to perform the public utility services
authorized by the Certificates of Public Convenience and Necessity heretofore
issued to it and to comply with the lawful rules, regulations and requirements
of the Commission.
IT IS THEREFORE ORDERED AS FOLLOWS:
1. The relief requested in the Joint Application heretofore filed in
this cause should be and the same is hereby granted and the Expected Structure
of the merger as set forth in the merger agreement should be and the same is
hereby approved.
-7-
<PAGE> 8
2. Entex, should be and it is hereby authorized to continue, from and
after consummation of said merger, to operate as a public utility in Entex's
certificated areas in Mississippi pursuant to the terms, conditions and rates
previously approved by this Commission.
3. This Order extends only to the Expected Structure of the merger as
set forth in the Merger Agreement, as discussed above. If, for any reason, the
merger is not completed under the Expected Structure, Applicants are directed to
seek further approval from the Commission prior to proceeding with either of the
alternative forms of the merger provided for in the Merger Agreement.
Chairman Nielsen Cochran votes aye, Vice Chairman Bo Robinson votes
aye and Commissioner Curt Hebert, Jr. votes aye.
ORDERED AND ADJUDGED by the Commission, this the 11th day of December,
1996.
MISSISSIPPI PUBLIC SERVICE COMMISSION
/s/ Nielsen Cochran
------------------------------
NIELSEN COCHRAN, CHAIRMAN
/s/ Bo Robinson
------------------------------
BO ROBINSON, VICE CHAIRMAN
/s/ Curt Hebert, Jr.
------------------------------
CURT HEBERT, JR., COMMISSIONER
ATTEST, A TRUE COPY:
/s/ Brian U. Ray
---------------------------------
BRIAN U. RAY, EXECUTIVE SECRETARY
-8-
<PAGE> 1
[Letterhead of Louisiana Public Service Commission]
December 23, 1996
<TABLE>
<S> <C>
Ms. Kathleen D. Alexander Mr. I. Jay Golub
Vice President and General Counsel Baker & Botts, L.L.P.
Arkla, a Division of NorAm Energy Corp. One Shell Plaza
P. O. Box 751 910 Louisiana
Little Rock, Arkansas 72203 Houston, Texas 77002
Mr. Paul W. Plunket, III Mr. Hugh Rice Kelly
Vice President and General Counsel Senior Vice President and General Counsel
Entex, a Division of NorAm Energy Corp. Houston Lighting & Power Company
P. O. Box 2628 P.O. Box 61867
Houston, Texas 77252-2628 Houston, Texas 77001
</TABLE>
RE: JOINT APPLICATION BY ARKLA, ENTEX, NORAM ENERGY CORP.,
HOUSTON INDUSTRIES INCORPORATED, HOUSTON LIGHTING AND POWER COMPANY
AND HI MERGER, INC. FOR NON-OPPOSITION TO A MERGER TRANSACTION.
Dear Ladies and Gentlemen:
This letter is in response to the Joint Application filed by the above
named parties with the Louisiana Public Service Commission (the "Commission" or
"LPSC") September 10, 1996 for non-opposition to an Agreement and Plan of Merger
(the "Merger Agreement") entered into among the joint applicants on August 11,
1996.
The Commission Staff has reviewed the following with regard to this
matter:
1) September 6, 1996 Joint Application for Approval of, or
Non-Opposition to, A Merger Transaction, and the Exhibits made
part thereof, which include the Merger Agreement;
2) Each of the eighteen (18) factors listed in the Commission's
March 18, 1994 General Order pertaining to mergers and
acquisitions; and
3) Notice of Publication of the proposed merger transaction in the
Commission Bulletin, which was published for opposition September
20, 1996.
The parties to the merger are: 1) Houston Industries Incorporated;
2) Houston Lighting and Power Company; 3) HI Merger, Inc.; 4) NorAm Energy
Corp.; 5) Arkla, a division of NorAm Energy Corp.; and 6) Entex, a division of
NorAm Energy Corp.
<PAGE> 2
2
NorAm Energy Corp. is a Delaware corporation, qualified to do
business in Louisiana. NorAm's principal offices are located in Houston, Texas.
Through its Arkla, Entex and Minnegasco gas distribution divisions, NorAm is the
nation's third-largest natural gas distribution utility in terms of number of
customers, providing service to over 2.7 million customers in six states.
Arkla operates a natural gas distribution business in Louisiana,
Arkansas and Oklahoma. In Louisiana, Arkla serves approximately 132,335
customers primarily in North Louisiana. Arkla's principal Louisiana offices are
located at 525 Milam Street, 12th Floor, Shreveport, Louisiana. Entex operates a
natural gas distribution business in Louisiana, Mississippi and Texas. Within
Louisiana, Entex serves approximately 127,019 customers, primarily in South
Louisiana. Entex's principal Louisiana offices are located at 2500 La. Highway
14, New Iberia, Louisiana. Arkla and Entex are public utilities and are subject
to the jurisdiction of the LPSC.
Houston Industries Inc. is currently a holding company and its
principal subsidiary, Houston Lighting and Power Company, is the ninth largest
electric utility in the United States in terms of electric sales. Houston
Lighting and Power Company is engaged in the generation, transmission,
distribution and sale of electric energy. Houston Lighting and Power Company's
service area covers a 5,000-square mile area on the Texas Gulf Coast, including
Houston. At present, Houston Industries Inc. has no natural gas utility
operations. HI Merger, Inc. is a wholly-owned subsidiary of Houston Industries
Inc., founded in August of 1996 to facilitate the merger.
The Parties state that they are undertaking the merger primarily for
strategic reasons. Over time, as the energy business changes, the Parties see a
convergence of the gas and electric business. The Parties believe that by
combining the expertise and financial resources of the companies, the merger
will strengthen and prepare both companies to meet growing competition in all
energy markets and to meet the future energy needs of their customers.
The Merger Agreement provides that under the expected form of the
merger (the "Expected Structure"), Houston Industries Inc. and Houston Lighting
and Power Company will be combined into a single company (with Houston Lighting
and Power Company as the survivor) and NorAm Energy Corp. will become a first
tier subsidiary of Houston Lighting and Power Company, which at the time of the
merger will be renamed Houston Industries Incorporated. Under the Expected
Structure, Entex and Arkla will continue as divisions of NorAm.
The Parties pledge that the manner of financing the merger will not
encumber the utility property of Entex and Arkla and will have no impact on
rates charged to customers of Arkla and Entex. However, none of NorAm's $1.4
billion debt will be retired in connection with the transactions.
Under the Merger Agreement, Houston Industries Inc. will pay
approximately $2.5 billion
<PAGE> 3
3
for NorAm common stock and equivalents. Houston Industries Inc. will pay $16.00
for each NorAm common share outstanding, approximately 50% of which will be paid
in the aggregate in cash and approximately 50% in Houston Industries Inc. common
stock. Debt may be incurred to fund payments to NorAm shareholders who choose to
take cash as part of the merger consideration. Such debt will not be secured by
the utility property of Houston Lighting and Power Company or NorAm, but will be
secured by preferred stock issued by Houston Industries, Inc.'s stock in
Time-Warner and/or intracompany notes.
In the proposed merger, Houston Industries Inc. will pay a premium
over book value for NorAm as a whole. Houston Industries Inc. has committed that
it will not seek to collect the acquisition premium resulting from the merger
through the rates of any of the regulated business units. Accordingly, the
Parties attest that the merger will not increase rates to customers in any of
the states served by NorAm, including Louisiana.
Because the principal objectives of the merger are strategic, the
Parties expect no significant near-term cost savings to result from the merger
transaction, so there is little opportunity to generate near-term rate
reductions. To the extent that there are net savings that result from the
merger, those benefits will be shared with Louisiana customers through the
operation of the prevailing LPSC rate orders of Arkla and Entex.
The Parties expect that the cost allocations impact of the merger will
provide a modest benefit to Entex and Arkla. The expected near-term savings are
attributable to a reduction in management personnel and the elimination of
certain non-management redundancies in certain aspects of some NorAm and Houston
Industries Inc. headquarters functions. The total corporate costs of the
combined company are thus expected to be somewhat less than the total of the
NorAm and Houston Industries Inc. stand-alone costs.
The Parties assert that the merger will have no adverse effect on the
operation of Arkla and Entex or their ability to provide reliable and adequate
service. Arkla and Entex will each retain its name and separate identity, will
continue to operate in Louisiana in the same way that they operate today and
will continue to maintain the level of service they now provide. The merger does
not seek any changes in the rates charged by Arkla and Entex to their customers,
or in any of their policies with respect to service, employees, operations,
financing, accounting, capitalization, depreciation or any other matters
affecting the public interest or utility operations. Arkla and Entex will
continue to maintain their books and records in accordance with all requirements
of the LPSC. Decisions regarding operations will remain with Arkla and Entex.
Under the Expected Structure of the Merger Agreement, the jurisdiction
and ability of the LPSC to effectively regulate and audit the operations of
Entex and Arkla in Louisiana should be preserved.
<PAGE> 4
4
As stated earlier, notice of the Parties' Joint Application was
published in the Commission's September 20, 1996 Bulletin to provide an
opportunity for interested persons opposed to the Merger Agreement to file
oppositions thereto within 25 days from the date of publication. The 25 day
period elapsed October 15, 1996 with no opposition being filed with the
Commission.
On October 14, 1996, Entergy Gulf States, Inc. and Entergy Louisiana,
Inc. (collectively "Entergy") filed Interventions in this matter, but did not
state that they were opposed to or protested the merger transaction. On December
5, 1996, Entergy filed a Motion to Dismiss its Interventions previously filed in
this matter, stating that "Entergy's concerns with the Merger Agreement have
been resolved, and Entergy does not intend to participate further in this
proceeding."
The Joint Application came before the Commission at its December 18,
1996 Open Session, after the Staff summarized the Expected Structure of the
Merger Agreement as set forth above, on motion of Commissioner Owen, seconded by
Commissioner Dixon, and unanimously adopted, the Commission voted to issue this
Letter of Non-Opposition to the Expected Structure of the Merger Agreement as
described in the Parties' Joint Application dated September 6, 1996 and the
Exhibits included therewith.
This statement of non-opposition of the Commission should be done
without prejudice to the authority of the Commission to make investigations and
require any reasonably necessary change it may legally find to be in the public
interest.
Sincerely
Lawrence C. St. Blanc
Secretary
cc: Commissioners
LPSC Docketing
LPSC Utilities
Mr. Charles Bradley, Louisiana Department of Revenue, Excise Tax Division,
P.O. Box 201, Baton Rouge, LA 70821
Paul F. Guarisco
