APPLICATION OF NORAM ENERGY CORP.
FOR ORDER OF EXEMPTION
PURSUANT TO SECTION 3(b)
OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
INTRODUCTION
NorAm Energy Corp. ("NorAm"), a Delaware corporation which
is neither a registered holding company nor an exempt holding
company under the Public Utility Holding Company Act of 1935 (the
"Act"), desires to pursue certain opportunities in Colombia and
Mexico as detailed below. NorAm is, therefore, seeking
unqualified orders of exemption pursuant to Section 3(b) of the
Act for companies that will be operating solely in Colombia and
Mexico.
THE COLOMBIAN TRANSACTION
NorAm seeks an unqualified order of exemption pursuant to
Section 3(b) of the Act for Colombian corporations (the
"Colombian Corporations"), to allow them to own concessions
granted by the government of Colombia to establish natural gas
distribution services without being subject to the provisions of
the Act. The government of Colombia has requested proposals to
establish natural gas distribution service in five areas in
Colombia. These concessions include areas which do not currently
have natural gas service but are reasonably close to pipelines
under construction, and have a potential market of not less than
200,000 customers. The concessions will be exclusive for some
period of time.
NorAm will be part of separate bidding groups for any
concession on which it bids and each group will utilize a
Colombian Corporation to operate the concession. Until NorAm
completes its due diligence regarding the concessions and
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completes discussions with bidding partners, NorAm will not know
for exactly how many concessions it will submit proposals, but
currently expects to bid on 4 or 5 concessions.
NorAm will acquire minority interests in any concession
through ownership of a Colombian Corporation. NorAm's stock
ownership in the Colombian Corporations would be held by a newly
formed wholly owned Delaware subsidiary (the "Delaware
Subsidiary") of NorAm.
NorAm's ownership interest in any single concession and
Colombian Corporation is expected to be approximately 20%, but
will not, in any event, exceed 49%. No income of the Colombian
Corporations will be derived, directly or indirectly, from
sources within the United States, and neither the Colombian
Corporations nor any of their subsidiaries will be a public
utility company operating in the United States.
Bids are expected to be awarded in early 1996. Separate
bidding groups have been or will be formed for each concession.
Each group of which NorAm would be a part will have a different
ownership composition, with a majority expected to be held by
local business interests. NorAm expects that it will own
approximately 20% of any group that it determines to join and may
be the only foreign natural gas company included in the group.
Bids will be submitted for no more than five separate
concessions.
NorAm is currently in active discussions with numerous
companies, including Colombian utility and natural gas
distribution companies, regarding forming bidding groups for the
concessions. NorAm will not bid for any concession unless it has
major local bidding partners that are substantial and
well-financed. NorAm's exact percentage of ownership will depend
on negotiations with its potential bidding partners. Each
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bidding partner will own shares in the Colombian Corporations
which will own the concessions.
Requests for proposals on the concessions are not for cash
or any purchase price payment; rather, they are for non-monetary
considerations and future capital commitments related to
connecting customers within the concession area. These requests
for proposals include:
1) General and specification conditions;
2) Requirements and documents;
3) Description of the exclusive service areas and general
conditions for providing the service;
4) Analysis of the proposals, criteria and factors for
their evaluation grading process: description,
criteria and conditions; and
5) Draft of the contract.
NorAm's financial commitment will be solely related to its share
of the costs associated with construction and connecting
customers within a concession area.
If this application (this "Application") is granted and
NorAm's bid is successful, NorAm will purchase approximately 20%
of the shares of one or more Colombian Corporations bidding for
concessions. The number of Colombian Corporations will be
determined after NorAm determines for how many concessions it
will bid.
In order for NorAm to successfully become part of a bidding
group and finalize arrangements with potential bidding partners,
it must be able to assure its potential partners that it can be a
legitimate bidder and that its involvement is not subject to any
conditions or contingencies. Without receipt of an unqualified
order of exemption pursuant to this Application, NorAm could not
give its potential bidding partners the required assurances
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because it would require NorAm's United States operations to
comply with the Act even though it has no United States
subsidiary public utility operations. NorAm would not bid unless
its operations continued to be free from regulation under the
Act. Additionally, in order for NorAm to be competitive in the
bidding process, it must be able to submit its bid without any
contingencies related to action by United States regulatory
commissions. NorAm believes that bids with such contingencies
will not be considered by the Colombian government. The granting
of an unqualified order of exemption pursuant to this Application
will provide NorAm a chance of success in the bidding process.
NorAm respectfully requests that the Commission grant its
Application for an order of exemption pursuant to Section 3(b) of
the Act.
The Colombian Concessions
Given the fact that the concessions are newly created, there
is no financial history nor is there any basis for preparing
reasonably reliable future estimates at this time. Each
concession will, in effect, be a new company. The sources of
funds for the Colombian Corporations for required concession work
related to connecting new customers will be 1) the capital
contributions of its shareholders; 2) internally generated funds
pursuant to general tariffs and connection charges billed
directly to customers; and 3) borrowings by each Colombian
Corporation which will not exceed 60% of its total
capitalization.
NorAm believes that each new meter hookup will cost between
$150 and $250 and that about 50% of such cost will be billed in
installments directly to the customer and the remainder will be
recovered through regular tariffs.
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NorAm expects that the concessions will be profitable soon
after initiation of service; however, the concessions are not
expected to produce positive cash flow for several years because
of the annual expenditures associated with expanding the
distribution system. The operations of the Colombian
Corporations will be regulated by the Energy Regulatory
Commission of Colombia.
The Colombian Transaction
NorAm proposes to participate in the government's bidding
process to buy concessions for establishing natural gas
distribution service in up to five areas in Colombia pursuant to
a government privatization plan. NorAm plans to acquire
approximately a 20% interest (in no event will NorAm's interest
exceed 49%) in up to five separate Colombian Corporations that
will be formed to bid on the Colombian concessions. The shares
in the Colombian Corporations will be held by NorAm's wholly
owned Delaware Subsidiary.
Though the amount of NorAm's investment cannot be precisely
determined at this time, NorAm's total investment for this
transaction, including any future capital contributions, will not
exceed $50 million for all concessions or $10 million for a
single concession. While the exact timing of the investments
will be based on construction schedules, connection costs and the
timing of cash generation by the Colombian Corporations, it is
expected that NorAm's investment will be made over at least a
five year period. The total investment is approximately 1.4% of
NorAm's consolidated assets and approximately 2.3% of NorAm's
total capitalization, each as of December 31, 1994. The amount
of NorAm's investment and the amount of ownership acquired will
be consistent with its view of the risks associated with
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investing in Colombia including, political stability, the
volatility of the currency, advantages and disadvantages of the
regulatory framework, enforcement measures and completion of a
thorough evaluation of the concessions and potential customers
and costs of construction. NorAm will not acquire a majority
interest in any Colombian Corporation. This Colombian
transaction will represent a very small investment when compared
to NorAm's overall operations.
THE MEXICAN TRANSACTIONS
NorAm also seeks an unqualified order of exemption pursuant
to Section 3(b) of the Act for Mexican corporations (the "Mexican
Corporations"), to allow them to 1) own concessions granted by
the government of Mexico to establish gas distribution systems in
Mexico and 2) purchase an interest in one or more existing gas
distribution businesses, without being subject to the provisions
of the Act. These concessions are expected to include areas
which do not currently have natural gas service but are
reasonably close to pipelines owned by Pemex, the national oil
and gas company, either in service or under construction, and
have a potential market of at least 100,000 customers. As a
condition to the purchase of any concession, NorAm will require
that the concession be exclusive for an extended period of time.
The Mexican government has not established procedures by
which such concessions may be obtained but expects to establish
such procedures this year. NorAm expects that it will acquire
concessions in connection with Grupo Gutsa, a Mexican
construction firm, and TransCanada Pipelines ("TransCanada"), a
major Canadian company, pursuant to a memorandum of understanding
("MOU") which states that the parties agree to jointly
participate in developing gas distribution facilities in Mexico.
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The MOU is subject to the development of definitive agreements
regarding the agreements of the parties. Until NorAm completes
its due diligence regarding the concessions and completes
discussions with Grupo Gutsa and TransCanada, NorAm will not know
for how many concessions, if any, it will submit proposals. The
parties would establish separate corporations for each concession
area because it is assumed the local Mexican companies would
become shareholders in the corporation serving their area.
Separate corporations would also facilitate local employee
ownership in the event such ownership were offered.
NorAm will acquire a minority interest in any concession
through stock ownership in a Mexican Corporation. All interests
in Mexico would be held by a newly formed, wholly owned Delaware
Subsidiary of NorAm that has been created to hold all of NorAm's
interests in these operations.
NorAm's ownership interest in any single concession is not
expected to exceed 40% and will not, in any event, exceed 49%.
NorAm's exact percentage of ownership will depend on negotiations
with the other parties to the MOU. No income of the Mexican
Corporations will be derived, directly or indirectly, from
sources within the United States, and neither the Mexican
Corporations nor any of their subsidiaries will be a public
utility company operating in the United States.
NorAm expects to submit its proposal to the Mexican
government after regulations governing the operation of these
distribution systems are published. NorAm expects that its
proposal to the Mexican government will include:
1) Technical qualifications of the bidding group;
2) Financial qualifications of the bidding group;
3) Construction schedules and plans for connecting
customers within the concession area; and
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4) Proposed customer tariffs and conditions of service,
including an extended period of exclusivity.
NorAm's financial commitment will be solely related to its share
of the costs associated with construction and connecting
customers within a concession area.
In order for NorAm to finalize arrangements with the other
parties to the MOU, it must be able to assure its partners that
its involvement is not subject to any conditions or contingencies
related to governmental approvals or actions. As previously
indicated, without receipt of an unqualified order of exemption
pursuant to this Application, NorAm could not give its bidding
partners the required assurances. Additionally, in order for
NorAm to submit a proposal that Pemex would accept, it must be
able to submit its proposal without any governmental
contingencies. The granting of an unqualified order of exemption
pursuant to this Application will provide NorAm a chance of
success in acquiring concessions. NorAm respectfully requests
that the Commission grant its Application for an order of
exemption pursuant to Section 3(b) of the Act.
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Existing Natural Gas Distribution Systems
Noram plans to submit a proposal to purchase a minority
interest in one or more existing natural gas distribution
businesses which have not been fully developed.
NorAm is reviewing information related to businesses serving
Mexican cities, including Saltillo and Monterrey. These
businesses are in need of capital to expand customer connections
within their service areas since none of them has connected a
majority of the potential customers in their areas.
The MOU also covers the purchase of certain existing small
gas distribution businesses expected to be offered for sale
pursuant to a privatization program and NorAm expects that its
total investment in such businesses will be less than
$10 million, given that the total assets of the largest of these
businesses is less than $20 million. Certain other larger
existing gas distribution businesses may be offered for sale and,
if so, NorAm may submit a bid together with MOU partners. NorAm
expects that its investment, if any, in these larger distribution
properties would not exceed $40 million.
MOU Partners
Grupo Gutsa
Grupo Gutsa, a large Mexican private corporation, engages in
construction and has a significant ownership interests in the $1
Billion World Trade Center, a water company serving one third of
Mexico City (which it operates), El Presidente Hotels and the
toll bridge between Juarez and El Paso, among other interests.
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TransCanada
TransCanada is a major Canadian company with assets of
approximately $10 billion at December 31, 1994. TransCanada
operates in three lines of business; 1) its Canadian mainline and
interconnected natural gas transmission lines which transport
natural gas across Canada and into the northern United States
("Transmission"), 2) its energy marketing business which engages
in the purchase and resale of natural gas, crude oil, refined
products and natural gas liquids ("Marketing") and 3) its power
generation and miscellaneous operations, including the sale of
thermal carbon black, the extraction of liquids from natural gas
and the provision of storage for natural gas ("Other"). For the
year ended December 31, 1994, Transmission, Marketing and Other
generated operating revenues of $1.87 billion, $3.16 billion and
$.18 billion, respectively and operating income of
$980.7 million, $21.5 million and $6.3 million, respectively.
The Mexican Concessions
Given the fact that the concessions are newly created, there
is no financial history nor is there any basis for preparing
reasonably reliable future estimates at this time. Each
concession will, in effect, be a new company. The sources of
funds for the Mexican Corporations for required concession work
related to connecting new customers will be 1) the capital
contributions of its shareholders; 2) internally generated funds;
and 3) borrowings by each Mexican Corporation not to exceed 60%
of its total capitalization.
NorAm believes that the cost of establishing gas service
will be about $300 per meter and will be recovered through
tariffs.
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NorAm expects that the concessions will be profitable soon
after initiation of service; however, the concessions are not
expected to produce positive cash flow for several years because
of the annual expenditures associated with expanding the
distribution system. The operations of the Mexican Corporations
are expected to be regulated by the Energy Regulatory Commission.
The Mexican Transactions
NorAm proposes to acquire concessions for establishing gas
distribution service in several areas in Mexico. NorAm plans to
acquire not more than a 49% interest in the Mexican Corporations
that will be formed to acquire the concessions. The shares in
the Mexican Corporations will be owned by NorAm, Grupo Gutsa and
TransCanada, possibly local Mexican companies and employees of
the Mexican Corporations.
Though the amount of NorAm's investment cannot be precisely
determined at this time, NorAm's total investments over a five
year period for these transactions including any future capital
contributions will not exceed $50 million for all concessions and
$50 million for any existing distribution businesses in Mexico.
NorAm estimates that its investment will be funded over at least
a five year period. The total is approximately 2.8% of NorAm's
consolidated assets and approximately 4.7% of NorAm's total
capitalization, each as of December 31, 1994. The amount of
NorAm's investment and the amount of ownership acquired will be
consistent with its view of the risks associated with investing
in Mexico including, political stability, the volatility of the
currency, advantages and disadvantages of the regulatory
framework, enforcement measures and completion of a thorough
evaluation of the concessions and potential customers and costs
of construction. NorAm will not acquire a majority interest in
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any Mexican Corporation. The Mexican transactions will represent
a very small investment when compared to NorAm's overall
operations.
ACCOUNTING TREATMENT FOR ALL TRANSACTIONS
NorAm's Colombian and Mexican interests will be reflected in
NorAm's financial statements according to the equity method of
accounting. Under that method, the revenues, assets and
liabilities of the Colombian Corporations and the Mexican
Corporations (collectively, the "Corporations") will not be
consolidated into NorAm's financial statements. NorAm's
consolidated statement of income will reflect only NorAm's
indirect percentage interest in the net income or net loss of the
Corporations. Any net loss will be limited to NorAm's total
investment. NorAm's consolidated balance sheet will reflect only
the amount of NorAm's investment in the Corporations, increased
by its percentage interest in the Corporations' retained earnings
or decreased by its percentage interest in any net losses of the
Corporations.
NORAM ENERGY CORP.
NorAm is a Delaware corporation with its principal places of
business and operations in Texas, Louisiana, Arkansas,
Mississippi, Oklahoma, Missouri and Minnesota. NorAm is not a
public utility holding company as defined in the Act because all
of its utility operations are conducted by NorAm, not a
subsidiary company. NorAm is principally engaged in the
distribution and transmission of natural gas, including
gathering, storage and marketing. NorAm's distribution business,
which provided approximately 60% of NorAm's operating income in
1994, serves approximately 2.7 million customers in six states
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with annual throughput of approximately 524.2 billion cubic feet
("Bcf"). NorAm is also engaged in the business of operating two
interstate pipelines with total annual throughput of
approximately 878 million MMBtu, with principal facilities in a
five state area and natural gas gathering systems, which annually
gather approximately 230 Bcf of gas through approximately 3,500
miles of pipe in the Anadarko, Arkoma and Ark-La-Tex supply
basins. NorAm also operates a natural gas marketing company
which provides gas supply, storage, transportation and other
services, with annual sales volume of approximately 318 Bcf.
NorAm's two interstate pipelines are regulated by the Energy
Regulatory Commission as to the services offered and the maximum
rates which may be charged. NorAm's natural gas distribution
operations are regulated as to services offered and the rates
which may be charged by state utility commissions or similar
bodies in Louisiana, Arkansas, Mississippi, Oklahoma and
Minnesota and by municipalities in Texas, although certain
aspects of service are regulated by the Texas Railroad
Commission. None of the transactions contemplated herein require
the prior approval of any of the aforementioned commissions.
NorAm's expertise in the gas business will significantly
contribute to the future operations of the Corporations. NorAm,
through the Corporations, can participate in the provision of
quality service to customers in each concession area and provide
technical and management services to the Corporations. NorAm
expects that only a small number of its employees, approximately
50, would ever be involved in on-site work when necessary. All
time and expenses related to such work would be reimbursed by the
respective Corporation to the employees' employer.
Additional information related to NorAm's financial and
operating information is contained in the periodic reports of
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NorAm filed with the Commission under the Securities Exchange Act
of 1934 (File No.1-3751).
STATUTORY STANDARD
NorAm is not a public utility holding company as defined
under the Act since it does not conduct utility operations
through any subsidiary. The Corporations would be gas utility
companies as defined under the Act. Any company which directly
or indirectly owns, controls or holds with power to vote 10% or
more of the voting securities of a foreign utility company is
considered a holding company under the Act. Based upon the
proposed transaction, NorAm will be a holding company with
respect to the Corporations and the Corporations will be
subsidiary companies of NorAm. NorAm and its Delaware Subsidiary
would be exempt from the provisions of the Act pursuant to Rule
10, provided the requirements of Section 3(b) are satisfied.
Section 3(b) provides that the Commission
"shall exempt any subsidiary company, as such, of a
holding company from any provision or provisions of
this title, the application of which to such subsidiary
company the Commission finds is not necessary in the
public interest or for the protection of investors, if
such subsidiary company derives no material part of its
income, directly or indirectly, from sources within the
United States, and neither it nor any of its subsidiary
companies is a public-utility company operating in the
United States."
The Corporations will be formed for the purpose of maintaining
the concessions. All of the income of the Corporations would be
derived from sources outside the United States. None of these
companies will be a public utility company operating in the
United States.
NorAm's partners will be exempt from the Act pursuant to
Rule 5 since they are foreign entities who will not own any
interest in a United States public utility company.
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The Corporations will not derive any of their income from
the United States. Therefore, it is not necessary in the public
interest or for the protection of the public investors to impose
upon these Corporations compliance with the Act. NorAm's
investment is slight as compared to its capitalization and such
investment will not impair the utility functions or the financial
conditions of NorAm. NorAm's investment of up to $150 million
over the next five year period, assuming the unlikely event of
the maximum investment, will total about 4.2% of the consolidated
assets and about 7% of its total capitalization, each as of
December 31, 1994. Consequently, because the contemplated
transaction will have no material effect on the consolidated
capitalization of NorAm, and no United States investor in the
securities of NorAm and its subsidiaries will have a material
direct or indirect interest in these Corporations, and the amount
of NorAm's investment will not be significant, there is no
regulatory purpose in requiring these Corporations to be treated
as public utility subsidiaries of a United States company.
NorAm's and its Delaware Subsidiary's acquisition of
interests in these Corporations would be exempt pursuant to
Rule 11 if this Application is granted.
In American & Foreign Power Co., 6 SEC 396, 403 (1939), and
in Middle West of Canada, Ltd., 2 SEC 505, 507 (1937), the
Commission stated that the purpose of Section 3(b) is that
foreign subsidiary companies "shall largely be freed from the
jurisdiction of this Commission with respect to such of their
activities as are essentially foreign in their nature and
effects." The activities of these Corporations will be focused
in Colombia and Mexico and are exclusively foreign in nature. No
portion of the Corporations' income will be derived directly or
indirectly from sources within the United States. Consequently,
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regulation by the Commission pursuant to the Act is not
necessary.
NorAm's utility operations will continue to be focused in
Texas, Louisiana, Arkansas, Mississippi, Oklahoma, Missouri and
Minnesota. While the acquisition of concessions and businesses
is based upon the future profitability of the Corporations,
NorAm's interest in those profits in relation to its other
operations will be insignificant. NorAm is not expected to
derive any significant part of its net income from the operations
of the Corporations. NorAm's investment will represent a small
fraction of its consolidated assets and equity. It is not
necessary to regulate these Corporations in the public interest
nor for the protection of investors. Therefore, NorAm's
Application for an unqualified order of exemption pursuant to
Section 3(b) should be granted.
NORAM ENERGY CORP.
By:Michael B. Bracy
Date: August 14, 1995 Michael B. Bracy
Executive Vice President
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PROPOSED FORM OF NOTICE
NORAM ENERGY CORP. ( )
NorAm Energy Corp., a Delaware corporation, ("NorAm"), 1600
Smith, 11th floor, Houston, Texas 77002, has filed an application
for an order seeking an exemption under Section 3(b) of the
Public Utility Holding Company Act of 1935 (the "Act") in
connection with its acquisition of 1) an interest in concessions
granted by the government of Colombia to establish natural gas
distribution services to areas in Colombia not previously being
served by a natural gas distribution system, 2) an interest in
concessions granted by the government of Mexico to establish
natural gas distribution services in Mexico not previously being
served by a natural gas distribution system, and 3) a minority
interest in one or more existing Mexican gas distribution
businesses.
NorAm is engaged in the business of distributing and
transmitting natural gas primarily in six states within the U.S.
NorAm is not a public utility holding company as defined in the
Act.
NorAm proposes to participate in the purchase of an interest
in concessions granted by the government of Colombia. NorAm will
acquire minority interests in each concession through ownership
of a Colombian corporation ("Colombian Corporation"). NorAm also
proposes to participate in the purchase of an interest in
concessions granted by the government of Mexico and the purchase
of minority interests in one or more Mexican existing natural gas
distribution businesses which have not been fully developed.
NorAm will participate in such acquisition through a memorandum
of understanding ("MOU") entered into with Grupo Gutsa and
TransCanada Pipelines for the creation of a subsidiary in Mexico
(the "Mexican Corporation"). NorAm's interests in the Colombian
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concessions and the Mexican concessions and businesses will not
exceed 49%, respectively.
The concessions and existing Mexican gas distribution
businesses would be considered gas utility companies as defined
in the Act. Therefore, should the transactions take place,
NorAm, the Colombian Corporations and the Mexican Corporations
would each be holding companies under the Act with respect to the
concessions.
Section 3(b) of the Act provides that the Commission may by
order, upon application, exempt any subsidiary company, as such,
of a holding company
"from any provision or provisions of the Act the
application of which to such subsidiary company . . .
is not necessary in the public interest or for the
protection of investors, if such subsidiary company
derives no material part of its income, directly or
indirectly, from sources within the United States, and
neither it nor any of its subsidiary companies is a
public utility company operating in the United States."
NorAm states that the concessions will derive no income, directly
or indirectly, from sources in the United States, and will not
operate, or have any subsidiary operating, as a public utility
company in the United States. NorAm further states that no
United States investor would have a direct or indirect material
interest in the concessions or businesses by virtue of NorAm's
interest in the concessions and the businesses, and that the
proposed acquisitions will not affect or impair utility functions
or the financial condition of NorAm. Under these circumstances,
NorAm states that it is not necessary in the public interest or
for the protection of investors to subject the concessions to any
of the provisions of the Act applicable to subsidiary companies,
and therefore, that NorAm is entitled to an unqualified order of
exemption under Section 3(b) of the Act.
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