File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION AND DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
MCN CORPORATION
500 Griswold Street
Detroit, Michigan 48226
(Name of companies filing this statement and
address of principal executive offices)
None
(Name of top registered holding company
parent of each applicant or declarant)
Daniel L. Schiffer, Esq.
Vice President, General Counsel
and Secretary
MCN Corporation
500 Griswold Street
Detroit, Michigan 48226
(Name and address of agent for service)
The Commission is requested to mail copies of
all orders, notices and communications to:
William S. Lamb, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, New York 10019-4513
Pursuant to Section 9(a)(2) and 10 of the Public
Utility Holding Company Act of 1935 (the "Act"), MCN Corporation,
a Michigan corporation ("MCN") hereby requests that the
Securities and Exchange Commission (the "Commission") authorize
the acquisition (the "Acquisition"), as described herein, of a 1%
general partnership interest in Southern Missouri Gas Company,
L.P., a Missouri limited partnership (the "Partnership"), which
will construct, own and operate a gas pipeline and distribution
system (the "System") in southern Missouri that is currently
under construction and owned by Tartan Energy Company of
Missouri, L.C., a Missouri limited liability company ("TEC").
Prior to the consummation of the Acquisition, ownership of the
System will be transferred to the Partnership, as described
below.
MCN is currently a public utility holding company
exempt from all provisions of the Act except Section 9(a)(2)
under Section 3(a)(1) pursuant to Rule 2. MCN owns all of the
issued and outstanding common stock of two public utility
companies as defined under the Act: Michigan Consolidated Gas
Company ("MichCon") and Citizens Gas Fuel Company ("Citizens"),
both of which are organized and operate virtually exclusively in
the state of Michigan. MCN believes that following the
consummation of the Acquisition and the commercial operation of
the Partnership, it will continue to be a public utility holding
company entitled to an exemption under Section 3(a)(1) of the Act
because the Partnership, which when it begins commercial
operation will be a public utility subsidiary of MCN organized
and operating in Missouri, will not account for a material part
of MCN's income<F1> and thus, MCN and each public utility
____________________
<F1> Specifically, under current plans, in its first full year of
commercial operation (1997), MCN's share of Partnership
revenue will account for 0.18% of MCN's consolidated
revenues, which according to current projections, will be
the highest such percentage reached, and it is projected
that in 1998, that percentage will decrease to approximately
0.17%. Although the term "material part of its income" is
not defined in the Act, in many instances, holding companies
with out-of-state utility subsidiaries accounting for an
equivalent amount of revenues have been permitted to claim
an exemption under Section 3(a)(1). For example, in In re
Yankee Atomic Electric Co., 36 S.E.C. 552 (1948), the
Commission granted an exemption under Section 3(a)(1) in a
case where 2% of the holding company's revenues were derived
from an out-of-state utility subsidiary. Indeed, the amount
of income generated by the Partnership and contributed to
MCN will be well within the traditional parameters of the
term materiality as discussed in Commission precedent. See
e.g., Commonwealth Edison, 28 S.E.C. 172 (1948) (holding
that utility subsidiary accounting for between 2.7% and 3.3%
of system revenues is not providing a material part of
income); Wisconsin Electric Power Company, 28 S.E.C. 909
(1948) (holding utility subsidiary accounting for 10.31% of
income and doing substantial business out-of-state is
material and not predominantly intra-state).
subsidiary from which it derives a material part of its income
will continue to be organized and operating predominantly in the
state of Michigan.
Item 1 DESCRIPTION OF PROPOSED TRANSACTION
A. Description of MCN
MCN was organized in 1988 and is the holding
company for (i) MichCon, a gas utility company as defined under
the Act engaged in the distribution, transmission and storage of
natural gas to approximately 1.1 million customers in Michigan;
(ii) Citizens, a gas utility as defined under the Act, providing
service to Adrian, Michigan, which MCN acquired in 1990 and (iii)
MCN Investment Corporation, a subsidiary holding company for
nonutility businesses. As mentioned above, MCN is exempt from
all provisions of the Act except Section 9(a)(2) under Rule
3(a)(1) because both MCN and its material public utility
subsidiaries are organized and operate predominantly in the same
state (Michigan). See, Form U-3A-2, "Statement by a Holding
Company Claiming Exemption under Rule 2 from the Provisions of
the Public Utility Holding Company Act of 1935," dated February
24, 1995, filed by MCN and incorporated herein by reference.
MCN's common stock is publicly traded on the New York Stock
Exchange. MCN's principal executive office of located at 500
Griswold Street, Detroit, Michigan 58226.
B. Existing Utility Operations
As mentioned above, MichCon is engaged in the
distribution, transmission and storage of natural gas to
approximately 1.1 million customers in Michigan and Citizens
provides services to the City of Adrian, Michigan. MichCon and
Citizens provide gas sale services primarily to residential and
small volume commercial customers and transportation services to
large volume commercial and industrial customers. MichCon also
provides transportation services to other gas utilities, gas
marketers and producers. In the fiscal year ended December 31,
1994, MCN reported consolidated revenues of approximately
$1,545.8 million, of which amount MichCon's revenues accounted
for $1,111.7 million or 71.9% and Citizens revenues were $14.4
million or 0.9%.
Approximately 46% of MichCon's gas supply originate in
the Midcontinent and Southern basins, 40% in Michigan and 10% in
Canada. MichCon and Citizens take gas from the Midcontinent and
Southern basins through the ANR and Panhandle pipelines pursuant
to firm and interruptible contracts with these pipelines.
MichCon is subject to regulation by the Michigan Public
Service Commission (the "Michigan PSC") with regard to rates and
other corporate matters and Citizens is subject to regulation by
the City of Adrian, Michigan with respect to its rates and by the
Michigan PSC with regard to other corporate matters.
C. Description of the Proposed Transaction
MCN has entered into an agreement (the "Formation
Agreement") containing the terms on which MCN intends to acquire
a 1% general partnership interest and a 46.5% limited partnership
interest in the Partnership. The remaining interests in the
Partnership will be owned as follows: 1% general partnership and
4% limited partnership interest owned by Tartan Management
Company of Missouri, L.C. or its successor ("Tartan") and 47.5%
limited partnership interest owned by Torch Energy Marketing,
Inc. ("Torch"). Torch, a Delaware corporation, is a wholly owned
subsidiary of Torch Energy Advisors Incorporated ("TEAI"), which
in turn is a wholly owned subsidiary of United Investors
Management, Inc. which is owned by Torchmark Corporation.
Torchmark Corporation has publicly announced its intended
disposition of TEAI to a newly formed investor group that
includes TEAI management and United Investors Management, Inc.
The limited liability company interests in Tartan will be held by
three individuals (the "Individuals"). Tartan will also serve as
operator of the System in accordance with the terms and
conditions set forth in the Construction and Management Agreement
attached hereto as Exhibit B-3.
The terms of the Partnership Agreement among MCN,
Tartan and Torch will provide that the limited partners will take
no part in the management or control of the Partnership's
business and the general partners will have exclusive management
and control of the business of the Partnership in accordance with
the provisions of the Missouri Uniform Limited Partnership Act.
The Partnership Agreement will also provide that the general
partners will have the exclusive right, without any requirement
of prior consultation with the limited partners, to do all things
that, in their sole and reasonable judgment, are necessary,
proper or desirable to carry out their duties and
responsibilities as general partners. The prior approval of a
majority in interest of the limited partners will be required
only for certain major events materially affecting the business
of the Partnership. These events will include, but will not
necessarily be limited to, (i) the sale, exchange, lease,
mortgage, or other disposition of 25% or more of the fair market
value of the business or assets of the Partnership, or the merger
or consolidation with another entity; (ii) incurring or prepaying
indebtedness (or providing guaranties of another entity's
indebtedness) other than in the ordinary course of business or,
if in the ordinary course of business, in an amount in excess of
$1,000,000; (iii) admitting any additional limited or general
partner or adjustment in a partners percentage ownership;
(iv) dissolving or liquidating the Partnership or appointing a
liquidating partner other than the general partners;
(v) commencing a voluntary, or admitting a material allegation in
an involuntary, proceeding in bankruptcy in the name of the
Partnership; (vi) entering into or effecting a material amendment
of any gas purchase agreement, any firm gas transportation
contract, any negotiated third-party gas sales contract in excess
of $10,000 or certain contracts with third parties in excess of
$100,000 per year; (vii) making any capital expenditure in excess
of $500,000; (viii) materially amending any material government
permit or materially amending any material filing with any
governmental body, or seeking any governmental action other than
is ordinarily required in the ordinary conduct of business; (ix)
making a determination with respect to the disposition of
insurance proceeds in excess of $500,000 or the repair or
rebuilding of the facilities in the event of substantial damage
or destruction; (x) settling a dispute or litigation involving
the Partnership that would materially adversely affect the
Partnership or require payment by the Partnership of more than
$1,000,000; (xi) engaging in any transaction with the general
partner or partners or an affiliate of either general partner
except where such transaction is effectuated on terms no less
favorable to the Partnership in a modified arm's-length
transaction with an unaffiliated entity; (xii) adopting and
operating under an annual budget that includes an increase of 10%
for any category of expenses over the amount included in the
prior year's budget, or an aggregate increase of 5% or
(xiii) modifying the annual budget to result in an increase of
10% for any category of expenses or an aggregate of 5%. In
addition, the Partnership Agreement will require the limited
partners to vote for the removal of either Tartan or MCN as a
general partner for cause and that Tartan or MCN may be removed
upon the affirmative vote of 66 rds of the interests of the
limited partners.<F2> On September 25, 1995, Torch
____________________
<F2> "Cause" will be defined in the Partnership Agreement to
include, but will not be limited to, (i) the failure of a
general partner to timely make a required capital
contribution; (ii) the failure of a general partner to
obtain the approval of a majority in interest of the limited
partners before undertaking those actions which require the
approval of the limited partners; (iii) the commencement of
bankruptcy or insolvency proceedings by or against a general
partner or certain of its affiliates; (iv) a general
partner's breach of any provision of the Partnership
Agreement which has a material adverse effect on the
construction, operation or maintenance of the operations of
the Partnership or on the limited partners' equity
investment in the Partnership; (v) a general partner's gross
negligence, fraud or breach of its fiduciary duties pursuant
to the Partnership Agreement; or (vi) in the case of Tartan,
a 45% or greater change in its stock ownership.
submitted a no-action request letter to the Division request that
the Division state it will not recommend enforcement action under
the Act upon Torch's acquisition of a 47.5% limited partner
interest in the Partnership.
The Partnership will initially distribute gas to the
residents of approximately fifteen communities in Greene,
Webster, Wright, Howell, Douglas and Texas counties, Missouri,
all of which are located in south-central Missouri. Currently,
the System is being constructed by TEC which also holds fifteen
local franchises for providing service issued by the Missouri
Public Service Commission (the "MPSC"). These licenses were
initially held by a predecessor of TEC, Tartan Energy Company
L.C., an Oklahoma limited liability company, which was merged
with and into TEC in accordance with the order of the MPSC dated
September 29, 1995 and attached hereto as Exhibit D-2. When
fully developed, the System will have over 300 miles of trunk
pipeline and distribution piping, serving over 10,000 customers.
The MPSC has already approved TEC's application for the
first $39 million in expenditures for developing the system to
serve approximately 9,000 customers in ten of the franchised
communities and construction began in March 1995. Attached as
Exhibit D-4 is a copy of this order, which was initially issued
to TEC's predecessor (the "MPSC April Order"). Effective upon
the consummation of the transactions described below, the terms
of the MPSC April Order will be applicable to the Partnership.
Pursuant to the MPSC April Order, the maximum financing for the
construction of the project will be $24 million (plus interest
during construction). The financing may be with recourse to the
System only. The remaining $15 million of project funding will
be in the form of equity contributions from the project partners.
In accordance with the MPSC Order, the project partners must make
an equity contribution for the initial $8 million in project
funding, which will be followed by the expenditure of the $24
million in debt financing, with construction finally being
completed with the remaining $7 million in equity funds.
Currently, Torch has $1.4 million outstanding in loans to TEC for
project development costs and MCN has $6.6 million outstanding in
loans to TEC for construction equity. These loans were secured
by a pledge of 98.5% of Tartan's and certain of the Individuals'
interests in TEC. Tartan and such Individuals have subsequently
transferred the 98.5% interest in TEC subject to the pledge to
Tartan Limited Partnership of Missouri (the "Interim Entity").
Tartan is the general partner of the Interim Entity and certain
of the Individuals are the limited partners. The Interim Entity
has assumed TEC's debt to Torch and MCN.
In order to transfer the assets of the System as well
as the franchises held by TEC to the Partnership to establish the
initial ownership structure for the Partnership and pursuant to
the terms of the Formation Agreement, the following transactions
will take place: MCN and Torch will contribute $8 million to the
Interim Entity in consideration of the subsequent distribution of
the general and limited partnership interests of the Partnership.
The $8 million will be used by Interim Entity to repay the loans
from Torch and MCN. The Interim Entity will cause the
Partnership to be formed. The Partnership will issue 98.5% of
its limited and general partnership interests to the Interim
Entity and 1.5% of its limited partnership interest to certain of
the Individuals. The Individuals will contribute their interest
in the Interim Entity to Tartan. The Interim Entity will
distribute the Partnership's limited partnership interest and
general partnership interests to Tartan (1% general and 4%
limited), MCN (1% general and 46.5% limited) and Torch (46%
limited) and the Individuals will sell their 1.5% limited
partnership interest in the Partnership to Torch. The Interim
Entity subsequently will be dissolved, leaving the Partnership as
the surviving entity owning the System and whose interests are
owned by MCN, Torch and Tartan. Torch and MCN will equalize
their equity contributions to the Partnership in apportioning
completion equity by the end of 1996. MCN has also agreed to
provide credit support to the Partnership during the construction
phase.
The merger of TEC into the Partnership is subject to
the approval of the MPSC. Although formal approval of the
Acquisition by the Michigan PSC is not required under Michigan
law, the staff of the Michigan PSC has stated that it does not
object to the Acquisition by MCN as set forth in the letter from
the staff of Michigan PSC attached as Exhibit D-1.
The timetable for the construction of the System is
currently estimated as follows: construction of 128 miles of
trunk pipeline in 7 cities (March to December 1995); construction
of distribution piping in 7 cities (May 1995 to June 1996);
construction of remaining 46 miles of trunk pipeline plus
distribution pipeline to final 3 cities covered by the MPSC order
(March-December 1996) and construction of distribution piping in
5 additional cities if the requisite Certificate of Convenience
and Necessity is granted by the MPSC (April-May 1996). It is
expected that the System will be fully developed by early 1997.
The natural gas supply for the System will be sourced
via the Williams Natural Gas Company ("Williams") pipeline, with
whom a ten year Transportation Service Agreement for firm
transportation has been negotiated. Williams has agreed to
construct, at its sole cost and expense, a pipeline lateral, tap
and measurement/regulation facilities in order to deliver gas to
the System.
MCN's current budget and projections for the next ten
years indicate that MCN's aggregate 47.5% share of the capital
expenditures of the Partnership will amount to approximately $6
million in 1996, less than $400,000 in 1997 and around $120,000
per year for the following eight years. Moreover, MCN's share of
the assets of the Partnership are not projected to exceed $20
million at any time in this period. For purposes of their
internal analysis, MCN and Torch have estimated the projected
revenues and net income for the Partnership as follows:
($ million) 1996 1997 1998
Revenue $3.9 $6.9 $6.8
Net Operating Income 2.0 2.0 2.8
MCN currently has approximately $2 billion in assets on a
consolidated basis and in excess of $1 billion in utility assets.
It should be noted that Tartan has filed a Form U-3A-2
with the Commission to claim an exemption from all provisions of
the Act (except section 9(a)(2)) under Section 3(a)(1).
Item 2 FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses of MCN expected to
be paid or incurred, directly or indirectly, in connection with
the transactions described above are estimated as follows:
Commission filing fee
relating to Application
on Form U-1 . . . . . . . . . . . . . . . . . . . . $2,000
Legal Fees . . . . . . . . . . . [To be filed by Amendment]
Miscellaneous . . . . . . . . . [To be filed by Amendment]
Total . . . . . . . . [To be filed by Amendment]
Item 3 APPLICABLE STATUTORY PROVISIONS
The following sections of the Act are directly or
indirectly applicable to the proposed transaction: Sections
9(a)(2) and 10.
Section 9(a)(2) makes it unlawful, without approval of
the Commission under Section 10, "for any person ... to acquire,
directly or indirectly, any security of any public utility
company, if such person is an affiliate ... of such company and
of any other public utility or holding company, or will by virtue
of such acquisition become such an affiliate." Because MCN
presently is an affiliate of two public utility companies,
MichCon and Citizens, and by virtue of the proposed transaction
will also become an affiliate of the Partnership, Section 9(a)(2)
requires approval by the Commission of the proposed transaction
under Section 10. MCN believes that the proposed transaction
meets the requirements of Sections 9(a)(2) and 10.
A. Section 10(b)(1)
Section 10(b)(1) provides that, if the requirements of
Section 10(f) are satisfied, the Commission shall approve an
acquisition unless:
(1) such acquisition will tend towards
interlocking relations or the concentration
of control of public utility companies, of a
kind or to an extent detrimental to the
public interest or the interest of investors
or consumers.
Section 10(b)(1) requires a finding that control is "of a kind or
to an extent detrimental to the public interest or the interest
of investors or consumers." The framers of the Act sought
through Section 10(b)(1) to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of
scale, the elimination of duplicative facilities and activities,
the sharing of production capacity and reserves and generally
more efficient operations" afforded by certain combinations.
American Electric Power Co., Inc., 46 S.E.C. 1299, 1309 (1978).
The acquisition of a 1% general partner interest, even coupled
with a 46.5% limited partner interest the latter of which does
not convey control for purposes of the Act, in the small
distribution system of the Partnership by MCN will not create an
"excess of concentration and bigness," but, as discussed in more
detail below, will afford the Partnership the opportunity to
achieve the economies of scale and efficiencies, particularly in
the areas of management expertise and gas supply, that the Act's
framers intended to preserve for the benefit of investors and
consumers.
B. Section 10(b)(2)
Section 10(b)(2) provides that the Acquisition should
be approved unless the price paid:
is not reasonable or does not bear a fair
relation to the sums invested in or the
coming capacity of the utility assets to be
acquired or the utility assets underlying the
securities to be acquired.
MCN will make a capital contribution of $8 million for its 47.5%
aggregate interest in the Partnership. The other partners will
make capital contributions of various intangible property as well
as a total of $8 million for an aggregate 52.5% in interests. As
previously noted, these financing arrangements have been
essentially mandated by the MPSC. The staff of the Michigan PSC
does not object to the arrangement. The MPSC can continue to
monitor the Partnership's expenditures through its ratemaking
proceedings and the Michigan PSC, as well as the City of Adrian
in the case of Citizens, can monitor MCN through ratemaking and
other proceedings designed to protect MichCon's and Citizen's
customers. In addition, each partner's contribution is to be
used to finance the construction and start up of the system and
effectively amounts to a purchase made at cost. Overall, the
fact that the amount of the equity contributions to be made have
been either approved or not objected to by these state
commissions, these arrangements were negotiated among the
partners on an arm's length basis and, as discussed below, the
investment constitutes a small portion of MCN's overall capital
expenditures, all lead to the conclusion that the price to be
paid by MCN is fair and does not warrant any of the negative
findings that call for disapproval under Section 10(b)(2).
C. Section 10(b)(3)
Section 10(b)(3) directs approval of the acquisition
unless the Commission finds that:
(3) such acquisition will unduly complicate
the capital structure of the holding-company
system of the applicant ... or will be
detrimental to ... the proper functioning of
such holding-company system.
Section 10(c)(1) provides that the Commission not approve an
acquisition that "is detrimental to the carrying out of the
provisions of section 11." Together they relate to the corporate
simplification standards of Section 11(b)(2), which require that
each registered holding company take the necessary steps
to ensure that the corporate or continued
existence of any company in the holding-
company system does not unduly or
unnecessarily complicate the structure ... of
such holding-company system.
The intent of these requirements is to assure the financial
soundness of the holding-company system, with a proper balance of
debt and equity. No such complexities will result from the
acquisition.
The following table shows the capitalization of MCN at
December 31, 1994:
Capitalization of MCN - as of December 31, 1994
(in thousands of dollars, except percentages)
Amount Percentage
Long term debt, including capital
lease obligations . . . . . . . $685,519 53%
Redeemable Cumulative Preferred
Securities of Subsidiaries . . 102,618 8
Common shareholders equity . . . 511,495 39
Total: $1,299,632 100%
MCN's investment in the Partnership will take the form of a
straightforward capital contribution which will not complicate or
indeed, involve MCN's capital structure.
D. Section 10(c)(1) and 10(c)(2)
Section 10(c) provides for two distinct findings with
respect to a proposed acquisition, and both are related to the
standards prescribed in Section 11(b). Section 10(c)(1) requires
that the proposed acquisition not be "detrimental to the carrying
out of the provisions of Section 11." As discussed below,
Section 11 of the Act relates to the simplification of holding
company systems, which was one of the major purposes behind the
passage of the Act. Section 11(b)(1) discusses two main elements
to this simplification: reform of the corporate structure of
utility holding companies and confining the properties and
business of the companies within holding company systems to an
"integrated public utility system."
Section 10(c)(2) is a more specialized provision. It
requires that an acquisition not be approved unless the
Commission finds that:
[S]uch acquisition will serve the public
interest by tending towards the economical
and efficient development of an integrated
public-utility system.
Section 2(a)(29)(B) defines an "integrated public utility system"
as applied to gas utility companies as:
[A] system consisting of one or more gas
utility companies which are so located and
related that substantial economies may be
effectuated by being operated as a single
coordinated system confined in its operation
to a single area or region, in one or more
States, not so large as to impair
(considering the state of the art and the
area or region affected) the advantages of
localized management, efficient operation,
and the effectiveness of regulation:
Provided, that gas utility companies deriving
natural gas from a common source of supply
may be deemed to be included in a single area
or region.
The acquisition of an interest in the Partnership by MCN will
meet the standard set forth in Section 2(a)(29)(B) and,
therefore, will satisfy the requirements of Sections 10(c)(1) and
(2) and should be approved by the Commission. First, both the
Commission's limited precedent and current technological
realities point to the conclusion that, with the Partnership
included, MCN's gas utility system will operate as a coordinated
system confined in its operation to a single area or region
because they will derive natural gas from a common source of
supply. None of the Act, the Commission's orders and rulings or
the Commission's staff's no-action letters provide a definition
as to what constitutes a "common source of supply."
Nevertheless, the Commission has not traditionally required that
the pipeline facilities of an integrated system be
interconnected,<F3> has looked to such issues as from whom
the distribution companies within the system receive much,
although not all, of their gas supply,<F4> and has considered
both purchases of gas from a common pipeline<F5> as well as
from different pipeline's when the gas originates from the same
gas field.<F6> Since the time of most of these decisions,
the state of the art in the industry has developed to allow
efficient operation of systems whose gas supplies derive from
many sources.
____________________
<F3> See In the Matter of Pennzoil Company, HCAR No. 15963 (1968)
(finding an integrated system where facilities both
connected with an unaffiliated transmission company but not
each other). See also, American Natural Gas Company, HCAR
15620 (1966) ("it is clear the integrated or coordinated
operations of a gas system under the Act may exist in the
absence of such interconnection").
<F4> See e.g., In the Matter of Philadelphia Company and Standard
Power and Light Company, HCAR No. 8242 (1948) ("most of the
gas used by these companies in their operations is obtained
from common sources of supply"); Consolidated Natural Gas
Company, HCAR No. 25040 (1990) (finding integrated system
where each company derived natural gas from two transmission
companies, although one such company also received gas from
other sources).
<F5> In the Matter of the North American Company, HCAR No. 10320
(1950) (finding Panhandle Eastern pipeline to be a common
source of supply).
<F6> See In the Matter of Central Power Company and Northwestern
Public Service Company, HCAR 2471 (1941), in which the
Commission declared an integrated system to exist where two
entities purchase from different pipeline companies since
"both pipelines rule out of the Otis field, side by side,
and are interconnected at various points in their
transmission system; and that they are within two miles of
each other at Kearney."
Following the Acquisition, MCN's gas utility company
subsidiaries will derive some of their gas from a common source
of supply as defined in Section 2(a)(29)(B). As previously
mentioned, MichCon receives approximately 46% of its gas supply
from the Midcontinent and Southern basins through the ANR and
Panhandle pipelines. The Partnership will take gas from the
Williams pipeline, which is interconnected with the ANR and
Panhandle pipelines. It is currently anticipated that the
Partnership's gas purchasing needs may be met in part by the same
MCN subsidiary that provides gas to Citizens.<F7> In the
____________________
<F7> Although MichCon and Citizens do exchange information on the
subject, MichCon's and Citizens' gas purchasing operations
are basically separate from each other.
past two years, MichCon and Citizens have obtained their gas
supply from the same gas field in numerous instances and both
companies transport substantial portions of their gas supply
through the Panhandle and ANR pipelines. Although gas purchases
for the Partnership will be made on an economic basis and not
with the main goal of ensuring a common source of supply, given
economies of scale and the past practice by the same purchasers,
it can be expected that the Partnership, Citizens and MichCon
will purchase gas from the same fields and that much of their gas
will travel thorough the same pipelines even if it is not from
the same field. As noted above, both purchases from a common
pipeline as well as from a common gas field have been found to
satisfy to "common source of supply" requirement of Section
2(a)(29)(B) of the Act.
In addition, MCN's ownership of an interest in the
Partnership will be beneficial to the management and operations
of the Partnership's system. MCN's management, through MichCon
and Citizens, is highly trained and experienced in providing gas
distribution services and will bring its technological, customer
service and regulatory expertise to the Partnership, and can pass
on that expertise to Tartan, the local operator of the
Partnership project. In addition, MCN's access to gas supplies
could prove useful to the Partnership, and complements the
financial strength MCN brings to the Partnership's operations.
While final arrangements are not yet in place, it is
anticipated that MCN will provide the Partnership with assistance
and expertise relating to the efficient operation of gas utility
companies. At the moment, MCN has agreed to provide engineering,
consulting (gas purchasing, planning and coordination) as well as
billing services to the Partnership at cost. At this point, no
specific estimate of the magnitude of the savings for the
Partnership that will result from this arrangement is possible,
but we believe the tangible benefits to the Partnership will be
substantial and additional intangible benefits will result from
access to MCN's management's expertise.
Item 4 REGULATORY APPROVALS
No federal commission, other than this Commission has
jurisdiction over the Acquisition as described herein. As
discussed above, the MPSC has approved the financing arrangements
for the System and the merger of TEC's predecessor with and into
TEC. Application to the MPSC for approval of the merger which
will result in ownership of the System and the related franchises
and certificates being transferred to the Partnership will be
made. In addition, the Partnership will hold a number of
franchises issued by local authorities allowing it to provide
service in those areas. No other state regulatory commission has
jurisdiction over the transactions for which approval is sought
herein, although the staff of the only other state commission
where any public utility companies involved in the transaction
are located has indicated that it does not object to the
transaction.
Item 5 PROCEDURE
MCN hereby requests that there be no hearing on this
Application and that the Commission issue its order as soon as
practicable after the filing hereof. The Commission is
respectfully requested to issue and publish the requisite notice
under Rule 23 with respect to the filing of this Application not
later than November 3, 1995, such notice to specify a date not
later than November 28, 1995, by which comments may be entered
and a date not later than November 30, 1995, as the date after
which an order of the Commission granting and permitting the
Application to become effective may be entered by the Commission.
A form of Notice if filed herewith as Exhibit G-1.
Without prejudice to its right to modify the same if a
hearing should be ordered on this Application, MCN hereby makes
the following specifications required by paragraph (b) of Item 5
of Form U-1:
1. There should not be a recommended decision by a
hearing officer or any other responsible officer
of the Commission.
2. The Division of Investment Management may assist
in the preparation of the Commission's decision
and/or order.
3. There should not be a 30-day waiting period
between issuance of the Commission's order and the
date on which the order is to become effective.
It is requested that the Commission send copies of all
communications to MCN as follows:
Daniel L. Schiffer, Esq.
Vice President, General Counsel
and Secretary
MCN Corporation
500 Griswold Street
Detroit, MI 48226
with concurrent copies to:
William S. Lamb, Esq.
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, NY 10019-4513
Item 6 EXHIBITS AND FINANCIAL STATEMENTS
a) Exhibits
B-1 Form of Partnership Agreement
B-2 Formation Agreement
B-3 Construction and Operation Agreement
C-1 Form U-3A-2 of MCN (Incorporated herein by
reference to Form U-3A-2 filed by MCN on February
24, 1995 (File No. 69-352)
D-1 Letter from the staff of the State of Michigan
Public Service Commission dated September 18, 1995
D-2 Order of the Missouri Public Service Commission,
dated September 29, 1995
D-3 Order of the Missouri Public Service Commission,
dated September 16, 1995
D-4 Order of the Missouri Public Service Commission,
dated April 15, 1995
F-1 Opinion of Counsel (to be filed by amendment)
F-2 "Past Tense" Opinion of Counsel (to be filed by
amendment)
G-1 Proposed Form of Public Notice
b) Financial Statements
1.1 Balance Sheet MCN (consolidated), as of June 30,
1995 (Incorporated herein by reference to Form
10-Q filed by MCN on August 7, 1995)
1.2 Statement of Income and Retained Earnings MCN
(consolidated), for the six months ended June 30,
1995 (Incorporated herein by reference to Form
10-Q filed by MCN on August 7, 1995)
Item 7 INFORMATION AS TO ENVIRONMENTAL EFFECTS
None of the matters that are the subject of this
application and declaration involve a "major federal action" nor
do they "significantly affect the quality of the human
environment" as those terms are used in section 102(2)(C) of the
National Environmental Policy Act. The transaction that is the
subject of this application will not result in changes in the
operation of the company that will have an impact on the
environment. MCN is not aware of any federal agency that has
prepared or is preparing an environmental impact statement with
respect to the transactions that are the subject of this
application.
SIGNATURE
Pursuant to the requirements of the Public Utility
Holding Company Act of 1935, the undersigned company has duly
caused this application and declaration to be signed on its
behalf by the undersigned thereunto duly authorized.
MCN CORPORATION
By: /s/ Daniel L. Schiffer
Daniel L. Schiffer
Vice President, General
Counsel and Secretary
Date: October 30, 1995
EXHIBIT B-1
THE SECURITIES REPRESENTED BY THIS AGREEMENT OF LIMITED
PARTNERSHIP HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE
SECURITIES LAWS OF ANY STATE. SUCH SECURITIES MAY NOT BE SOLD,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME
WHATSOEVER, EXCEPT UPON REGISTRATION OR UPON DELIVERY TO THE
PARTNERSHIP OF AN OPINION OF COUNSEL SATISFACTORY TO THE GENERAL
PARTNERS THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR
THE SUBMISSION TO THE GENERAL PARTNERS OF THE PARTNERSHIP OF SUCH
OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE GENERAL PARTNERS TO
THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF
THE SECURITIES ACT OF 1933, AS AMENDED, APPLICABLE STATE
SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED UNDER SUCH
ACT OR LAWS.
AGREEMENT OF LIMITED PARTNERSHIP
OF
SOUTHERN MISSOURI GAS COMPANY, L.P.
This Agreement of Limited Partnership ("Partnership
Agreement") is made as of ___________, 1995 (the "Effective
Date"), by and among the Partners (as defined below).
Although upon the formation of the Partnership, the
Partnership Interests will be solely held by Tartan Limited
Partnership of Missouri and the Individuals, such Partnership
Interests shall immediately be distributed and/or conveyed as
contemplated under the Formation Agreement. Accordingly, the
execution of this Agreement by the Partners is either in their
capacity as partners in Tartan Limited Partnership of Missouri
and Individuals or as Partners.
In consideration of the mutual promises made herein, and for
other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Partners hereby
agree as follows:
ARTICLE I
DEFINITIONS
1.1 Definitions. The following terms used in this
Partnership Agreement shall (unless otherwise expressly provided
herein or unless the context otherwise requires) have the
following respective meanings:
"Act" means The Missouri Revised Uniform Limited Partnership
Act, Vernon's Annotated Missouri Statutes tit. XXIII Ch. 359 et
seq. (1994), as it may be amended from time to time, and any
successor act.
"Adjusted Capital Account Deficit" means, with respect to
any Partner, the deficit balance, if any, in such Partner's
Capital Account as of the end of the relevant fiscal year, after
(a) increasing such Capital Account by any amounts that such
Partner is obligated to restore under the standards set by Treas.
Reg. Sec. 1.704-1(b)(2)(ii)(c) (relating to a Partner's obligation
to restore the deficit balance in its capital account), or is
deemed obligated to restore under Treas. Reg. Sec. 1.704-2(g) and
1.704-2(i)(5) (as those provisions may apply to obligations to
restore for debts owed to the Partnership by such Partners, or
relating to a Partner's share of minimum gain) and (b) decreasing
such Capital Account by the amount of all losses and deductions
for the items described in Treas. Reg. Sec. 1.704-1(b)(2)(ii)(d)(5)
(relating to allocations of loss and deductions that, as of the
end of the year, are reasonably expected to be made) and
1.704-1(b)(2)(ii)(d)(6) (relating to year-end distributions).
The foregoing definition of Adjusted Capital Account Deficit is
intended to comply with the provisions of Treas. Reg. Sec. 1.704-
1(b)(2)(ii)(d) (relating to the "alternate test for economic
effect") and shall be interpreted consistently therewith.
"Affiliate" or "Affiliates" means with respect to any
Person, except as otherwise provided herein: (i) any person or
entity directly or indirectly controlling, controlled by or under
common control with such Person; (ii) any person or entity owning
or controlling 10% or more of the outstanding voting securities
of such Person; and (iii) if such Person is an officer, director,
partner or member, any company for which such Person acts in such
capacity.
"Capital Account" means, with respect to a Partner, the
Capital Account maintained for such Partner in accordance with
the following provisions:
(a) To each Partner's Capital Account there shall be
credited such Partner's Capital Contributions, such Partner's
distributive share of Profits, any items in the nature of income
or gain which are specially or curatively allocated pursuant to
Section 5.4 hereof, and the amount of any Partnership liabilities
assumed by such Partner or which are secured by any asset of the
Partnership distributed to such Partner.
(b) To each Partner's Capital Account there shall be
debited the amount of cash and the Gross Asset Value of any
Partnership asset distributed to such Partner pursuant to any
provision of this Partnership Agreement, such Partner's distribu-
tive share of Losses and any items in the nature of deductions or
losses that are specially allocated pursuant to Section 5.3
hereof, and the amount of any liabilities of such Partner assumed
by the Partnership or which are secured by any property con-
tributed by such Partner to the Partnership.
(c) In the event all or a portion of a Partnership
Interest is transferred in accordance with the terms of this
Partnership Agreement, the transferee shall succeed to the
Capital Account of the transferor to the extent it relates to the
transferred Partnership Interest.
(d) In determining the amount of any liability for
purposes of this definition of Capital Accounts, there shall be
taken into account Code Sec. 752(c) and any other applicable
provisions of the Code and Regulations.
The foregoing provisions and the other provisions of this
Partnership Agreement relating to the maintenance of Capital
Accounts are intended to comply with Treas. Reg. Sec. 1.704-1(b)
(relating to whether such allocations shall have a "substantial
economic effect" for tax purposes), and shall be interpreted and
applied in a manner consistent with such Regulations.
"Capital Contributions" means, with respect to any Partner,
the amount of money and the initial Gross Asset Value of any
property (other than money) contributed to the Partnership with
respect to the Partnership Interest held by such Partner. Loans
to the Partnership shall not be included in the Capital Account
of any Partner. The principal amount of a promissory note which
is not readily traded on an established securities market and
which is contributed to the Partnership by the maker of the note
shall not be included in the Capital Account of any Partner until
the Partnership makes a taxable disposition of the note or until
(and to the extent) principal payments are made on the note, all
in accordance with Treas. Reg. Sec. 1.704-1(b)(2)(iv)(d)(2)
(relating to the contributions to a partnership of promissory
notes).
"Certificate of Limited Partnership" means the Certificate
of Limited Partnership of Southern Missouri Gas Company, L.P.
filed with the Secretary of the State of Missouri, as it may be
amended and/or restated from time to time.
"Change" or "Changes" means (i) a Transfer of a Partnership
Interest, (ii) the issuance of additional Units upon a Capital
Contribution, (iii) any redemption of Units, or (iv) any
combination thereof.
"Chemical Bank Credit Agreement" means the Credit Agreement,
dated October __, 1995, between Tartan Energy Company of
Missouri, L.C. and Chemical Bank as in effect on the date hereof.
"Code" means the Internal Revenue Code of 1986, as amended
from time to time (or any corresponding provisions of succeeding
law).
"Departing Partner" shall mean a former General Partner,
from and after the effective date of any withdrawal or removal of
such former General Partner pursuant to Article VIII.
"Depreciation" means, for each fiscal year or other period,
an amount equal to the depreciation, amortization, or other cost
recovery deduction allowable with respect to an asset for such
year or other period, except that if the Gross Asset Value of an
asset differs from its adjusted basis for Federal income tax
purposes at the beginning of such year or other period,
Depreciation shall be an amount which bears the same ratio to
such beginning Gross Asset Value as the Federal income tax
depreciation, amortization, or other cost recovery deduction for
such year or other period bears to such beginning adjusted tax
basis; provided, however, that if the Federal income tax
depreciation, amortization, or other cost recovery deduction for
such year is zero, Depreciation shall be determined with
reference to such beginning Gross Asset Value using any
reasonable method selected by Tartan Management or its successor.
"Effective Date" shall have the meaning set forth in the
introduction to this Partnership Agreement.
"Formation Agreement" means that certain Formation
Agreement, dated as of October 12, 1995, by and among MCN, Tartan
Energy Company of Missouri, L.C., Tartan Management, Tartan
Limited Partnership of Missouri, TEMI and the Individuals party
thereto.
"General Partner" or "General Partners" means MCN and Tartan
Management, and any additional Persons admitted to the
Partnership as a general partner of the Partnership, but does not
include any Person who has ceased to be a general partner of the
Partnership.
"Gross Asset Value" means, with respect to any asset, the
asset's adjusted basis for Federal income tax purposes, except as
follows:
(a) The initial Gross Asset Value of any asset
contributed by a Partner to the Partnership shall be the gross
fair market value of such asset, as determined by the con-
tributing Partner and the Partnership;
(b) The Gross Asset Values of all Partnership assets
shall be adjusted to equal their respective gross fair market
values, as determined by the General Partners, as of the
following times: (a) the acquisition of an additional interest
in the Partnership by any new or existing Partner in exchange for
more than a de minimis Capital Contribution; (b) the distribution
by the Partnership to a General Partner or Limited Partner of
more than a de minimis amount of Property as consideration for an
interest in the Partnership; and (c) the liquidation of the
Partnership within the meaning of Treas. Reg. Sec. 1.704-
1(b)(2)(ii)(g) (relating to when a liquidation of a partnership
occurs); provided, however, that adjustments pursuant to clauses
(a) and (b) above shall be made only if the General Partners,
with the consent of a Majority in Interest of the Limited
Partners, determine that such adjustments are necessary or
appropriate to reflect the relative economic interests of the
General Partners and Limited Partners in the Partnership;
(c) The Gross Asset Value of any Partnership asset
distributed to any General Partner or Limited Partner shall be
the gross fair market value of such asset on the date of
distribution; and
(d) The Gross Asset Values of Partnership assets shall
be increased (or decreased) to reflect any adjustments to the
adjusted basis of such assets pursuant to Code Sec. 734(b) or Code
Sec. 743(b), but only to the extent that such adjustments are taken
into account in determining Capital Accounts pursuant to Treas.
Reg. Sec. 1.704-1(b)(2)(iv)(m) (relating to a Code Sec. 754
election) and the definition of Capital Account hereof.
"Indemnitee" shall mean (i) a Partner, (ii) any Departing
Partner, (iii) any Person who is or was an Affiliate of the
Partner or any Departing Partner, (iv) any Person who is or was
an officer, director, employee, partner, agent or trustee of the
Partner, the Partnership, any Departing Partner or any such
Affiliate, or (v) any Person who is or was serving at the request
of a Partner, any Departing Partner or any such Affiliate as a
director, officer, employee, partner, agent, attorney or trustee
of another Person.
"Limited Partner" or "Limited Partners" means Tartan
Management, MCN and TEMI and their successors, and any other
person or entity admitted as a Limited Partner of the Partnership
pursuant to this Partnership Agreement, or a General Partner
whose Partnership Interest becomes that of a Limited Partner
pursuant to this Partnership Agreement but does not include any
Person who has ceased to be a Limited Partner.
"Majority in Interest of the Limited Partners" means such of
the Limited Partners as have, at the time of determination, more
than fifty percent of the Partnership Percentages of all Limited
Partners.
"Majority in Interest of the Partners" means such of the
Partners as have, at the time of determination, more than fifty
percent of the Partnership Percentages of all Partners.
"Management Agreement" means that certain Construction,
Operation, and Maintenance Management Agreement, dated as of
__________, 1995, by and between Tartan Energy Company of
Missouri, L.C. d/b/a Southern Missouri Gas Company, L.C. and
Tartan Management.
"MCN" means MCN Corporation, a Michigan corporation.
"Partners" or "Partner" means the General Partners and the
Limited Partners, or any of them individually.
"Partnership" means Southern Missouri Gas Company, L.P., a
Missouri limited partnership.
"Partnership Agreement" has the meaning given that term in
the introductory paragraph hereof.
"Partnership Interest" means that equity interest of a
Partner in the Partnership, as reflected by such Partner's
Partnership Percentage.
"Partnership Percentage" means, unless there has been a
conversion pursuant to Section 4.1(d)(iii), the ownership
percentage of each Partner which shall be as set forth below:
(a) General Partners - 2% collectively, which
immediately following the Second Closing (as defined in the
Formation Agreement) shall be allocated 1% to MCN and 1% to
Tartan Management; and
(b) Limited Partners - 98% collectively, which
immediately following the Second Closing (as defined in the
Formation Agreement) shall be allocated 47.5% to TEMI, 46.5% to
MCN and 4% to Tartan Management.
Upon the occurrence of a Change or Changes, however, such
Partnership Percentages shall be subject to adjustment pro rata
so as to reflect such Change or Changes.
"Person" means any individual, joint venture, partnership,
limited liability company, corporation, trust or other entity.
"Profits" and "Losses" means, for each fiscal year or other
period, an amount equal to the Partnership's taxable income or
loss for such year or period applicable to a particular class of
Units, determined in accordance with Code Sec. 703(a) (for this
purpose, all items of income, gain, loss, or deduction required
to be stated separately pursuant to Code Sec. 703(a)(1) shall be
included in taxable income or loss), with the following ad-
justments:
(a) Any income of the Partnership applicable to such
class of Units that is exempt from Federal income tax and not
otherwise taken into account in computing Profits or Losses
pursuant to this definition of Profits and Losses shall be added
to such taxable income or loss;
(b) Any expenditures of the Partnership applicable to
such class of Units described in Code Sec. 705(a)(2)(B) or treated
as Code Sec. 705(a)(2)(B) expenditures pursuant to Treas. Reg. Sec.
1.704-1(b)(2)(iv)(i), and not otherwise taken into account in
computing Profits or Losses pursuant to this definition of
Profits and Losses, shall be subtracted from such taxable income
or loss;
(c) In the event the Gross Asset Value of any
Partnership asset attributable to such class of Units is adjusted
as required by the terms of the definition of Gross Asset Value
hereof, the amount of such adjustment shall be taken into account
as gain or loss from the disposition of such asset for purposes
of computing Profits or Losses;
(d) Gain or loss resulting from any disposition of
Partnership assets attributable to such class of Units with
respect to which gain or loss is recognized for Federal income
tax purposes shall be computed by reference to the Gross Asset
Value of the property disposed of, notwithstanding that the
adjusted tax basis of such property differs from its Gross Asset
Value; and
(e) In lieu of the depreciation, amortization, and
other cost recovery deductions taken into account in computing
such taxable income or loss for such class of Units, there shall
be taken into account Depreciation for such fiscal year or other
period, computed in accordance with the definition of
Depreciation herein.
"Project" means that certain local distribution company gas
project located in southern Missouri and more fully described in
Exhibit "A" attached hereto.
"Section 754 Election" means an election under Section 754 of the
Code relating to the adjustment for tax purposes of the basis of
the assets of the Partnership.
"Service" means the Internal Revenue Service of the United
States of America.
"Substituted Limited Partner" shall refer to a Transferee of
a Limited Partner's Partnership Interest who is admitted to the
Partnership as a Limited Partner in accordance with the
provisions of Section 7.1 of this Partnership Agreement.
"Tartan Management" means Tartan Management Company of
Missouri, L.C., a Missouri limited liability company.
"TEMI" means Torch Energy Marketing, Inc., a Delaware
corporation.
"Transfer" means, as a noun, any voluntary or involuntary
transfer, assignment, sale, pledge, gift, hypothecation or other
disposition and, as a verb, voluntarily or involuntarily to
transfer, assign, sell, pledge, gift, hypothecate or otherwise
dispose of.
"Transferee" shall have the meaning set forth in Section 7.1
hereof.
"Transferor" shall have the meaning set forth in Section 7.1
hereof.
"Treasury Regulations" or "Treas. Reg." means the income tax
regulations, including proposed and temporary Regulations,
promulgated under the Code, as such regulations may be amended
from time to time (including corresponding provisions of
succeeding regulations).
"Units" shall have the meaning set forth in Section 4.1
hereof.
1.2 Other Terms. Other terms may be defined elsewhere in
the text of this Partnership Agreement and shall have the meaning
indicated therein.
ARTICLE II
FORMATION OF LIMITED PARTNERSHIP
2.1 Formation. The parties hereby agree to form the
Partnership pursuant to the Act, upon the terms and conditions
set forth herein.
2.2 Name. The name of the Partnership shall be, and the
business of the Partnership shall be conducted under the name of
"Southern Missouri Gas Company, L.P." The words "Limited
Partnership" or the initials "Ltd." shall be included in the
Partnership's name and substituted for the term "L.P." where
necessary for the purposes of complying with the laws of any
jurisdiction that so requires. The Partnership's business may be
conducted under any other name or names deemed advisable by the
General Partners. The General Partners in their sole discretion
may change the name of the Partnership at any time and from time
to time by amending this Partnership Agreement without the vote
or concurrence of the Limited Partners.
2.3 Registered Office; Principal Office and Registered
Agent. The address of the registered office of the Partnership
in the State of Missouri shall be The Corporation Company,
7733 Forsyth Boulevard, Clayton, Missouri 63105; Telecopy: (314)
721-0336. The principal office of the Partnership shall be c/o
Tartan Management Company of Missouri, L.C., 8801 South Yale,
Suite 385, Tulsa, Oklahoma 74137; Telecopy: (918) 493-7475 or
such other place as the General Partners may from time to time
designate to the Partners. The Corporation Company shall serve
as the registered agent for service of process on the Partnership
in the State of Missouri at the above registered office. A
General Partner may be the registered agent for service of
process in any other jurisdiction in which the Partnership is
qualified to do business or may select another suitable
representative. The Partnership may maintain offices at such
other place or places as the General Partners deem advisable.
2.4 Term of Partnership. The Partnership shall commence as
of the date of the filing of the Certificate of Limited
Partnership as required under the Act and shall continue for a
period ending the earlier of:
(a) September 30, 2035;
(b) The date on which all of the assets acquired by
the Partnership have been sold and converted to cash (or to cash
equivalents, or securities tradeable on a national securities
exchange) or otherwise disposed of and all installment obligation
receivables have been collected;
(c) The date on which the Partnership is voluntarily
dissolved by the agreement of the General Partners and of a
Majority in Interest of the Limited Partners;
(d) The date on which the Partnership is dissolved by
operation of law or judicial decree; or
(e) The occurrence of an event of withdrawal of the
General Partners as set forth in Section 359.241 of the Act,
except as provided in Section 8.3 hereof.
2.5 Purpose. The purpose and business of the Partnership
shall be any business which may lawfully be conducted by a
limited partnership organized pursuant to the Act, including,
without limitation, the acquisition, development, marketing and
operation of the Project as a commercial venture.
ARTICLE III
MANAGEMENT OF THE PARTNERSHIP
3.1 General Authority and Powers of the General Partners.
(a) Except as otherwise provided in this Partnership
Agreement, the General Partners shall have full and complete
charge of all affairs of the Partnership, and the management and
control of the Partnership's business shall rest exclusively with
the General Partners. Except as otherwise provided in this
Partnership Agreement, the General Partners will have the
exclusive right, without any requirement of prior consultation
with the Limited Partners, to do all things that, in their sole
and reasonable judgment, are necessary, proper or desirable to
carry out their duties and responsibilities as General Partners.
The General Partners shall have a fiduciary responsibility for
the safekeeping and use of all funds of the Partnership, whether
or not in the General Partners' immediate possession or control.
The General Partners shall not use or permit another to use such
funds or assets in any manner except for the exclusive benefit of
the Partnership and subject, however, to Section 3.2. Except as
otherwise provided in the Management Agreement or in this
Partnership Agreement, the General Partners acting jointly shall
have the rights, powers and authority granted hereunder and by
law to obligate and bind the Partnership and, on behalf and in
the name of the Partnership, to take such action as the General
Partners jointly deem necessary or advisable (subject only to the
limitations of authority as specifically set forth in this
Partnership Agreement or in the Management Agreement), including,
without limitation, the following:
(i) To cause the Partnership to enter into any
amendments to the Management Agreement;
(ii) To cause the Partnership to borrow money only to
the extent called for by the Chemical Bank Credit Agreement
and, if security is required therefor, to mortgage or
subject any Partnership investment to any other security
device, to obtain replacements of any mortgage or other
security device, and to prepay, in whole or in part,
refinance, increase, modify, consolidate, or extend any
mortgage or other security device, all of the foregoing at
such terms and in such amounts as the General Partners, in
their sole discretion, deem to be in the best interests of
the Partnership;
(iii) To cause the Partnership to place record
title to or the right to use Partnership assets in the name
or names of a nominee or nominees, or trustee or trustees,
for any purpose convenient or beneficial to the Partnership;
(iv) To cause the Partnership to acquire and enter into
any contract of insurance which the General Partners deem
necessary or appropriate for the protection of the
Partnership and the General Partners, for the conservation
of Partnership assets or for any purpose convenient or
beneficial to the Partnership;
(v) To cause the Partnership to employ persons in the
operations and management of the business of the Partnership
on such terms and for such compensation as the General
Partners shall determine;
(vi) To prepare or cause to be prepared reports,
statements and other relevant information for distribution
to the Limited Partners, including annual and quarterly
reports as required by Article XII of this Partnership
Agreement;
(vii) To open accounts and deposits and maintain
funds in the name of the Partnership in banks or other
financial institutions or to invest such funds as the
General Partners deem appropriate;
(viii) To cause the Partnership to make or revoke
any of the elections referred to in Section 754 of the Code
or any similar provisions enacted in lieu thereof;
(ix) To cause the Partnership to invest and reinvest
excess Partnership funds during the term of the Partnership
in such short-term investments as the General Partners deem
appropriate, subject to the maintenance of such working
capital and contingency reserves as the General Partners
deem appropriate;
(x) To amend this Partnership Agreement without the
consent or vote of the Limited Partners: (a) to reflect the
addition or substitution of Limited Partners; (b) to add to
the representations, duties or obligations of the General
Partners or their Affiliates or surrender any right or power
granted to the General Partners or their Affiliates herein,
for the benefit of the Limited Partners; (c) to cure any
ambiguity, or to correct or supplement any provision herein
which may be inconsistent with any other provision herein;
(d) to change the registered and/or principal office of the
Partnership; and (e) to restate the Partnership Agreement
periodically to consolidate amendments thereto which have
been properly adopted by the Partners or otherwise adopted
in accordance with the Partnership Agreement;
(xi) To cause the Partnership to Transfer a Limited
Partner's Partnership Interest in accordance with
Article VII hereof;
(xii) To execute, acknowledge and deliver any and
all instruments to effectuate the rights, authority and
powers of the General Partners, and to take all such action
in connection therewith as the General Partners shall deem
necessary or appropriate;
(xiii) To prepare, file and publish any and all
instruments or documents necessary to enable the Partnership
to transact business or otherwise to exist, operate and be
recognized as a limited partnership in jurisdictions outside
of Missouri;
(xiv) To cause the Partnership to enter into such
contracts and agreements as may be necessary or appropriate;
(xv) To cause the Partnership to comply with all
applicable federal, state and local laws, regulations and
ordinances;
(xvi) To create management positions and Part-
nership offices to conduct the business of the Partnership
and to designate individuals to assume the responsibilities
of such positions as officers which offices may include the
following: President, Vice President, Secretary and
Treasurer;
(xvii) To cause the Partnership to issue additional
Units in accordance with Section 4.1 hereof; and
(xviii) To set compensation levels for the officers
of the Partnership, if any.
(b) The General Partners shall, except as otherwise
provided in this Partnership Agreement, have all of the rights
and powers and shall be subject to all of the restrictions and
liabilities of a partner in a general partnership.
3.2 Restrictions on Authority of the General Partners.
(a) Notwithstanding anything to the contrary in this
Partnership Agreement, including the provisions set forth in
Section 3.1, the following actions of the General Partners shall
require the consent of the Majority in Interest of Limited
Partners (in the manner set forth in Section 13.3 hereof) and
without such consent, may not be taken by the Partnership (nor
any Partner or other Person on behalf of the Partnership):
(i) The sale, exchange, lease, mortgage, or other
disposition of 25% or more of the fair market value of the
business or assets of the Partnership, or the merger or
consolidation with another entity;
(ii) Any incurrence or prepayment of indebtedness (or
provide guaranties of another Person's indebtedness) other
than in the ordinary course of business or, if in the
ordinary course of business, in an amount in excess of
$1,000,000;
(iii) Admission of any additional limited or
general partner, or adjusting any Partner's Partnership
Percentage;
(iv) Dissolution or liquidation of the Partnership or
appointment of a liquidating partner other than the General
Partners;
(v) Causing the Partnership to commence a voluntary
case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law
or of any other voluntary case or proceeding to be
adjudicated a bankrupt or insolvent;
(vi) Causing the Partnership to consent to (1) the
entry of a decree or order for relief against the
Partnership in an involuntary case or proceeding under any
applicable federal or state bankruptcy, insolvency,
reorganization or other similar law, (2) the commencement of
any bankruptcy or insolvency case or proceeding against the
Partnership, (3) the filing of a petition or answer or
consent seeking reorganization or relief under any
applicable federal or state law, or (4) to the appointment
of or taking possession by a custodian, receiver,
liquidator, assignee, trustee, sequestrator or similar
official of any substantial part of the Partnership's
property;
(vii) Causing the Partnership to file a petition or
answer or consent seeking reorganization or relief under any
applicable federal or state law;
(viii) Entering into, or effecting a material
amendment of (i) any gas purchase agreement, (ii) any firm
gas transportation contract, (iii) any negotiated third
party gas sales contract in an amount in excess of $10,000,
or (iv) any contract (other than a gas sales contract or a
contract pertaining to an expansion which has been approved
under Section 3.5 of the Management Agreement) with a third
party in excess of $100,000 per year;
(ix) Making any capital expenditure in excess of
$500,000;
(x) Materially amending any material government
permit, materially amend any material filing with any
governmental body, or seek any governmental action other
than is ordinarily required in the ordinary conduct of
business;
(xi) Making a determination with respect to the
disposition of insurance proceeds in excess of $500,000 or
the repair or rebuilding of the Partnership facilities in
the event of substantial damage or destruction;
(xii) Settling a dispute or litigation involving
the Partnership that would materially adversely affect the
Partnership or require payment by the Partnership of more
than $1,000,000;
(xiii) Engaging in any transaction with any General
Partner or an Affiliate of a General Partner except where
such transaction is effectuated on terms no less favorable
to the Partnership in an arm's-length transaction with an
unaffiliated Person;
(xiv) Adopting and operating under an annual budget
for the Partnership that includes an increase of 10% for any
category of expenses over the amount included in the prior
year's budget, or an aggregate increase of 5%;
(xv) Modifying the annual budget of the Partnership to
result in an increase of 10% for any category of expenses or
an aggregate of 5%;
(xvi) Granting to a General Partner or any Af-
filiate of a General Partner any contractual rights or
undertaking other than in accordance with this Partnership
Agreement;
(xvii) Pledging or encumbering on behalf of the
Partnership any assets of the Partnership other than in
connection with financings relating to the acquisition or
improvement of assets used or to be used in the business of
the Partnership or a refinancing of such indebtedness or for
the purpose of obtaining working capital;
(xviii) Possessing any Partnership property or as-
signing the rights of the Partnership in specific Partner-
ship property for other than a Partnership purpose;
(xix) Commingling Partnership funds with those of
any other person or entity;
(xx) Causing the Partnership to lend money to a General
Partner or an Affiliate thereof for other than a "bona fide"
Partnership purpose;
(xxi) Causing the Partnership to require any
Partner to make additional Capital Contributions other than
in accordance with this Partnership Agreement or the
Formation Agreement;
(xxii) Causing the Partnership to make an assignment
for the benefit of creditors, or the admission by the
Partnership in writing of its inability to pay its debts
generally as they become due, or to take action in
furtherance of any such action;
(xxiii) Causing the Partnership to approve a
materially different method by which the Partnership keeps
its books as provided in Article XII; or
(xxiv) Causing the Partnership to enter into any
contract to do any of the foregoing.
(b) Without first obtaining unanimous approval from
the Limited Partners (in the manner set forth in Section 13.3),
the General Partners shall not have the authority to perform any
act (other than an act required by this Partnership Agreement or
any act taken in good faith reliance upon counsel's opinion that
such act will not subject any Limited Partner to liability as a
general partner) which would, at the time the act occurred,
subject any Limited Partner to liability as a general partner
under the law of any applicable jurisdiction.
3.3 Indemnification.
(a) To the fullest extent permitted by law but subject
to the limitations expressly provided in this Partnership
Agreement, each Indemnitee shall be indemnified and held harmless
by the Partnership from and against any and all losses, claims,
damages, liabilities (joint or several), expenses (including
without limitation, reasonable legal fees and expenses),
judgments, fines, settlements and other amounts arising from any
and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative (other than
claims by or on behalf of the Partnership), in which any
Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, by reason of its status as an Indemnitee;
provided, that in each case the Indemnitee acted in good faith,
in a manner which such Indemnitee believed to be in, or not
opposed to, the best interests of the Partnership and, with
respect to any criminal proceeding, had no reasonable cause to
believe its conduct was unlawful; and provided further that, in
each case, the Indemnitee acted not in express violation of the
direction of at least one General Partner. The termination of
any action, suit or proceeding by judgment, order, settlement
conviction or upon a plea of nolo contendere, or its equivalent,
shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification
pursuant to this Section 3.3 shall be made only out of the assets
of the Partnership.
(b) To the fullest extent permitted by law, expenses
(including without limitation, reasonable legal fees and
expenses) incurred by an Indemnitee in defending any claim,
demand, action, suit or proceeding shall, from time to time, be
advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by
the Partnership of an undertaking by or on behalf of the
Indemnitee to repay such amount if it shall be determined that
the Indemnitee is not entitled to be indemnified as authorized in
this Section 3.3.
(c) The indemnification provided by this Section 3.3
shall be in addition to any other rights to which an Indemnitee
may be entitled under any agreement pursuant to any vote of the
Partners, as a matter of law or otherwise, as to actions in the
Indemnitees' capacity as an Indemnitee and shall continue as to
an Indemnitee who has ceased to serve in such capacity and as to
actions in any other capacity.
(d) The Partnership may purchase and maintain (or
reimburse a General Partner or its Affiliates for the cost of)
insurance, on behalf of the Partners and such other Persons as
the General Partners shall determine, against any liability that
may be asserted against or expense that may be incurred by any
such Person in connection with the Partnership's activities,
whether or not the Partnership would have the power to indemnify
such Person against such liabilities under the provisions of this
Partnership Agreement.
(e) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification
provisions set forth in this Partnership Agreement.
(f) An Indemnitee shall not be denied indemnification
in whole or in part under this Section 3.3 because the Indemnitee
had an interest in the transaction with respect to which the
indemnification applies if the transaction was otherwise
permitted by the terms of this Partnership Agreement.
(g) The provisions of this Section 3.3 are for the
benefit of the Indemnitees, their heirs, successors, assigns and
administrators and shall not be deemed to create any rights for
the benefit of any other Persons.
(h) No amendment, modification or repeal of this
Section 3.3 or any other provision hereof shall in any manner
terminate, reduce or impair the right of any past, present or
future Indemnitee to be indemnified by the Partnership, nor the
obligation of the Partnership to indemnify any such Indemnitee
under and in accordance with the provisions of this Section 3.3
as in effect immediately prior to such amendment, modification or
repeal with respect to claims arising from or relating to matters
occurring, in whole or in part, prior to such amendment
modification or repeal, regardless of when such claims may arise
or be asserted.
(i) The General Partners shall indemnify and hold
harmless the Partnership, the Limited Partners, and their
respective directors, officers, shareholders and agents from and
against any and all claims, actions, demands, costs and
liabilities (including reasonable attorney's fees) arising out of
any act or omission of such General Partner that constitutes
fraud, willful misconduct, gross negligence or bad faith.
3.4 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth
in this Partnership Agreement, no Indemnitee shall be liable for
monetary damages to the Partnership or the Limited Partners for
losses sustained or liabilities incurred as a result of any act
or omission if such Indemnitee acted in good faith and in
compliance with this Agreement.
(b) Subject to its obligations and duties as General
Partner set forth in Article III and without limiting the General
Partner's indemnity obligations under Section 3.3.(i), the
General Partners may exercise any of the powers granted to them
by this Partnership Agreement and perform any of the duties
imposed upon it hereunder either directly or by or through its
agents, and the General Partners shall not be responsible for any
misconduct or negligence on the part of any such agent appointed
by a General Partner in good faith.
(c) Any amendment, modification or repeal of this
Section 3.4 or any other provision hereof shall be prospective
only and shall not in any way affect the limitations on the
liability to the Partnership and the Limited Partners of a
General Partners, its directors, officers and employees under
this Section 3.4 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part, prior
to such amendment, modification or repeal, regardless of when
such claims may arise or be asserted.
3.5 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this
Partnership Agreement, whenever a potential conflict of interest
exists or arises between any General Partner or any of its
Affiliates, on the one hand, and the Partnership, any Partner or
any of their Affiliates, on the other hand, any resolution or
course of action in respect of such conflict of interest shall be
permitted and deemed approved by all Partners, and shall not
constitute a breach of this Partnership Agreement, of any
agreement contemplated herein, or of any duty stated or implied
by law or equity, if the resolution or course of action is or, by
operation of this Partnership Agreement, is deemed to be, fair
and reasonable to the Partnership. The General Partners shall be
authorized in connection with its resolution of any conflict of
interest to consider: (i) the relative interests of any party to
such conflict, agreement, transaction or situation and the
benefits and burdens relating to such interest; (ii) any
customary or accepted industry practices and any customary or
historical dealings with a particular Person; (iii) any
applicable generally accepted accounting or other practices or
principles; and (iv) such additional factors as the General
Partners determine in their sole discretion to be relevant,
reasonable or appropriate under the circumstances. Nothing
contained in this Partnership Agreement, however, is intended to
nor shall it be construed to require the General Partners to
consider the interests of any Person other than the Partnership.
In the absence of fraud, willful misconduct, gross negligence or
bad faith by a General Partner, the resolution, action or terms
so made, taken or provided by a General Partner with respect to
such matter shall not constitute a breach of this Partnership
Agreement or any other agreement contemplated herein or a breach
of any standard of care or duty imposed herein or therein or
under the Act or any other law, rule or regulation.
(b) Whenever this Partnership Agreement or any other
agreement contemplated hereby provides that a General Partner, a
Majority in Interest of the Partners, or any of their respective
Affiliates is permitted or required to make a decision (i) in its
"sole discretion" or "discretion" that it deems "necessary or
appropriate" or under a grant of similar authority or latitude,
such Person shall be entitled to consider only such interests and
factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting,
any other Person, or (ii) in "good faith" or under another
express standard, such Person shall act under such express
standard and shall not be subject to any other or different
standards imposed by this Partnership Agreement, any other
agreement contemplated hereby or under the Act or any other law,
rule or regulation. The General Partners shall have no duty,
express or implied, to sell or otherwise dispose of any asset of
the Partnership, other than in the ordinary course of business.
No borrowing by the Partnership or the approval thereof by a
General Partner shall be deemed to constitute a breach of any
duty of a General Partner to the Partnership or the Limited
Partners by reason of the fact that the purpose or effect of such
borrowing is directly or indirectly to enable the General
Partners to receive payments as set forth herein.
(c) Whenever a particular transaction, arrangement or
resolution of a conflict of interest is required under this
Partnership Agreement to be "fair and reasonable" to any Person,
the fair and reasonable nature of such transaction, arrangement
or resolution shall be considered in the context of all similar
or related transactions.
(d) The Partners recognize that each of the Partners,
directly or through its respective affiliates, may be currently
engaged in numerous businesses in the gas industry including,
without limitation, buying, selling, marketing, and oil and gas
and derivative products for profit. Each Partner agrees that
each other Partner may continue such activities, may form new
Affiliates to engage in such activities, and may expand the
present scope of such activities, in each case irrespective of
whether such activities might be deemed in competition with the
business and activities of the Partnership, without in any manner
being obligated to disclose such activities to the Partnership or
the other Partners, or to permit the Partnership or the Partners
to participate therein, and without any liability to the
Partnership or the Partners for breach of any duty arising out of
such other Partner's position as a Partner in the Partnership.
(e) Notwithstanding anything else in this Agreement,
no Partner shall take any action as a Partner pursuant to this
Agreement in any circumstance where such Partner or any of its
Affiliates has any economic or other interest (other than as a
Partner hereunder) in the outcome of such action, whether as a
party to an agreement, party to a transaction or otherwise. In
any case where the terms of this Agreement would require the vote
or consent of such Partner in order to authorize the proposed
action, no vote or consent of such Partner shall be required and
the determination of whether the requisite proportion of the
Partners has approved or otherwise consented to such action shall
be determined by calculating the proportion of Partners
authorized to vote, authorize or otherwise consent to such action
(after taking into account the immediately preceding sentence and
limited to Partners of an appropriate class if appropriate) that
have voted, authorized or otherwise approved such action.
3.6 Other Matters Concerning the General Partners.
(a) The General Partners may rely and shall be
protected in acting or refraining from acting upon any
resolution, certificate, statement, instrument, opinion, report,
notice, request, consent, order, bond, debenture, or other paper
or document believed by it to be genuine and to have been signed
or presented by the proper party or parties.
(b) The General Partners may consult with legal
counsel, accountants, appraisers, management consultants,
investment bankers and other consultants and advisers selected by
it and any act taken or omitted in reliance upon an opinion
(including, without limitation, a written opinion of Counsel (who
may be regular counsel to the Partnership or the General
Partners)) acceptable to the General Partners of such Persons as
to matters that the General Partners reasonably believe to be
within such Person's professional or expert competence shall be
conclusively presumed to have been done or omitted in good faith
and in accordance with such opinion.
(c) The General Partners shall have the right, in
respect of any of their powers or obligations hereunder, to act
through any of their duly authorized officers and a duly
appointed attorney or attorneys-in-fact. Each such attorney
shall, to the extent provided by the General Partners in the
power of attorney, have full power and authority to do and
perform each and every act and duty that is permitted or required
to be done by the General Partners hereunder.
(d) Any standard of care and duty imposed by this
Partnership Agreement or under the Act or any applicable law,
rule or regulation shall be modified, waived or limited as
required to permit the General Partners to act under this
Partnership Agreement or any other agreement contemplated by this
Partnership Agreement and to make any decision pursuant to the
authority prescribed in this Partnership Agreement, so long as
such action is reasonably believed by the General Partners to be
in the best interests of the Partnership.
3.7 Title to Partnership Assets. Title to assets of the
Partnership, whether real, personal or mixed and whether tangible
or intangible, shall be deemed to be owned by the Partnership as
an entity, and no Partner, individually or collectively, shall
have any ownership interest in such assets of the Partnership or
any portion thereof. Title to any or all of the assets of the
Partnership may be held in the name of the Partnership, the
General Partners or one or more nominees, as the General Partners
may determine. The General Partners hereby declare and warrant
that any assets of the Partnership for which title is held in the
name of such General Partner shall be held by such General
Partner for the exclusive use and benefit of the Partnership in
accordance with the provisions of this Partnership Agreement;
provided, however, that each General Partner shall use its
reasonable efforts to cause record title to such assets (other
than these assets in respect of which a General Partner
determines that the expense and difficulty of conveyancing makes
transfer of record title to the Partnership impracticable) to be
vested in the Partnership as soon as reasonably practicable. All
assets of the Partnership shall be recorded as the property of
the Partnership in the books and records, irrespective of the
name in which record title to such assets are held.
3.8 Reliance by Third Parties. Notwithstanding anything to
the contrary in this Partnership Agreement, any Person dealing
with the Partnership shall be entitled to assume that, unless
such Person has actual or constructive knowledge to the contrary,
the General Partners together have full power and authority to
encumber, sell or otherwise use in any manner any and all assets
of the Partnership and to enter into any contracts on behalf of
the Partnership, and such Person shall be entitled to deal with
the General Partners together as if they, acting together, were
the Partnership's sole party in interest, both legally and
beneficially. Each Limited Partner hereby waives any and all
defenses or other remedies that may be available against such
Person to contest, negate or disaffirm any action of the General
Partners in connection with any such dealing unless such Person
has actual or constructive knowledge to the contrary. In no
event shall any Person dealing with the General Partners or their
representatives be obligated to ascertain that the terms of this
Partnership Agreement have been complied with or to inquire into
the necessity or expedience of any act or action of the General
Partners or their representatives. Each and every certificate,
document or other instrument executed on behalf of the
Partnership by the General Partners together or their
representatives shall be conclusive evidence in favor of any and
every Person relying thereon or claiming thereunder and without
knowledge to the contrary that (a) at the time of the execution
and delivery of such certificate, document or instrument, this
Partnership Agreement was in full force and effect, (b) the
Person executing and delivering such certificate, document or
instrument was duly authorized and empowered to do so for and on
behalf of the Partnership, and (c) such certificate, document or
instrument was duly executed and delivered in accordance with the
terms and provisions of this Partnership Agreement, and is
binding upon the Partnership.
3.9 Powers and Duties of the Limited Partners.
(a) Except as otherwise provided in this Partnership
Agreement, the Limited Partners shall not participate in the
management or control of the business affairs of the Partnership,
transact any business on behalf of the Partnership, or have any
power or authority to bind or obligate the Partnership. The
General Partners shall have exclusive management and control of
the business of the Partnership in accordance with the provisions
of the Act. Notwithstanding the foregoing, the Limited Partners
shall have the right to vote with respect to: (i) all such
activities set forth in Sections 3.2(a) and (b) above; (ii) in
certain circumstances, the reconstitution of the Partnership;
(iii) the election of additional and/or successor General Part-
ners; (iv) the election of additional and/or successor Limited
Partners; (v) the amendment of this Partnership Agreement except
as provided herein; and (vi) the approval of other matters as
otherwise provided in this Partnership Agreement. In addition, a
Majority in Interest of the Limited Partners shall have the right
to call meetings of the Partnership in accordance with the
provisions of Section 13.3 and to propose votes on the above
items.
(b) Although all Limited Partners have the express
authority to vote with respect to the activities set forth in
Section 3.2(a), the General Partners need only obtain the written
consent of a Majority in Interest of the Limited Partners,
pursuant to the procedures set forth in Section 13.3(c) hereof,
to proceed with any such activities unless a greater percentage
is otherwise provided for under this Partnership Agreement.
(c) No vote or consent of any Limited Partners shall
be effective to change any Partner's Partnership Percentage in an
adverse and discriminatory manner without the affirmative vote or
written consent of such Partner, except a vote to amend the
agreement to increase the number of Units available for issuance.
3.10 No Right of Limited Partners to Receive Property Other
Than Cash. No right is given to a Limited Partner to demand and
receive property other than cash in return for his Capital
Contribution. However, the General Partners may, in their sole
discretion, make a distribution of property other than cash upon
the dissolution and liquidation of the Partnership to any or all
of the Partners.
3.11 Other Activities. Subject to the restrictions
otherwise placed on the General Partners by this Article III,
none of the parties hereto shall have any obligation with respect
to the Partnership or to any of the other parties insofar as
making other investment opportunities available to the
Partnership. Accordingly, the parties may, notwithstanding the
existence of this Partnership Agreement, engage in whatever
activities they choose, whether the same are competitive with the
Partnership or otherwise, without having or incurring any
obligation to offer any interest in such activities to the
Partnership or any party hereto. The General Partners are
required to devote only so much of their time to the business of
the Partnership as in their respective judgment is reasonably
required to satisfy their obligations under this Agreement.
3.12 Management Agreement. On the Effective Date, Tartan
Energy Company of Missouri, L.C. will be merged with and into the
Partnership with the result that the Partnership will succeed to
the rights and obligations of Tartan Energy Company of Missouri,
L.C. under the Management Agreement. As a result, under the
Management Agreement, Tartan Management will be the manager of
the Project and thus be responsible for managing the
construction, operation and maintenance of the Project, and such
other activities as may be specified in the Management Agreement,
all in accordance with the terms of the Management Agreement.
The parties hereto acknowledge the delegation of authority to the
manager pursuant to the Management Agreement. All activities
undertaken or performed by Tartan Management, its Affiliates and
their respective officers, directors, employees, partners, and
agents in performing the duties and obligations of Manager under
the Management Agreement shall be considered to be undertaken or
performed in the capacity of manager of the Partnership and not
as a Partner under this Partnership Agreement. Accordingly, the
terms of the Management Agreement, and not the terms of this
Partnership Agreement, will govern all such activities. Further,
it is recognized and acknowledged that the obligations of Tartan
Management as a General Partner under the Partnership Agreement
shall not apply to Tartan Management as manager of the
Partnership, inasmuch as the Management Agreement shall establish
the rights and obligations of Tartan Management as such manager.
ARTICLE IV
FINANCING OF THE PARTNERSHIP
4.1 Initial Capital Contributions.
(a) Units. Subject to the provisions of this
Partnership Agreement, the General Partners are authorized to
sell ownership interests in the Partnership designated as "Units"
and to issue such Units in classes pursuant to Section 4.1(b) of
this Partnership Agreement. Fractional Units may be issued for a
pro rata Capital Contribution based on a whole Unit purchase
price. The number of Units, class thereof purchased by each
Partner, the amount of such Partner's Capital Contribution and
the residential address of each Partner (or principal business
address if not an individual) shall be listed on Exhibit "B"
which shall be attached hereto and amended from time to time by
the General Partners as warranted.
(b) Additional Units or Securities.
(i) From time to time, the General Partners are
authorized to offer and sell Units authorized to be sold
pursuant to Section 4.1(a) and to admit the purchaser(s) of
such Units to the Partnership as Limited Partners designated
by the class of Units so purchased. Units to be issued by
the Partnership under this Section 4.1(b) shall be issuable
from time to time in one or more subclassifications or
series with such designations, preferences and relative,
participating, optional or other special rights as set forth
below; provided, however, that all Units of every such
subclassifications or series shall have identical voting
rights to the Total Units issued.
(ii) Upon the issuance of any subclassifications
or series of Units, the General Partners (pursuant to the
General Partners' powers of attorney from the Limited
Partners), without the consent at the time of any Limited
Partner or its assignee (each person purchasing Units being
deemed to consent to such amendment) may increase or
decrease the number of Units in a class, although no such
decrease shall reduce the number of any class of Units below
the number then outstanding and any such amendment shall
comply with Sections 3.2 and 3.4 hereof, and execute, swear
to, acknowledge, deliver, file and record, if required, an
amended Certificate of Limited Partnership and whatever
other documents may be required in connection therewith.
(iii) The General Partners are also authorized
to cause the issuance of any other type of security of the
Partnership from time to time to Partners or other persons
or entities on terms and conditions established in the sole
and complete discretion of the General Partners. Such
securities may include, without limitation, unsecured and
secured debt obligations of the Partnership, debt
obligations of the Partnership convertible into Units, and
options, rights or warrants to purchase any such Units. The
General Partners are authorized and directed to do all
things which it deems to be necessary, convenient,
appropriate or advisable in connection therewith. As and
when any Units are issued, the General Partners shall amend
Exhibit "B" accordingly to reflect the change in the number
of outstanding Units.
(iv) In the event any additional Units are issued
to any party other than Tartan Management or its Affiliates,
there shall be issued to Tartan Management, simultaneously with
such issuance of additional Units and without requiring
additional consideration therefor, additional Units in an amount
equal to 5% of the total of such new Units being issued and
Tartan Management's Partnership Percentage shall be adjusted to
reflect such issuance.
(c) Class A Units. There is hereby established, out
of the authorized but unissued Units of the Partnership, a class
of Units to be designated "Class A Units" ("Class A Units") to
have the preferences, limitations and relative rights as set
forth herein:
(i) The Class A Units shall be reserved for
issuance to the General Partners to evidence such General
Partner's Capital Contributions.
(ii) In the initial offering of Units, the General
Partners shall issue Class A Units to MCN and Class A Units
to Tartan Management in the amounts and for the
consideration specified on Exhibit B. The General Partner
shall, if necessary, purchase additional Class A Units out
of the authorized but unissued Class A Units upon the
subsequent issuances of other classes of Units so as to
ensure that each General Partner's aggregate Partnership
Percentage is no less than one percent (1%).
(iii) Unless there has been a conversion
pursuant to Section 4.1(d)(iii), the Class A Units, in the
aggregate, shall be entitled to receive as an allocation
from the Partnership 2.0% of any allocation made in
accordance with Article V hereof ("Class A Allocation").
Each owner of a Class A Unit shall receive such proportion
of the Class A Allocation so as to reflect such owner's
Partnership Percentage.
(d) Class B Units. There is hereby established out of
the authorized but unissued Units of the Partnership, a class of
Units to be designated "Class B Units" ("Class B Units") to have
the preferences, limitations, and relative rights as set forth
herein:
(i) In the initial offering of Units, the General
Partners shall issue Class B Units to TEMI, MCN and Tartan
Management in the amounts and for the consideration
specified on Exhibit B.
(ii) Unless there has been a conversion pursuant
to Section 4.1(d)(iii), the Class B Units, in the aggregate,
shall be entitled to receive as an allocation from the
Partnership 98.0% of any allocation made in accordance with
Article V hereof ("Class B Allocation"). Each owner of a
Class B Unit shall receive such proportion of the Class B
Allocation so as to reflect such owner's Partnership
Percentage.
(iii) Notwithstanding anything to the contrary
in this Agreement, TEMI shall have the independent right to
convert enough Class B Units owned by it into Class A Units
representing a General Partner Partnership Interest equal to
1%, and MCN, Tartan Management and TEMI shall have the right
to simultaneously convert all Class B Units owned by them
into Class A Units, and in each case to establish a
management committee composed of one representative of each
of them to manage the business and operations of the
Partnership, or otherwise reform the ownership of the
Project, if the Limited Partners unanimously determine that
their status as holding companies pursuant to the Public
Utility Holding Company Act of 1935, as amended, would not
be affected by such change. In the event of a conversion
pursuant to this subsection (iii), the Partnership
Percentages and Partnership allocations specified elsewhere
in this Partnership Agreement shall be appropriately
modified to provide each Partner with the same aggregate
Partnership Percentage and profit allocation to which it was
entitled prior to such conversion. In addition, in the
event of any such conversion, the parties will make such
other mutually agreeable modifications to this Agreement to
reflect such conversion.
4.2 Additional Capital Contributions of the General
Partners. If from time to time the Limited Partners make
additional Capital Contributions to the Partnership pursuant to
Section 4.3 below, the General Partners shall, if necessary, make
additional Capital Contributions to the Partnership in such
amounts as to provide that its aggregate Capital Contributions
are at all times not less than 1% of the aggregate Capital
Contributions of the Partnership.
4.3 Additional Capital Contributions of the Limited
Partners. From time to time the Partners, subject to the
approval of the General Partners and a Majority in Interest of
the Limited Partners (in the manner set forth in Section 13.3),
may make additional Capital Contributions to the Partnership in
the form of cash or other property. For purposes of this
section, contributions of property shall be deemed to be Capital
Contributions in an amount equal to the fair market value of the
contributed property on the date of contribution. All Partners
shall be permitted to make such contributions based on their
Partnership Percentages provided, however, that no Limited
Partner shall be required to make an additional Capital
Contribution but the failure to do so shall reduce that Limited
Partner's Partnership Interest; provided however, Tartan
Management's limited partnership interest shall not be reduced
below the smallest limited partnership interest Tartan Management
has owned from the period following the Second Closing (as
defined in the Formation Agreement) to the date at which such
additional capital contribution was not made. Determination of
such Partner's Partnership Percentage shall be based on the
method described in the definition provisions of this Partnership
Agreement.
4.4 Capital Accounts. A separate Capital Account shall be
established and maintained by the Partnership for each Partner in
the manner described in the definition of the term "Capital
Account" in Article I hereof.
4.5 Loans by Partners. Except as otherwise provided for in
this Partnership Agreement, neither the General Partners nor the
Limited Partners shall be required to make loans to the
Partnership. Loans may be made, however, with the consent of the
General Partners, by any Partner to the Partnership and such
loans shall not be considered contributions to the capital of the
Partnership. To the extent loans are made by any Partner to the
Partnership, they shall be made on terms, as to interest rates
and other finance charges as are comparable to amounts that are
charged by unrelated banks and other financial institutions on
comparable loans for the same purpose.
4.6 Interest. No interest shall be paid to any Partner on
the initial or any subsequent Capital Contribution to the
Partnership.
4.7 Time for Return of Contributions. No Partner shall be
entitled to require the return of his Capital Contribution. Upon
the full and complete winding up and liquidation of the business
and affairs of the Partnership, the Partners shall be entitled to
distributions as set forth in Article X.
4.8 Right of Participation. If the Partnership proposes to
issue any Units or debt securities of the Partnership after the
Effective Date other than those Units described in Section
4.1(e), the General Partner shall give written notice to each
Limited Partner at least thirty (30) days prior to the proposed
issuance ("Participation Notice"). The Participation Notice
shall specify the type and number of Units or debt securities the
Partnership proposes to sell along with the price, terms and
closing date of such proposed sale. Each Limited Partner must
notify the General Partner in writing within fifteen (15) days of
the receipt (as set forth in Section 13.1 hereof) of the
Participation Notice whether such Limited Partner shall accept
the offer to purchase a portion of the Units or debt securities,
such portion to be as set forth below, on the terms and at the
price stipulated in the Participation Notice. If no response has
been received by the General Partner from a Limited Partner at
such time, the Limited Partner shall be deemed to have refused
the offer. The maximum number of Units or debt securities a
Limited Partner electing to participate shall be eligible to
purchase shall be equal to the total number of Units or debt
securities offered multiplied by a fraction (i) the numerator of
which is the number of Units then owned by such Limited Partner,
and (ii) the denominator of which is the total number of Units
then owned by all Limited Partners electing to participate. The
notice given by the Limited Partner must state the number of
Units or debt securities the Limited Partner desires to purchase;
provided, however, that the notice may indicate that the Limited
Partner desires to purchase a greater percentage of the proposed
offering than may be allocated to such Limited Partner in the
event another Limited Partner fails to accept the entire amount
of such other Limited Partner's allocation, such other Limited
Partner's allocation being the "Nonparticipation Units." The
closing of the proposed sale to the Limited Partners and to the
third party (if the Limited Partners do not accept the entire
proposed offering) shall be on the closing date and on the terms
and conditions stipulated in the Participation Notice. If the
proposed sale is not completed on such terms within six months
from the date of the Participation Notice, the Partnership may
not issue Units or debt securities of the Partnership without
again complying with this Section 4.8.
4.9 Limited Liability of the Limited Partners.
Notwithstanding anything to the contrary contained herein, the
liability of a Limited Partner for any of the debts, losses or
obligations of the Partnership shall by limited to the Limited
Partner's Capital Contributions which have contributed to the
Partnership. No Limited Partner shall have any personal
liability whatsoever, whether to the Partnership or any third
party, for the debts of the Partnership or any of its losses.
4.10 Benefits of Agreement. Nothing in this Partnership
Agreement, and, without limiting the generality of the foregoing,
in this Article IV, expressed or implied, is intended or shall be
construed to give to any creditor of the Partnership or any
creditor of any Partner of any other person or entity whatsoever,
other than the Partners and the Partnership, any legal or
equitable right, remedy or claim under or in respect of this
Partnership Agreement or any covenant, condition or provisions
herein contained, and such provisions are and shall be held to be
for the sole and exclusive benefit of the Partners and the
Partnership.
4.11 Tartan Management Capital Contributions.
Notwithstanding any other provision of this Partnership
Agreement, Tartan Management shall not be required (i) to make
Capital Contributions, other than its initial Capital
Contribution or (ii) to purchase additional Units.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
5.1 Profits and Capital Distributions. After giving effect
to the special and curative allocations set forth in Section 5.4
hereof, Profits for any fiscal year shall be allocated to the
Partners based on the applicable Partnership Percentage in effect
during such fiscal year.
5.2 Losses. After giving effect to the special and
curative allocations set forth in Section 5.4 hereof, Losses for
any fiscal year shall be allocated to the Partners based on the
applicable Partnership Percentage in effect at the time such Loss
was incurred or realized, which allocation may cause a Partner to
have an Adjusted Capital Account Deficit at the end of a fiscal
year.
5.3 Allocation Upon Sale of Assets. Upon the sale of
substantially all of the assets of the Partnership, the Profits
attributable to such sale shall be allocated to the Partners as
follows:
(a) First, in accordance with any regulatory
allocations as required under Section 5.4 hereof.
(b) Second, all items of Partnership income, gain,
loss, and deduction realized by the Partnership upon the sale or
other disposition of its assets pursuant to this Section shall be
allocated among the Partners for Federal income tax purposes and
shall be credited or charged to the Capital Accounts of the
Partners in the following manner:
(i) In the event the sum of the items of Partner-
ship income, gain, loss, deduction, and credit result in
taxable income, all the items comprising such gain shall be
allocated and credited as follows:
(1) First, to the Limited Partners, if any, whose
Capital Account possess a negative balance at
the time such gain is realized, in the same
ratio as such Limited Partner's negative
Capital Account balances are to the total of
all Limited Partners' negative Capital
Account balances, until such Limited Part-
ner's Capital Account balance is zero.
(2) Second, to the Partners in an amount neces-
sary to cause the positive balances of their
Capital Accounts to be in the same ratio as
their respective Partnership Percentage.
(3) Third, to the Partners in the same ratio as
their respective Partnership Percentage.
(ii) In the event the sum of the items of Partner-
ship income, gain, loss, deduction, and credit result in
taxable loss, all the items comprising such loss shall be
allocated and credited as follows:
(1) First, to the Partners in an amount necessary
to cause the positive balances of their
Capital Accounts to be in the same ratio as
their respective Partnership Percentage.
(2) Second, to the Partners in the same ratio as
their respective Partnership Percentage until
the Limited Partners' Capital Accounts attain
a zero balance.
(3) Third, to the General Partners in the same
ratio as their respective Partnership
Percentage.
(c) Third, after the Capital Accounts of the Partners
have been adjusted in the manner required in the immediately
preceding paragraph, the General Partners, as liquidator, shall
ascertain the fair market value by appraisal or other reasonable
method of all the unsold assets of the Partnership and shall
adjust the Capital Accounts of the Partners by assuming the
taxable sale of all the remaining unsold assets of the
Partnership for cash equal to the fair market value thereof as of
the date of the dissolution of the Partnership and debiting or
crediting the Capital Account of each Partner with its respective
share of the hypothetical gain and/or loss resulting from such
hypothetical sale. Such hypothetical gain or loss shall be
allocated in accordance with the provisions of 5.3(b) immediately
above.
(d) Notwithstanding any other provision of this
Partnership Agreement to the contrary, no allocation of income,
gain, loss, deduction or credit shall be made to a Partner if
such allocation would not have "substantial economic effect"
pursuant to Treas. Reg. Secs. 1.704-1(b) et seq., as such
regulations may be amended and in effect from time to time and
any corresponding provisions of succeeding regulations, or
otherwise be in accordance with such Partner's interest in the
Partnership as provided for in such regulations.
5.4 Regulatory Allocations. Notwithstanding the general
allocation rules set forth above, the following special
allocation rules ("Regulatory Allocations") shall apply under the
following circumstances described, in the following order:
(a) Limitation of Losses and Deductions. The losses
and deductions allocated to any Partner with respect to any
fiscal year shall not exceed the maximum amount of losses and
deductions that can be allocated without causing such Partner to
have a deficit in its Adjusted Capital Account at the end of such
fiscal year. All losses and deductions in excess of the
limitation set forth in the preceding sentence shall be allocated
so as to allocate the maximum permissible losses and deductions
to each Partner under Treas. Reg. Sec. 1.704-1(b)(2)(ii)(d).
(b) Partnership Minimum Gain Chargeback. If there is
a net decrease in Partnership Minimum Gain during any fiscal
year, each Partner, in accordance with Treas. Reg. Sec. 1.704-2(g)
shall be allocated items of income and gain for such fiscal year
(and, if necessary, for subsequent fiscal years) in proportion
to, and to the extent of, an amount equal to the portion of such
Partner's share of the net decrease in Partnership Minimum Gain
during such fiscal year, subject to the exceptions set forth in
Treas. Reg. Sec. 1.704-2(f); provided that, if the Partnership has
any discretion as to an exception set forth in Treas. Reg. Sec.
1.704-2(f)(5), the Tax Matters Partner (with the consent of the
other General Partner(s), if any) shall exercise such discretion
on behalf of the Partnership. The Tax Matters Partner shall, if
the application of this Section 5.4(b) would cause a distortion
in the economic arrangement among the Partners, ask the
Commissioner of Internal Revenue to waive the Partnership Minimum
Gain chargeback requirements pursuant to Treas. Reg. Sec. 1.704-
2(f)(4). To the extent this Section 5.4(b) is inconsistent with
Treas. Reg. Sec. 1.704-2(f) or incomplete with respect to such
Sections of the Treasury Regulations, the Partnership Minimum
Gain chargeback provided for herein shall be applied and
interpreted in accordance with such Sections of the Treasury
Regulations.
(c) Partner Minimum Gain Chargeback. If there is a
net decrease in Partner Minimum Gain during any fiscal year, each
Partner shall be allocated items of income and gain for such
fiscal year (and, if necessary, for subsequent fiscal years) in
an amount equal to the such Partner's share of the net decrease
in Partner Minimum Gain during such fiscal year in accordance
with Treas. Reg. Sec. 1.704-2(i)(5), subject to the exceptions set
forth in Treas. Reg. Sec. 1.704-2(i)(4). The Tax Matters Partner
shall, if the application of this Section 5.4(c) would cause a
distortion in the economic arrangement among the Partners, ask
the Commissioner of Internal Revenue to waive the Partnership
Minimum Gain chargeback requirements pursuant to Treas. Reg.
Sec. 1.704-2(i)(4). To the extent this Section 5.4(c) is
inconsistent with Treas. Reg. Sec. 1.704-2(i)(4) or incomplete
with respect to such Sections of the Treasury Regulations, the
Partnership Minimum Gain chargeback provided for herein shall be
applied and interpreted in accordance with such Sections of the
Treasury Regulations.
(d) Qualified Income Offset. If in any fiscal year a
Partner unexpectedly receives an adjustment, allocation or
distribution described in Treas. Reg. Sec. 1.704-1(b)(2)(ii)(d)(4),
(5) or (6), and such adjustment allocation or distribution causes
or increases an Adjusted Capital Account Deficit for such
Partner, then, such Partner shall be allocated items of income
and gain (consisting of a pro rata portion of each item of
Partnership income, including gross income and gain) in an amount
and manner sufficient to eliminate such Adjusted Capital Account
Deficit as quickly as possible, provided that an allocation
pursuant to this Section 5.4(d) shall be made only if and to the
extent that a Partner would have an Adjusted Capital Account
Deficit after all other allocations provided for in this Section
5 have been tentatively made as if this Section 5.4(d) were not
in the Agreement.
(e) Gross Income Allocation. In the event any Partner
has an Adjusted Capital Account Deficit at the end of any fiscal
year, each such Partner shall be allocated items of income and
gain (consisting of a pro rata portion of each item of
Partnership income, including gross income and gain) in an amount
and manner sufficient to eliminate such Adjusted Capital Account
Deficit as quickly as possible, provided that an allocation
pursuant to this Section 5.4(e) shall be made only if and to the
extent that a Limited Partner would have an Adjusted Capital
Account Deficit after all the other allocations provided for in
this Section 5 have been tentatively made as if this Section
5.4(e) were not in the Agreement.
(f) Nonrecourse Deductions. Nonrecourse deductions
for any fiscal year shall be allocated to the Partners in the
same ratio as their Partnership Percentage.
(g) Partner Nonrecourse Deductions. Partner
Nonrecourse Deductions shall be allocated among the Partners in
accordance with the ratios in which the Partners share the
economic risk of loss for the Partner Nonrecourse Debt that gave
rise to those deductions as determined under Treas. Reg. Sec. 1.752-
2. This allocation is intended to comply with the requirements
of Treas. Reg. Sec. 1.704-2(i) and shall be interpreted and applied
consistent therewith.
(h) The Regulatory Allocations set forth in this
Section 5.4 shall be applied only to the extent required by
applicable Treasury Regulations for the resulting allocations
provided for in Sections 5.1 through 5.3, taking into account
such Regulatory Allocations, to be respected for Federal income
tax purposes. The Regulatory Allocations are intended to comply
with the requirements of Treas. Reg. Sec. 1.704-1(b), 1.704-2 and
1.752-1 through 1.752-5 (the "Allocation Regulations") and shall
be interpreted and applied consistently therewith.
5.5 Curative Allocations. Notwithstanding any other
provision of this Section 5 other than the Regulatory
Allocations, allocations shall be taken into account in making
the allocations under Sections 5.1 through 5.3 (the "Agreed
Allocations") so that, to the extent possible, the net amount of
items of income, gain, loss and deduction allocated to each
Partner pursuant to the Regulatory Allocations and the Agreed
Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each Partner under the
Agreed Allocations had the Regulatory Allocations and this
curative allocation not otherwise been provided in this Section
5.
5.6 Other Allocation Rules.
(a) Section 754 Adjustments. To the extent an
adjustment to the adjusted tax basis of any Partnership asset
pursuant to Code Sec. 734(b) or Code Sec. 743(b) is required, pursuant
to Treas. Reg. Sec. 1.704-1(b)(2)(iv)(m), to be taken into account
in determining Capital Accounts, the amount of such adjustment
shall increase the basis of the asset or loss (if the adjustment
decreases such basis) and such gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section.
(b) Tax Allocations: Code Section 704(c). In
accordance with Code Sec. 704(c) and the Regulations thereunder,
income, gain, loss and deduction with respect to any property
contributed to the capital of the Partnership shall, solely for
tax purposes, be allocated among the General Partners and Limited
Partners so as to take account of any variation between the
adjusted basis of such property to the Partnership for Federal
income tax purposes and its initial Gross Asset Value using the
"traditional method with curative allocations" as set forth in
Treas. Reg. Sec. 1.704-3(c).
In the event the Gross Asset Value of any Partnership asset is
adjusted as required by the definition of "Gross Asset Value" as
contained in this Partnership Agreement, subsequent allocations
of income, gain, loss and deduction with respect to such asset
shall take account of any variation between the adjusted basis of
such asset for Federal income tax purposes and its Gross Asset
Value in the same manner as under Code Sec. 704(c) and the
Regulations thereunder. Any elections or other decisions
relating to such allocations shall be made by the General
Partners in any manner that reasonably reflects the purpose and
intention of this Partnership Agreement. Allocations pursuant to
this Section 5.6(b) are solely for purposes of federal, state,
and local taxes and shall not affect, or in any way be taken into
account in computing, any Person's Capital Account or share of
Profits, Losses, other items, or distributions pursuant to any
provision of this Partnership Agreement.
5.7 Distributions. Except as provided in Article X below
and as may otherwise be allowed in Article IV above, the General
Partners in their sole discretion shall have the authority to
cause the Partnership to allocate and distribute cash or other
property to the Partners monthly on a basis in accordance with
this Partnership Agreement and shall distribute such cash or
other property at least once a year as necessary to provide the
Partners with funds to pay any required taxes due to the
operation of the Partnership, including its liquidation.
5.8 Amounts Withheld. All amounts withheld pursuant to the
Code or any provision of any state or local tax law with respect
to any payment or distribution to the Partnership, the General
Partners, or the Limited Partners shall be treated as distributed
to the General Partners and the Limited Partners pursuant to
Article V for all purposes under this Partnership Agreement. The
General Partners shall allocate such amounts among the General
Partners and the Limited Partners in a manner that is consistent
with Article V hereof and applicable law.
ARTICLE VI
GENERAL PARTNERS' COMPENSATION
AND REIMBURSEMENT
6.1 Compensation to General Partners. Except as expressly
provided in this Article VI and as provided in Article IV, the
General Partners shall receive no compensation from the
Partnership for services rendered in their capacity as General
Partners of the Partnership.
6.2 Expenses in Connection with Organization of the
Partnership. The Partnership shall be responsible for all
reasonable out-of-pocket fees, costs and expenses actually
incurred in connection with (a) the organization of the
Partnership; (b) the qualification of the Partnership to do
business in any state in which the General Partners determine
that such qualification is advisable; (c) the legal (including
tax advice) and accounting fees and disbursements of the
Partnership; and (d) other out-of-pocket expenses of a similar
nature incurred in connection with such activities.
6.3 Operational Expenses. Subject to the terms of the
Management Agreement, the General Partners shall provide all
managerial services for the Partnership. In connection with such
services, the Partnership shall be obligated to reimburse the
General Partners or their respective Affiliates or designees, on
a monthly basis, for all reasonable and necessary costs and
expenses incurred in connection with providing the day-to-day
management of the Partnership, including (i) the direct costs and
expenses of the General Partners or such Affiliate or designee
for capital equipment, based upon usage of such capital equipment
in connection with Partnership matters, and (ii)
reasonable, direct out-of-pocket expenses for any legal,
accounting, printing, appraisal and similar reasonable general
office services rendered by unaffiliated third parties. No
Partner shall allocate its overhead expenses to the Partnership.
ARTICLE VII
ASSIGNABILITY OF PARTNERS' INTERESTS
7.1 Restrictions on Transfer of Limited Partner's Interest.
Except as set forth in Section 7.3, no Limited Partner may
Transfer all or a portion of its Partnership Interest (the
"Transferor"), unless the Transferor and transferee (the
"Transferee"), comply with the provisions of this Section 7.1.
No portion of a Limited Partner's right to receive his allocable
share of income and losses and distributions of the Partnership
may be Transferred without the Transfer of the same portion of a
Limited Partner's Partnership Interest. Failure to comply with
this Section 7.1 shall render the purported Transfer null and
void and of no force or effect.
(a) Written Consent of Partners. The Transferor shall
give prior written notice of its desire to Transfer all or a
portion of its Partnership Interest, specifying the name of the
Transferee, the consideration and the terms and provisions of the
proposed transaction. Each General Partner shall have twenty
(20) days after receipt of the Transferor's notice to exercise
its right, but not the obligation, to purchase the portion of the
Partnership Interest to be sold on the same terms and conditions
as specified in the notice. Such General Partner shall give
written notice to the Transferor of such election and shall
purchase and pay for such Partnership Interest at the office of
the Partnership on the later of (i) within thirty (30) days from
the delivery of the General Partners' election to purchase or
(ii) the second business day following expiration of any required
governmental waiting periods or the issuance of any governmental
consents. If a General Partner does not exercise its rights to
purchase, the Transferor shall still be required to obtain, prior
to the consummation of such Transfer, the approval of the General
Partners and the approval of a Majority in Interest of the
Limited Partners (which approval shall be subject to the
completion of all acts required in this Section 7.1 and may be
given or withheld in the General Partners' and Limited Partners'
sole discretion and in the manner set forth in Section 13.3).
(b) Opinion of Counsel. The Transferor shall deliver
to the General Partners evidence satisfactory to the General
Partners, (including, if requested by the General Partner, an
opinion of counsel in form and substance satisfactory to counsel
to the Partnership), that:
(i) such Transfer and any offerings made in
connection therewith are in compliance with applicable
federal and state securities laws;
(ii) such Transfer will not cause a termination of
the Partnership for tax purposes or cause it to be
classified as an association; and
(iii) the Transfer will comply with all
applicable rules and regulations of government authorities.
(c) Investment Letter. The Transferee of all or a
portion of a Limited Partner's Partnership Interest shall execute
a statement satisfactory to the General Partners that he is
acquiring such Partnership Interest or part thereof for his own
account for investment and not with a view to the distribution or
resale thereof.
(d) Transfer Expenses. The Transferee and Transferor
shall agree (in writing) with the Partnership to pay all
reasonable expenses (including legal and accounting expenses
incurred by the Partnership) in connection with the Transfer
(which may be shared between them in the proportions they
desire).
(e) Substituted Limited Partner. A Transferee may
become a Substituted Limited Partner on the last business day of
the month following the date on which the Transfer occurred if:
(i) In case of Transfers other than by operation
of law, the Transferor states its intention in writing to
have the Transferee become a Substituted Limited Partner as
concerns the portion of its Partnership Interest to be
Transferred;
(ii) The Transferee agrees to pay any filing fees,
reasonable counsel fees, and other reasonable expenses in
connection with its becoming a Substituted Limited Partner;
and
(iii) The Transferee agrees in writing to be
bound by all of the terms and provisions of the Partnership
Agreement and any other document or instrument executed by
or otherwise binding upon the Limited Partners as if an
original party to the Partnership Agreement or other such
document or instrument.
(f) Tax Consequences. Any Transfer of all or a
portion of a Limited Partner's Partnership Interest (whether or
not such Transferee becomes a Substituted Limited Partner) shall
be null and void if it prejudices or affects the continuity of
the Partnership for the purposes of Section 708 of the Code. The
General Partners are expressly authorized to enforce this
provision by notifying the Partners that all Transfers will be
suspended or limited for a period of up to 12 months whenever
Partnership Interests totalling 25% or more of all Partnership
Interests shall have been Transferred in any consecutive 12 month
period. Prior to any such Transfer becoming effective, the
General Partners may require an opinion of counsel in form and
substance satisfactory to the General Partners to the effect that
the Transfer will not cause adverse tax consequences to any of
the nontransferring Partners, and such Transferor shall be
responsible for paying said counsel's fee for such opinion. At
such time as a Transfer of all or a portion of a Limited
Partner's Partnership Interest is possible in accordance with the
Code, any such Transfer shall be approved in accordance with this
Partnership Agreement in the order in which any such requests are
received by the General Partners after such time. Any Partner
whose action or inaction caused a termination pursuant to Section 708
of the Code prior to the time provided in this Partnership
Agreement shall indemnify and hold harmless the other Partners
from any and all incremental federal, state and local tax
liability incurred as a result of such termination unless each
Partner agrees to waive this provision.
(g) Recognition of Transferee as Limited Partner.
Upon the effective Transfer of all or a portion of a Partnership
Interest and compliance with the other paragraphs of this Section
7.1, the General Partners shall, to the extent required by law
execute, file and record with the appropriate governmental
agencies such documents as are required to accomplish the
substitution of the Transferee as a Substituted Limited Partner.
If required by law, the Certificate of Limited Partnership shall
be amended and recorded not more often than quarterly, to
recognize the admission of Substituted Limited Partners. Nothing
contained herein is meant to require the filing of a Certificate
of Limited Partnership (or amendment thereto) which includes the
names of all Limited Partners and Substituted Limited Partners,
if under applicable state law the inclusion of such names is dis-
cretionary. In all events the General Partners shall amend this
Partnership Agreement to reflect the admittance to the Part-
nership of the Substituted Limited Partner. The Partnership
shall treat a Transferee who becomes a Substituted Limited
Partner pursuant to the provisions of this Section 7.1 as a
Substituted Limited Partner with respect to the Partnership
Interest, or part thereof, assigned from the last business day of
the calendar quarter following the acceptance by the General
Partners of the Transfer, notwithstanding the time consumed in
preparing and filing the necessary documents with governmental
agencies necessary to effectuate the substitution.
(h) Binding Effect. Any Transferee admitted to the
Partnership as a Substituted Limited Partner shall be subject to
and bound by all the provisions of the Partnership Agreement as
if an original party to the Partnership Agreement.
7.2 Restrictions on Transfer of General Partners' Interest.
Except as set forth in Section 7.3, no portion of a General
Partners' Partnership Interest (including the General Partners'
right to receive their allowable share of income and losses and
distribution of the Partnership) may be Transferred except in
accordance with this Section 7.2. Failure to comply with this
Section 7.2 shall render the purported Transfer null and void and
of no force or effect.
(a) Written Consent of Partners. A General Partner
shall give prior written notice of its desire to Transfer its
Partnership Interest, specifying the name of the transferee the
consideration and the terms and provisions of the proposed
transaction. The Limited Partners shall have twenty (20) days
after receipt of the General Partner's notice to exercise their
right, but not their obligation, to purchase the portion of the
Partnership Interest to be sold on the same terms and conditions
as specified in the notice, and if so purchased, at the election
of the purchasing Limited Partner, the General Partnership
Interest so purchased may be converted into a Limited Partnership
Interest. The Limited Partners shall give written notice to such
General Partner of such election and shall purchase and pay for
such Partnership Interest at the office of the Partnership on the
later of (i) thirty (30) days from the delivery of the Limited
Partners' election to purchase or (ii) the second business day
following expiration of any required governmental waiting periods
or the issuance of any governmental consents. If the Limited
Partners do not exercise their right to purchase, such General
Partner shall still be required to obtain, prior to the
consummation of such Transfer, the approval of a Majority in
Interest of the Limited Partners (in the manner set forth in
Section 13.3).
(b) Opinion of Counsel. The Partnership must receive
an opinion of counsel from the Partnership that such transfer and
admission
(i) would not cause the loss of limited liability
of the Limited Partners under this Partnership Agreement,
and
(ii) would not cause the Partnership to be treated
as an association taxable as a corporation for Federal
income tax purposes, and
(iii) would not affect the status of the
Partnership, the Partners or any of their respective
Affiliates under the Public Utility Holding Company Act of
1935.
(c) Prior to the transfer of all of a General
Partner's Partnership Interest, the Partnership shall have
admitted another entity or individual as a General Partner so as
not to cause the dissolution of the Partnership.
7.3 Permitted Transfers of Partnership Interests.
Notwithstanding any provision of this Article VII or the
Partnership Agreement to the contrary:
(a) Any Limited Partner may Transfer (i) to another
person or entity its Partnership Interest in connection with such
Limited Partners merger or consolidation with another person or
entity or (ii) all or a portion of its Partnership Interest to an
Affiliate controlled by such Limited Partner;
(b) the General Partners and the Limited Partners may
pledge or otherwise encumber their Partnership Interests to
secure indebtedness of the Partnership which the General Partners
in their sole discretion have deemed it in the best interest of
the Partnership to incur;
(c) subject to Section 7.2(a) above, each of the
General Partners may Transfer its Partnership Interest in partial
or complete liquidation of its Partnership Interest; provided
that prior to such Transfer the remaining General Partner admits
an additional or substitute General Partner as General Partner of
the Partnership in accordance with Section 8.5; and
(d) any corporate General Partner may Transfer all or
a portion of its Partnership Interest upon its merger or
consolidation with another person or entity or the transfer by it
of all or substantially all its assets to another person, the
assumption of the rights and duties of such corporate General
Partner by such person, and the admission of such person to the
Partnership as a General Partner, provided such person
(i) if it is other than an individual, is
organized under the laws of the United States of America or
any State thereof;
(ii) shall represent to the Partnership that it
has, or will have following the transaction, substantially
the same or greater tangible net worth as the transferring
General Partner; and
(iii) furnishes to the Partnership an opinion of
independent counsel to the effect that such merger,
consolidation, transfer or assumption (A) would not cause
the loss of limited liability of the Limited Partner under
this Partnership Agreement and (B) would not cause the
Partnership to be treated as an association taxable as a
corporation for Federal income tax purposes.
ARTICLE VIII
WITHDRAWAL AND REMOVAL OF A GENERAL PARTNER;
ADMISSION OF SUCCESSOR AND ADDITIONAL GENERAL PARTNER
8.1 Voluntary Withdrawal. Each General Partner hereby
agrees that it may withdraw from the Partnership only with the
prior consent of a Majority in Interest of the Limited Partners
both as to withdrawal and the terms and conditions thereof which
consent shall not be unreasonably withheld as long as the
operation of the Partnership is not materially adversely
affected; and any withdrawal without such prior consent shall
constitute a breach of this Partnership Agreement by the
withdrawing General Partner.
8.2 Other Withdrawal Events. The occurrence of any of the
events described in 17-402(a)(4) and (5) of the Act shall not
effect the withdrawal of a General Partner until the latter of
(i) 60 days subsequent to such occurrence or (ii) 30 days after a
General Partner (whether or not such General Partner was the
General Partner affected by such event) gives notice of the
occurrence to the Limited Partners. The General Partner shall
give notice of such event to the Limited Partners within 10 days
of the occurrence of such event.
8.3 Removal of the General Partner.
(a) A General Partner may not be removed as a general
partner except (i) for Cause (as defined below) with the removal
for any such reason approved by a Majority in Interest of Limited
Partners (in the manner set forth in Section 13.3), or (ii) by
the vote or consent of at least 66 % of Partnership Percentages
of all Limited Partners (in the manner set forth in Section
13.3). "Cause" shall mean (i) the failure of a General Partner
to timely make a required capital contribution, (ii) the failure
of a General Partner to obtain the approval of a Majority in
Interest of the Limited Partners before undertaking those actions
which require the approval of the Limited Partners, (iii) the
commencement of bankruptcy or insolvency proceedings by or
against a General Partner or its affiliates, (iv) a General
Partner's breach of any provision of this Partnership Agreement
which has a material adverse effect on the construction,
operation or maintenance of the operations of the Partnership or
on the Limited Partners' equity investment in the Partnership,
(v) gross negligence, fraud or breach of a General Partner's
fiduciary duties pursuant to this Partnership Agreement or (vi) a
45% or greater change in the stock ownership of Tartan
Management. For purposes of clause (iii) above, the term
affiliate with respect to a General Partner shall mean any Person
or entity owning 50% or more of the outstanding voting securities
of such General Partner.
(b) Written notice setting forth the effective date of
such removal (which date shall not be less than 30 days after the
service of such notice) shall be served upon the General Partner
to be removed pursuant to the notice provisions contained in
Section 13.1 of this Partnership Agreement. As of the effective
date of such removal, all of such person's rights and powers as a
General Partner shall cease and such General Partner's
Partnership Interest shall be converted automatically into a
limited partner interest (based on the fair market value of such
General Partner's Partnership Interest).
8.4 Liability of a Withdrawn General Partner. Any General
Partner which shall voluntarily or involuntarily for any reason
(including bankruptcy, death or adjudication of incompetency)
withdraw from the Partnership, or sell, transfer or assign its
general partner Partnership Interest, shall be and remain liable
for all obligations and liabilities incurred by such General
Partner prior to the time such withdrawal, conversion, sale,
transfer or assignment, has become effective, but shall be free
of any obligation or liability incurred on account of the
activities of the Partnership from and after the time such
withdrawal, conversion, sale, or transfer or assignment shall
have become effective except for any liabilities or damages
attributable to its action in withdrawing from the Partnership.
8.5 Additional or Successor General Partner.
(a) A General Partner may admit additional or
successor General Partners in connection with a transfer of all
or a part of the General Partner's Partnership Interest subject
to Section 7.2(a) above. If a General Partner withdraws or is
removed pursuant to Sections 8.1, 8.2 or 8.3 and if such
withdrawal or removal would leave the Partnership without a
General Partner, then prior to the effective date of such removal
or withdrawal, the Limited Partners shall meet to select and
appoint one or more successor General Partners to continue the
business of the Partnership, which selection and appointment
shall be effected by the approval of a Majority in Interest of
the Limited Partners (in the manner set forth in Section 13.3)
and become effective prior to the removal or withdrawal of a sole
General Partner. A 1% partnership interest shall be reallocated
from the Limited Partners, pro rata, to any successor General
Partner(s) required pursuant to this Section 8.5, unless the
successor General Partner makes a capital contribution to the
Partnership equal to or greater than 1% of the total of the
Capital Contributions to the Partnership.
(b) If Tartan Management is removed for Cause, a
single purpose subsidiary of TEMI will succeed to the 1% general
partner interest of Tartan Management or the Limited Partners may
select another Person as a successor General Partner in
accordance with the terms hereof, in each case, without the
consent of Tartan Management, and the 1% general partnership
interest of Tartan Management shall be converted pursuant to
Section 8.3.
8.6 Successor General Partner. If a General Partner
withdraws or is removed in its capacity as a General Partner by
the affirmative vote of a Majority in Interest of the Limited
Partners, then prior to the effective date of such removal or
withdrawal, the Limited Partners shall meet to select and appoint
a successor General Partner, which selection and appointment
shall be effected by the approval of a Majority in Interest of
the Limited Partners (in the manner set forth in Section 13.3)
and become effective prior to the removal or withdrawal of the
General Partner.
8.7 Continuation of Partnership. In the event of an event
which causes the dissolution of the Partnership by the provisions
of this Partnership Agreement, the Partnership may be
reconstituted and its business continued without being wound up:
(a) by the remaining General Partner(s) (without the
approval of any of the Limited Partners) if there remains at
least one General Partner; or
(b) within 90 days after such dissolution or on the
date of the withdrawal of a General Partner, by the agreement in
writing of all Partners (whether or not there remains at least
one General Partner).
ARTICLE IX
DISSOLUTION AND LIQUIDATION
9.1 Dissolution. The Partnership shall be dissolved:
(a) upon the expiration of its term as provided in
Section 2.4 or the occurrence of any other event in Section 2.4;
and
(b) upon any other event that, under this Partnership
Agreement or Section 359.241 of the Act, causes its dissolution,
except as otherwise provided herein.
9.2 Liquidation. Upon dissolution of the Partnership,
unless the Partnership is continued pursuant to the provisions of
this Partnership Agreement, either the General Partners (or a
liquidator selected by a Majority in Interest of the Partners)
shall proceed with the winding up of the business and the
liquidation of the Partnership as set forth under Article X.
ARTICLE X
ALLOCATIONS AND DISTRIBUTIONS ON LIQUIDATION
10.1 Liquidation and Termination.
(a) In the event of the dissolution of the Partnership
in accordance with Section 9.1 above, unless the remaining
Partners, if any, elect to continue the business of the
Partnership as provided by the terms of this Partnership
Agreement, the General Partners or the liquidator of the
Partnership shall proceed with the winding up of the affairs of
the Partnership. Upon the dissolution of the Partnership no
further business shall be conducted, except for such action as
shall be necessary for the winding up of the affairs of the
Partnership and the distribution of its assets to the Partners
pursuant to the provisions of this section. The General Partners
shall act as liquidating trustees or may appoint in writing one
or more liquidating trustees who shall have full authority to
wind up the affairs of the Partnership and to make final
distribution as provided herein; provided, however, if the
Partnership is dissolved by an act which constitutes a breach of
this Partnership Agreement by a General Partner, the Limited
Partners shall, by a vote of the Majority in Interest of the
Limited Partners, designate a party to act as the liquidating
trustee.
(b) Upon dissolution of the Partnership, the
liquidating trustee or trustees may sell any or all Partnership
property, at the best cash price available or it may distribute
those properties in kind. The General Partners may, if they so
desire, purchase or cause an Affiliate or Affiliates of either of
them to purchase all of the Partnership property upon liquidation
following thirty (30) days prior public notice of the proposed
sale and provided at least thirty (30) days advance notice of the
proposed sale has been given to the Limited Partners. The price
paid by the General Partners or any of their Affiliates for any
Partnership property shall in no event be less than the greater
of (i) the highest bid received from a third party, or (ii) the
General Partners' estimate of the fair market value of such
property (the fair market value shall be determined by an
independent third party deemed by the General Partners, competent
to appraise such assets).
(c) The General Partners shall apply and distribute
the assets of the Partnership as follows:
(i) First, to the payment and discharge of all of
the Partnership's debts and liabilities to creditors other
than the General Partners or Limited Partners;
(ii) Second, to the payment and discharge of all
of the Partnership's debts and liabilities to the General
Partners or Limited Partners; and
(iii) Third, according to the Partners
respective Partnership Percentage.
10.2 Capital Account Deficits and Special Distributions. If
any Partner has a deficit balance in his Capital Account (after
giving effect to all contributions, distributions and allocations
for all taxable years, including the year during which such
liquidation occurs), such Partner shall have no obligation to
make any contribution to the capital of the Partnership with
respect to such deficit, and such deficit shall not be considered
a debt owed to the Partnership or to any other Person for any
purpose whatsoever. In the discretion of the General Partners, a
pro rata portion of the distributions that would otherwise be
made to the General Partners and Limited Partners pursuant to
this Article X may be:
(a) distributed to a trust established for the benefit
of the General Partners and Limited Partners for the purposes of
liquidating Partnership assets, collecting amounts owed to the
Partnership, and paying any contingent or unforeseen liabilities
or obligations of the Partnership or of the General Partners
arising out of or in connection with the Partnership. The assets
of any such trust shall be distributed to the General Partners
and Limited Partners from time to time, in the reasonable
discretion of the General Partners, in the same proportions as
the amount distributed to such trust by the Partnership would
otherwise have been distributed to the General Partners and
Limited Partners pursuant to this Partnership Agreement; or
(b) withheld to provide a reasonable reserve for
Partnership liabilities (contingent or otherwise) and to reflect
the unrealized portion of any installment obligations owed to the
Partnership, provided that such withheld amounts shall be
distributed to the General Partners and Limited Partners as soon
as practicable.
10.3 Deemed Distribution and Recontribution. Notwith-
standing any other provision of this Article X, in the event the
Partnership is liquidated within the meaning of Treas. Reg. Sec.
1.704-1(b)(2)(ii)(g) (regarding when a liquidation occurs) but
it has not dissolved pursuant to Section 9.1 hereof, the
Partnership shall not be liquidated, the Partnership's
liabilities shall not be paid or discharged, and the
Partnership's affairs shall not be wound up. Instead, the
Partnership shall be deemed to have distributed the property in
kind to the General Partners and Limited Partners, who shall be
deemed to have assumed and taken such property subject to all
Partnership liabilities, all in accordance with their respective
Capital Accounts. Immediately thereafter, the General Partners
and Limited Partners shall be deemed to have recontributed the
property in kind to the Partnership, which shall be deemed to
have assumed and taken such property subject to all such liabili-
ties.
ARTICLE XI
CERTIFICATES AND OTHER DOCUMENTS
11.1 General Partners as Attorney for Limited Partners.
(a) Each Limited Partner, by becoming a Limited Part-
ner, hereby constitutes and appoints the General Partners and
any successor of the General Partner, the true and lawful
attorney of, and in the name, place and stead of said Limited
Partner, from time to time:
(i) To make all agreements amending this Part-
nership Agreement, as now or thereafter amended, that may be
appropriate to reflect solely:
(1) A change of the name or the location of the
principal place of business or the Partner-
ship;
(2) The disposal by a Limited Partner of his
Partnership Interest, in any manner permitted
by this Partnership Agreement, and any return
of the Capital Contribution of a Limited
Partner (or any part thereof), if any,
provided for by this Partnership Agreement;
(3) A person becoming a Limited Partner of the
Partnership, as permitted by this Partnership
Agreement;
(4) A change in any provision of this Partnership
Agreement or the exercise by any person of
any right or rights thereunder not requiring
the consent of such Limited Partner; and
(5) The exercise by any person of any right or
rights under this Partnership Agreement re-
quiring the consent or approval of a majority
or a specified percentage of the Limited
Partners when the required consent or
approval has been given.
(b) To make such certificates, instruments and docu-
ments, including fictitious business name statements, as may be
required by, or may be appropriate under, the laws of the State
of Missouri in connection with the use of the name of the
Partnership by the Partnership and to make such applications and
filings to transact business as a foreign limited partnership in
those jurisdictions where the nature of the Partnership's
properties or business makes such action advisable;
(c) To make such certificates, instruments and docu-
ments, including those referenced in Section 11.2 below, and also
including amendments to this Partnership Agreement, as said
Limited Partner may be required or as may be appropriate for said
Limited Partner to make, by the laws of any state or other
jurisdiction solely to reflect:
(i) A change of address of such Limited Partner;
(ii) Any changes in or amendments to this
Partnership Agreement or the Certificate of Limited
Partnership, or pertaining to the Partnership, of any kind
referred to in paragraph 11.1(a); and
(iii) Any other changes in or amendments to
this Partnership Agreement or the Certificate of Limited
Partnership, but only if and when such Limited Partner has
agreed to such other changes or amendments by signing,
either personally or by duly appointed attorney (other than
the power of attorney set forth herein), an agreement
amending this Partnership Agreement.
(d) Each of such agreements, certificates, instruments
and documents shall be in such form as such attorney and counsel
for the Partnership shall deem appropriate. The powers hereby
conferred to make agreements, certificates, instruments and
documents shall be deemed to include the powers to sign, execute,
acknowledge, swear to, verify, deliver, file, record and publish
the same.
(e) Each Limited Partner authorizes such attorney to
take any further action which such attorney shall consider neces-
sary or convenient in connection with any of the foregoing and
hereby gives such attorney full power and authority to do and
perform each and every act and thing whatsoever requisite and
necessary to be done in and about the foregoing as fully as such
Limited Partner might or could do if personally present, and
hereby ratifies and confirms all that such attorney shall
lawfully do or cause to be done by virtue hereof.
(f) The powers hereby conferred shall continue from
the date such Limited Partner becomes a Limited Partner in the
Partnership until such Limited Partner shall cease to be a
Limited Partner and, being coupled with an interest, shall be
irrevocable.
11.2 Making and Filing of Certificates. The General
Partners agree, when authorized pursuant to Section 11.1 hereof,
or otherwise, to make, file or record with the Secretary of State
of the State of Missouri or any other appropriate public
authority and (if required) to publish the certificate, any
amendments thereof, and such other certificates, instruments and
documents as may be required or appropriate in connection with
the business and affairs of the Partnership.
ARTICLE XII
BOOKS OF ACCOUNT, FINANCIAL
STATEMENTS AND FISCAL MATTERS
12.1 Books of Account. The Partners intend that the
Partnership shall be treated as a partnership for federal, state
and local tax purposes. Each Partner agrees not to make the
election described in Section 761(a) of the Code to be excluded
from the application of the provisions of Subchapter K of Chapter
1 of Subtitle A of the Code. Moreover, each Partner agrees not
to make an election to be excluded from the partnership
provisions of any applicable state or local taxation statute.
The General Partners shall, to the extent permissible under ex-
isting law, for income tax purposes, keep on an accrual basis,
adequate books of account of the Partnership wherein there shall
be recorded and reflected all of the Capital Contributions to the
Partnership and all of the expenses and transactions of the
Partnership. Such books of account shall be kept at the
principal place of business of the Partnership, and each Limited
Partner and his authorized representatives shall have at all
times, during reasonable business hours, free access to and the
right to inspect and copy such book of account and all records of
the Partnership, including the right to obtain by mail or to
inspect a list of the names and addresses and Partnership
Interests owned of the Limited Partners. All books and records
of the Partnership shall be kept on the basis of an annual
accounting period ending December 31, except for the final
accounting period which shall end on the dissolution or
termination of the Partnership without reconstitution.
Accelerated methods of depreciation may, if approved under
Section 3.2, be elected by the Partnership with respect to its
assets for purposes of reporting federal or state taxes.
12.2 Reports and Financial Statements. The General Partners
shall maintain a system of accounting established and
administered in accordance with Generally Accepted Accounting
Principals and shall provide the following reports and financial
statements to the Partners:
(a) Annual Report. Within 55 days after the end of
each calendar year, (i) a balance sheet as of the end of such
calendar year, together with a statement of income or loss and a
statement of changes in cash flows for the Partnership for such
year; (ii) a report summarizing the fees and other remuneration
(including reimbursable expenses) paid by the Partnership to the
General Partners or their Affiliates during the preceding year
and summarizing the activities of the Partnership for each year;
and (iii) a statement showing each Limited Partner's estimated
allocation of income, gains, losses and credits for Federal
income tax purposes. The balance sheet and financial statements
described in clause (i) of this Section 12.2(a) shall be audited
by a nationally or regionally recognized certified public
accounting firm or other certified public accounting firm
acceptable to the Limited Partners;
(b) Quarterly Reports. Within 30 days after the end
of each calendar quarter a report summarizing the principal
activities of the Partnership during the previous quarter;
(c) Monthly Reports. Within 30 days after the end of
each month, the balance sheet of the Partnership as of the end of
such month and the statement of income of the Partnership for
such month and for the period commencing at the end of the
previous fiscal year and ending with the end of such month, all
in reasonable detail; and
(d) Income Tax Information. Within 90 days after the
end of each calendar year, the Partnership will also furnish each
Limited Partner (and each transferee assignee of a Partnership
Interest who shall have not become a Substituted Limited Partner
and of whom the General Partner is aware) with the required
income tax information based upon the Partnership's tax return
which will be prepared and filed with the Service.
12.3 Tax Returns and Other Reports. The General Partners,
at the Partnership's expense, shall cause income tax returns for
the Partnership to be prepared and timely filed with the appro-
priate authorities. The General Partners, at Partnership
expense, shall cause to be prepared and timely filed, with
appropriate federal and state regulatory and administrative
bodies, all reports required to be filed with such entities under
then current applicable laws, rules and regulations. Such
reports shall be prepared on the accounting or reporting basis
required by such regulatory bodies. Any Limited Partner shall be
provided with a copy of any such report upon request without
expense to it.
12.4 Fiscal Year. The fiscal year of the Partnership shall
begin with the first day of January and end on the last day of
December in each year; provided, however, that the General
Partners, subject to approval under Section 3.2 and any requisite
approval by the Service and the applicable state taxing
authorities, may change the Partnership's fiscal year.
12.5 Bank Accounts, Funds and Assets. The funds of the
Partnership shall be invested in such accounts and investments as
described herein and such funds shall be withdrawn only by the
General Partners or their duly authorized agents. The General
Partners shall have fiduciary responsibility for the safekeeping
and use of all funds of the Partnership, whether or not in its
immediate possession or control, and it shall not employ, or
permit another to employ, such funds or assets in any manner
except for the exclusive benefit of the Partnership.
12.6 Elections. The Tax Matters Partner shall make the
following elections under the Code and Treasury Regulations and
any similar state or local statutes:
(a) To adopt the calendar year as the annual
accounting period, unless otherwise required by law;
(b) To adopt the accrual method of accounting;
(c) To compute the allowance for depreciation
utilizing the shortest life and fastest method permissible under
the Modified Accelerated Cost Recovery System or other applicable
depreciation system;
(d) To amortize start-up expenditures, if any, over a
sixty (60) month period in accordance with Section 195(b) of the Code
and any similar state statute;
(e) To amortize start-up expenditures if any, over a
sixty (60) month period in accordance with Section 709(b) of the Code
and any similar state statute;
(f) To make such other elections as it may deem
advisable to reduce Partnership taxable income to the maximum
extent possible and to take deductions in the earliest taxable
year possible; and
(g) To make the election provided under Section 754 of the
Code, upon the request of any Partner, if there is a distribution
of property as described in Section 734 of the Code or if there is a
transfer of an interest as described in Section 743 of the Code.
12.7 Other Partnership Records. The Partnership shall keep
and maintain in its principal office all records as required by
Section 359.051 of the Act. Such records shall include, but are
not limited to, the following:
(a) A current list that states: (i) the name and
mailing address of each Partner, separately identifying in
alphabetical order the General Partners and the Limited Partners
of the Partnership; (ii) the last known street address of the
business or residence of the General Partners; (iii) the names of
the Partners who are members of each specified class or group of
Partners; and (iv) the Partnership Percentage or Partnership In-
terest owned by each Partner.
(b) Copies of the Partnership's federal, state and
local information or income tax returns for each of the
Partnership's six most recent tax years, if applicable.
(c) A copy of the Partnership Agreement and the
Certificate of Limited Partnership, all amendments or restate-
ments, executed copies of any powers of attorney under which the
Partnership Agreement and the Certificate of Limited Partnership
and all amendments or restatements to the Partnership Agreement
and the Certificate of Limited Partnership have been executed,
and copies of any document that creates, in the manner provided
by the Partnership Agreement, classes or groups of Partners.
(d) A written statement of: (i) the amount of the
cash contribution and a description and statement of the agreed
value of any other contribution made by each Partner, and the
amount of the cash contribution and a description and statement
of the agreed value of any other contribution that the Partner
has agreed to make in the future as an additional contribution;
(ii) the times at which additional contributions are to be made
or events requiring additional contributions to be made; and
(iii) the date on which each Partner became a Partner.
(e) A written registration of all pledges and/or
grants of security interest by all Partners in any outstanding
Partnership Interest reflecting the name and address of all
secured parties or pledgees. The General Partners shall give all
notices of such pledges and grants of security interests to all
such parties as required by Article 9 of The Missouri Uniform
Commercial Code.
(f) Correct and complete books and records of account
of the Partnership.
12.8 Partnership-Level Tax Audits. The Partners recognize
and agree that Tartan Management shall be the "tax matters
partner" of the Partnership pursuant to Section 6231(a)(7) of the Code.
As tax matters partner, Tartan Management shall take such action
as may be necessary to cause all Partners to become "notice
partners" within the meaning of Section 6231(a)(8) of the Code. Tartan
Management shall keep all Partners informed of all matters that
come to its attention in its capacity as "tax matters partner" by
giving the Partners notice thereof within ten days after it
becomes informed of any such matters. Tartan Management shall
take no actions in its capacity as "tax matters partner" which
will bind the Partnership without the unanimous consent of all
Partners. Tartan Management shall have no obligation or
liability hereunder to the Partnership or any other Partner for
any omission, decision made or action taken in connection with
the discharge of its duties as "tax matters partner" unless such
omission, decision, or action is made or taken in bad faith or as
a result of willful misconduct.
12.9 Survival of Tax Provision. The provisions of the
Agreement relating to tax matters shall survive the termination
of the Agreement and the termination of any Partner's interest in
the Partnership and shall remain binding on that Partner for the
period of time necessary to resolve with any federal, state and
local tax authority and tax matters regarding the Partnership.
ARTICLE XIII
MISCELLANEOUS
13.1 Notices. Any notice, request, instruction,
correspondence or other document to be given hereunder by any
party (herein collectively called "Notice") shall be in writing
and delivered in person or by courier service requiring
acknowledgment of receipt of delivery or mailed by certified
mail, postage prepaid and return receipt requested, or by
telecopier, as follows:
if to MCN,
MCN Corporation
500 Griswold Street
Detroit, Michigan 48226
Attention: General Counsel
Telecopier No.: (313) 965-0009
with a copy (which shall not constitute notice to):
Citizens Gas and Fuel
127 North Main Street
Adrian, Michigan 47221
Attention: Devere Elgas
Telecopier No.: (517) 263-8510
if to Tartan Management,
Tartan Management Company of Missouri, L.C.
8801 South Yale, Suite 385
Tulsa, Oklahoma 74137
Attention: Mr. Tom M. Taylor
Telecopier No.: (918) 493-7475
if to TEMI,
Torch Energy Marketing, Inc.
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Attention: General Counsel
Telecopier No.: (713) 655-1711
if to any other Partner, addressed to the applicable
address provided by such Partner in writing to all
other Partners.
Notice given by personal delivery, courier service or mail shall
be effective upon actual receipt. Notice given by telecopier
shall be confirmed by appropriate answer back and shall be
effective upon actual receipt if received during the recipient's
normal business hours, or at the beginning of the recipient's
next business day after receipt if not received during the
recipient's normal business hours. All Notices by telecopier
shall be confirmed promptly after transmission in writing by
certified mail or personal delivery. All Notices by mail shall
be deemed received on the fifth business day following the date
on which the same is mailed. Any party may change any address to
which Notice is to be given to it by giving Notice as provided
above of such change of address.
13.2 Conveyances, Contracts and Documents. Any deed, bill
of sale, mortgage, deed of trust, lease, contract of sale, or
other commitment purporting to purchase, sell, assign, convey or
encumber the interest of the Partnership in all of any portion of
any real or personal property at any time held in its name, and
any other contract, check, draft, document, communication or
notice to which the Partnership is a party, including any
documentation committing the Partnership to purchase any real or
personal property, may be signed by a General Partner, and no
other signature will be required.
13.3 Meetings of or Actions by the Limited Partners.
(a) Meetings of the Limited Partners to vote upon any
matters on which the Limited Partners are authorized to take
action under this Partnership Agreement or as the same may be
amended from time to time may be called at any time by any
General Partner or by a Majority in Interest of the Limited
Partners by delivering written notice, either in person or by
registered mail, of such call to either of the General Partners.
Within 10 days following receipt of such request, the General
Partner receiving such notice shall cause a written notice to be
given, either in person or by registered mail, to the Limited
Partners entitled to vote advising them that a meeting,
convenient to the Limited Partners, will be held at a time and
place fixed by the General Partners. Such meeting will be held
not less than 10 days nor more than 60 days after the mailing of
the notice of the meeting. Included with the notice of the
meeting shall be a detailed statement of the action proposed,
including a verbatim statement of the wording of any resolution
proposed for adoption by the Limited Partners and of any proposed
amendments to this Partnership Agreement, as the same may from
time to time be amended. Meetings of the Partners may be
conducted by means of telephone conference or similar com-
munications equipment whereby all persons participating in the
meeting can hear and speak to each other. All expenses of the
meeting and notification shall be borne by the Partnership.
(b) A Majority in Interest of the Partners entitled to
vote on any such action shall constitute a quorum for the trans-
action of that specific action at any meeting. Personal presence
of the Limited Partners shall not be required, provided either
(a) an effective and notarized written consent to or rejection of
such proposed action is submitted to a General Partner or (b) a
proxy is submitted to a General Partner. Attendance by a Limited
Partner and voting in person at any meeting shall revoke any
written consents or rejections of such Limited Partner submitted
with respect to action proposed to be taken at such meeting.
(c) Any matter on which the Limited Partners are
authorized to take action under this Partnership Agreement or
under law may be taken by the Limited Partners without a meeting
and shall be as valid and effective as action taken by the Limit-
ed Partners at a meeting assembled, if (i) at least 10 calendar
days prior to the earliest date on which the action to be taken
by consent may occur, a General Partner shall cause written
notice describing such action to be given, either in person or by
registered mail, to the Limited Partners who would be entitled to
vote upon such action at a meeting and (ii) written consents to
such action by the Limited Partners are (A) signed by the Limited
Partners entitled to vote upon such action at a meeting who hold
the Partnership Percentages required to authorize such action,
and (B) are delivered to a General Partner. In the event that
there shall be no General Partner, the Limited Partners may take
action without a meeting by the written consent of Limited
Partners having a majority of such higher percentage as required
elsewhere herein of the voting power of the Limited Partners
entitled to vote.
13.4 Dispute Resolution.
(a) The General Partners shall attempt in good faith
to resolve any controversy or claim arising from or relating to
this Agreement promptly by negotiations. On the request of any
Partner, whether made before or after the institution of any
legal proceeding, any action, dispute, claim or controversy of
any kind now existing or hereafter arising between any of the
Partners in any way arising out of, pertaining to or in
connection with the management of the Partnership, this
Partnership Agreement or any other matter relating thereto or
arising therefrom (a "Dispute") shall be resolved by binding
arbitration in accordance with the terms hereof. Any party may,
by summary proceedings, bring an action in court to compel
arbitration of any Dispute.
(b) Any arbitration shall be administered by the
American Arbitration Association (the "AAA") in accordance with
the terms of this Section 13.4, the Commercial Arbitration Rules
of the AAA, and, to the maximum extent applicable, the Federal
Arbitration Act. Judgment on any award rendered by an arbitrator
may be entered in any court having jurisdiction.
(c) Any arbitration shall be conducted before one
arbitrator. The arbitrator shall be a practicing attorney
licensed to practice in the State of Missouri who is
knowledgeable in the subject matter of the Dispute selected by
agreement between the parties hereto. If the parties cannot
agree on an arbitrator within 30 days after the request for an
arbitration, then any party may request the AAA to select an
arbitrator. The arbitrator may engage consultants that the
arbitrator deems necessary to render a conclusion in the
arbitration proceeding.
(d) To the maximum extent practicable, an arbitration
proceeding hereunder shall be concluded within 180 days of the
filing of the Dispute with the AAA. Arbitration proceedings
shall be conducted in St. Louis, Missouri. Arbitrators shall be
empowered to impose sanctions and to take such other actions as
the arbitrators deem necessary to the same extent a judge could
impose sanctions or take such other actions pursuant to the
Federal Rules of Civil Procedure and applicable law. At the
conclusion of any arbitration proceeding, the arbitrator shall
make specific written findings of fact and conclusions of law.
The arbitrator shall have the power to award recovery of all
costs and fees to the prevailing party. Each party agrees to
keep all Disputes and arbitration proceedings strictly
confidential except for disclosure of information required by
applicable law.
(e) All fees of the arbitrator and any consultant
engaged by the arbitrator, shall be paid equally by the Partners
involved unless otherwise awarded by the arbitrator.
13.5 Captions and Pronouns. Any titles or captions or
articles or paragraphs contained in this Partnership Agreement
are for convenience only and shall not be deemed part of the
context of this Partnership Agreement. All pronouns and any
variations thereof shall be deemed to refer to the masculine,
feminine, neuter, singular or plural, as the identification of
the person or persons, firm or firms, corporation or corporations
may require.
13.6 Binding Effect. Except as otherwise herein provided,
this Partnership Agreement shall be binding upon and inure to the
benefit of the parties hereto, their heirs, executors,
administrators, successors and all persons hereafter having or
holding a Partnership Interest, whether as assignees, Substituted
Limited Partners, or otherwise. Nothing in this Partnership
Agreement, express or implied, is intended to confer upon any
person or entity other than the parties hereto and their
respective permitted successors and assigns, any rights, benefits
or obligations hereunder.
13.7 Additional Projects. If Tartan Management or any of
its Affiliates intends, directly or indirectly, to participate in
a pipeline project in the state of Missouri involving the
distribution of gas other than the Project ("Additional
Project"), then Tartan Management shall give written notice (an
"Additional Project Notice") to TEMI and MCN at least thirty (30)
days prior to Tartan Management entering into any definitive
agreement other agreement or document providing for the
Additional Project. Such notice shall specify the nature of the
project, shall contain reasonable detail of Tartan Management's
or its Affiliates' proposed involvement in such project, and
whether such project is an Equity Additional Project (as
hereinafter defined). It is understood that while Tartan
Management is required to give MCN and TEMI notice of all such
Additional Projects, the right of MCN and TEMI to participate in
any Additional Projects shall be limited to those Additional
Projects in which Tartan Management or any of its Affiliates,
directly or indirectly, has the right to invest or earn an
interest (the "Equity Additional Project"). In this regard,
Tartan Management agrees that it shall not circumvent the
provisions of this Section 13.7 by structuring its participation
in any Additional Project so that such Project is not an Equity
Additional Project. If such project is an Equity Additional
Project, then the Additional Project Notice shall also specify
the prospective parties and all material terms contemplated in
connection with such Equity Additional Project and shall contain
an offer to TEMI and MCN to participate in the Equity Additional
Project under the same terms and conditions as the Project. Each
of TEMI and MCN shall notify Tartan Management in writing within
thirty (30) days of the receipt (as set forth in Section 13.1
hereof) of the Additional Project Notice whether TEMI or MCN,
respectively, shall accept the offer to participate in the Equity
Additional Project on such terms and conditions. If one of
either TEMI or MCN declines to participate in the Equity
Additional Project, then the party that elected to participate in
the Equity Additional Project ("Electing Party") shall be
entitled to all of the rights offered to both TEMI and MCN in the
Additional Project Notice for such Equity Additional Project,
including without limitation the total ownership interest
originally offered both to TEMI and MCN. If the Electing Party
declines to participate to the extent of all of the rights of
both TEMI and MCN, then Tartan Management shall have the right to
participate for that portion of the Equity Additional Project in
which MCN or TEMI has declined to participate. If neither MCN
nor TEMI participate, Tartan Management or any of its Affiliates
may proceed on their own behalf with such Equity Additional
Project, subject to the written approvals of both MCN and Torch,
which approvals will not be unreasonably withheld. Any written
proposal of a proposed expansion of the System submitted by
Tartan Management under Section 3.5 of the Management Agreement
shall also constitute an Additional Project Notice under this
Section 13.7.
In the event of any dispute between Tartan Management, MCN
and TEMI regarding whether an Additional Project is an Equity
Additional Project, or whether Tartan Management has structured
its participation in an Additional Project so that such Project
is not an Equity Additional Project, such dispute shall be
resolved pursuant to Section 13.4 hereof.
13.8 Inspection of Property. The General Partners covenant
that they will permit any employee, agent or professional
consultant designated by a Partner in writing, at such Partner's
expense (except if a breach of this Partnership Agreement exists,
then at the Partnership's expense), to visit and inspect any of
the properties of the Partnership, to examine the Partnership
books and financial records of the Partnership and make copies
thereof or extracts therefrom and to discuss the affairs,
finances and accounts of the Partnership with the principal
officers of the General Partners and the Partnership's
independent public accountants, all at such reasonable times and
as often as a Partner may reasonably request. A Partner shall
have no duty to make any such inspection or examination nor shall
it incur any liability or obligation by reason of failing to make
any such inspection or examination. Should any examination of
such books and records demonstrate that any statement, report,
schedule, notice or other writing furnished by the General
Partners is untrue or incorrect in any material respect, the
General Partners shall forthwith upon request of any Partner
cause an independent certified public accounting firm to audit
the pertinent books and records of the Partnership and to furnish
a written opinion to each Partner concerning such books and
records, all at the sole cost and expense of the Partnership.
13.9 Proposed Partners. All Persons who purchase Units
("Proposed Partners"), shall take subject to the terms and
conditions of this Partnership Agreement. Any Proposed Partner
shall be required to become a party to this Partnership Agreement
by executing an Adoption Agreement in the form required by the
General Partner and shall have all the rights and obligations of
a Partner (limited or general, as applicable) hereunder.
13.10 Amendment of the Partnership Agreement. A General
Partner may, from time to time, propose amendments to this
Partnership Agreement. Such General Partner shall submit all
proposed amendments to all of the Partners, and such General
Partner shall include in such submission its recommendation as to
the proposed amendment. Except as otherwise stated in this
Partnership Agreement, the approval of the General Partners and a
Majority in Interest of the Limited Partners (in the manner set
forth in Section 13.3) shall be required to amend this
Partnership Agreement; provided, however, that the provisions of
Section 3.2(b) cannot be amended without the unanimous approval
of the Limited Partners and the provisions of Section 8.2, clause
(ii) cannot be amended without the approval of at least 66 % of
Partnership Percentages of all Limited Partners (in either case
in the manner set forth in Section 13.3) and the provisions of
Sections 3.9(c), 4.1(b)(iv) and 4.11 cannot be amended without
the written agreement of Tartan Management.
13.11 Entire Agreement. This Partnership Agreement
contains the entire understanding and agreements among the
parties hereto respecting the within subject matter, and
supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties, and there
are no warranties, representations or other agreements between
the parties in connection with the subject matter hereof except
as set forth specifically herein or contemplated hereby.
13.12 Governing Law. THE PROVISIONS OF THIS PARTNERSHIP
AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF MISSOURI (EXCLUDING ANY
CONFLICTS-OF-LAW RULE OR PRINCIPLE THAT MIGHT REFER SAME TO THE
LAWS OF ANOTHER JURISDICTION), EXCEPT TO THE EXTENT THAT SAME ARE
MANDATORILY SUBJECT TO THE LAWS OF ANOTHER JURISDICTION PURSUANT
TO THE LAWS OF SUCH OTHER JURISDICTION.
13.13 Tax Controversies. Should there be any contro-
versy with the Service or any other taxing authority involving
the Partnership or an individual Partner or Partners, the outcome
of which may adversely affect the Partnership either directly or
indirectly, the Partnership may incur expenses it deems necessary
and advisable in the interest of the Partnership to oppose such
proposed deficiency, including, without being limited thereto,
attorneys' and accountants' fees. The Partners hereby grant to
Tartan Management the authority to represent the Partnership
before any office of the Service or state or local tax agencies
with respect to any tax matters regarding the Partnership, to
appoint an attorney-in-fact to represent the Partnership before
such offices or agencies and to serve as "tax matters partner" of
the Partnership, as that term is defined in Section 6231(a)(7) of the
Code.
13.14 Counterparts and Execution. This Partnership
Agreement may be executed in multiple counterparts, each of which
shall be deemed an original Partnership Agreement, and all of
which shall constitute one Partnership Agreement, by each of the
parties hereto on the dates respectively indicated in the
signatures of said parties, notwithstanding that all of the
parties are not signatories to the original or to the same
counterpart, to be effective as of the day and year hereinabove
set forth.
13.15 Severability. If any provision of this Partner-
ship Agreement is held to be illegal, invalid or unenforceable
under present or future state or federal laws or rules and
regulations promulgated thereunder effective during the term
hereof, such provision shall be fully severable, and the
Partnership Agreement shall be construed and enforced as if such
illegal, invalid or unenforceable provision had never comprised a
part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal,
invalid or unenforceable provision or by its severance herefrom.
Furthermore, in lieu of such illegal, invalid, or unenforceable
provision, there shall be automatically as a part of this
Partnership Agreement a provision similar in terms to such
illegal, invalid, or unenforceable provision as may be possible
and be legal, valid and enforceable.
13.16 Waiver. None of the requirements of this Partner-
ship Agreement may be waived unless waived in writing by the
named party or all parties to this Partnership Agreement.
Failure by any party to enforce its rights hereunder shall not
subsequently act as a waiver of those or any other rights. The
waiver by any party of a breach of any provision of this
Partnership Agreement shall not operate or be construed as a
waiver by such party of any subsequent breach.
13.17 Attorneys' Fees. In any suit to enforce this
Partnership Agreement, the prevailing party shall have the right
to recover its costs and reasonable attorneys' fees and expenses,
including costs, fees and expenses on appeal if the finder of
facts determines that the non-prevailing party's arguments were
frivolous or totally without merit.
IN WITNESS WHEREOF, the Partners have executed this
Partnership Agreement to be effective as of the Effective Date.
GENERAL PARTNERS:
TARTAN MANAGEMENT COMPANY
OF MISSOURI, L.C.
By:
_____________________________
Name:
Title:
MCN CORPORATION
By:
_____________________________
Name:
Title:
LIMITED PARTNERS:
MCN CORPORATION
By:
_____________________________
Name:
Title:
TORCH ENERGY MARKETING, INC.
By:
_____________________________
Name:
Title:
TARTAN MANAGEMENT COMPANY
OF MISSOURI, L.C.
By:
_____________________________
Name:
Title:
_____________________________________
Tom M. Taylor
_____________________________________
Michael N. Trusty
EXHIBIT "A"
Description of Gas Project
EXHIBIT "B"
Partner Contributions and Unit Ownership
Property Units Partnership
Percentage
TEMI Cash of 47.5%
$_____
MCN Cash of 47.5%
$_____
Tartan Intangibles 5% plus the
Management as defined in right to receive
the Recitals additional Units
of the as set forth in
Formation Section
Agreement. 4.1(b)(iv) of
the Partnership
Agreement
EXHIBIT B-2
FORMATION AGREEMENT
THIS AGREEMENT ("Agreement") is entered into as of the 12th
day of October, 1995 by and among MCN CORPORATION ("MCN"), a
Michigan corporation, TARTAN ENERGY COMPANY OF MISSOURI, L.C.
("Tartan"), a Missouri limited liability company, TARTAN
MANAGEMENT COMPANY OF MISSOURI, L.C. ("Tartan Management"), a
Missouri limited liability company, TARTAN LIMITED PARTNERSHIP OF
MISSOURI (the "Missouri Interim Entity"), a Missouri limited
partnership, TORCH ENERGY MARKETING, INC. ("Torch"), a Delaware
corporation, and Tom M. Taylor and Michael N. Trusty (the
"Individuals").
R E C I T A L S:
MCN is a public utility holding company, with subsidiaries
engaged in the distribution and sale of natural gas at retail in
Michigan. Tartan, which is owned by the Individuals and Tartan
Management, is the surviving company of a merger with and into it
of Tartan Energy Company, L.C. ("Old Tartan"), an Oklahoma
limited liability company. As a result of the merger, Tartan
holds 15 local franchise agreements with cities and
unincorporated areas in Missouri which have been approved by the
Missouri Public Service Commission ("MPSC") and a certificate of
public convenience and necessity issued by the MPSC for the
construction and operation of a gas pipeline and distribution
system. Tartan, Old Tartan and their owners expended significant
efforts in causing Old Tartan to acquire the franchise agreements
and the certificate of public convenience and necessity for the
construction and operation of the System hereinafter defined, all
of which represents intangible property of Tartan (the
"Intangibles"). Torch has expertise in gas gathering. Old
Tartan and Tartan, with the support of MCN and Torch have
initiated on behalf of the Partnership hereinafter referred to,
the construction of the System. MCN, Tartan Management, Torch
and the Individuals propose to form Southern Missouri Gas
Company, L.P., a Missouri limited partnership (the
"Partnership"), to own the System, and to cause the Partnership
to issue limited partnership interests and general partnership
interests which will be owned by MCN, limited partnership
interests and general partnership interests which will be owned
by Tartan Management, limited partnership interests which will be
owned by Torch and limited partnership interests which will be
owned by the Individuals. The Parties have agreed that they will
participate in the ownership of the Partnership and in the
System, all to the extent set forth in this Agreement and in
accordance with and in the manner contemplated hereby.
In consideration of the premises and the mutual covenants
herein contained, the Parties agree as follows:
1. Definitions. For purposes of this Agreement:
(a) "Affiliate" means, as to any Party, any Person
that, directly or indirectly, controls, is controlled by, or is
under common control with such Party. The terms "controls",
"controlled by", and "under common control with" refer to the
possession (to the exclusion of others) of the power effectively
to direct or cause the direction of, the management and policies
of a Person, whether through ownership of not less than a
majority of voting securities, by contract or otherwise.
(b) "Chemical Note" means the promissory note from
Tartan to Chemical Bank pursuant to the Credit Agreement.
(c) "Credit Agreement" means the Credit Agreement
between Tartan and Chemical Bank, to be dated as of the First
Closing Date and to be substantially in the form of Exhibit E.
(d) "Environmental Claim" means any and all
administrative, regulatory or judicial actions, suits, demands,
demand letters, claims, liens, notices of noncompliance or
violations, noticed investigations or proceedings relating in any
way to any Environmental Law (for purposes of this definition,
"Claims") or any permit issued under any such Environmental Law,
including without limitation (i) any and all Claims by
governmental or regulatory authorities for enforcement, cleanup,
removal, remedial or other actions for damages pursuant to any
applicable Environmental Law and (ii) any and all Claims by any
third party seeking damages, contribution, indemnification, cost
recovery, compensation or injunctive relief resulting from
Hazardous Materials or arising from alleged injury or threat of
injury to health, safety or the environment.
(e) "Environmental Law" means any federal, state or
local statute, law, rule, regulation, ordinance, code, published
policy or rule of common law now in effect and in each case as
amended and any published judicial or administrative
interpretation thereof, including any judicial or administrative
order, consent decree or judgment, relating to Hazardous
Materials, the environment or health relating to or arising from
environmental conditions, including without limitation the
Comprehensive Environmental Response, Compensation, and Liability
Act of 1980, as amended 42 U.S.C. Sec. 9601 et seq.; the Hazardous
Materials Transportation Act, as amended, 49 U.S.C. Sec. 1801 et
seq.; the Resource Conservation and Recovery Act, as amended, 42
U.S.C. Sec. 6901 et seq.; the Federal Water Pollution Control Act,
as amended, 33 U.S.C. Sec. 1251 et seq.; the Toxic Substances
Control Act, 15 U.S.C. Sec. 2601 et seq.; the Clean Air Act, 42
U.S.C. Sec. 7401 et seq.; the Safe Drinking Water Act, 42 U.S.C. Sec.
3808 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. Sec. 2701
et seq.; and relevant state and local laws.
(f) "First Closing" means the date and time set for
closing the Credit Agreement and effecting the first draw under
the Chemical Note, or such other time and date as may be agreed
to in writing by the Parties for the closing of the transactions
contemplated hereby for the First Closing, and "First Closing
Date" means the date of the First Closing.
(g) "Hazardous Materials" means (i) any petroleum or
petroleum products (other than natural gas), radioactive
materials, asbestos in any form that is or could become friable,
urea formaldehyde foam insulation, transformers or other
equipment that contain dielectric fluid containing levels of
polychlorinated biphenyls, and radon gas; (ii) any chemicals,
materials or substances defined as or included in the definition
of "hazardous substances," "hazardous wastes," "hazardous
materials," "extremely hazardous wastes," "restricted hazardous
wastes," "toxic substances," "toxic pollutants," "contaminants"
or "pollutants," or words of similar import under any applicable
Environmental Law; and (iii) any other chemical, material or
substance, exposure to which is prohibited, limited or regulated
by any governmental authority.
(h) "Intercreditor Agreement" means the Intercreditor
Agreement in the form of Exhibit D hereto, among Tartan, MCN,
Torch and Torch as collateral agent for MCN and Torch, dated the
date of the Pledge Agreement and entered into in connection
therewith.
(i) "Material Adverse Effect" means a material adverse
effect on the assets, liabilities, business, condition (financial
or otherwise), prospects or results of operations of Tartan taken
as a whole.
(j) "MPSC" means the Missouri Public Service
Commission.
(k) "Parties" means the parties to the Agreement.
(l) "Person" means any individual, corporation,
limited liability company, limited or general partnership, joint
venture, association, joint-stock company, trust, unincorporated
organization or government or any agency or political subdivision
thereof.
(m) "Pledge Agreement" means the Pledge Agreement from
the Missouri Interim Entity in favor of MCN and Torch referred to
in Section 3 hereof.
(n) "PUHCA" means the Public Utility Holding Company
Act of 1935, as amended.
(o) "Related Documents" means, as of the First
Closing, all documents attached hereto as Exhibits and all
necessary supporting documents, and, as of the Second Closing,
all those documents plus such of those documents attached hereto
as Annexes which are to be executed at the Second Closing and all
necessary supporting documents.
(p) "Release" means discharging, disposing, dumping,
emitting, emptying, escaping, injecting, leaking, leaching,
placing, seeping, spilling and the like, into or upon any land or
water or air, or otherwise entering into the environment.
(q) "Second Closing" means 9:00 a.m. Houston time on
the second business day after the effective date of the MPSC
order approving the merger of Tartan with and into the
Partnership and the satisfaction of the conditions set forth in
Section 16 hereof, and "Second Closing Date" means the date of
the Second Closing.
(r) "System" means the rights-of-way and easements,
fee properties, equipment, vehicles, permits, leases (for realty
or personalty), pipelines and appurtenant facilities, including
any future compressor station, referred to in the Plan attached
hereto as Annex I.
(s) "Tartan Group" means Tartan and Tartan Management
in its individual capacity and in its capacity as general partner
acting on behalf of the Missouri Interim Entity.
(t) "Tartan Notes" means the promissory notes from
Tartan to MCN and to Torch referred to in Section 3 hereof.
(u) "Taxes" means (i) all federal, foreign, state or
local net or gross income, gross receipts, sales, use, real
property gains or transfer, ad valorem, property, value-added,
franchise, production, severance, windfall profit, withholding,
payroll, employment, excise or similar taxes, assessments,
duties, fees, documentary, stamp, levies or other governmental
charges, together with any interest thereon, any penalties,
additions to tax or additional amounts with respect thereto and
any interest in respect of such penalties, additions or
additional amounts, and (ii) liability for the payment of any
consolidated or combined tax (including, without limitation, any
liability imposed pursuant to Treasury Regulations Section
1.1502-6), together with any interest thereon, any penalties,
additions to tax or additional amounts with respect thereto and
any interest in respect of such penalties, additions or
additional amounts, of the type described in clause (i) above.
(v) When used in Section 10 hereof, "knowledge" means
best knowledge of the entity making the representation or
warranty, and "Owner" means the applicable entity in the Tartan
Group that owns the business, property and assets of Old Tartan
relative to the System at the time the relevant representation or
warranty is made.
2. Nature of the System.
(a) Use of the System. The System will be used solely
for the purchasing, treating, transportation, distribution and
sale of gas (i) for the benefit of the Partnership prior to the
Second Closing, and (ii) by the Partnership thereafter.
(b) Effect of this Agreement on Other Businesses of
the Parties. The Parties and their Affiliates shall not, by
reason of this Agreement or of any related agreements or by
reason of their participation as Unitholders of the Partnership,
be restricted in any way in the conduct and expansion of their
respective businesses and undertakings except as expressly
provided herein or in the agreements attached as Annexes hereto.
(c) Conduct of the System. The Parties agree that the
System will be initiated and conducted in the manner specified
herein and in the documents and agreements, as such documents and
agreements are permitted to be supplemented or amended from time
to time, set forth as follows:
(i) Plan, a copy of which is attached hereto as
Annex I;
(ii) Agreement of Limited Partnership of the
Partnership, to be dated as of the Second Closing Date and
to be substantially in the form of Annex II;
(iii) Construction, Operation, and Maintenance
Management Agreement between Tartan Management and Tartan,
to be dated as of the First Closing Date and to be
substantially in the form of Annex III;
(iv) Plan and Agreement of Merger between Tartan
and the Partnership, to be dated as of the Second Closing
Date and to be substantially in the form of Annex IV;
(v) Gas Service Transportation Agreement between
Williams Natural Gas Company ("WNG") and Tartan, dated as of
July 25, 1994, and Facility Construction, Ownership and
Operating Agreement between WNG and Tartan, dated as of
July 15, 1994, as amended September 28, 1994, and March 16,
1995, to be transferred by operation of law pursuant to the
merger provided for by (iv) above, copies of which are
attached hereto collectively as Annex V; and
(vi) Contribution Agreements between Torch and
MCN, to be dated the First Closing Date and to be
substantially in the forms of Annexes VI and VII.
3. First Closing and Interim Financing. The First Closing
of the transactions contemplated by this Agreement shall take
place at the offices of Torch, 1221 Lamar, Suite 1600, Houston,
Texas or at such other place as may be agreed to by the Parties.
Subject to the terms and conditions hereof, the following events
will take place at the First Closing:
(a) The Tartan Notes. MCN and Torch have advanced
their own funds, first to Old Tartan and then to Tartan, for
initial expenditures in furtherance of the System. Such advances
have been evidenced by promissory notes from Old Tartan to MCN
and Torch and are now evidenced by the Tartan Notes in the forms
of Exhibits A and B. The Tartan Notes are secured by a pledge
agreement pledging 98.5% of Tartan Management's and the
Individuals' ownership interest in Tartan.
(b) Interim Financing. The Credit Agreement will be
signed, the closing contemplated by the Credit Agreement will
occur and the first draw under the Chemical Note will be
effected. The funds from the first drawing will be used at least
in part to prepay the Tartan Notes in an amount equal to the
difference between the amounts outstanding under the Tartan Notes
and $8 million.
(c) First Closing Actions. Tartan Management and the
Individuals will transfer 98.5% of their collective ownership
interest in Tartan to the Missouri Interim Entity. The
Individuals will own the remaining 1.5% of Tartan, and with
Tartan Management as general partner, will own limited
partnership interests in the Missouri Interim Entity. The
Missouri Interim Entity will assume the Tartan Notes by endorsing
its guarantee and assumption thereon. The pledge agreement
referred to in Section 3(a) securing the Tartan Notes will be
replaced by the Pledge Agreement to be dated as of the First
Closing Date and to be substantially in the form of Exhibit C,
pledging all of the Missouri Interim Entity's ownership interests
in Tartan. The Intercreditor Agreement will be executed by the
parties thereto.
(d) Payment of Tartan Notes. Remaining amounts due on
the Tartan Notes will be repaid by the Missouri Interim Entity at
the Second Closing.
(e) Document Execution and Delivery. Each of the
Parties will execute and deliver those documents contemplated by
this Section 3 to which it is a party, and the Individuals and
Tartan Management will cause the Missouri Interim Entity to
execute and deliver those documents listed in Section 2(c) and
contemplated by this Section 3 to which it is a party, in each
case including those documents required in connection with the
closing of the transactions contemplated by the Credit Agreement.
4. Credit Support Payments. Tartan and Tartan
Management acknowledge that MCN and Torch have been instrumental
in Tartan obtaining the financing provided by the Credit
Agreement and the Chemical Note. Specifically, without the
credit support of MCN and Torch provided pursuant to the Credit
Agreement (and the resulting financial risks assumed by MCN and
Torch in this regard), Tartan would have been unable to obtain
financing on the terms set forth in the Credit Agreement and the
Chemical Note, which terms include a much more favorable interest
rate than Tartan could have received on its own. Accordingly, in
order to compensate MCN and Torch for the credit support they
have provided to enable Tartan to obtain the financing provided
by the Credit Agreement (including such favorable interest rate)
Tartan shall pay, within ten days after the last day of each
calendar quarter and on the date the Chemical Note shall be paid
in full and extinguished, (i) directly to MCN an amount equal to
(A) the average outstanding daily balance of the Chemical Note
during the applicable period, multiplied by (B) an amount equal
to 1.21875% per annum based on a 365-day year, and (ii) directly
to Torch an amount equal to (A) the average outstanding daily
balance of the Chemical Note during the applicable period,
multiplied by (B) an amount equal to .40625% per annum based on a
365-day year.
5. Revised Capital Structure.
(a) If Tartan exhausts funding under the Chemical
Note, and additional funds are required to complete construction
of the System and to provide adequate working capital, additional
equity funds will be provided to Tartan by capital contributions
from the Missouri Interim Entity, which funds will be obtained by
draws from Torch under the Tartan Note assumed by the Missouri
Interim Entity until such amounts equal the amount of the draws
made from MCN under the Tartan Note assumed by the Missouri
Interim Entity, and thereafter by equal draws from Torch and MCN
under such Tartan Notes. In no event, however, shall the total
draws from Torch under the applicable Tartan Note exceed
$8 million and the total draws from MCN under the applicable
Tartan Note exceed $8 million, unless mutually agreed in writing
by MCN, Torch, Tartan and the Missouri Interim Entity.
(b) Following complete construction of the System, the
Parties will seek on behalf of the Partnership permanent
financing to pay in full and extinguish the Chemical Note,
together with such additional debt capital to complete any agreed
upon expansions of the System and to provide working capital.
Such debt capital shall be derived from one or more short-term or
long-term borrowings through either public or private placement,
which may be taxable or tax exempt, as the partners deem most
appropriate and economical. Any such permanent financing, and
such additional debt capital, shall be obtained in full
compliance with any requirements of the MPSC, including orders of
the MPSC regarding debt/equity ratios for Tartan.
6. Construction and Operation of the System Prior to the
Second Closing. Prior to the Second Closing, Tartan will
continue to construct and operate the System for the benefit of
the Partnership. To the fullest extent permitted by law, any
profits or losses attributable to this interval will be
segregated for the benefit of the Partnership and distributed
thereto at the Second Closing.
7. Second Closing. The Second Closing of the transactions
contemplated by this Agreement shall take place at the offices of
Torch, 1221 Lamar, Suite 1600, Houston, Texas or at such other
place as may be agreed to by the Parties. Subject to the terms
and conditions hereof, the following events will take place at
the Second Closing:
(a) Organizational Steps. MCN and Torch will make
capital contributions in those amounts required to reflect their
respective equity interests in the Missouri Interim Entity so
that when such interests are subsequently distributed to Torch
and MCN as provided below, such interests will reflect their
respective Partnership Percentages, as that term is defined in
the Agreement of Limited Partnership (but in no event shall those
amounts be less than $1.4 million for Torch and $6.6 million for
MCN). Thereafter, MCN, Tartan Management, Torch and the
Individuals will cause the formation of the Partnership by
executing the Agreement of Limited Partnership in their capacity
first as partners of the Missouri Interim Entity and then in
their capacity as direct partners in the Partnership, to be dated
as of the Second Closing Date and to be substantially in the form
of Annex II. The Certificate of Limited Partnership, to be dated
as of the Second Closing Date and to be substantially in the form
of Exhibit F, will be filed with the Secretary of State of
Missouri. Tartan will merge with and into the Partnership, and
the Plan and Agreement of Merger reflected in Annex IV will be
filed with the Secretary of State of Missouri. The Partnership
will issue limited partnership interests and general partnership
interests to the Missouri Interim Entity and limited partnership
interests to the Individuals. The Individuals will contribute
their equity interests in the Missouri Interim Entity to Tartan
Management. The Missouri Interim Entity will distribute limited
partnership interests and general partnership interests to Tartan
Management, limited partnership interests and general partnership
interests to MCN and limited partnership interests to Torch so as
to evidence their respective Partnership interests.
Contemporaneously, the Individuals will sell their limited
partnership interests to Torch for approximately $130,000. The
Missouri Interim Entity will be dissolved and liquidated.
(b) Document Execution and Delivery. Each of the
Parties will execute and deliver those documents listed in
Section 2(c) and contemplated by this Section 7 to which it is a
party and which were not executed at the First Closing, MCN and
Tartan Management will cause the Partnership to execute and
deliver those documents listed in Section 2(c) and contemplated
by this Section 7 to which the Partnership is a party and the
Individuals and Tartan Management will cause the Missouri Interim
Entity to execute and deliver those documents listed in Section
2(c) and contemplated by this Section 7 to which it is a party.
8. Columbus Air Force Base Contract. The parties
acknowledge that Tartan is bound by a contract (the "Contract")
for the design and construction of a fuel conversion distribution
facility at Columbus Air Force Base, Columbus, Mississippi (the
"Project"). Tartan is also responsible for a promissory note
dated October 14, 1994, in the amount of $600,000 from Old Tartan
to Liberty Bank and Trust Company, which evidences a revolving
line of credit (the "Loan"), for use in the Project. All of the
rights and obligations of Old Tartan and Tartan under the
Contract, the Project and the Loan by letter agreement dated
January 1, 1995, between Old Tartan and Tartan Energy Resources,
L.C. ("Tartan Resources"), are now the rights and obligations of
Tartan Resources and Tartan Management. Under that agreement,
Tartan Resources has agreed to indemnify Old Tartan and hold it
harmless against all liabilities, claims, etc. arising out of the
Contract, the Project and the Loan, and any agreements or
activities relating thereto. As such, notwithstanding any
provision of this Agreement to the contrary, the terms and
provisions of this Agreement shall not be applicable to the
Project, the Contract, the Loan, and any and all agreements and
activities relating thereto. Tartan Resources shall indemnify
and hold harmless Old Tartan, Tartan, the Partnership, MCN,
Torch, Tartan Management and the Individuals against any and all
loss, liability, claim, damage and expense whatsoever, as
incurred (including fees and expenses reasonably incurred in
investigating or defending any such claim), based upon or arising
out of the foregoing contracts, instruments and arrangements.
9. Representations and Warranties of MCN. MCN hereby
represents and warrants as follows:
(a) Organization. MCN is a corporation duly
incorporated, validly existing and in good standing under the
laws of the State of Michigan with full corporate power to carry
on its business as now being conducted.
(b) Power and Authority; Enforceability. MCN has all
requisite corporate power and authority to enter into this
Agreement and the Related Documents to which it is a party and to
perform its obligations hereunder and thereunder. This Agreement
and the Related Documents to which it is a party have been duly
authorized, executed and delivered on behalf of MCN and, assuming
due authorization, execution and delivery of the other parties
thereto, constitutes a legal, valid and binding obligation of MCN
enforceable in accordance with its terms, except that (i) such
enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally and (ii) the remedy of
specific performance and injunction and other forms of equitable
relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(c) No Conflict with Other Instruments or Consents.
Except as otherwise set forth in this Subsection (c), neither the
execution and delivery of this Agreement or the Related Documents
nor the consummation of the transactions contemplated hereby or
thereby (i) will conflict with or result in (or with giving of
notice or passage of time or both would result in) a breach,
default or violation of (A) any of the terms, provisions or
conditions of the charter, as amended, or bylaws, as amended, of
MCN or (B) any material agreement, document, instrument,
judgment, decree, order, governmental permit, certificate or
license to which MCN is a party or to which it is subject or by
which its property is bound, (ii) will result in the creation of
any lien, charge or other encumbrance on any material property or
asset of MCN, or (iii) will require MCN to obtain the consent of
any private nongovernmental third party. No consent, action,
approval or authorization of, or registration, declaration or
filing with, any governmental department, commission, agency or
other instrumentality having jurisdiction over MCN is required by
MCN to authorize the execution and delivery of this Agreement or
the Related Documents by MCN or, except for (i) approvals by the
Securities and Exchange Commission pursuant to PUHCA, (ii) filing
each Plan and Agreement of Merger with the Secretary of State of
Missouri, and (iii) approval of the MPSC, the consummation of the
transactions contemplated hereby and thereby.
(d) Accuracy of Representations and Warranties. All
representations and warranties of MCN contained in this Agreement
(except as affected by transactions contemplated by this
Agreement) shall be true in all material respects at and as of
the relevant Closing as if such representations and warranties
were made at and as of the relevant Closing, and MCN shall
perform, at or prior to the relevant Closing, all agreements and
covenants required by this Agreement to be performed by MCN at or
prior to the relevant Closing.
(e) Litigation. There are no suits, actions, claims,
proceedings or investigations pending or to the knowledge of MCN,
threatened, seeking to prevent or challenge the transactions
contemplated by this Agreement.
10. Representations and Warranties of Tartan, and Tartan
Management. Each entity in the Tartan Group, hereby represents
and warrants as follows:
(a) Organization. Tartan and Tartan Management are
both limited liability companies duly organized, validly existing
and in good standing under the laws of the State of Missouri.
The Missouri Interim Entity is a limited partnership duly
organized, validly existing and in good standing under the laws
of the State of Missouri.
(b) Power and Authority; Enforceability. Each entity
in the Tartan Group has all requisite company or partnership (as
applicable) power and authority to enter into this Agreement and
the Related Documents to which each is a party and to perform its
obligations hereunder and thereunder. This Agreement and the
Related Documents to which each is a party have been duly
authorized, executed and delivered on its behalf and, assuming
due authorization, execution and delivery of the other parties
thereto, constitutes a legal, valid and binding obligation of
each enforceable in accordance with its terms, except that (i)
such enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally and (ii) the remedy of
specific performance and injunction and other forms of equitable
relief may be subject to equitable defenses and to the discretion
of the court before which any proceeding therefor may be brought.
(c) No Conflict with Other Instruments or Consents.
Except as otherwise set forth in this Subsection (c), neither the
execution and delivery of this Agreement or the Related Documents
nor the consummation of the transactions contemplated hereby or
thereby (i) will conflict with or result in (or with giving of
notice or passage of time or both would result in) a breach,
default or violation of (A) any of the terms, provisions or
conditions of the applicable limited liability company agreement
or the agreement of limited partnership, each as amended, of any
entity in the Tartan Group or (B) any material agreement,
document, instrument, judgment, decree, order, governmental
permit, certificate or license to which any such entity is a
party or to which any such entity is subject or by which the
property of any such entity is bound, (ii) will result in the
creation of any lien, charge or other encumbrance on any material
property or asset of any such entity in the Tartan Group, or
(iii) will require any such entity in the Tartan Group to obtain
the consent of any private nongovernmental third party. No
consent, action, approval or authorization of, or registration,
declaration or filing with, any governmental department,
commission, agency or other instrumentality having jurisdiction
over any such entity in the Tartan Group is required by any such
entity in the Tartan Group to authorize the execution and
delivery of this Agreement or the Related Documents by any such
entity in the Tartan Group or, except for (i) filing each Plan
and Agreement of Merger with the Secretary of State of Missouri,
(ii) approval of the MPSC, and (iii) filing of Form U-3A-2 with
the Securities and Exchange Commission prior to commencement of
commercial operation of the System, the consummation of the
transactions contemplated hereby and thereby.
(d) Title to Properties. Owner has good and
indefeasible title to all of its real properties purported to be
owned in fee, has good and merchantable title to all of its
personal properties and is the owner of all of its other
properties and assets (other than natural gas), which are
material to the business of Owner (provided that no title
warranty is made with respect to permits, rights-of-way,
easements or leases) excepting, however, property and other
assets, not material to Owner, acquired or sold or otherwise
disposed of in the ordinary course of business, free of any
mortgage, pledge, lien, charge, security interest or other
encumbrance, subordination or adverse claim, except such
imperfections of title and encumbrances as are not substantial in
amount and do not in the aggregate materially detract from the
value of Owner's property or materially impair the business or
property of Owner. All buildings, plants and offices and all
machinery, fixtures and equipment are in satisfactory operating
condition and repair, normal wear and tear excepted. Owner
enjoys peaceful and undisturbed possession under all material
permits or leases under which it is operating, and to the best of
any member of the Tartan Group's knowledge all such permits and
leases are valid, subsisting and in full force and effect. Owner
does not own or lease any assets, nor does Owner have any
liabilities, other than assets and liabilities described in or
contemplated by the Plan.
(e) Material Contracts. Except as contemplated by
this Agreement, including orders and regulations of the MPSC,
Owner has no and is not bound by any of the following: (i) any
agreement, contract or commitment relating to the employment of
any person, (ii) any agreement, indenture or other instrument
that contains restrictions with respect to mergers or other
business combinations, or payment of profits, dividends or any
other distributions, (iii) any agreement, contract or commitment
relating to capital expenditures, (iv) any loan or advance to, or
investment in, any other Person or any agreement, contract or
commitment relating to the making of any such loan, advance or
investment, (v) any guarantee or other contingent liability in
respect of any indebtedness or obligation of any Person (other
than the endorsement of negotiable instruments for collection in
the ordinary course of business), (vi) any management service,
consulting or any other similar type of contract, (vii) any
agreement, contract or commitment limiting the freedom of Tartan
to engage in any line of business or to compete with any Person,
or (viii) any other agreement, contract or commitment that would
have a Material Adverse Effect.
(f) Permits. The Plan lists all of the material
governmental and other third party permits (including, without
limitation, environmental permits and occupancy permits),
licenses, consents and authorizations ("Permits") required, to
the knowledge of any member of the Tartan Group, in connection
with the use, operation or ownership of the System. Owner holds
all of the Permits, and all of the Permits are valid and in full
force and effect. Owner is in substantial compliance with all of
the Permits and has received no notice of default with respect
thereto.
(g) Litigation. Except for proceedings before the
MPSC as contemplated by this Agreement, no member of the Tartan
Group has received notice of any action, suit, proceeding at law
or in equity, arbitration or administrative or other proceeding
by or before (or any investigation by) any governmental or other
instrumentality or agency, which is pending, or, to the knowledge
of any member of the Tartan Group, threatened, against or
affecting the properties or rights of Owner, relating to the
System, and no member of the Tartan Group knows of a valid basis
for any such action, proceeding or investigation. No member of
the Tartan Group has received notice of any such suits, actions,
claims, proceedings or investigations which are pending or to the
knowledge of any member of the Tartan Group, threatened, seeking
to prevent or challenge the transactions contemplated by this
Agreement.
(h) Intellectual Properties. No member of the Tartan
Group is aware of any actual or claimed infringement or violation
of any patents, patent applications, registered and unregistered
trademarks, service marks, trade names and logos, registered and
unregistered copyrights, computer programs, data bases, trade
secrets or proprietary information.
(i) Taxes. Owner (I) has (or will have by the
relevant Closing) caused to be duly filed in a timely manner
(taking into account all extensions of due dates) with the
appropriate federal, state, local and other governmental
authorities all returns, information returns or statements, and
reports with respect to Taxes that are required to be filed by or
with respect to it, and (II) has (or will have by the relevant
Closing) caused to be paid or deposited or made adequate
provision in accordance with generally accepted accounting
principles consistently applied for the payment of all Taxes
(including estimated Taxes) required with respect to the periods
covered by such returns, statements or reports or by any taxing
authority. To the knowledge of each member of the Tartan Group,
adequate provision has (or will have by the relevant Closing)
been made for all Taxes due with respect to Owner for all periods
through the date hereof. Except for tax liens securing the
payment of Taxes not yet due and payable, (i) there are no tax
liens upon any assets of Owner, (ii) there are no outstanding
agreements or waivers by or with respect to Owner extending the
period for assessment or collection of any Taxes, (iii) there is
no pending action, proceeding or investigation, and no action,
proceeding or investigation has been threatened by any
governmental authority, for assessment or collection of Taxes
with respect to Owner and (iv) no claim for assessment or
collection of Taxes has been asserted and no actual or proposed
assessment has been made against Owner with respect to the Owner.
(j) Compliance with Laws. Each member of the Tartan
Group is, to the best of its knowledge, or Tartan Management,
pursuant to the Construction, Operation, and Maintenance
Management Agreement is, to the best of its knowledge, in
compliance with all applicable laws, regulations, orders,
judgments and decrees applicable to the System, except where any
noncompliance in the aggregate would not have a Material Adverse
Effect.
(k) Employee Benefits. Owner has made available to
MCN and Torch true and complete copies of all employee benefit
plans, policies, programs and arrangements and all related
contracts, agreements and other descriptions thereof with respect
to the employee benefits provided to the employees of Owner (the
"Benefit Plans"). Each of the Benefit Plans has, to the
knowledge of each member of the Tartan Group, been maintained in
compliance with its terms and the requirements of all applicable
laws. None of the Benefit Plans are subject to Title IV of the
Employee Retirement Income Security Act of 1974, as amended, and
the regulations promulgated and rulings issued thereunder
("ERISA"), or the minimum funding obligations of Section 412 of
the Internal Revenue Code of 1986, as amended, and the
regulations promulgated and rulings issued thereunder (the
"Code"), and Owner and any entity required to be aggregated
therewith pursuant to Section 414(b) or (c) of the Code have no
liability under Title IV of ERISA or under Section 412(f) or
412(n) of the Code.
(l) Financial Statements. Copies of Old Tartan's
(i) unaudited balance sheet (the "Balance Sheet") as at June 30,
1995 (the "Balance Sheet Date") and the related statement of
income, cash flows and shareholders' equity for the interim
periods then ended for the six months ended June 30, 1995, and
(ii) unaudited balance sheet as at December 31, 1994 and the
related unaudited statement of income, cash flows and owners'
equity for the fiscal year then ended (including in all cases the
notes thereto) (collectively, the "Financial Statements") have
been previously delivered to the Parties. The Financial
Statements have been prepared in accordance with generally
accepted accounting principles consistently applied except as
noted therein and except, in the case of unaudited interim
financial statements, for normal year-end adjustments, and fairly
present the financial position of Old Tartan as of the respective
dates set forth therein and the results of operations and cash
flows for Old Tartan for the respective fiscal periods set forth
therein.
(m) No Adverse Changes. Except as contemplated by
this Agreement, since the Balance Sheet Date Tartan has conducted
its business only in the ordinary course of business consistent
with past practice and there have been no changes that could have
a Material Adverse Effect.
(n) Environmental Laws and Regulations. Except as set
forth in the Plan and except where it would not have a Material
Adverse Effect (i) Hazardous Materials have not been generated,
used, treated or stored on, or transported to or from, any
property of Owner by Owner, or, to the knowledge of any member of
the Tartan Group, its authorized agents or its independent
contractors (including suppliers), (ii) Hazardous Materials have
not been Released or disposed of by Owner, or to the knowledge of
any member of the Tartan Group, by its authorized agents or its
independent contractors (including suppliers) on any property of
Owner except such Releases that do not violate any Environmental
Laws, (iii) Owner is, to the knowledge of the members of the
Tartan Group, in compliance with all applicable Environmental
Laws and the requirements of any permits issued under such
Environmental Laws with respect to any property of Owner, (iv) No
member of the Tartan Group has received notice of any
Environmental Claims against Owner or any property of Owner, (v)
there are no facts or circumstances, conditions, pre-existing
conditions or occurrences on any property of Owner known to any
member of the Tartan Group that could reasonably be anticipated
(A) to form the basis of an Environmental Claim against Owner or
any property of Owner, or (B) to cause any property of Owner to
be subject to any restrictions on the ownership, occupancy use or
transferability of any property of Owner under any Environmental
Law, (vi) to the knowledge of the members of the Tartan Group,
there are not now and there never have been any underground
storage tanks located on any property of Owner, and (vii) Owner
has not in the ordinary course of business transported or stored
Hazardous Materials (except for natural gas odorant materials).
(o) Solvency. No entity in the Tartan Group is
entering into this Agreement with actual intent to hinder, delay
or defraud creditors.
(p) Copies Complete. The copies of the charter
documents, bylaws and other governing documents, each as amended
to date, of Owner and the copies of all leases, instruments,
agreements, licenses, permits, certificates or other documents
which have been made available to MCN and Torch in connection
with the transactions contemplated hereby are complete and
accurate in all material respects and are true and correct copies
of the originals thereof.
(q) Effect of Prior Merger. Tartan possesses all of
the rights, privileges, immunities and franchises, of a public
nature as well as of a private nature, all property and assets
(real, personal or mixed, tangible or intangible), all claims and
choses in action, title to any real estate (or any interest
therein) and every other interest of or belonging to or due to
Old Tartan. Each representation and warranty herein made with
respect to an Owner would have been true with respect to Old
Tartan if made immediately prior to the effective time of the
merger of Old Tartan with and into Tartan.
(r) Accuracy of Representations and Warranties. All
representations and warranties of each entity in the Tartan Group
contained in this Agreement (except as affected by transactions
contemplated by this Agreement) shall be true in all material
respects at and as of the relevant Closing as if such
representations and warranties were made at and as of the
relevant Closing, and each entity in the Tartan Group shall
perform, at or prior to the relevant Closing, all agreements and
covenants required by this Agreement to be performed by it at or
prior to the relevant Closing.
Provided, however, the above representations and warranties
of Tartan Management shall only apply to the extent any
misrepresentation or inaccuracies could have an effect on the
System, the project contemplated hereby or the other Parties.
11. Representations and Warranties of Torch. Torch hereby
represents and warrants as follows:
(a) Organization. Torch is a corporation duly
incorporated, validly existing and in good standing under the
laws of the State of Delaware with full corporate power to carry
on its business as now being conducted.
(b) Power and Authority; Enforceability. Torch has
all requisite corporate power and authority to enter into this
Agreement and the Related Documents to which it is a party and to
perform its obligations hereunder and thereunder. This Agreement
and the Related Documents to which it is a party have been duly
authorized, executed and delivered on behalf of Torch and,
assuming due authorization, execution and delivery of the other
parties thereto, constitutes a legal, valid and binding
obligation of Torch enforceable in accordance with its terms,
except that (i) such enforcement may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating
to or affecting creditors' rights generally and (ii) the remedy
of specific performance and injunction and other forms of
equitable relief may be subject to equitable defenses and to the
discretion of the court before which any proceeding therefor may
be brought.
(c) No Conflict with Other Instruments or Consents.
Except as otherwise set forth in this Subsection (c), neither the
execution and delivery of this Agreement or the Related Documents
nor the consummation of the transactions contemplated hereby or
thereby (i) will conflict with or result in (or with giving of
notice or passage of time or both would result in) a breach,
default or violation of (A) any of the terms, provisions or
conditions of the charter, as amended, or bylaws, as amended, of
Torch or (B) any material agreement, document, instrument,
judgment, decree, order, governmental permit, certificate or
license to which Torch is a party or to which it is subject or by
which its property is bound, (ii) will result in the creation of
any lien, charge or other encumbrance on any material property or
asset of Torch, or (iii) will require Torch to obtain the consent
of any private nongovernmental third party. No consent, action,
approval or authorization of, or registration, declaration or
filing with, any governmental department, commission, agency or
other instrumentality having jurisdiction over Torch is required
by Torch to authorize the execution and delivery of this
Agreement or the Related Documents by Torch or, except for (i)
receipt of its requested no-action letter from the Securities and
Exchange Commission relative to PUHCA, (ii) filing each Plan and
Agreement of Merger with the Secretary of State of Missouri, and
(iii) approval of the MPSC, the consummation of the transactions
contemplated hereby and thereby.
(d) Accuracy of Representations and Warranties. All
representations and warranties of Torch contained in this
Agreement (except as affected by transactions contemplated by
this Agreement) shall be true in all material respects at and as
of the relevant Closing as if such representations and warranties
were made at and as of the relevant Closing, and Torch shall
perform, at or prior to the relevant Closing, all agreements and
covenants required by this Agreement to be performed by Torch at
or prior to the relevant Closing.
(e) Litigation. There are no suits, actions, claims,
proceedings or investigations pending or to the knowledge of
Torch, threatened, seeking to prevent or challenge the
transactions contemplated by this Agreement.
12. Certain Changes. Except as contemplated by this
Agreement (including the Annexes and Exhibits hereto), without
first obtaining the written consent of MCN and Torch, from the
date hereof until the Second Closing, each entity in the Tartan
Group covenants that it will not:
(a) make any material change in the conduct of its
businesses and operations, or its financial reporting and
accounting methods;
(b) other than as contemplated by the Plan, enter into
any material contract or agreement or terminate or amend in any
material respect, or be in default in any material respect under
any material contract or agreement to which it is a party;
(c) declare, set aside or pay any dividends, or make
any distributions, in respect of its equity securities, or
repurchase, redeem or otherwise acquire any such securities;
(d) merge into or with or consolidate with any other
corporation, person or other entity or acquire all or
substantially all of the business or assets of any corporation,
person or other entity;
(e) make any change in its charter documents or
bylaws;
(f) purchase any securities of any corporation, person
or entity, except short term debt securities of governmental
entities and banks, or make any investment in any corporation,
partnership, joint venture or other business enterprise;
(g) increase the indebtedness of, or incur any
obligation or liability, direct or indirect, for, it other than
the incurrence of liabilities pursuant to existing agreements or
in the ordinary course of business consistent with past
practices; provided, however, that in no event will it incur any
obligation or liability for indebtedness for borrowed money
maturing more than 12 months from the date of issue;
(h) sell, lease or otherwise dispose of any of its
assets other than the sale of its assets in the ordinary course
of business or pursuant to existing contracts;
(i) purchase, lease or otherwise acquire any property
of any kind whatsoever other than in the ordinary course of
business;
(j) allow or permit the expiration, termination or
cancellation at any time prior to the Second Closing of any of
its material insurance policies, unless it is replaced, with no
loss of coverage, by a comparable insurance policy;
(k) implement or adopt any change in its tax methods,
principles or elections;
(l) make any change in its authorized capital or out-
standing securities;
(m) issue, sell, or deliver, or agree to issue, sell
or deliver, any capital stock, bonds or other corporate
securities, or grant or agree to grant any options, warrants or
other rights calling for the issue, sale or delivery of its
securities;
(n) pay any obligation or liability other than current
liabilities reflected in the Balance Sheet and current
liabilities incurred since the date of the Balance Sheet, in the
ordinary course of business;
(o) cancel or otherwise terminate any material debts
or claims;
(p) enter into any agreement or arrangement granting
any preferential rights to purchase any of its assets, properties
or rights, or requiring the consent of any party to the transfer
or assignment of any of such assets, properties or rights;
(q) make or permit any material amendment or
termination of any material contract, agreement or license to
which it is a party or by which it or any of its assets or
properties are subject which would have a Material Adverse
Effect;
(r) make, directly or indirectly, any accrual or
arrangement for, or payment of bonuses or special compensation of
any kind or any severance or termination pay to, any present or
former officer or employee, except in the ordinary course of its
business;
(s) increase the rate of compensation payable by it to
any of its employees or agents or adopt any new, or make any
increase in any existing profit sharing, bonus, deferred
compensation, savings, insurance, pension, retirement or other
employee benefit plan for any of such employees or agents except
those for which Tartan has and is accruing funds for same not in
violation of the Plan;
(t) execute any collective bargaining agreement;
(u) make any capital expenditures which, in the aggre-
gate, exceed $25,000;
(v) take any action that would have required consent
of the limited partners if both the Agreement of Limited
Partnership and the Construction, Operation, and Maintenance
Management Agreement had been executed and in effect; or
(w) commit to do any of the foregoing.
Provided, however, the above covenants of Tartan Management shall
only apply to the extent the failure of Tartan Management to
comply with such covenants could have an effect on the System,
the project contemplated hereby, or the other Parties.
13. Operations. Subject to the necessary receipt of funds
from MCN and Torch and Chemical Bank pursuant to the Chemical
Note, from the date hereof until the Second Closing, each entity
in the Tartan Group will:
(a) with respect to the System, maintain its
properties and facilities in as good working order and condition
as at present, ordinary wear and tear excepted;
(b) with respect to the System, use its reasonable
business efforts to maintain and preserve its business
organization intact, retain its present employees and maintain
its relationship with suppliers, customers and others having
business relations with it;
(c) advise MCN and Torch promptly in writing of any
material adverse change in its business operations or in the
System;
(d) file on a timely basis all material notices,
reports or other filings required to be filed with or reported to
any federal, state, municipal or other governmental department,
commission, board, bureau, agency or any instrumentality
(including without limitation the MPSC) of any of the foregoing
wherever located; and
(e) file on a timely basis all complete and correct
applications or other documents necessary to maintain, renew or
extend any material permit, license, variance or any other
approval required by any governmental authority necessary or
required for the continuing operation of its businesses, whether
or not such approval would expire before or after the Second
Closing.
14. Expenses and Provisions of Funds. The Parties
acknowledge that they each have incurred, and will continue to
incur prior to the Second Closing, certain out-of-pocket expenses
in connection with the organization of the Partnership, with the
preparation of this Agreement and the Related Documents and with
the consummation of the transactions contemplated hereby and
thereby, which may be properly allocated to the Partnership. The
Parties shall keep full and accurate records of all such
expenses, and agree to submit promptly to the other Parties a
statement of such expenses. The Parties agree that all expenses
reflected on the above-mentioned statements which, in the
unanimous judgment of the Parties, are properly allocable to the
Partnership shall be forwarded promptly to the Partnership and
shall be paid promptly to the Party that incurred such expenses.
15. Conditions to Each Closing.
(a) MCN. The obligations of MCN to close the
transactions contemplated at the relevant Closing are, at the
option of MCN, subject to the conditions that:
(i) The representations and warranties of each
entity in the Tartan Group contained herein will be accurate
in all material respects at and as of the relevant Closing
as though such representations and warranties had been made
at and as of such Closing; all terms, covenants and
conditions of this Agreement to be complied with and
performed by an entity in the Tartan Group at or before the
relevant Closing will have been duly complied with and
performed; and each entity in the Tartan Group will have
delivered to MCN a certificate dated as of the relevant
Closing and signed by the President or any Vice President
thereof to the foregoing effect.
(ii) The representations and warranties of Torch
contained herein will be accurate in all material respects
at and as of the relevant Closing as though such
representations and warranties had been made at and as of
such Closing; all terms, covenants and conditions of this
Agreement to be complied with and performed by Torch at or
before the relevant Closing will have been duly complied
with and performed; and Torch will have delivered to MCN a
certificate dated as of the relevant Closing and signed by
the President or any Vice President thereof to the foregoing
effect.
(b) Tartan Group. The obligations of each entity in
the Tartan Group to close the transactions contemplated at the
relevant Closing are, at the option of each entity in the Tartan
Group, subject to the conditions that:
(i) The representations and warranties of MCN
contained herein will be accurate in all material respects
at and as of the relevant Closing as though such
representations and warranties had been made at and as of
such Closing; all terms, covenants and conditions of this
Agreement to be complied with and performed by MCN at or
before the relevant Closing will have been duly complied
with and performed; and MCN will have delivered to each
entity in the Tartan Group a certificate dated as of the
relevant Closing and signed by the President or any Vice
President thereof to the foregoing effect.
(ii) The representations and warranties of Torch
contained herein will be accurate in all material respects
at and as of the relevant Closing as though such
representations and warranties had been made at and as of
such Closing; all terms, covenants and conditions of this
Agreement to be complied with and performed by Torch at or
before the relevant Closing will have been duly complied
with and performed; and Torch will have delivered to each
entity in the Tartan Group a certificate dated as of the
relevant Closing and signed by the President or any Vice
President thereof to the foregoing effect.
(c) Torch. The obligations of Torch to close the
transactions contemplated at the relevant Closing are, at the
option of Torch, subject to the conditions that:
(i) The representations and warranties of MCN
contained herein will be accurate in all material respects
at and as of the relevant Closing as though such
representations and warranties had been made at and as of
such Closing; all terms, covenants and conditions of this
Agreement to be complied with and performed by MCN at or
before the relevant Closing will have been duly complied
with and performed; and MCN will have delivered to Torch a
certificate dated as of the relevant Closing and signed by
the President or any Vice President thereof to the foregoing
effect.
(ii) The representations and warranties of each
entity in the Tartan Group contained herein will be accurate
in all material respects at and as of the relevant Closing
as though such representations and warranties had been made
at and as of such Closing; all terms, covenants and
conditions of this Agreement to be complied with and
performed by an entity in the Tartan Group at or before the
relevant Closing will have been duly complied with and
performed; and each entity in the Tartan Group will have
delivered to Torch a certificate dated as of the relevant
Closing and signed by the President or any Vice President
thereof to the foregoing effect.
16. Additional Conditions to Second Closing. The
obligations of each Party to close the transactions contemplated
herein at the Second Closing are, at the option of each Party,
subject to the additional conditions that:
(a) The consummation of the transactions contemplated
herein and in the related documents will not violate any
applicable law, rule or regulation, and all consents, actions,
approvals or authorizations of governmental department,
commission, agency or other instrumentality (including without
limitation the Securities and Exchange Commission and the MPSC)
or courts or arbitrators and all filings, approvals or other
actions required to be taken, made or obtained by or on behalf of
any Party or the Partnership pursuant to any law, rule or
regulation shall have been obtained, made or taken, as
applicable.
(b) No action, suit or proceeding shall have been
commenced, pending or threatened, and no statute, rule,
regulation or order shall have been proposed, enacted,
promulgated or issued or deemed applicable to the transactions
contemplated by this Agreement, by any United States federal or
state government or governmental agency or instrumentality or
court or private non-governmental person or entity, which, in the
opinion of such Party, reasonably may be expected to (i) prohibit
such Party's ownership or operation of all or a material portion
of such party's interest in the Partnership or such Party's
business or assets, or compel such party to dispose of or hold
separate all or a material portion of such Party's or the
Partnership's business or assets, as a result of the transactions
contemplated by this Agreement or (ii) impose or confirm material
limitations on the ability of such Party effectively to exercise
full rights of ownership of its interest in the Partnership or
such Party's material business and properties which in such
party's judgment make it inadvisable or impracticable to
consummate the transaction contemplated hereby.
17. Termination; Survival of Representations, Warranties
and Covenants. This Agreement shall terminate on the date of the
Second Closing except that (i) the provisions of Sections 4, 8,
14, 18, 22, 24 and 25 hereof shall continue for a period of five
years following the Second Closing and (ii) all representations,
warranties and covenants in this Agreement and in any certificate
delivered by any of the Parties at any closing shall survive for
a period of one year after the Second Closing.
18. Brokers. Regardless of whether any closing shall
occur, each Party shall indemnify and hold harmless the other
Parties and the Partnership from and against any and all
liability for any brokers' or finders' fees arising with respect
to brokers or finders retained or engaged by such Party in
respect of the transactions contemplated by this Agreement.
19. Notices. Any notice, request, instruction, corre-
spondence or other document to be given hereunder by any Party to
the others (herein collectively called "Notice") shall be in
writing and delivered in person or by courier service requiring
acknowledgement of receipt of delivery or mailed by certified
mail, postage prepaid and return receipt requested, or by
telecopier, as follows:
If to MCN, addressed to:
MCN Corporation
500 Griswold Street
Detroit, Michigan 48226
Attention: General Counsel
Telecopier No.: (313) 965-0009
with a copy (which shall not constitute notice) to:
Citizens Gas and Fuel
127 North Main Street
Adrian, Michigan 47221
Attention: Devere Elgas
Telecopier No.: (517) 263-8510
If to Tartan, addressed to:
Tartan Energy Company of Missouri, L.C.
8801 South Yale, Suite 385
Tulsa, Oklahoma 74137
Attention: Mr. Tom M. Taylor
Telecopier No.: (918) 493-7475
If to Tartan Management, addressed to:
Tartan Management Company of Missouri, L.C.
8801 South Yale, Suite 385
Tulsa, Oklahoma 74137
Attention: Mr. Tom M. Taylor
Telecopier No.: (918) 493-7475
If to an Individual, addressed to:
Tartan Energy Company of Missouri, L.C.
8801 South Yale, Suite 385
Tulsa, Oklahoma 74137
Attention: [Name of Individual]
Telecopier No.: (918) 493-7475
If to Torch, addressed to:
Torch Energy Marketing, Inc.
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Attention: Roland E. Sledge, Esq.
Telecopier No.: (713) 655-1711
Notice given by personal delivery or courier service shall be
effective upon actual receipt. Notice given by mail shall be
effective five days after deposit with the United States postal
service. Notice given by telecopier shall be confirmed by
appropriate answer back and shall be effective upon actual
receipt if received during the recipient's normal business hours,
or at the beginning of the recipient's next business day after
receipt if not received during the recipient's normal business
hours. All Notices by telecopier shall be confirmed promptly
after transmission in writing by certified mail or personal
delivery. No Notice shall be given to or by the Partnership.
Any Party may change any address to which Notice is to be given
to it by giving Notice as provided above of such change of
address.
20. No Negotiations. The Individuals shall not permit any
entity in the Tartan Group to liquidate or to merge or
consolidate with, or to acquire a substantial portion of the
assets of, any other Person except for the mergers contemplated
by this Agreement. Neither any entity in the Tartan Group nor
the Individuals shall, directly or indirectly, alone or with
others, encourage, initiate or participate in discussions with
(for the purpose or with the intention of obtaining or soliciting
any proposal or offer relating to the matters hereinafter set
forth in this Section), or otherwise solicit from, any Person any
proposals or offers relating to the liquidation or the
disposition of material assets or business of any entity in the
Tartan Group, or the acquisition of any capital stock or interest
of any entity in the Tartan Group, or the merger or consolidation
of any entity in the Tartan Group with any other Person except
for the mergers contemplated by this Agreement. In the event,
however, that either Torch or MCN declines to participate in an
Equity Additional Project (as such term is defined in Section
13.7 of the Partnership Agreement), then the Individuals and
Tartan Management shall be permitted to engage in discussions
with any Person for the purpose of obtaining additional funding
(either debt or equity) for such Equity Additional Project,
including funding, to enable Tartan Management to participate in
that portion of the Equity Additional Project, including funding,
which Torch or MCN so declines to participate in under the
provisions of Section 13.7 of the Partnership Agreement.
21. Method of Payment. All payments hereunder shall be
made in United States dollars and, unless the Parties making and
receiving such payments shall agree otherwise or the provisions
hereof provide otherwise, shall be made by wire or intrabank
transfer of immediately available funds by 11:00 a.m. Houston
time on the date such payment is due to such account as the Party
receiving payment may designate at least three business days
prior to the proposed date of payment.
22. Further Assurances. Assignors, grantors and
transferors of documents listed in Section 2(c) and parties to
each Plan and Agreement of Merger referred to in Section 2(c)
will, from time to time after the relevant Closing and without
further consideration from the assignee, grantee or transferee
thereof, or the other party thereto, respectively, execute and
deliver such other instruments of conveyance and transfer and
take such other action as may reasonably be requested to more
effectively convey, transfer to, vest in, and put such assignee
or other party in possession of any property or rights to be
transferred pursuant hereto. The Individuals and Tartan
Management will ensure that the same steps are taken on the same
basis with respect to Old Tartan.
23. Governing Law. The provisions of this Agreement and,
unless specifically otherwise provided in the document delivered
pursuant hereto, the documents delivered pursuant hereto shall be
governed by and construed and enforced in accordance with the
laws of the State of Delaware (excluding any conflicts-of-law
rule or principle that might refer same to the laws of another
jurisdiction), except to the extent that same are mandatorily
subject to the laws of another jurisdiction pursuant to the laws
of such other jurisdiction.
24. Entire Agreement; Amendments and Waivers. This
Agreement, together with all Exhibits and Annexes attached
hereto, constitutes the entire agreement between the Parties
hereto pertaining to the subject matter hereof and supersedes all
prior agreements, understandings, negotiations and discussions,
whether oral or written, of the Parties, and there are no
warranties, representations or other agreements between the
Parties in connection with the subject matter hereof except as
set forth specifically herein or contemplated hereby. No
supplement, modification or waiver of this Agreement shall be
binding unless executed in writing by the Party to be bound
thereby. The failure of a Party to exercise any right or remedy
shall not be deemed or constitute a waiver of such right or
remedy in the future. No waiver of any of the provisions of this
Agreement shall be deemed or shall constitute a waiver of any
other provision hereof (regardless of whether similar), nor shall
any such waiver constitute a continuing waiver unless otherwise
expressly provided.
25. Binding Effect, Non-Assignability and Alienation of
Benefits. This Agreement shall be binding upon and inure to the
benefit of the Parties and their respective permitted successors
and assigns; but neither this Agreement nor any of the rights,
benefits or obligations hereunder shall be assigned, by operation
of law or otherwise, by any Party without the prior written
consent of the others. Nothing in this Agreement, express or
implied, is intended to confer upon any Person other than the
Parties and their respective permitted successors and assigns,
any rights, benefits or obligations hereunder.
26. Special Covenant of the Tartan Group. Each entity in
the Tartan Group covenants with MCN and Torch that no part of the
System will commence commercial operation prior to the filing of
the Form U-3A-2.
27. Other Adjustment. If the Second Closing cannot occur
solely because the Securities and Exchange Commission has not,
and in the reasonable judgment of the Parties will not, issue a
favorable ruling on MCN's application under PUHCA or issue the
no-action letter of Torch relative to PUHCA, the Parties agree to
work together in good faith to develop an alternative structure
for the transaction that will preserve the economic benefits of
the transaction contemplated hereby. Such alternative structure
may include conversion of MCN's proposed general partnership
interest in the Partnership to a limited partnership interest,
conversion of the proposed partnership interest of MCN or Torch
in the Missouri Interim Entity to a debt instrument, locating a
new party to act as additional general partner or, if necessary,
the sale of one or more Party's interest in the Partnership to an
unaffiliated third party.
28. No Assurance of Return. Each Individual, Torch and MCN
acknowledge (a) that they are experienced and knowledgeable
investors in the natural gas industry and that they have
performed all due diligence investigations as they deem necessary
or appropriate for the entering into of this Agreement (including
the Exhibits and Annexes attached hereto), and (b) no Party
hereto has or is warranting that the transactions contemplated by
this Agreement (including the Exhibits and the Annexes attached
hereto) and the construction and operation of the System in
conjunction therewith, will result in any guaranteed return on,
or recovery of, any amounts which may be invested by another
Party hereto in conjunction with the foregoing.
29. Severability. If one or more of the provisions
contained in this Agreement or in any other document delivered
pursuant hereto shall, for any reason, be held to be invalid,
illegal or unenforceable in any respect, such invalidity,
illegality or unenforceability shall not affect any other
provisions of this Agreement or any other such document.
30. Headings, Exhibits and Annexes. The headings of the
several Sections herein are inserted for convenience of reference
only and are not intended to be a part or to affect the meaning
or interpretation of this Agreement. The Exhibits and Annexes
referred to herein are attached hereto and incorporated herein by
this reference.
31. Construction. This Agreement was drafted jointly by
the Parties, and no presumption shall operate in favor of or
against any Party as a result of any responsibility that any
Party may have had for drafting this Agreement or any part
thereof.
32. Multiple Counterparts. This Agreement may be executed
in one or more counterparts, each of which shall be deemed an
original, but all of which together shall constitute one and the
same instrument.
IN WITNESS WHEREOF, MCN, Tartan, Tartan Management, the
Missouri Interim Entity and Torch have caused this Agreement to
be signed by their respective officers thereunto duly authorized,
and the Individuals have signed this Agreement, all as of the
date first above written.
MCN CORPORATION
By:
_____________________________________
Name:
Title:
TARTAN ENERGY COMPANY OF MISSOURI, L.C.
By:
_____________________________________
Name:
Title:
TARTAN MANAGEMENT COMPANY OF
MISSOURI, L.C.
By:
_____________________________________
Name:
Title:
TARTAN LIMITED PARTNERSHIP OF MISSOURI
By Tartan Management Company of
Missouri, L.C., the General Partner
By:
_____________________________________
Name:
Title:
TORCH ENERGY MARKETING, INC.
By:
_____________________________________
Name:
Title:
________________________________________
Name: Tom M. Taylor
________________________________________
Name: Michael N. Trusty
Solely for purposes of the indemnification provision in
Section 8, Tartan Energy Resources, L.C. signs this Agreement.
TARTAN ENERGY RESOURCES, L.C.
By:
_____________________________________
Name:
Title:
EXHIBIT B-3
SOUTHERN MISSOURI GAS COMPANY, L.C.
CONSTRUCTION, OPERATION AND MAINTENANCE MANAGEMENT AGREEMENT
This Agreement is entered into effective October 13, 1995
between TARTAN ENERGY COMPANY OF MISSOURI, L.C. d/b/a SOUTHERN
MISSOURI GAS COMPANY, L.C. ("SMGC"), a Missouri Limited Liability
Company, and TARTAN MANAGEMENT COMPANY OF MISSOURI, L.C. ("TMC"),
a Missouri Limited Liability Company.
W I T N E S S E T H:
WHEREAS, SMGC has received authorization from the Missouri
Public Service Commission ("MPSC") to construct, own and operate
a natural gas distribution system in south central Missouri; and
WHEREAS, SMGC desires to have TMC manage the construction,
operation and maintenance of such distribution system, as well as
manage SMGC and TMC desires to provide such services; and
WHEREAS, SMGC and TMC desire to enter into this Agreement to
set forth the terms and conditions upon which TMC will provide
such services for SMGC;
THEREFORE, in consideration of the premises and the mutual
covenants contained in this Agreement, SMGC and TMC agree as
follows:
ARTICLE I
DEFINITIONS
1.1 "Adjusted Operating Budget" has the meaning set forth
in Section 3.3 of this Agreement.
1.2 "Affiliate" of a Person shall mean any other Person
which, directly or indirectly through one or more intermediaries,
controls or is controlled by or is under common control with such
Person. The term "control" shall mean, with respect to a Person
that is a corporation, the right to exercise, directly or
indirectly, more than 50% of the voting rights with respect to
the outstanding shares of such corporation, and with respect to a
Person that is not a corporation, the right to direct management
policies of such Person.
1.3 "Agreement" shall mean this Construction, Operation and
Maintenance Management Agreement.
1.4 "Day" means a period of twenty-four (24) consecutive
hours, beginning at 8:00 a.m. Central Time.
1.5 "Expansion Budget" has the meaning set forth in Section
3.5 of this Agreement.
1.6 "Operating Account" has the meaning set forth in
Section 4.1 of this Agreement.
1.7 "Operating Budget" has the meaning set forth in Section
3.1 of this Agreement.
1.8 "Manager" means Tartan Management Company of Missouri,
L.C., or its permitted successors or assigns, or any other entity
that may be appointed Manager in accordance with the terms of
this Agreement.
1.9 "Manager Personnel" has the meaning set forth in
Section 6.4 of this Agreement.
1.10 "Parties" means Manager and SMGC.
1.11 "Partnership Agreement" means that certain Agreement of
Limited Partnership of Southern Missouri Gas Company, L.P. to be
entered into in accordance with the provisions of the Formation
Agreement for Southern Missouri Gas Company, dated October ___,
1995 by and among MCN Corporation, Tartan Energy Company of
Missouri, L.C., Torch Energy Marketing, Inc., et al.
1.12 "Person" means an individual, corporation, voluntary
association, joint stock company, business trust, partnership,
limited liability company, proprietorship or other legal entity
(excluding any governmental body) however constituted.
1.13 "SMGC" means Tartan Energy Company of Missouri, L.C.
d/b/a Southern Missouri Gas Company, L.C. or its permitted
successors or assigns.
1.14 "System" means that certain natural gas distribution
system as described on Exhibit "A" attached to this Agreement, as
such system may hereafter be modified or extended.
ARTICLE II
APPOINTMENT, RESPONSIBILITY AND AUTHORITY
2.1 Appointment of Manager. SMGC hereby appoints TMC, and
TMC hereby accepts such appointment, as Manager of SMGC and the
System.
2.2 Responsibility and Authority of Manager. Subject to
the terms of this Agreement and to the limitations set forth in
the Partnership Agreement, and subject to the budgetary approvals
required under Article III, Manager shall cause to be performed
on behalf of SMGC, and SMGC hereby vests in Manager the power and
authority to do, the following:
(a) Supervise the performance of all activities necessary
for the planning, design, construction, testing,
administration, accounting, operation, maintenance,
repair, expansion and abandonment of the System and of
SMGC;
(b) Subject to Section 3.5 below, seek additional
franchises from communities, for which SMGC does not
presently have a franchise, in the area of the System
and provide economic feasibility studies for SMGC with
respect to serving such communities and, if required,
provide such studies to the Missouri Public Service
Commission;
(c) Cause to be obtained all property, labor, material,
equipment, services and supplies from any available
source required by Manager to perform its
responsibility hereunder;
(d) Perform all administrative, accounting and related
reporting duties of SMGC to its owners and to its
regulators, and other governmental entities having
jurisdiction or authority over SMGC;
(e) Implement and administer all contracts pertaining to
and necessary for the construction, operation,
maintenance and repair of the System, including,
without limitation, the billing and collection of
amounts due and payable;
(f) In accordance with policies established by SMGC,
execute contracts for the purchase of natural gas
supply, acquisition of firm and/or interruptible
transportation on supplying pipelines and for peak
demand supply needs of the System as may be required;
(g) Make all reports required by governmental authorities
and obtain all necessary licenses and permits
applicable to the construction, operation, maintenance
and repair of all parts of the System;
(h) Obtain and maintain in force and effect, and require
all contractors and their subcontractors performing
services or providing equipment to maintain in force
and effect, insurance for the benefit of Manager and
SMGC in accordance with Article VI below or as
otherwise required by law;
(i) Maintain accurately the book of accounts for the System
and SMGC in accordance with generally accepted
accounting principles and the requirements of the
Missouri Public Service Commission;
(j) Prepare such forecasts, budgets, returns, statements,
reports and other filings as are required by this
Agreement or as SMGC may reasonably request;
(k) Retain all records relating to the System for such
period as required by law or for such longer period as
directed by the SMGC, but in no event for less than
three (3) years;
(l) Pay and discharge in a timely manner all obligations
under this Agreement incurred on behalf of SMGC by the
Manager to third parties which Manager does not contest
and contest such obligations as Manager considers to
warrant being contested;
(m) Acquire any leases, easements, rights-of-way,
servitudes and grants as are necessary for the
construction, operation, maintenance, and/or repair of
the System, and resist the perfection of any liens
against the System and to the extent permitted by law,
except as otherwise authorized by SMGC, hold the System
free from liens;
(n) Render and pay all local, state and federal taxes
(other than income and corporate franchise taxes)
applicable to or incurred as a result of the ownership
and operation of the System;
(o) Represent the System and SMGC in all matters before the
Missouri Public Service Commission (including, without
limitation, all utility rate matters). Maintain
contacts with federal, state, and local governmental
authorities on matters relating to the System;
(p) Make all operational decisions with respect to the
System, consistent with i) such policies as SMGC may
implement in consultation with Manager, and ii) the
requirements of the Missouri Public Service Commission;
(q) Cause to be performed such other services and take such
other actions as are necessary to fulfill Manager's
duties and obligations under this Agreement with
respect to the System and SMGC or as are reasonably
requested by SMGC.
In no event, however, shall Manager take any action with respect
to the System or SMGC which would require the approval of the
limited partners under Section 3.2 of the Partnership Agreement
(including any action prior to the execution of the Partnership
Agreement which would require such approval if the Partnership
Agreement were executed), without first obtaining the approval of
the requisite percentage of the Limited Partners' interests as
required under the Partnership Agreement. In addition, Manager
shall not take any of the following actions without first
obtaining the written agreement of SMGC: 1) enter into any gas
purchase contract, 2) enter into any firm gas transportation
contract, 3) enter into any negotiated third party gas sales
contract in an amount in excess of $10,000 and, (4) enter into
any contract (other than a gas sales contract or a contract
pertaining to an expansion which has been approved under Section
3.5) with a third party in an amount in excess of $100,000 per
year.
2.3 Reports. The Manager shall provide five (5) types of
reports, and such other reports as SMGC and Manager may agree
upon. All reports shall be provided by Manager to all owners of
SMGC. These five (5) types of reports are operating reports,
construction reports, system development reports, additional
reports and reports of non-routine occurrences. These reports
are defined as follows:
(a) Operating Reports. Within forty-five (45) Days
following the last Day of each month, and within fifty-five
(55) Days after the end of each calendar year, Manager shall
submit to the owners of SMGC a detailed report of operations
and maintenance of the System during such month and year,
respectively. Such reports shall include for the applicable
reporting period:
(i) income statement;
(ii) balance sheet;
(iii) the information required by Section 4.6 of
this Agreement;
(iv) information required to be reported to the
owners of SMGC under this Agreement; and
(v) such additional information as SMGC may
reasonably request concerning the operation
and maintenance of the System during the
reporting period.
(b) Construction Reports. Within thirty (30) Days
following the last Day of each month, and within sixty (60)
Days after the end of each calendar year, Manager shall
submit to the owners of SMGC a detailed report of
significant construction activities on the System during
such month and year, respectively, that are not covered in
the operating reports discussed in (a) above. Such reports
shall include for each applicable construction project:
(i) Total amount to be spent on the project;
(ii) The amount spent through the last Day of such
period and the amount of work completed
through such date;
(iii) The amount of any revision of the project
cost should it vary more than ten percent
(10%) from the original estimate;
(iv) Any information required for banks or other
entities providing construction funding for
the project being constructed; and
(v) Additional information that SMGC may
reasonably request concerning construction
activities that are ongoing.
(c) System Developmental Reports. Subject
to Section 3.5 below, within forty-five (45) Days
following the last Day of each calendar quarter.
Manager shall submit to the owners of SMGC a
report of progress on the development of
additional investment opportunities relating to
the System and the focus of the development
efforts moving forward.
(d) Additional Reports. Manager shall
provide to the owners of SMGC all information
concerning the operation of the System which is
necessary to allow the owners of SMGC to prepare
and submit, on a timely basis, all reports,
statements and other information required to be
furnished by SMGC to any lender pursuant to any
agreement, note or contract. Such requirements of
SMGC may include, without limitation, audited and
unaudited financial statements, opinions of
independent public accountants, certificates of
the officers of the Manager and/or monthly
operating reports and cash flow reports. Manager
shall also provide to the owners of SMGC such
additional information as may be reasonably
requested by SMGC, or the owners of SMGC.
(e) Reports of Non-Routine Occurrences.
Manager shall report to the owners of SMGC all
non-routine occurrences that Manager determines
may have a material adverse impact upon the
operation of the System as soon as practicable
after such occurrences. Manager shall promptly
prepare a follow-up report for the owners of SMGC
detailing as appropriate Manager's response to
each non-routine occurrence.
2.4 Relationship with SMGC. In performing its
responsibilities under this Agreement, Manager shall be an
independent contractor and not an employee of SMGC. This
Agreement shall not and is not intended to create any partnership
or joint venture relationship between SMGC and Manager.
2.5 Manager's Obligation. Manager agrees to
carry out its responsibilities and obligations under this
Agreement in accordance with sound workmanlike and prudent
practices of the natural gas distribution industry. All
personnel engaged or directed by Manager to perform services
under this Agreement (whether employees of SMGC or Manager,
consultants or independent contractors) shall be duly qualified
and experienced to perform such services. Manager shall ensure
that its employees, and shall use commercially reasonable best
efforts to ensure that SMGC's employees, consultants or
independent contractors, comply with all relevant laws, statutes,
ordinances, safety codes, regulations and rules of the
governmental authorities having jurisdiction over the same.
Subject to any applicable approval requirements set forth in
Section 2.2 above, Manager is authorized to execute on behalf of
SMGC all contracts, governmental filings and any other written
documentation of any kind deemed necessary by Manager, in the
performance of its obligations hereunder.
2.6 Emergencies. Notwithstanding any other
provision in this Agreement to the contrary, in case of
explosion, fire, flood, freezing, other sudden emergency, or any
major interruption of the operation of the System, or any part
thereof, the prior approval of SMGC shall not be required before
Manager shall be entitled to take such steps and incur such costs
as, in Manager's reasonable opinion, are necessary to deal with
such emergency or interruption. Provided, however, that Manager
shall, as promptly as possible, report such emergency or
interruption to SMGC. Manager shall also make all required
reports regarding said emergency to the applicable federal,
state, and local governmental authorities having jurisdiction
over the same.
2.7 Personnel. All personnel who are to be
located in Missouri in connection with the System or SMGC (other
than consultants and independent contractors, or employees of
Manager temporarily assigned to the System) shall be the
employees of SMGC and not of Manager. All personnel retained as
consultants and independent contractors in connection with the
System or SMGC, shall be retained on behalf of SMGC. Only such
personnel who are located at Manager's principal place of
business in Tulsa, Oklahoma (including such personnel who are
temporarily assigned by Manager to the System in Missouri) shall
be employees of Manager.
2.8 Meetings. The Manager shall be responsible
for coordinating the following meetings of the owners of SMGC.
Manager shall provide all owners of SMGC at least ten (10) Days'
prior notice of any meetings. These meetings are:
First Quarter Meeting. The first quarter
meeting will generally take place during the month
of March. The previous year end financial
results, audit reports and other items necessary
to meet any annual meeting requirements will be
presented at such meeting.
Second Quarter Meeting. The second quarter
meeting will generally take place during early
summer and may include a field visit of any
construction activities on-going. Year to date
financial information will be reviewed at this
meeting and field visits made if requested by
SMGC.
Third Quarter Meeting. The third quarter
meeting will generally take place in September.
Year to date financial results will be reviewed at
this meeting. The Manager will also present a
proposed Operating Budget for the following
calendar year which will include projected capital
expenditures for such following year (except for
capital expenditures contained in any Expansion
Budget). Such budget shall be subject to the
review and approval procedures set forth in
Article III.
Fourth Quarter Meeting. The fourth quarter
meeting will generally take place in mid-November
or early December. Year to date financial results
as well as projected year end results will be
reviewed at this meeting.
Any owner of SMGC shall have the right to call a meeting with the
Manager and to establish the agenda items for that meeting. Any
such owner shall provide Manager and the other owners of SMGC
with at least ten (10) days prior notice of such meeting and the
agenda to be presented at such meeting.
2.9 Other Activities. Subject to any provision
of this Agreement which specifically provides to the contrary,
this Agreement shall not restrict in any way the rights of SMGC
or Manager to engage in other businesses or activities; provided,
however, Manager shall not engage in activities in direct
competition with the System, unless Manager is permitted to
engage in such activities pursuant to Section 13.7 of the
Partnership Agreement.
ARTICLE III
BUDGETS, APPROVALS AND AUTHORIZATIONS
3.1 Budgets. The initial construction budget for
the Phase I construction of the System shall be as set forth in
Exhibit "B" attached to this Agreement. The Operating Budget
(including the manpower plan for the System) for calendar year
1996 shall be as set forth in Exhibit "C" attached to this
Agreement. The Operating Budget from the commencement of this
Agreement through the end of calendar year 1995 (the "Initial
Period") shall be the Operating Budget for 1996 multiplied by a
fraction, the numerator of which shall be the number of months
during the Initial Period and the denominator of which shall be
twelve (12). No further approvals shall be required of SMGC with
respect to such initial construction budget or such Operating
Budgets.
On or before the third quarter meeting to be held
in calendar year 1996, and on or before the third quarter meeting
to be held in each year thereafter during the term hereof as set
forth in Section 2.8 hereof, Manager shall prepare and submit to
the owners of SMGC an Operating Budget for the next succeeding
calendar year (the "Operating Budget"). The Operating Budget
submitted by Manager to the owners of SMGC shall set forth the
costs and expenditures for each month during such calendar year
estimated to be incurred under this Agreement. The Operating
Budget shall include such supporting documentation and data as
reasonably requested by SMGC. Such Operating Budget shall
include a separate "Capital" section which shall set forth
estimates of all capital and construction projects planned for
such calendar year, except for construction projects for the
expansion of the System into new service areas (i.e., towns,
cities, or counties where SMGC has not previously provided
natural gas service) which expansions are addressed in Section
3.5 below. All gas supply costs, transportation costs and any
other costs to be included in SMGC's purchased gas adjustment
clause authorized by the Missouri Public Service Commission shall
not be part of the Operating Budget.
3.2 Approval of Budgets.
(a) Authorization. Manager and SMGC
shall use their good faith efforts to reach
agreement on the Operating Budget for the ensuing
calendar year at the third quarter meeting at
which such Operating Budget is presented by
Manager under Section 2.8 above. If Manager and
SMGC are unable to reach agreement on such
Operating Budget at such meeting, within ten (10)
days following the conclusion of such meeting SMGC
shall submit to Manager, with a copy to all owners
of SMGC, a revised Operating Budget for such
ensuing year that SMGC is willing to accept.
Following Manager's receipt of such revised
Operating Budget, SMGC and Manager shall continue
to use their good faith efforts to reach agreement
on the Operating Budget for such ensuing calendar
year. If SMGC and Manager are unable to reach
agreement on such Operating Budget by December 1st
prior to the commencement of the calendar year in
which such Operating Budget is to be effective,
the Default Budget shall be deemed to be the
agreed upon Operating Budget for such ensuing
calendar year until such time as the parties
otherwise agree upon an Operating Budget for such
year or such Operating Budget is established by an
order of an arbitrator pursuant to the provisions
of Article XI. The Default Budget shall mean the
greater of 1) the Operating Budget in effect for
the calendar year immediately preceding the
calendar year for which the parties are unable to
reach agreement on an Operating Budget or 2) the
Operating Budget set forth on Exhibit "C" attached
hereto (provided, however, the "Capital" portion
of each Operating Budget specified in 1) or 2)
above shall be excluded from such Operating
Budgets); plus a capital amount of $250,000 to be
utilized for capital expenditures relating to the
System. Notwithstanding the language of the
preceding sentence the following shall apply: 1)
the General and Administrative Fee under Section
5.1 below to be included in the Default Budget for
any year shall, unless the parties have otherwise
agreed upon such Fee, be the Default General and
Administrative Fee for such year and 2) each time,
and at such time as, an expansion under Section
3.5 is approved by SMGC, the Operating Budget set
forth in Exhibit C shall be modified to reflect
the changed non-"Capital" costs and expenses
anticipated to such Operating Budget by reason of
such expansion.
(b) Arbitration. If the parties are
unable to reach agreement on an Operating Budget
by December 1st of the year preceding the year in
which such Operating Budget is to apply, the
parties shall resolve such disagreement by
arbitration pursuant to the provisions of Article
XI below. If the parties are able to reach
agreement on some but not all portions of any
Operating Budget, only those portions of the
Operating Budget which the parties are unable to
reach agreement on shall be submitted to
arbitration.
(c) Limitations of Expenditures. Without
the prior written consent of SMGC, Manager shall
not exceed the Operating Budget for any calendar
year by an amount in excess of ten percent (10%)
for any specific category, or by an amount in
excess of five percent (5%) in the aggregate, of
such Operating Budget, except as specified in
Sections 3.3 or 3.4 below.
3.3 Adjusted Operating Budget. If, during the
period covered by an Operating Budget, Manager determines that an
adjustment to the estimated costs set forth in the Operating
Budget is necessary or appropriate, then Manager shall submit to
SMGC, with a copy to the owners of SMGC, for approval an adjusted
budget ("Adjusted Operating Budget") setting forth such
adjustments as Manager considers are necessary or appropriate.
Within thirty (30) Days following SMGC's receipt of Manager's
proposed Adjusted Operating Budget, SMGC shall either approve
such budget by written notice to Manager or submit to Manager a
revised budget, in each case with a copy to the owners of SMGC.
SMGC's failure to submit to Manager a revised budget within such
thirty (30) Day period shall constitute its approval of the
Adjusted Operating Budget submitted by Manager. If SMGC submits
a revised budget, Manager shall have ten (10) Days from its
receipt of such revised budget to elect in writing to either
accept or reject it. Manager's failure to provide written notice
of acceptance of such revised budget to SMGC within such ten (10)
Day period shall constitute an approval of such revised budget.
If Manager rejects such revised budget, the matter shall be
resolved pursuant to the provisions of Article XI below.
3.4 Emergency/Required Expenditures. In the
event of, or given reasonable anticipation of, any force majeure
(as defined in Article VIII below) or other occurrence or
condition which might threaten life or property or render all or
any part of the System incapable of continuous operation, or if
required in order to prevent a material default under any
contract of SMGC or of Manager (entered into in the performance
of its duties under this Agreement), to comply with an order of a
governmental authority with jurisdiction over the System, or to
maintain the operational integrity of the System, Manager shall
take such steps and incur such reasonable expenses and reasonable
costs as in its reasonable opinion are required to deal with each
such emergency or requirement. Manager shall report the
particulars of any such emergency or requirement to SMGC in
writing as promptly as possible. If the emergency or requirement
causes Manager to incur expenses in excess of the expenditure
limitations set forth in Section 3.2(b) above, Manager's report
shall also include the particulars of such expenses.
3.5 Expansions.
(a) Identification. In the event Manager
identifies a possible expansion of the System into
a town, city, or county not then being served by
the System, which Manager believes can be
profitably achieved it shall upon not less than
ten (10) Days' notice call a meeting of the owners
of SMGC. At such meeting, Manager shall present
to the owners of SMGC a written proposal of such
expansion, which proposal shall include a detailed
description of such proposed expansion, together
with a detailed cost estimate of such expansion
("Expansion Budget").
(b) Response.
(i) Within thirty (30) Days following
the conclusion of any meeting
specified under (a) above involving
a proposed expansion having an
estimated cost of Two Million
Dollars ($2,000,000) or less, SMGC
shall provide its written notice to
Manager that it either approves or
disapproves such expansion
proposal. SMGC's failure to submit
to Manager its written approval of
such expansion proposal within such
thirty (30) Day period, shall be
deemed SMGC's rejection of such
proposal.
(ii) Within sixty (60) Days following
the conclusion of any meeting
specified under (a) above involving
a proposed expansion having an
estimated cost in excess of Two
Million Dollars ($2,000,000), SMGC
shall provide its written notice to
Manager that it either approves or
disapproves such expansion
proposal. SMGC's failure to submit
to Manager its written approval of
such expansion proposal within such
sixty (60) Day period, shall be
deemed SMGC's rejection of such
proposal.
(c) Approval. If SMGC approves an
expansion proposal within the applicable time
period set forth in (b) above, Manager shall
proceed with such expansion on behalf of SMGC
under this Agreement. In such event Manager shall
not exceed the Expansion Budget by an amount in
excess of ten percent (10%) in the aggregate of
such budget, without the prior written consent of
SMGC.
(d) Rejection. If SMGC rejects or is
deemed to have rejected an expansion proposal
under Section 3.5(b) above, Manager shall not
pursue the expansion specified in such expansion
proposal. Provided, however, subject to the
provisions of Section 13.7 of the Partnership
Agreement, Manager shall be permitted to pursue
such expansion for its own account, either by
itself or in concert with other Persons.
(e) During the period from the
Effective Date until the date of execution of the
Partnership Agreement, any proposed expansion
under this Section 3.5 shall be subject to the
provisions of Section 13.7 of the Partnership
Agreement (as if such Partnership Agreement were
then in effect).
ARTICLE IV
OPERATING ACCOUNT; DEPOSITS AND PAYMENTS
4.1 Operating Account. Manager will establish
and maintain a separate bank account in the name of SMGC with a
financial institution designated by SMGC ("Operating Account").
4.2 Deposits into the Operating Account.
(a) Proceeds. From and after the
Effective Date, Manager shall deposit into the
Operating Account (i) all proceeds (including,
without limitation, all sales proceeds, interest
income, insurance proceeds, settlements, proceeds
from condemnation or other taking, and refinancing
proceeds) received by Manager on behalf of SMGC
derived from the operation of the System or of
SMGC and (ii) any monies received by Manager from
SMGC under Section 4.2(b) below.
(b) Payments by SMGC. From and after
the Effective Date, SMGC shall pay to Manager for
deposit into the Operating Account the following
amounts:
(i)Payments by SMGC for Costs under
the Operating Budget and any Expansion
Budget. If necessary, within ten Days of
the end of each calendar month, Manager
shall invoice SMGC, with backup
documentation sufficient to support such
invoice, for the amount necessary to cause
the balance in the Operating Account to be
sufficient to pay all costs incurred under
the Operating Budget and any Expansion
Budget which Manager anticipates will
require payment in the next succeeding
month. If invoiced, SMGC shall pay the
invoiced amount within five (5) Days of
receipt of the invoice. In addition, if,
during any calendar month, Manager
determines that the sums available in the
Operating Account will be insufficient to
timely pay all amounts owed or incurred in
accordance with this Agreement during such
month, then the Manager shall notify SMGC,
in writing, of such circumstance and the
amount required to maintain a balance
sufficient to pay such amounts. SMGC shall,
within five (5) Days following its receipt
of such notice, remit to Manager such sums
as stated in Manager's notice.
(ii)Payment by SMGC of Manager's
Construction Fee. Within five (5) Days of
SMGC's receipt of an invoice, with backup
documentation sufficient to support such
invoice, from Manager for any construction
fee determined under Section 5.2 SMGC shall
pay the amount of such fee specified on such
invoice into the Operating Account; provided
that such payment shall not be required if
SMGC has made any payment required under
Section 4.2(b)(i) for such month and
sufficient amounts are in the Operating
Account to provide for the amounts to be
paid to Manager in accordance with Section
4.3 below.
(iii)Payment by SMGC of Incentive Fee
for Oversight of Ongoing Operations. Within
five (5) days of SMGC's receipt of an
invoice, with backup documentation
sufficient to support such invoice, from
Manager for the incentive fee for ongoing
operations determined under Section 5.3,
SMGC shall pay the amount of such fee
specified on such invoice into the Operating
Account; provided that such payment shall
not be required if SMGC has made any payment
required under Section 4.2(b)(i) for such
month and sufficient amounts are in the
Operating Account to provide for the amounts
to be paid to Manager in accordance with
Section 4.3 below.
4.3 Charges to the Operating Account by Manager.
On or after the Effective Date of this Agreement, and on or after
the first Day of each calendar month thereafter, Manager may
charge the Operating Account all amounts to be paid or reimbursed
to Manager under Article V of this Agreement.
4.4 Distribution. Manager shall, with each
monthly operating report submitted under Section 2.3(a) of this
Agreement, distribute to SMGC from the Operating Account the
amount in such account, if any, which is in excess of the amount
necessary to pay all costs incurred under the Operating Budget
and any Expansion Budget which Manager anticipates will require
payment in the following month plus any cash reserves provided
for in the Operating Budget or otherwise approved by SMGC.
Manager's obligation to make any such distribution to SMGC is
subject to SMGC having made all of its required payment and
funding obligations which are then due under this Agreement.
4.5 Limitations. Except where the result of
Manager's gross negligence or willful misconduct (including a
willful breach of this Agreement by Manager), Manager shall not
be liable for, nor shall Manager have any liability or
responsibility to pay or discharge any debts, obligations, costs,
taxes or any other expenses incurred, arising or in any way
related to the System or SMGC, including the operation thereof,
by Manager from its own funds or accounts, it being agreed that
all such debts, costs, obligations and expenses are, and shall
remain, the responsibility of SMGC and are to be paid from funds
received into the Operating Account from or on behalf of SMGC.
SMGC shall indemnify Manager against, and hold Manager harmless
from, all such debts, obligations, costs, taxes and other
expenses, including reasonable attorneys' fees, court costs and
any and all other loss or liability in connection therewith.
4.6 Statement of Account. Manager shall include
in the operating reports required by Section 2.3(a) of this
Agreement a statement showing all payments into, all payments and
distributions from and the balance remaining in the Operating
Account at the end of the applicable reporting period.
ARTICLE V
PAYMENTS TO MANAGER
5.1 General and Administrative Fee. SMGC shall
pay to Manager each month the "General and Administrative Fee" to
compensate Manager for a portion of its "General and
Administrative Costs" in performing the day to day management of
SMGC. Such General and Administrative Fee does not compensate
Manager for its "General and Administrative Costs" i) in
performing the management of any construction projects approved
by SMGC under Section 3.5, for which Manager will receive
compensation as determined under Section 5.2 below or ii) in
performing System development activities, for which Manager will
receive compensation as determined under Section 5.5 below.
(a) The "General and Administrative
Costs" of Manager shall be the general and
administrative costs of the principal business
location of Manager, such principal business
location currently being at Tulsa, Oklahoma.
These general and administrative costs of the
principal business location shall be general and
administrative salaries of employees of Manager at
the principal business location, employees
pensions and benefits and payroll taxes of such
employees, office supplies and expenses at the
principal business location of such employees,
personal injuries and physical damages at or to
the principal business location, rents and
depreciation of office furniture and equipment at
the principal business location, and amortization
of office leaseholds and maintenance of general
plant at the principal business location.
(b) The parties agree that the General
and Administrative Fee shall initially be $25,000
per month (the "Initial General and Administrative
Fee").
(c) The General and Administrative Fee
shall be agreed upon by the parties each year and,
subject to the provisions of subsection (e) below,
shall be included in the Operating Budget. If the
parties are unable to agree upon the General and
Administrative Fee for any year, the General and
Administrative Fee for such year shall be the
"Default General and Administrative Fee."
(d) The "Default General and
Administrative Fee" for any year shall equal the
product of the Initial General and Administrative
Fee multiplied by a fraction, the numerator of
which shall be the Index for the most recent month
for which the Index is available, and the
denominator of which shall be the Index for the
month of October, 1995. In no event, however,
shall the Default General and Administrative Fee
ever be less than the Initial General and
Administrative Fee. For the purposes of the
foregoing, the Index shall be the Consumer Price
index for all Urban Customers (CPI-U) as published
by the U.S. Department of Labor, Bureau of Labor
Statistics. If the Index is subsequently
converted to a different standard reference base
or otherwise revised, the determination of the
Default General and Administrative Fee shall be
made by using the conversion factor, formula or
table for converting the Index as published by the
Bureau of Labor Statistics, or in its absence, by
using the conversion factor, formula or table as
published by any nationally recognized publisher
of similar statistical information. If the Index
ceases to be published, then for purposes of the
determination of the Default General and
Administrative Fee, there shall be substituted for
it any other index that Manager and SMGC shall
agree upon. If the parties are unable to agree
upon a substitute index within 90 days after the
Index ceases to be published, the matter shall be
determined by arbitration in accordance with
Article XI of the Agreement.
(e) During any period in which any
construction project(s) are occurring on or in
connection with the System, the General and
Administrative Fee of Manager paid during any such
period shall be allocated between such
construction project(s) and the other activities
with respect to the System occurring during such
period, as appropriate.
(f) In the event an employee of
Manager, who otherwise is normally employed at the
principal business location of Manager, is
assigned to work at a different location for a
period in excess of two (2) weeks in connection
with work for the System or SMGC, all costs and
expenses of such employee (including without
limitation salary, personal expenses, benefits,
etc.) shall, to the extent authorized or approved
under Article III above, be charged to SMGC in
accordance with Section 5.4 below during the
period such employee is assigned to work at a
different location then Manager's principal
business location.
5.2 Construction Fee. For any construction
project approved by SMGC pursuant to Section 3.5 above, SMGC
shall pay to Manager a mutually acceptable construction
management fee, which fee shall be agreed upon at the time of
approval of such project by SMGC. Any fee payable under this
Section 5.2 shall be in addition to, and not in lieu of, any
other amounts to be paid to Manager under this Agreement.
(a) Initial Phase I Construction. The
construction management fee to be paid to Manager
for the construction of the System as set forth in
the Phase I Implementation Plan dated March 17,
1995 (the "Plan") shall consist of the following:
(i)A fee of $25,000 per month to
compensate Manager for a portion of its
"General and Administrative Costs" (as
defined in Section 5.1 above) in performing
the construction management of the System as
set forth in the Plan.
(ii)Subject to the other provisions of
this Section 5.2(a)(ii), an incentive fee of
Three Hundred Thousand Dollars ($300,000)
for construction management of the main
trunk pipeline specified in the Plan which
shall be payable at the startup of mainline
operations; provided, however, that payment
of this fee shall not cause the actual cost
of the mainline to exceed the projected cost
included in the Plan. If necessary, this
fee will be reduced to an amount so as not
to cause the actual mainline construction
costs to exceed such projected cost. A copy
of such projected cost of the mainline is
attached as Exhibit "D".
(iii)Subject to the other provisions of
this Section 5.2(a)(iii), an incentive fee
of Three Hundred Thousand Dollars ($300,000)
for construction management of the
distribution systems specified in the Plan,
as contemplated by such Plan, shall be paid
in two increments. The first portion of
such fee shall be One Hundred Forty Thousand
Dollars ($140,000) and shall be paid in
increments of Twenty Thousand Dollars
($20,000), with each such Twenty Thousand
Dollar ($20,000) increment payable to
Manager at the time the distribution system
to one of the seven (7) communities
specified in the Plan commences operations.
The second portion of such fee shall be One
Hundred Sixty Thousand Dollars ($160,000)
and shall be paid at the discretion of SMGC
as hereinafter determined. At any point in
time following the connection of five
thousand (5,000) customers to the System
Manager may request payment of such amount.
Manager may not make such request, however,
until such time as the merger contemplated
in Section 7.2 occurs. Upon receipt of such
request SMGC shall submit such request to
its limited partners for approval. If the
limited partner(s) holding a majority of the
limited partnership units which are
permitted to vote on such matter, determine
in the sole discretion of such limited
partner(s) that Manager has satisfactorily
performed the construction management of the
distribution systems specified by the Plan,
taking into consideration the management,
progress and cost of such distribution
systems, then SMGC shall pay to Manager the
$160,000 incentive fee.
(b) Subsequent Construction Projects.
Any expansion proposal submitted by Manager for a
construction project under Section 3.5 above,
shall include Manager's proposed construction
management fee for such project. Such proposed
fee shall include both i) a monthly fee to
compensate Manager for a portion of its "General
and Administrative Costs" (as defined in Section
5.1 above) in performing the construction
management of the proposed construction project
and ii) incentive fees for the management of the
proposed construction project. The approval of
any expansion proposal under Section 3.5, shall
include an agreement upon the construction
management fee to be paid Manager in conjunction
with the construction project which is the subject
of such proposal.
5.3 Incentive Fee for Oversight of Ongoing
Operations.
(a) If for any calendar year the Return (as
hereinafter defined) for such year exceeds the
Return for such year as set forth in Table 1 below
(the "Base Return"), SMGC shall pay to Manager an
incentive fee equal to the sum of the following:
(i) Twenty percent (20%) of the
product of a) the number of basis points
by which the Return exceeds the Base
Return, not to exceed one hundred basis
points, times b) the Net Income (as
hereinafter defined) for such year; plus
(ii) Twenty five percent (25%) of
the product of a) the number of basis
points (in excess of 100 basis points)
by which the Return exceeds the Base
Return, not to exceed two hundred basis
points, times b) the Net Income for such
year; plus
(iii) Thirty percent (30%) of the
product of a) the number of basis points
(in excess of 200 basis points) by which
the Return exceeds the Base Return,
times b) the Net Income for such year.
Table 1
Year 1996 1997 1998 1999 2000 2001 and beyond
Base Return 3% 6% 10% 12% 14% to be mutually
agreed upon
For purposes of the calculations to be made under
this Section 5.3(a), each one (1) basis point
shall equal .0001. Any fee payable under this
Section 5.3 shall be in addition to, and not in
lieu of, any other amounts to be paid to Manager
under this Agreement. The total incentive fee to
be paid under this Section 5.3 shall not exceed
seventy-five thousand dollars ($75,000) per year
when averaged over a three (3) consecutive year
period.
(b) For purposes of this Section 5.3, the
following definitions shall apply:
(i) "Return" shall mean for any calendar
year a percentage (to be calculated to three
places to the right of the decimal point) which
shall be determined by dividing the Net Income (as
hereinafter defined) for such year by the Owner
Equity (as hereinafter defined) for such year.
(ii) "Net Income" shall mean for any
calendar year, (x) the total gross revenues of
SMGC from all sources for such year, minus (y) the
Expenses (as hereinafter defined) for such year.
(iii)"Expenses" for any calendar year shall
mean all costs incurred by SMGC during such year
(including book depreciation as determined in
accordance with MPSC guidelines, any interest
expenses and imputed income taxes or other taxes
based on income of SMGC) which are expensed (i.e.,
not capitalized). For purposes of the foregoing,
imputed income taxes means the income taxes that
would have been paid had SMGC been a corporation
domiciled in Missouri.
(iv) "Owner Equity" shall mean for any
calendar year the arithmetic average of the equity
investment in SMGC (expressed in dollars) on the
first and last day of such year. For purposes of
the foregoing, such equity investment shall be
determined insofar as possible as if (i) SMGC were
a corporation domiciled in Missouri, and ii) the
interests of the partners in SMGC were stockholder
interests in such corporation.
5.4 Manager Direct Charges Incurred in Connection with
the System or SMGC. Subject to the limitations hereinafter
prescribed in this Section 5.4 and to the extent authorized or
approved under Article III above, Manager shall charge SMGC, and
SMGC shall pay for all direct costs and expenditures reasonably
incurred by Manager in connection with the planning, design,
construction, testing, administration, accounting, operation,
maintenance, upkeep, repair, expansion and abandonment of the
System and SMGC, (to the extent such costs and expenditures are
not paid directly by SMGC), including the following items:
(1) Rentals: All rentals paid by Manager.
(2) Labor and Personal Expenses:
(a) Salaries, wages and personal expenses of
Manager's and its Affiliates' employees directly
engaged in connection with the System, and in
addition, the portion reasonably allocable to the
System of the amounts paid as salaries, wages and
personal expenses of others temporarily employed
in connection therewith. As used herein, the term
"personal expense" shall mean travel, hotel,
transportation, meals and other usual out-of-
pocket expenditures incurred by employees in the
performance of their duties and for which such
employees are reimbursed.
(b) The cost of holiday, vacation, sickness
and other fringe benefits and customary allowances
applicable to the salaries, wages and personal
expenses chargeable under Section 5.4(2)(a) above.
The cost of plans for employees' group life
insurance, hospitalization, disability, pension,
retirement, savings, thrift, bonus, and other
benefit plans, applicable to labor costs which are
chargeable under Section 5.4(2)(a) hereto.
(c) Costs, expenses or contributions made
pursuant to assessments imposed by governmental
authority which are applicable to labor costs as
provided under Section 5.4(2)(a) and (b) hereto.
(d) The costs set forth in Section 5.4(2)(a)
through (c) above for Manager's employees who are
included within the General and Administrative Fee
under Section 5.1 above shall not be recovered
under this Section 5.4; provided, however, the
"personal expenses" (as defined in Section
5.4(2)(a) above) of such employees shall be
recovered under this Section 5.4.
(3) Material, equipment and supplies purchased or
furnished by Manager for use on the System or by SMGC,
which shall be charged at Manager's cost.
(4) Transportation of employees, equipment,
materials and supplies incurred in connection with the
System or SMGC.
(5) Services furnished by Persons other than
Manager shall be charged based on:
(a) The actual cost paid by Manager to a
Person for contract services and equipment.
(b) The salaries, wages and personal
expenses of professional consultant services and
contract services of technical personnel directly
employed, temporarily or permanently.
(c) The actual cost paid by Manager for
utilities.
(6) All costs or expenses necessary to replace or
repair System or SMGC property made necessary because
of damages or losses incurred by fire, flood, storm,
theft, accident or any other cause not controllable by
Manager through the exercise of reasonable diligence.
(7) All costs and expenses of investigations,
audits, proceedings, claims, demands or causes of
action arising in connection with the System or SMGC,
including without limitation reasonable attorney fees
and expenses, together with any judgments paid or
amounts paid in settlement or satisfaction of any of
the foregoing, and the actual expenses incurred by
Manager in securing evidence for the purpose of
defending against any such action or claim.
(8) All taxes, less any credits received, of
every kind and nature assessed or levied upon or in
connection with the System or the operation thereof, or
SMGC, including charges for late payment arising from
extensions of the time for filing.
(9) Insurance: All premiums paid and expenses
incurred for insurance carried under the Agreement or
for the benefit of the System or SMGC.
(10) All costs incurred in connection with the
System or SMGC as a result of or in compliance with
governmental or regulatory requirements, including
without limitation those relating to utility regulation
as well as environmental, health or safety
considerations applicable to the System or SMGC. Such
costs may include, but are not limited to, disposal of
wastes, surveys of an ecological or archaeological
nature and pollution prevention or control as required
by applicable legal requirements.
(11) All costs incurred for abandonment and
reclamation of the System, including costs required by
governmental or other regulatory authority.
(12) All costs of acquiring, leasing, installing,
operating, repairing and maintaining communication
systems, including radio and microwave facilities, for
the operation of the System or SMGC.
(13) All land right acquisition costs, including
those for rights-of-way, surface leases, permits, fee
purchases, etc.
5.5 Development Activities. SMGC shall pay to Manager
each month an initial fee of $5,000 per month to compensate
Manager for development activities undertaken by Manager in an
effort to expand the System. Such initial fee shall be paid
until the end of calendar year 1996. The continuation of such
fee, or any modification of such fee, beyond such period shall be
subject to the inclusion of such amount in the Operating Budget
in accordance with the approval process set forth in Section 3.2
above.
ARTICLE VI
INSURANCE, INDEMNITY, LITIGATION
6.1 Insurance. To the extent available, and to the
extent not otherwise obtained by SMGC, Manager shall obtain, and
shall maintain in effect at least the minimum insurance coverages
on the System, SMGC, and Manager as are specified in Section 6.2
below and any additional insurance required by SMGC applicable to
the System, to protect the interests of Manager, SMGC and any
lender of SMGC, if required by such lender. Manager shall
maintain such insurance coverage until this Agreement is
terminated under Article IX below.
6.2 Coverages.
(a) Minimum Insurance Coverages.
(i) Worker's compensation
insurance as required by applicable law, and
Employer's Liability Insurance with limits
of $1,000,000 per occurrence. The policies
shall be endorsed to include borrowed
servant, all states, voluntary compensation
and stop gap coverage endorsements. The
worker's compensation insurance policy shall
contain a provision that the insurance
company shall have no right to recovery or
subrogation against Manager, SMGC or their
respective Affiliates, shareholders,
members, managers, partners, officers,
directors or employees.
(ii) Commercial general liability
insurance with a combined single limit of
$1,000,000 per occurrence for bodily injury
and property damage, and including, without
limitation, the following specific
coverages:
(1) Coverage for all premises
operations and work let or sublet (for
independent contractors).
(2) Personal injury coverage.
(3) Employees named as additional
insureds, with the fellow employee
exclusion deleted.
(4) Broad form property damage
coverage, including completed
operations.
(5) Coverage against blasting
damage, adjacent building collapse and
damage to underground utilities, where
applicable.
(6) Blanket contractual liability
coverage against liability under
contracts entered into in connection
with the construction, operation,
maintenance or repair of the System, as
applicable.
(7) Sudden and accidental
pollution liability coverage, as
applicable.
(8) Exclusions for exemplary or
punitive damages to be deleted.
(iii) Umbrella Liability with limits
of $5,000,000.
(iv) Automobile liability insurance
covering the use of all owned, non-owned and
hired automobiles with a combined single
limit of $1,000,000 per occurrence, as well
as automobile liability insurance provided
by contractors and subcontractors with a
combined single limit of $1,000,000 per
occurrence, for bodily injury and property
damage.
(v) If Manager utilizes aircraft in the
performance of work, aircraft liability
insurance including owned, non-owned,
chartered or hired, fixed wing or rotary
aircraft with limits of at least $5,000,000
combined single limit bodily injury and
property damage. Aircraft liability will
include contractual liability. Hull
insurance will be provided on all owned
aircraft subject to the full replacement
value. Non-owned, chartered or hired
aircraft will be insured for hull insurance
to the full replacement value by the owner.
(vi) Builder's risk insurance during the
course of any construction, as applicable.
(vii) Manager shall use every
reasonable effort to have its contractors
and sub-contractors comply with applicable
Workers Compensation Laws, and carry such
insurances as Manager may deem necessary.
(b) General Conditions.
(i) All policies of insurance will
include endorsement providing that the
insurer will give thirty (30) Days' advance
written notice by certified mail to Manager
and SMGC in the event of cancellation,
material change in coverage or non-renewal.
Manager shall provide to the owners of SMGC,
certificates of insurance on all insurance
coverage obtained by Manager hereunder.
(ii) All policies of insurance shall be
endorsed to provide that the underwriter
shall have no rights of recovery or
subrogation against Manager, SMGC, or their
respective Affiliates, shareholders,
officers, directors, employees, managers,
members, partners, agents or insurance
underwriters.
(iii) Manager shall never be held
responsible for the financial solvency of
any insurance carrier or for the inability
to obtain the coverages set forth. Such
coverages and limits may change or be
unavailable from time to time and Manager
does not guarantee their continuance but
will use its best reasonable efforts to
provide such coverages and limits at
reasonable costs.
6.3 SMGC Insurance. SMGC shall have the right
to purchase, at its own cost, any insurance in addition to the
insurance obtained by Manager under Section 6.1 above, for the
sole and specific account of SMGC. Manager shall provide any
assistance required by SMGC to establish any claim made under
SMGC's specific insurance.
6.4 Indemnity. To the extent not satisfied by
insurance carried pursuant to this Article VI, SMGC shall
indemnify, defend and hold harmless Manager, and its Affiliates,
and their respective shareholders, officers, directors,
employees, managers, members, partners and agents (collectively
"Manager Personnel") from and against any and all claims,
damages, liabilities, demands, costs and expenses (including,
without limitation, attorneys' fees, court costs and interest)
arising out of or in connection with or as an incident to any act
or omission (including, without limitation, those arising from
the negligence of Manager or Manager Personnel) in the carrying
out by Manager of its responsibilities under this Agreement; save
and except such acts or omissions which are proven to constitute
gross negligence or willful misconduct (including a willful
breach of this Agreement by Manager) of Manager or Manager
Personnel.
6.5 Litigation.
(a) Litigation Decisions. Any and all
claims, damages or causes of action against SMGC
or Manager in favor of anyone other than SMGC or
in favor of any governmental entity arising out
of, in connection with, or as an incident to
Manager's performance under this Agreement
(including, without limitation, the management of
the construction, operation, maintenance or repair
of the System) shall be settled or litigated and
defended by SMGC or by Manager on behalf of SMGC.
Manager shall not commence litigation on behalf of
SMGC against third parties without the
authorization of SMGC.
(b) Notice of Litigation. Manager shall
give SMGC, and the owners of SMGC, notice of any
litigation against SMGC as soon as practicable
after Manager receives notice of such litigation.
6.6 Waiver of Claims. SMGC hereby waives any
and all claims against Manager and Manager Personnel for damages
resulting from Manager's or Manager Personnel's error or delay in
carrying out, attempting to carry out, or failing to carry out
its responsibilities under this Agreement, or any damages of any
kind, including consequential damages, occurring during the
course of, or arising from, performance or failure to perform
under this Agreement, unless such damages are proven to have
resulted from the gross negligence or willful misconduct
(including a willful breach of this Agreement by Manager) of
Manager or Manager Personnel.
ARTICLE VII
ASSIGNMENT
7.1 Assignment. No party to this Agreement
shall assign any of its rights or obligations under this
Agreement without the prior written consent of the other.
7.2 Merger. The parties specifically
acknowledge and agree that it is contemplated SMGC will be merged
into a partnership in which the partners in such partnership
would include at a minimum Torch Energy Marketing, Inc., MCN
Corporation, and Tartan Management Company of Missouri, L.C., or
any of their respective successors. In the event of such merger
all references to SMGC in this Agreement shall be deemed to
include such partnership.
ARTICLE VIII
FORCE MAJEURE
8.1 Force Majeure. If by reason of force
majeure any party to this Agreement is rendered unable, wholly or
in part, to perform or carry out its obligations under this
Agreement, other than to make payments when due, and if such
party gives notice and reasonably full particulars of such force
majeure in writing or by telecopy to the other within a
reasonable time after the occurrence of the cause relied on, the
party giving such notice, so far as and to the extent that it is
affected by such force majeure, shall not be liable during the
continuance of any inability so caused. The Party claiming force
majeure shall use due diligence to remedy its nonperformance with
all reasonable dispatch.
8.2 Force Majeure Defined. Without limitation,
force majeure shall include acts of God; acts of a public enemy;
fires, explosions, wars, earthquakes; storms or other inclement
weather which necessitates extraordinary measures and expense to
construct facilities and/or maintain operations; floods; extreme
cold or freezing; washouts; necessity for compliance with any
present or future court order or decision, law, regulation,
ruling or ordinance promulgated by any governmental authority
having jurisdiction, either federal, state, local or military;
civil disturbances; strikes, lockouts or other industrial
disturbances; shutdowns for purposes of necessary repairs,
relocations, or construction of facilities; breakage of or
accident to machinery or lines of pipe; the necessity for testing
(as required by governmental authority or as deemed necessary by
the Manager for safe operation); the necessity of making repairs
or alterations to machinery or lines of pipe; failure to surface
equipment or pipelines; inability of either party to obtain
necessary material, supplies, permits or labor to perform or
comply with any obligation or condition of this Agreement;
inability to obtain or delays in obtaining rights-of-way; and any
other causes, whether of the kind herein recited or not, which
are not reasonably in the control of the party claiming
suspension.
8.3 Strikes and Lockouts. It is understood and
agreed that the settlement of strikes, lockouts or other
industrial disturbances shall be entirely within the discretion
of the party having the difficulty and that the requirement of
Section 8.1 above that any force majeure shall be remedied with
all reasonable dispatch shall not require the settlement of
strikes, lockouts or other industrial disturbances by acceding to
the demands of an opposing party involved in such strike, lockout
or other industrial disturbance, when such course is inadvisable
in the discretion of the party having the difficulty.
ARTICLE IX
TERM AND TERMINATION
9.1 Term and Termination. This Agreement shall
take effect on the Effective Date, and shall remain in full force
and effect until the first to occur of:
(a) SMGC and Manager having agreed in
writing to terminate this Agreement; or
(b) Manager is removed or resigns pursuant
to the other provision of this Article IX; or
(c) January 1, 2001; provided, however, this
Agreement shall automatically extend for
successive one (1) year periods, unless either
party provides the other written notice of
termination at least six (6) months prior to
January 1, 2001, or any January 1st, thereafter.
9.2 Removal of Manager. SMGC shall be entitled
to remove Manager if any of the following events occur:
(a) Proceedings shall be commenced by or
against Manager for relief under any bankruptcy or
insolvency laws, or any law relating to the relief
of debtors (unless such proceedings are the result
of SMGC's failure to render payment to Manager as
required in this Agreement); and, such proceeding
(if involuntary) is not dismissed, nullified,
stayed or otherwise rendered ineffective within
sixty (60) Days after such proceedings shall have
been commenced; or
(b) A final non-appealable order of a court
having jurisdiction is entered appointing a
receiver, liquidator, trustee or assignee in
bankruptcy or insolvency for Manager's account or
for the winding up or liquidation of Manager's
affairs (unless such order is the result of SMGC's
failure to render payment to Manager as required
in this Agreement); and, such order (if the result
of any involuntary proceed) remains in force and
is undischarged or unstayed for a period of sixty
(60) Days; or
(c) Manager shall make a general assignment
of all of its assets for the benefit of its
creditors; or
(d) Manager shall default in the performance
of a substantial obligation under this Agreement
and within fifteen (15) Days (or such shorter time
which may be dictated as a result of any court
order, rule or regulation) following receipt of
written notice from SMGC of any such default,
Manager does not commence reasonable actions
necessary to remedy such default as soon as
reasonably practical.
(e) Manager fully divests itself of its
interest in SMGC (including any interest of
Manager in any successor to SMGC, which successor
may be by merger, or as otherwise permitted by
this Agreement).
(f) If SMGC successfully removes Manager,
Manager shall cooperate with SMGC to provide an
orderly transition of the management of the System
to SMGC.
9.3 Resignation of Manager. Manager may resign
if any of the following events occur:
(a) Proceedings shall be commenced by or
against SMGC for relief under any bankruptcy or
insolvency laws, or any law relating to the relief
of debtors; and, such proceeding (if involuntary)
is not dismissed, nullified, stayed or otherwise
rendered ineffective within sixty (60) Days after
such proceedings shall have been commenced; or
(b) A final non-appealable order of a court
having jurisdiction is entered appointing a
receiver, liquidator, trustee or assignee in
bankruptcy or insolvency for SMGC's account or for
the winding up or liquidation of SMGC's affairs;
and, such order (if the result of any involuntary
proceeding) remains in force and is undischarged
or unstayed for a period of sixty (60) Days; or
(c) SMGC shall make a general assignment of
all of its assets or of this Agreement for the
benefit of its creditors; or
(d) SMGC dissolves, liquidates or terminates
its corporate (or partnership, if applicable)
existence (other than by reason of the merger
contemplated in Section 7.2); or
(e) In any month during the term hereof, the
Operating Account and any funds made available by
SMGC are depleted (other than by reason of
Manager's breach of this Agreement) such that said
available funds are insufficient to pay when due
all costs and expenses incurred in accordance with
this Agreement, including, without limitation, the
payment to Manager of amounts owed under Article V
of this Agreement; provided Manager gives SMGC
fifteen (15) Days prior written notice of its
resignation. If, prior to the expiration of the
15th Day following SMGC's receipt of Manager's
notice, SMGC provides the funds necessary to meet
such current financial obligations, then such
notice shall be of no further force or effect and
Manager's notice of resignation shall be deemed
withdrawn.
9.4 Accounting and Liability. If Manager is
removed or resigns pursuant to Sections 9.2 or 9.3, Manager
shall, as soon as reasonably practical, submit to SMGC a final
accounting of its operations under this Agreement. In such
event, at the request of SMGC, Manager shall cooperate in an
audit and/or an inventory of all materials relating to the
System, which SMGC shall conduct or cause to be conducted. SMGC
shall reimburse Manager for all reasonable costs and expenses
incurred by Manager in conjunction with the foregoing. Manager
shall deliver to SMGC all records, reports and data that are in
its possession as the Manager. Subject to the provisions of
Section 9.5, upon the termination of this Agreement Manager shall
be released and discharged from all duties and obligations of
Manager under this Agreement.
9.5 Effect. Termination of this Agreement shall
not relieve any party of its obligation to pay amounts of money
due hereunder which were due prior to such termination or become
due as a result of such termination or as a result of actions
taken prior to such termination, whether the resultant liability
is known or unknown at the time of such termination. In the
event Section 9.2(f) is applicable, termination of the Agreement
shall be deemed to occur at the time Manager turns over
management of the System to SMGC.
ARTICLE X
NOTICES
10.1 Notices. Any notice, request, instruction,
correspondence or other document to be given hereunder by any
party (herein collectively called "Notice") shall be in writing
and delivered in person or by courier service requiring
acknowledgement of receipt of delivery or mailed by certified
mail, postage prepaid and return receipt requested, or by
telecopier, as follows:
If to the owners of SMGC:
MCN Corporation
500 Griswold Street
Detroit, Michigan 48226
Attention: General Counsel
Telecopier No.: (313) 965-0009
With a copy (which shall not constitute
notice to) to:
Citizens Gas and Fuel
127 North Main Street
Adrian, Michigan 47221
Attention: Devere Elgas
Telecopier No.: (517) 263-8510
Tartan Management Company of Missouri,
L.C.
8801 South Yale
Suite 385
Tulsa, Oklahoma 74137
Attention: Tom M. Taylor
Telecopier No.: (918) 493-7475
Torch Energy Marketing, Inc.
1221 Lamar, Suite 1600
Houston, Texas 77010-3039
Attention: General Counsel
Telecopier No.: (713) 655-1711
If to any other owner of SMGC, addressed to
the applicable address provided by such
owner in writing to the Manager.
If to Manager:
Tartan Management Company of Missouri,
L.C.
8801 South Yale
Suite 385
Tulsa, Oklahoma 74137
Attention: Tom M. Taylor
Telecopier No.: (918) 493-7475
Notice given by personal delivery, courier service or mail shall
be effective upon actual receipt. Notice given by telecopier
shall be confirmed by appropriate answer back and shall be
effective upon actual receipt if received during the recipient's
normal business hours, or at the beginning of the recipient's
next business day after receipt if not received during the
recipient's normal business hours. All Notices by telecopier
shall be confirmed promptly after transmission in writing by
certified mail or personal delivery. All Notices by mail shall
be deemed received on the fifth business day following the date
on which the same is mailed. Any party may change any address to
which Notice is to be given to it by giving Notice as provided
above of such change of address.
10.2 Notices Prior to Execution of Partnership
Agreement. During the period from the Effective Date until the
date of execution of the Partnership Agreement, all information
which is required hereunder to be sent to the owners of SMGC
shall be sent to MCN Corporation and Torch Energy Marketing, Inc.
at their respective addresses set forth in Section 10.1 above.
ARTICLE XI
DISPUTE RESOLUTION
11.1 Arbitration. SMGC and Manager shall attempt
in good faith to resolve any controversy or claim arising from or
relating to this Agreement promptly by negotiations. On the
request of either party, whether made before or after the
institution of any legal proceeding, any action, dispute, claim
or controversy of any kind now existing or hereafter arising
between SMGC and Manager in any way arising out of, pertaining to
or in connection with this Agreement (a "Dispute") shall be
resolved by binding arbitration in accordance with the terms
hereof. Any party may, by summary proceedings, bring an action
in court to compel arbitration of any Dispute.
11.2 Rules of Arbitration. Any arbitration shall
be administered by the American Arbitration Association (the
"AAA") in accordance with the terms of this Section 13.4, the
Commercial Arbitration Rules of the AAA, and, to the maximum
extent applicable, the Federal Arbitration Act. Judgment on any
award rendered by an arbitrator may be entered in any court
having jurisdiction.
11.3 Arbitrator. Any arbitration shall be
conducted before one arbitrator. The arbitrator shall be a
practicing attorney licensed to practice in the State of Missouri
who is knowledgeable in the subject matter of the Dispute
selected by agreement between the parties hereto. If the parties
cannot agree on an arbitrator within thirty (30) Days after the
request for an arbitration, then any party may request the AAA to
select an arbitrator. The arbitrator may engage consultants that
the arbitrator deems necessary to render a conclusion in the
arbitration proceeding.
11.4 Arbitration Process. To the maximum extent
practicable, an arbitration proceeding hereunder shall be
concluded within one hundred eighty (180) Days of the filing of
the Dispute with the AAA. Arbitration proceedings shall be
conducted in St. Louis, Missouri. Arbitrators shall be empowered
to impose sanctions and to take such other actions as the
arbitrators deem necessary to the same extent a judge could
impose sanctions or take such other actions pursuant to the
Federal Rules of civil Procedure and applicable law. At the
conclusion of any arbitration proceeding, the arbitrator shall
make specific written findings of fact and conclusions of law.
The arbitrator shall have the power to award recovery of all
costs and fees to the prevailing party. Each party agrees to
keep all Disputes and arbitration proceedings strictly
confidential except for disclosure of information required by
applicable law.
11.5 Fees. All fees of the arbitrator and any
consultant engaged by the arbitrator, shall be paid by SMGC and
Manager equally unless otherwise awarded by the arbitrator.
ARTICLE XII
MISCELLANEOUS
12.1 Waiver. No waiver by Manager or SMGC of any
default by the other party in the performance of any provision,
condition or requirement in this Agreement shall be deemed to be
a waiver of, or in any manner release the other party from,
performance of any other provision, condition or requirement
herein, nor shall such waiver be deemed to be a waiver of, or in
any manner a release of, the other party from future performance
of the same provision, condition or requirement.
12.2 Headings. The headings contained in this
Agreement are for reference purposes only and shall not affect
the meaning or interpretation of this Agreement.
12.3 Regulation. This Agreement and the
obligations of Manager and SMGC hereunder are subject to all
applicable law, rules, orders and regulations of governmental
authorities.
12.4 Applicable Law. This Agreement shall be
governed by and interpreted in accordance with the laws of the
State of Missouri, except that any conflict of laws rule of such
jurisdiction which would require reference to the laws of some
other jurisdiction shall be disregarded.
12.5 Severability. If and to the extent that any
court or governmental agency of competent jurisdiction holds any
part or provision of this Agreement to be invalid or
unenforceable, the parties shall agree upon an equitable
adjustment of the provisions of this Agreement with a view toward
effecting its purpose. Such holding shall in no way affect the
validity or effectiveness of the other provisions of this
Agreement, which shall remain in full force and effect.
12.6 Remedies. All rights and remedies under
this Agreement are cumulative and in addition to other rights or
remedies under this Agreement or any applicable law.
12.7 Exhibits. Each exhibit referred to in this
Agreement is incorporated in this Agreement by reference.
12.8 Entirety of Agreement. Except to the extent
expressly contemplated herein, from and after the Effective Date,
this Agreement reflects the whole and entire agreement between
Manager and SMGC with respect to the subject matter hereof and
supersedes all previous agreements and understandings between
Manager and SMGC. This Agreement may be amended, restated or
supplemented only by the written agreement between Manager and
SMGC.
12.9 Special and Consequential Damages.
(a) In no event shall Manager or Manager
Personnel be liable to SMGC, its Affiliates or
their respective agents, officers, employees,
representatives, invitees, or principals, partners
and managers for any incidental, punitive,
consequential, or special damages (including,
without limitation, loss of profits and loss of
business opportunities), arising out of, resulting
from or relating in any way to this Agreement or
activities or omissions or delays in connection
therewith (including, without limitation, the
performance (whether timely or not) or
nonperformance of this Agreement) regardless of
whether Manager, its Affiliates and/or others may
be wholly, partially or solely negligent or
otherwise at fault, and regardless of any defect
in the System or the goods, equipment, or
materials relating to the System.
(b) In no event shall SMGC, its Affiliates,
and their respective shareholders, officers,
directors, employees, managers, members, partners
and agents be liable to Manager or Manager's
Personnel for any incidental, punitive,
consequential, or special damages (including,
without limitation, loss of profits and loss of
business opportunities), arising out of, resulting
from or relating in any way to this Agreement or
activities or omissions or delays in connection
therewith (including, without limitation, the
performance (whether timely or not) or
nonperformance of this Agreement), regardless of
whether SMGC, its Affiliates and/or others may be
wholly, partially or solely negligent or otherwise
at fault, and regardless of any defect in the
System or the goods, equipment, or materials
relating to the System.
12.10 No Drafting Presumption. No presumption
shall operate in favor of or against any party hereto as a result
of any responsibility that any party may have had for drafting
this Agreement.
12.11 Third-Party Beneficiaries. The
covenants and obligations of Manager and SMGC under this
Agreement are made for their express benefit, and except as
otherwise specifically set forth in this Agreement, no Person,
other than a Person which is a permitted successor or assign of
Manager or SMGC, is intended to have nor shall have the benefit
of, or any right to seek enforcement or recovery under, any of
such covenants or obligations.
12.12 Claims of Manager and SMGC. All claims
hereunder of Manager against SMGC shall be limited to the assets
of SMGC, and, in the event of any such claims, Manager hereby
waives any and all rights to proceed against any Affiliate of
SMGC. Further, all claims hereunder of SMGC against Manager
shall be limited to the assets of Manager, and SMGC hereby waives
any and all rights to proceed against any Affiliate of Manager.
For purposes of this Section 12.12, the term "Affiliate" shall
include the shareholders, officers, directors, members, managers
and partners of Manager, SMGC and their respective Affiliates.
12.13 Warranties. Except as specifically set
forth in this Agreement, Manager does not warrant any material
furnished hereunder by Manager beyond or back of the dealer's or
manufacturer's guaranty; and in case of defective material,
credit shall not be passed to SMGC until adjustment has been
received by Manager from the manufacturers or their agents.
12.14 Adjustments and Audits.
(a) All invoices and statements rendered to
SMGC by Manager under this Agreement during any
calendar year shall conclusively be presumed to be
true and correct after twenty-four (24) months
following the end of any such calendar year,
unless within the said twenty-four (24) month
period SMGC takes written exception thereto and
makes claim on Manager for adjustment. No
adjustment favorable to Manager shall be made
unless it is made within the same prescribed
period. The provisions of this paragraph shall
not prevent adjustments resulting from a physical
inventory of the System.
(b) Upon at least three (3) days' notice to
Manager, SMGC or any owner of SMGC (including any
employee, agent or professional consultant
designated by them) shall have the right at all
reasonable times during usual business hours, at
their sole expense, to visit and inspect any of
the properties of the System and to audit and copy
Manager's accounts and records relating to the
System or SMGC (including an examination of the
books and financial records of the System) for any
calendar year within the twenty-four month period
following the end of such calendar year; provided,
however, the making of an audit shall not extend
the time for the taking of written exception to,
and the adjustment of, any invoices or statements
hereunder. Manager shall bear no portion of the
audit cost incurred under this paragraph by SMGC,
or any owner of SMGC, unless agreed to by Manager.
The audits shall not be conducted more than once
each calendar year without the prior approval of
Manager, such approval not to be unreasonably
withheld. Accordingly, SMGC and the owners of
SMGC shall coordinate any audits each may desire
to undertake. Manager shall reply in writing to
an audit report within sixty (60) days after
receipt of such report from SMGC, or any owner of
SMGC. In addition SMGC or any owner of SMGC shall
have the right to discuss the affairs, and
finances of the System or SMGC with the principal
officers of Manager, and SMGC's independent public
accountants, all at such reasonable times and as
often as SMGC or any owner of SMGC may reasonably
request. Neither SMGC, nor any owner of SMGC
shall have any duty to make any inspection or
audit nor shall it incur any liability or
obligation (except as set forth in this Section
12.14) by reason of failing to make any such
inspection or examination.
12.15 Other Terms of Construction. Whenever
the context may require, any pronouns used in this Agreement
shall include the corresponding masculine, feminine or neuter
forms, and the singular form of nouns, pronouns and verbs shall
include the plural and vice versa.
12.16 Security of Payment. Notwithstanding
any provision of this Agreement to the contrary, SMGC's payment
and funding obligations under this Agreement shall apply whether
or not SMGC is authorized or able to recover payments made or to
be made to Manager hereunder from its customers.
12.17 Counterparts. This Agreement is
executed in counterparts, each of which shall be deemed an
original, but all of which together shall constitute but one and
the same instrument.
12.18 Manager's Office. Manager may select
the location of its office or offices to perform its obligations
hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
IN WITNESS WHEREOF, the Parties have entered into
this Agreement effective as of the Day first written above.
MANAGER:
TARTAN MANAGEMENT
COMPANY OF MISSOURI,
L.C.
By:
___________________
Name:
_________________
Title:
________________
TARTAN ENERGY COMPANY
OF MISSOURI, L.C.
d/b/a SOUTHERN MISSOURI GAS
COMPANY, L.C.
By:
___________________
Name:
_________________
Title:
________________
September 18, 1995
Ms. Cathy Baker, Assistant
Office of Public Utility Regulation
Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20849
Re: MCN Corporation
Dear Ms. Baker:
At the request of MCN Corporation ("MCN"), which is the parent
company of Michigan Consolidated Natural Gas Company ("MichCon")
and Citizens Gas Fuel Company ("Citizens"), both public utility
companies subject to the jurisdiction of the Michigan Public
Service Commission, the staff of the MPSC submits the following
comments:
1. The MPSC staff is aware of MCN's proposed acquisition of a
1% general and a 46.7% limited partnership interest in a
Missouri limited partnership (the "Partnership") which will
construct, own and operate a gas pipeline and distribution
system in southern Missouri as well as the related financing
arrangements.
2. MCN's proposed acquisition does not require the approval of
the MPSC.
3. The MPSC staff does not object to MCN's proposed acquisition
of these interests or the financing thereof.
It should be noted that while the MPSC does have jurisdiction
over MichCon's rates, the rates charged by Citizens are subject
to regulation by the City of Adrian, Michigan. The MPSC does
have jurisdiction over other activities of Citizens.
Respectfully submitted,
Hasso C. Bhatia, PhD
Director, Technical Services
Division
STATE OF MISSOURI
PUBLIC SERVICE COMMISSION
At a session of the Public Service
Commission held at its office
in Jefferson City on the 19th
day of September, 1988.
In the matter of the application of )
Tartan Energy Company of Missouri, L.C., )
a Missouri limited liability company, )
for authority to acquire control of and ) Case No. GM-96-61
merge with Tartan Energy Company, L.C., )
d/b/a) Southern Missouri Gas Company, L.C., )
an Oklahoma limited liability company. )
ORDER APPROVING APPLICATION TO MERGE
On August 28, 1995, Tartan Energy Company of Missouri,
L.C., a Missouri limited liability company (Tartan-Missouri), and
Tartan Energy Company, L.C., d/b/a Southern Missouri Gas Company,
L.C., an Oklahoma limited liability company (Tartan-Oklahoma),
filed a joint application. In the joint application, Tartan-
Missouri and Tartan-Oklahoma request authority to merge Tartan-
Oklahoma into Tartan-Missouri, with Tartan-Missouri being the
surviving entity. On September 14, 1995, the applicants filed a
letter stating their intent that the surviving entity do business
as Tartan Energy Company of Missouri, L.C., d/b/a Southern
Missouri Gas Company, L.C.
Also, on August 28, 1995, Tartan-Missouri and Tartan-
Oklahoma filed a motion for expedited approval of the
application. In the motion applicants state that the reason for
the proposed change of domicile is to ensure that the public
utility and its parent are eligible for an "intrastate exemption"
under the provisions of the Public Utility Holding Company Act
(PUHCA) of 1935. Tartan believes that it will be ready to begin
distribution of natural gas on a limited basis to various
municipalities beginning on or about October 1, 1995. However,
Tartan-Oklahoma may not begin serving its Missouri customers
until the merger application is approved without subjecting its
parents to regulation under PUHCA. Therefore, Tartan states, it
is necessary to obtain approval of the merger prior to the
October 1, 1995, projected in-service date for the commencement
of service.
On August 30, 1995, the Commission issued an Order And
Notice. The Order And Notice provided that a copy of the Order
And Notice be sent to the county commissions of the affected
counties. The Order And Notice gave interested persons an
opportunity to intervene by filing an application to intervene no
later than September 14, 1995. No persons have filed an
application for intervention in this case.
On September 15, 1995, the Staff of the Missouri Public
Service Commission (Staff) filed a memorandum to the official
case file. Staff recommends that the Commission waive 4 CSR 240-
2.060, which would require the applicants to file an income
statement. Staff states that income statements are not needed in
this case since Tartan-Missouri is a newly created corporation
and Tartan-Oklahoma has not started gas delivery and sales under
its certificate.
After reviewing 4 CSR 240-2.060, it appears that a
requirement to file an income statement appears in 4 CSR 240-
2.060(3)(E). The Commission finds that the income statements
normally required with an application of this type are not needed
in this particular case for the reasons identified by Staff.
Thus, the Commission will waive the requirement in 4 CSR 240-
2.060(3)(E) that applicants file income statements.
Staff states that Tartan-Oklahoma currently does not
have an effective Purchased Gas Adjustment (PGA) factor. Staff
notes that although Tartan has filed a PGA factor to be effective
October 3, 1995, Staff expects this PGA to become effective after
October 3, 1995, due to errors contained in the PGA filing.
Staff states that Tartan-Oklahoma may not serve customers until
it obtains approval of a PGA factor to recover gas costs.
Staff states that it does not object to the merger as
it does not perceive any detriment to customers under this
request. Staff recommends that the Commission order Tartan-
Missouri to file an "Adoption Notice" which would allow Tartan-
Missouri to adopt the existing tariff of Tartan-Oklahoma without
having to refile every tariff sheet to make company name and
address changes. Staff further suggests that if the Commission
approves the merger, the Commission order that the merger become
effective simultaneously with the effective date of the "Adoption
Notice" tariff sheet required to be filed and approved.
Based on its review of the application and Staff's
memorandum, the Commission finds that the application for merger
of Tartan-Oklahoma and Tartan-Missouri, with Tartan-Missouri
being the surviving entity, should be approved.
IT IS THEREFORE ORDERED:
1. That the requirement to file income statements
contained in 4 CSR 240-2.060(3)(E) be, and is, hereby waived.
2. That the joint application of Tartan Energy
Company of Missouri, L.C., a Missouri limited liability company,
and Tartan Energy Company, L.C., d/b/a Southern Missouri Gas
Company, L.C., an Oklahoma limited liability company, for
authority to merge Tartan-Oklahoma into Tartan-Missouri, with
Tartan-Missouri being the surviving entity be, and is, hereby
approved.
3. That Tartan Energy Company of Missouri, L.C.,
d/b/a Southern Missouri Gas Company, L.C., shall file an
"Adoption Notice" to bear an effective date of September 29,
1995.
4. That Tartan Energy Company of Missouri, L.C., a
Missouri limited liability company, and Tartan Energy Company,
L.C., d/b/a Southern Missouri Gas Company, L.C., an Oklahoma
limited liability company be, and are, hereby authorized to enter
into, execute and perform in accordance with the terms of all
other documents reasonably necessary and incidental to the
performance of the transactions which are the subject of the
joint application filed in this case.
5. That the motion of expedited approval of
application filed by Tartan Energy Company of Missouri, L.C., a
Missouri limited liability company, and Tartan Energy Company,
L.C., d/b/a Southern Missouri Gas Company, L.C., an Oklahoma
limited liability company, be, and is, hereby granted.
6. That this order shall become effective on the 29th
day of September, 1995.
BY THE COMMISSION
/s/
David L. Rauch
Executive Secretary
(SEAL)
Mueller, Chm., McClure, Kincheloe,
Crumpton and Drainer, CC., concur.
STATE OF MISSOURI
OFFICE OF THE PUBLIC SERVICE COMMISSION
I have compared the preceding copy with the original on file
in this office and I do hereby certify the same to be a true copy
therefrom and the whole thereof.
WITNESS my hand and seal of the Public Service Commission,
at Jefferson City, Missouri, this 19th day of September, 1995.
/s/
______________________________
David L Rauch
Executive Secretary
BEFORE THE PUBLIC SERVICE COMMISSION
OF THE STATE OF MISSOURI
- - - - - - - - - - - - - - - - - - - - x
:
In the matter of the application of :
Tartan Energy Company, L.C., d/b/a :
Southern Missouri Gas Company, for a : CASE NO. GA-94-127
certificate of convenience and :
necessity authorizing it to construct,:
install, own, operate, control, manage:
and maintain gas facilities and to :
render gas service in and to residents:
of certain areas of Wright, Texas, :
Howell, Webster, Greene and Douglas :
Counties, including the incorporated :
municipalities of Seymour, Cabool, :
Houston, Licking, Mountain Grove, :
Mountain View, West Plains, Ava, :
Mansfield, Marshfield and Willow :
Springs, Missouri. :
- - - - - - - - - - - - - - - - - - - - x
APPEARANCES
James M. Fischer, Attorney at Law, 102 East High Street,
Suite 200, Jefferson City, Missouri 65101, For Tartan
Energy Company, L.C., d/b/a Southern Missouri Gas Company.
Gary W. Duffy and Sondra B. Morgan, Attorneys at Law, Brydon,
Swearengen & England, P.O. Box 456, 312 East Capitol,
Jefferson City, Missouri 65102, For Missouri Gas Energy.
Richard W. French, Attorney at Law, French & Stewart Law
Offices, 1001 East Cherry Street, Suite 302, Columbia,
Missouri 65201, For Brotherton Propane, PB's Propane and
West Plains Propane, Inc.
James F. Mauze' and Thomas E. Pulliam, Attorneys at Law, Ottsen,
Mauze' and Building, 112 South Hanley Road, St. Louis,
Missouri 63105-3418, For Missouri Gas Company.
Bruce A. Connell, Attorney at Law, 600 North Dairy Ashford,
ML 1034, Houston, Texas 77079, For Conoco Inc.
John Landwehr, Associate Counsel, Cook, Vetter and Doerhoff,
231 Madison Street, Jefferson City, Missouri 65101, For
Brooks Gas Company, Conoco Inc., Empiregas Inc. of Ava,
Empiregas Inc. of Birch Tree, Empiregas Inc. of Houston,
Empiregas Inc. of Mountain Grove, Empiregas Inc. of
Springfield, Empiregas Inc. of West Plains, Garrett's
Propane Gas Service, Glen's Propane Gas Service, Inc., Ozark
Gas & Appliance Co., RPA, Inc., Red Top Gas, Inc., Rees Oil
Company, Smith Gas Company, Synergy Gas Corporation of Ava,
Synergy Gas Corporation of Farmingdale, NY, Synergy Gas
Corporation of Gainesville, Synergy Gas Corporation of
Mountain Grove, Synergy Gas Corporation of Republic, Synergy
Gas Corporation of Seymour, Tri-County Gas Company of
Seymour, Tri-County Gas Company and Tuttle Utility Gas Inc.
Susan A. Anderson, Assistant Public Counsel, P.O. Box 7800,
Jefferson City, Missouri 65102, For the office of the
Public Counsel and the Public.
William M. Shansey, Assistant General Counsel, P.O. Box 360,
Jefferson City, Missouri 65102, For the Staff of the
Missouri Public Service Commission.
HEARING EXAMINER: Elaine E. Bensavage
REPORT AND ORDER
Procedural History
On October 15, 1993, Tartan Energy Company, L.C., d/b/a
Southern Missouri Gas Company (Tartan) filed an application
pursuant to Section 393.170, RSMo 1986 and 4 CSR 240-2.060 for a
certificate of convenience and necessity authorizing it to
construct, install, own, operate, control, manage, and maintain
gas facilities, and to render gas service in and to residents of
certain areas of Wright, Texas, Howell, Webster, Greene, and
Douglas Counties, including the incorporated municipalities of
Seymour, Cabool, Houston, Licking, Mountain Grove, Mountain View,
West Plains, Ava, Mansfield, Marshfield, and Willow Springs,
Missouri. The application included a number of exhibits designed
to comply with 4 CSR 240-2.060, and indicated that other exhibits
would be late-filed when they became available. On January 4,
1994, the Commission issued an Order and Notice, giving notice of
Tartan's application and setting an intervention deadline of
February 3, 1994. On January 20, 1994, Tartan filed a request
for variance pursuant to 4 CSR 240-14.010(2), seeking a variance
from the provisions of 4 CSR 240-14.020(1)(E), (F), and (H) in
order to offer to customers a conversion incentive program for a
period of 24 months during the construction of the distribution
system.
Six entities or groups of entities filed timely
requests for intervention. After the intervention deadline, the
various petitioners for intervention and Tartan filed a number of
suggestions in support, suggestions in opposition, and responses
with respect to the requests for intervention. Some of these
responses also dealt with Tartan's variance request. On March
23, 1994, Williams Natural Gas Company (Williams) also filed an
application to intervene. On March 29, 1994, the Commission
issued an order in which it granted intervention to the following
entities: (1) Conoco Inc. (Conoco); (2) Missouri Gas Energy
(MoGE); (3) West Plains Propane, Inc. Brotherton Propane, and
PB's Propane (Propane Dealers Group One); (4) Missouri Gas
Company (MoGas); (5) Empiregas Inc. of Ava, Empiregas Inc. of
Birch Tree, Empiregas Inc. of Houston, Empiregas Inc. of Mountain
Grove, Empiregas Inc. of Springfield, Empiregas Inc. of West
Plains, Red Top Gas, Inc., Tri-County Gas Company, Ozark Gas &
Appliance Co., RPA, Inc., Garrett's Propane Gas Service, Glen's
Propane Gas Service, Inc., Tuttle Utility Gas Inc., Brooks Gas
Company, Rees Oil Company, Smith Gas Company, Synergy Gas
Corporation of Republic, Synergy Gas Corporation of Mountain
Grove, Synergy Gas Corporation of Ava, Synergy Gas Corporation of
Gainesville, Synergy Gas Corporation of Seymour, and Synergy Gas
Corporation of Farmingdale, NY (Propane Dealers Group Two); and
(6) Arkla Energy Resources Company (Arkla). (Propane Dealers
Group One, Propane Dealers Group Two, and Conoco are hereafter
referred to collectively as Propane Dealers.) The order also
denied the application of Williams for intervention as untimely,
and took Tartan's variance request with the case.
On April 22, 1994, Tartan filed a motion for issuance
of a protective order and establishment of a procedural schedule,
which elicited a number of responses from the various parties.
On May 24, 1994, the Commission issued an Order Granting
Protective Order And Setting Procedural Schedule, which scheduled
a hearing for August 1-4, 1994, and shortened the time for
responses to discovery requests to seven days. On June 15, 1994,
City Utilities of Springfield, Missouri (City Utilities) filed a
motion to intervene, to which Tartan filed a response on June 21,
1994. The Commission issued an order denying intervention on
July 6, 1994, indicating that City Utilities' application was
well beyond the intervention period, with insufficient
justification given for the untimeliness of the application.
On July 1, 1994, Tartan filed a First Amended
Application which indicated that Tartan had received franchises
ratified by the voters in nine communities, that it had received
a franchise from the City of Mountain View which had not yet been
ratified by the voters, and that it had not received franchises
from the municipalities of Seymour, Fordland, Diggins, Norwood,
or Rogersville, therefore it was not requesting that these latter
municipalities be considered in this proceeding. The amended
application also indicated that Tartan now proposed that natural
gas would be provided to its distribution system through a city
gate delivery point from a new interconnection pipeline to be
owned and operated by Williams Natural Gas Pipeline located near
Springfield, Missouri. In addition, the amended application
attached and incorporated by reference revised Exhibit 3, a metes
and bounds description of the proposed service area excluding the
municipalities which failed to give Tartan a franchise;
Exhibit 8, specimen tariffs; and Exhibits 9 and 10, Supplements 1
and 2 to Tartan's Feasibility Study which were attached to its
original application as Exhibit 4.
On July 11, 1994, Tartan filed an objection to the use
of the affidavit of Al Lindsey attached to the rebuttal testimony
of Peter W. Frost, Conoco's witness, and on July 19, 1994, the
Propane Dealers filed a motion for suspension of the procedural
schedule. On July 22, 1994, a Stipulation and Agreement
(Stipulation) was filed, signed by Tartan, the Staff of the
Missouri Public Service Commission (Staff), and the Office of the
Public Counsel (Public Counsel). On July 29, 1994, the Propane
Dealers field a request for hearing.
On August 1, 1994, prior to the commencement of the
hearing, the parties orally argued the pending motions, and the
Commission overruled Tartan's objection to the use of the
affidavit of Al Lindsey, and denied the request for suspension of
the procedural schedule, instead granting a continuance until
August 3, 1994. The Commission also ruled on a number of oral
motions raised at this time, granting a request to allow oral
supplemental testimony regarding the Stipulation, and granting a
request that a briefing schedule be set in lieu of the oral
argument previously arranged, as briefs might better assist the
Commission given the addition of new oral testimony. On
August 3, 1994, a hearing was commenced on all matters respecting
Tartan's application, and concluded on August 5, 1994.
Findings of Fact
The Missouri Public Service Commission, having
considered all of the competent and substantial evidence upon the
whole record, makes the following findings of fact:
Tartan Energy Company, L.C., is a limited liability
company duly organized and existing under the laws of the State
of Oklahoma, with its principal place of business located
8801 South Yale, Suite 385, Tulsa, Oklahoma 74137. Tartan was
issued a Certificate of Limited Liability Company by the State of
Oklahoma on March 3, 1993. Tartan has not, however, filed with
the Commission a certificate from the Missouri Secretary of State
stating that it is authorized to do business in Missouri.
Registrations of Fictitious Name filed with the Missouri
Secretary of State were submitted to the Commission as a late-
filed supplement to Exhibit 1, which was attached to Tartan's
application, on behalf of Tartan Energy Company, L.C., and
Southern Missouri Gas Company. The owners of Tartan are listed
on the Registration of Fictitious Name as Torch Energy Marketing,
Inc. of Houston, Texas, and Tom M. Taylor of Tulsa, Oklahoma. At
the hearing Mr. Taylor testified that 85 percent of Tartan is
owned by Torch Energy Advisors, Inc., which is a subsidiary of
Torchmark Corporation, and 15 percent is owned by the management
of Tartan, specifically Mr. Taylor, Mr. Trusty, and Mr. Boyles.
It is unclear whether Torch Energy Marketing, Inc. and Torch
Energy Advisors, Inc. are the same or different corporations, or
whether, if different corporations, Torch Energy Marketing, Inc.
is also a subsidiary of Torchmark. The Registration of
Fictitious Name for Southern Missouri Gas Company lists Tartan
Energy Company, L.C. as the 100 percent owner. Testimony at the
hearing indicated that Southern Missouri Gas Company was
established as the name under which Tartan would do business in
the State of Missouri.
Although there is a dearth of statutory guidance, the
Commission has articulated requirements for certificates in
Commission Rule 4 CSR 240-2.060(2), and the criteria to be used
in evaluating such applications in Re Intercon Gas, Inc., 30 Mo
P.S.C. (N.S.) 554, 561 (1991). The Intercon case combined the
standards used in several similar certificate cases, and set
forth the following criteria: (1) there must be a need for the
service; (2) the applicant must be qualified to provide the
proposed service; (3) the applicant must have the financial
ability to provide the service; (4) the applicant's proposal must
be economically feasible; and (5) the service must promote the
public interest. Id.
The Propane Dealers filed a 14-page Request For Hearing
as nonsignatory parties to the Stipulation. This 14-page
document lists 10 issues raised by the prefiled testimony and
discovery, and 15 issues, with sub-parts, raised by the
Stipulation. However, regardless of whether the Commission is
evaluating Tartan's original proposal or the proposal put forth
in the Stipulation, the standard designated in Intercon remains
the same, and is the basis for the issues which the Commission
must address in this case. In essence the "issues" raised in the
Request For Hearing are really arguments, and as such these
"issues" need not be individually addressed.
The Commission has reviewed and considered all of the
evidence and argument presented by the various parties in this
case. Due to the extreme time constraints in this matter and the
volume of evidence submitted, some evidence and positions on
certain matters may not be addressed by the Commission. The
failure of the Commission to mention a piece of evidence or the
positions of a party indicates that, while the evidence or
position was considered, it was not found to be relevant or
necessary to the resolution of the issue involved.
Tartan in its original application proposed to render
natural gas transportation and distribution services in the
incorporated municipalities of Cabool, Houston, Licking, Mountain
Grove, Mountain View, West Plains, Ava, Mansfield, Marshfield,
Seymour, and Willow Springs, Missouri, and their environs in
Wright, Texas, Howell, Webster, Greene, and Douglas Counties,
Missouri.<F1> It also indicated that it was seeking franchises
____________________
<F1> All future references are to cities or counties within the
State of Missouri, unless otherwise noted.
from additional communities, but these additional franchises
never materialized. Tartan's amended application dropped the
request to serve Seymour, as it had not received a franchise from
that community, and also indicated that although it had received
a franchise from the city of Mountain View, no voter ratification
election for the franchise had yet taken place. The area sought
to be certificated is east of the city of Springfield along
Highways 60 and 63, extending to and including the above-
mentioned municipalities, and also extending south of Highway 60
along Highway 5 to include the city of Ava, and north of Highway
60 along Highway A to include the city of Marshfield.
As proposed in Tartan's amended application, natural
gas would be provided to Tartan's distribution system through a
city gate delivery point from a new interconnection pipeline to
be owned and operated by Williams located near Springfield. This
interconnection would connect Tartan's 174.4 mile trunkline with
the existing 16-inch lateral pipeline of Williams. It is
estimated that the entire project will cost approximately $39
million during its first three years, assuming ratification of
all franchises specified in Tartan's application. Tartan also
referenced a feasibility study in its application, which was
late-filed and marked as its Exhibit 4 and made a part of its
application. The feasibility study includes a project
description, engineering cost estimates, estimates of system
demand, plans for financing, revenues and expenses during the
first three years of operation, and proposed rates and charges.
Subsequently two supplements to the feasibility study were filed.
Supplement No. 1 contains a sensitivity analysis of the total
project demand for natural gas, and Supplement No. 2 contains
miscellaneous updates and additional information.
Various Staff members submitted prefiled rebuttal
testimony in which they took issue to some degree or other with
various aspects of Tartan's plan. Staff's ultimate initial
recommendation was conveyed through the rebuttal testimony of
Craig A. Jones. Mr. Jones recommended that the project not be
approved, but also listed conditions which should be met before a
certificate was granted, in the event that the Commission decided
to grant a certificate. However, it is Staff's position that the
bulk of Mr. Jones' concerns, as well as the concerns of the other
Staff members involved in this proceeding, were ameliorated by
the provisions of the Stipulation. The Stipulation essentially
provides the Commission with an alternate proposal for its
consideration and decision. Since the Stipulation in essence
represents a new or revised proposal by Tartan, and since the
bulk of the cross-examination conducted at the hearing related to
the provisions of the Stipulation, it is appropriate at this
juncture to summarize some of the major provisions of the
Stipulation. In restating portions of the Stipulation, the
Commission is not intending to include all the nuances and
details contained therein. A copy of this Stipulation is
attached hereto and incorporated herein by reference as
Attachment 1, and the reader is referred to this attachment for
the specifics agreed to in the Stipulation.
The Stipulation signed by Tartan, Staff, and Public
Counsel contains the following major provisions:
-- that a certificate of convenience and necessity be
granted conditioned on the approval of tariffs
prior to the commencement of construction, with a
certificate to become effective on the same
effective date as the tariffs;
-- that issuance of the certificate be conditioned
upon the presentation to the Commission's
Procurement Analysis Department of a signed firm
transportation contract with Williams covering the
production zone for 5,000 Mcfs per day, increasing
to 10,000 Mcfs per day within three years, and the
market zone for 10,000 Mcfs per day prior to the
approval of tariffs;
-- that Tartan adopt depreciation rates consistent
with those recommended by Staff witness Guy C.
Gilbert;
-- that Tartan meet the conditions proposed by Staff
witness Hans Shieh with respect to gas safety.
(This provision also notes that the Stipulation
does not anticipate the construction of a propane
peak shaving plant, but that in the event a
decision is made to construct such a plant, the
plans for the plant will be submitted to the
Commission prior to construction);
-- that Tartan provide only retail natural gas
service to the ten municipalities from which it
has received franchises, with the certificate of
convenience and necessity to serve Mountain View
contingent upon voter ratification of the
franchise;
-- that Tartan is required to file a rate case on or
before the two-year anniversary of the
commencement of service in West Plains. A
normalized volume level of at least 1,797,000 Mcfs
shall be imputed for purposes of determining
revenues associated therewith in the second year
anniversary rate case, all subsequent rate cases,
and actual cost adjustment (ACA) cases for
determining appropriate rates. In the event the
normalized test year volume level for the service
area is less than 1,797,000 Mcfs per year, Tartan
may not defer any costs associated therewith to a
future rate proceeding, but in the event the
normalized test year volume level for the service
area exceeds 1,797,000 Mcfs per year, this actual
volume level shall be utilized for establishing
rates instead. The provisions of this paragraph
are deemed to apply to any of Tartan's successors
or assigns;
-- that Tartan consents to achieve a capital
structure reflecting a 40-42 percent common equity
to total capital ratio; that Tartan obtain a
resolution from the board of directors of Torch
Energy Advisors, Inc. committing Torch to issue a
minimum of $15 million in equity or more if needed
to supply sufficient equity for Tartan to achieve
the 40-42 percent ratio; that Tartan must attain
the 40-42 percent ratio within two years of the
issuance of the certificate of convenience and
necessity; and that Tartan may not implement a
general or limited increase in non gas rates until
it has achieved the 40-42 percent ratio. In
addition, Tartan may not issue long-term debt
financing until such time as it has a minimum
equity range in its capital structure of $8 to $10
million, and that it will not seek Commission
approval for more than $24 million in total debt
financing within two years of the effective date
of the Report and Order in this proceeding;
-- that Tartan's variance request be granted, but
that one-half of the conversion costs associated
therewith be booked below-the-line for ratemaking
purposes, with the remaining one-half of the
conversion costs associated with the provision of
piping or equipment on the customer's side of the
meter treated as a start-up cost and included in
rate base for ratemaking purposes;
-- that the following rates shall be used for
Tartan's non-gas costs:
Residential and General Service
Customer Charge - Residential $10.00 per month
Customer Charge - General Service $15.00 per month
For all Ccfs used per month $ 0.307 per Ccf
Firm Large Volume and Firm Transportation Service
Customer Charge $300.00 per month
Maximum Commodity Charge $ 0.293 per Ccf
Minimum Commodity Charge $ 0.01 per Ccf
-- that Tartan be required to maintain certain types
of information; and
-- that Tartan establish a gas supply department
within one year of the effective date of the
Report and Order in this proceeding.
(1) Need for Service
Testimony was presented that there are no regulated gas
suppliers in the area proposed to be certificated. Fuel sources
are propane, wood, fuel oil, and electricity. Propane is the
fuel source most similar to natural gas, and is unregulated by
the Commission.
Nine communities have granted franchises which the
voters therein have ratified, and voter ratification of a
franchise in Mountain View is still pending. The franchises
provide some evidence of need and are entitled to great weight in
that regard. The fact that these ten communities were willing to
go through the process of issuing a franchise and holding an
election so that the voters would have an opportunity to pass on
the issue demonstrates a serious desire for an interest in
natural gas. Who would be in a better position to assess the
need for natural gas than the very communities seeking it?
In addition, there was this testimony by Tartan's
witness Tom Taylor on the issue of need: "From the aspect of the
Tartan perception of this Stipulation, we were interested in
providing first-time natural gas service to a part of the state
that is currently underserved. We were approached by seven of
these communities initially, on their initiative, not our
initiative, to develop a gas system to meet their needs,
providing their citizens a choice of natural gas. So we are in
the framework of trying to provide a service that is needed."
Tr. at 77. It is unclear whether the "we" refers to Tartan or
its cadre of witnesses, Mr. Taylor, Mr. Trusty, and Mr. Keith,
who are not unknown in the State of Missouri, but in any event
the fact that so many communities would take the initiative to
seek out proposals for a natural gas system is strong evidence of
need.
The Missouri Court of Appeals has held that "[t]he term
'necessity' does not mean 'essential' or 'absolutely
indispensable', but that an additional service would be an
improvement justifying its cost." State ex rel. Intercon Gas v.
P.S.C., 848 S.W.2d 593, 597 (Mo. App. W.D. 1993). Testimony was
adduced indicating that natural gas is one of the preferred forms
of energy in the central United States where it is readily
available. The availability of natural gas provides a new energy
alternative which may lower energy costs and promote economic
development. Natural gas may also provide an inviting
alternative for industrial and commercial customers. In
addition, the project itself will represent a major capital
investment in south central Missouri, which will require the
employment of workers during the construction phase of the
project, and for the operation of the pipeline.
The Commission also notes that as a general policy in
recent years, it has looked favorably upon applications designed
to spread the availability of natural gas throughout the State of
Missouri wherever feasible. The Commission's most recent
pronouncement respecting the spread of natural gas may be found
in its decision in Re the application of UtiliCorp United, Inc.
d/b/a Missouri Public Service, Case No. GA-94-325 (Report and
Order issued August 22, 1994). The Commission finds that the
facts related above provide sufficient indicia of the need for
natural gas service in the proposed service area.
(2) Applicant's Qualifications
Little or no evidence was presented refuting the
qualifications of Tartan to provide the proposed service. No
serious challenge was made to the accuracy of Tartan's analysis
of the overall cost of the project, nor to the engineering design
and technical requirements of the project.
Tartan is owned by Torch Energy Advisors, Inc. and
Mr. Taylor, Mr. Trusty and Mr. Boyles. Mr. Taylor is an engineer
with a degree in industrial engineering who has received
continuing professional education over the years in all aspects
of the natural gas and the petroleum businesses, including
natural gas transportation. For 17 years he worked for Sun Pipe
Line Company (Sun) in various engineering, operating, and
administrative positions. He later joined ESCO Energy, Inc.
where his primary responsibility was starting a subsidiary, Omega
Pipeline Company (Omega). Omega is in the business of gathering
and transporting natural gas, and was the owner and operator from
inception of Missouri Pipeline Company and MoGas. Mr. Taylor
served as president of Omega, and also as president of Missouri
Pipeline Company, which was the first intrastate pipeline ever
certified by the Public Service Commission. Currently Mr. Taylor
is president of Tartan.
Mr. Trusty holds both a bachelor's and master's degree
in mechanical engineering, and is a Registered Professional
Engineer in the State of Oklahoma. Mr. Trusty was employed by
Sun for seven years during which he was involved in pipeline
engineering, operations, and maintenance. His final position
with Sun was as manager of corporate planning. Subsequently he
joined Omega at its inception and served as vice president of
engineering and operations. Currently he is the vice president
of engineering and operations for Tartan. Mr. Keith, who
testified as one of Tartan's witnesses, is currently employed as
a utility consultant. He has a bachelor of business
administration degree with a major in accounting, and over the
years has held a number of positions relating to utilities and
utility regulation, including a position with the staff of the
Kansas Corporation Commission.
None of these gentlemen are unknown to the Missouri
Public Service Commission. Mr. Taylor and Mr. Trusty were
intimately involved in the proposals which led to the
organization and development of Missouri Pipeline Company and
MoGas. Both of these projects have been successfully completed
and provide services within the State of Missouri. Thus,
Tartan's managers have some familiarity with the environment in
the State of Missouri, including the regulatory environment.
Counsel for Conoco raises the specter that Mr. Taylor
and Mr. Trusty may leave Tartan at some point after a certificate
is granted. While it is true that Mr. Taylor and Mr. Trusty may
leave Tartan, just as the vast majority of people in this country
are free to change positions or jobs, Tartan's qualifications do
not rest solely on the shoulders of these gentlemen. Tartan is
also owned by Torch Energy Advisors Inc., which is involved in
the acquisition and management of oil and gas properties,
including oil and gas production and development, energy property
acquisitions including various pipelines, oil and gas marketing,
and well operations. Torch Energy Advisors, Inc. also recently
purchased Panda Resources (Panda), which is a gas marketing
company. Although Tartan is undecided about whether it intends
to use Panda, it at least has knowledge of the existence of gas
marketing companies and would likely have access to Panda if
needed. In addition, Torch Energy Advisors, Inc. is a wholly-
owned subsidiary of the Torchmark Corporation of Birmingham,
Alabama, and handles Torchmark's energy investments.
The Missouri Court of Appeals provides some guidance on
this issue: "The safety and adequacy of facilities are proper
criteria in evaluating necessity and convenience as are the
relative experience and reliability of competing suppliers."
State ex rel. Intercon Gas v. PSC, 848 S.W.2d 593, 597 (Mo. App.
W.D. 1993). As previously stated, no one has significantly
challenged the safety or adequacy of Tartan's proposed
facilities, and the owners and managers of Tartan are experienced
in the natural gas industry. The Commission is confident that
Tartan possesses the necessary knowledge of the natural gas
utility industry including the industry as it has developed in
the State of Missouri, as well as of all the requisite technical
requirements regarding engineering, safety, and so forth, and so
finds. Thus, Tartan has shown that it is qualified to provide
the proposed service.
(3) Applicant's Financial Ability
The evidence indicates that Tartan is owned by Torch
Energy Advisors, Inc., a company which is in the business of
energy investment, and which currently has $350 million invested
in energy-related assets. In turn, Torch Energy Advisors, Inc.
is a wholly-owned subsidiary of the Torchmark Corporation, which
is an insurance and diversified financial services holding
company with assets of $6 billion.
As of March, 1994, Tartan has expended approximately
$625,000 on this project, representing costs associated with the
initial investigation and research, preliminary engineering
costs, and the expenses of interacting with local community
leaders on various aspects of the project, as well as expenses
related to the filing of its application for a certificate. This
developmental effort was capitalized by Torch Energy Advisors,
Inc. on a monthly basis with 45 days of working capital in the
amount of approximately $75,000. Staff witness Jay Moore
testified that it was acceptable to inject equity on a month-to-
month basis in the form of working capital. Both Tartan witness
Tom Taylor and Staff witness Jay Moore testified that their
understanding of one of the conditions imposed on the issuance of
a certificate under the Stipulation is an up-front equity funding
of Tartan in the amount of $8 to $10 million, with a commitment
of $15 million in equity. Tartan has indicated that it would
like to obtain debt financing as soon as possible so it can take
advantage of current low interest rates; as lenders will not lend
$24 million without a strong equity commitment, including at
least a resolution from the board of directors of Torch Energy
Advisors, Inc., Tartan has an incentive to seek out the equity
commitment it needs.
The Propane Dealers attempt to attack the capital
structure proposed under this Stipulation by comparing it with
the capital structure authorized in a prior case involving MoGas
and Missouri Pipeline Company. However, several witnesses
testified that the difference in capital structure was
attributable to the different atmosphere in the banking and
insurance industries at that point in time. Although there is no
guarantee that Tartan can obtain debt financing, this is true for
any utility going forward.
It is clear that with Torch Energy Advisors, Inc.
backing Tartan, Tartan has the financial ability to provide the
proposed service; it is equally clear that Tartan has no
independent means to go forward with the project. The Commission
so finds. The Commission also determines that under these
circumstances a certificate of convenience and necessity should
not be issued to Tartan unless adequate protections are built
into the Report and order to ensure that Tartan has access to the
financial resources it requires. Any certificate issued will be
issued to Tartan, not Torch Energy Advisors, Inc., therefore the
Commission wishes to assure itself that Tartan will have the
capacity to build the proposed project.
(4) Economic Feasibility of Proposal
The Propane Dealers raised numerous points in their
request for hearing, at the hearing, and in their briefs,
regarding the feasibility of both Tartan's original proposal and
the proposal as modified by the Stipulation. The Commission will
attempt to review only those points which it deems have the most
potential for merit or, if the positions of the Propane Dealers
are accepted, have the greatest impact on the issue of
feasibility.
One of the most important issues pertaining to the
economic feasibility of Tartan's proposal is the conversion rate
which Tartan is expected to reach by the end of the third year of
the project. In his prefiled rebuttal testimony, Staff witness
Craig Jones testified that a conversion rate of about 45 percent
was more realistic than Tartan's proposed conversion rate of
approximately 70 percent. Staff based its initial calculations
of rates on this 45 percent conversion assumption, and came up
with a cost for natural gas that was equivalent to a propane cost
of 83 cents per gallon. Staff also stated that although propane
prices may peak in the winter at a price in excess of 83 cents
per gallon, the overall price for propane would generally be less
than that. Given the 83 cent figure, Mr. Jones concluded that
Staff's calculations produced rates very close to or in excess of
propane prices, and therefore the project would not be feasible
based on those numbers.
However, as part of the Stipulation Tartan agreed to
the imputation of a volume level of at least 1,797,000 Mcfs in
future rate cases. According to Staff witness David Winter, the
1,797,000 Mcf volume figure results in a conversion rate of just
over 70 percent, about what Tartan originally proposed. Using
the imputed volume level, Staff calculated an equivalent propane
price of approximately 73 cents. This new figure of 73 cents is
below the original calculation of 83 cents, which Staff felt to
be too close to the price of propane.
On the question of propane prices and what price
represents the average price at which natural gas would be
expected to compete, the various parties offered different
estimates of the cost of propane. The Propane Dealers estimated
the average cost of propane to be 68 cents, Staff estimated 68 to
75 cents, and Tartan estimated 69-1/2 to 89-1/2 cents. Although
arguments were raised about how the various figures were obtained
and what the various numbers truly represented, the Commission
finds that the numbers offered by the parties are essentially
consistent with each other.
Testimony was also presented with respect to conversion
rates in other portions of Missouri. These figures ranged from
relatively low conversion rates such as those experienced in the
Franklin County area, around 41 percent, to very high conversion
rates experienced in Cuba and St. James, 83.9 percent and 94.6
percent respectively. However, no effort was made to compare the
communities in Tartan's general service area with the communities
experiencing the varied conversion rates in other parts of the
state, in terms of similarities and dissimilarities. The
evidence indicates that in the past conversion rates have varied
quite dramatically from location to location within the State of
Missouri. In the Commission's most recent certificate case
involving natural gas, however, the Commission accepted as
reasonable the company's estimate of a 70 to 90 percent
conversion rate. Re the matter of the application of UtiliCorp
United, Inc. d/b/a Missouri Public Service, Case No. GA-94-325
(Report and Order issued August 22, 1994) at 5-6. The Commission
also deems it appropriate to focus on the effect of the volume
imputation level. In the same rebuttal testimony in which Mr.
Jones recommended disapproval of Tartan's proposal, he also
stated a number of conditions which should be included in any
order granting a certificate to Tartan. Mr. Jones testified as
follows:
First, SMGC [Tartan] should bear all risk
associated with recovering the cost resulting
from this project. If approved, rates would
be established for the provision of service
in the proposed area. If the rates are
somehow made to be competitive with propane
and enough customers convert to natural gas,
the company would theoretically, with time,
recover its investment. However, if the
number of customers is insufficient to
generate enough sales to recover the costs,
the unrecovered cost should be the
responsibility of SMGC's stockholders, not
its customers. These unrecovered revenues
should not be recovered through rate
increases in a subsequent rate case.
Language assigning a minimum sales volume and
maximum rate base and cost figures should be
included in any order approving the
certificate. Staff's proposed figures are
reflected in Schedule 1 of Staff witness
David Winter's rebuttal testimony. These
figures will have to be maintained in future
rate cases to prevent the risk of the project
from being shifted to the ratepayers in
subsequent rate cases. In my opinion this is
the only way to prevent the risk of this
project from being included in rates that
customers pay in future years (i.e., rate
base and depreciation).
If SMGC is confident of its numbers used in
this Application, they should have no
objection to protective language, designed to
minimize the risk to the Company's customers,
being placed in any order that might grant a
certificate.
Exh. #25 at 24-25. The Staff's position in supporting the
Stipulation, therefore, is consistent with its position as
originally filed.
At the hearing Mr. Jones admitted that the Stipulation
does not contain a maximum rate base and cost figures, but
testified that the imputation of volume levels minimized the risk
to customers. The Commission finds the testimony of Mr. Jones to
be persuasive, and that the Stipulation provisions relating to
the imputation of the 1,797,000 Mcf volume level adequately shift
the risk to Tartan and its shareholders, and provide reasonable
protection to customers against the possibility that Tartan has
overestimated the conversion rates reasonably attainable.
As part of the Stipulation, Tartan agreed to provide
only retail service to the 10 municipalities which Tartan seeks
to serve under the requested certificate of convenience and
necessity. Copies of the franchises for these municipalities
were filed as part of Tartan's application. Several of the
franchises contain provisions which would allow the
municipalities to either purchase the distribution system built
by Tartan within a five year period from the date of first
delivery of natural gas, or rescind the franchise within 120
calendar days after Tartan's receipt of its certificate of
convenience and necessity in order to proceed with the immediate
construction of its own distribution system, or both. In the
event a municipality decided to rescind the franchise in order to
build its own distribution system the municipality is required to
have its engineering design, cost estimate, contractor selection,
and funding in place prior to the rescission. Three
municipalities expressed an interest in building their own
distribution system, Mountain View, Ava, and Houston, but only
Mountain View and Ava had taken the step of passing bond
elections in anticipation of constructing municipally-owned
systems in their communities. The Propane Dealers argue that in
light of the Stipulation, in which they claim Tartan has
effectively bargained away some of the options which were
available to the municipalities under the franchises, the
franchises are no longer valid, and thus Tartan can no longer
meet one of the prerequisites for the issuance of a certificate
of convenience and necessity.
As a preliminary matter the Commission notes that under
the applicable statute, Section 393.170.2, RSMo 1986, and the
applicable rule, 4 CSR 240-2.060(2)(A) 10 A, Tartan was at a
minimum only required to file a verified statement or affidavit
stating that it had received the required consent of the proper
municipal authorities. The fact that it was unnecessary to file
actual copies of the franchises is consistent with Staff's
argument in its reply brief that the Commission has no authority
to adjudicate the validity of a franchise. State ex rel.
Electric Company of Missouri vs. Atkinson, cited by Staff, states
as follows:
If the parties to that franchise are
satisfied with what is left of it after
striking out that provision, there is no
reason why the appellant should be heard to
complain. It is generally conceded that the
Public Service Commission is not a court. To
say the least, it is not its primary business
to determine legal questions, and especially
it should not undertake to determine a legal
question in which the party raising is not
concerned.... The statute empowers the Public
Service Commission to issue a certificate of
convenience and necessity, or to refuse it,
but does not empower it to adjudicate the
question of the validity of the franchise.
State ex rel. Electric Company of Missouri vs. Atkinson, 275 Mo.
325, 204 S.W. 897, 898 (banc 1918). This case is also consistent
with the understanding of counsel for Propane Dealers Group One,
who stated on the record, "[S]ince the issue on franchises is
basically a legal issue, I have no further questions of Mr. Jones
on that issue at this time..." Tr. at p. 489.
In addition to the foregoing, the Commission also notes
that the evidence indicated the municipalities were aware of
Tartan's need for approval of the Public Service Commission.
Moreover, the franchises also contain numerous other conditions,
such as the requirement that Tartan furnish reasonable assurance
to the municipalities of the availability of a natural gas supply
at competitive prices prior to commencing physical construction
of the distribution system. Finally, the Commission is not
convinced that Tartan has effectively bargained away the rights
of the municipalities under the franchises, as Staff witness
Craig Jones testified that one solution to the problem of Tartan
serving municipalities in other than a retail capacity would be
for Tartan to establish a second company to operate separately as
an intrastate pipeline, which could then offer transport service
to communities owning their own distribution systems. Exh. #25
at 18-19.
The Propane Dealers expend a fair amount of energy
arguing that the gas rates and nongas rates utilized by Staff and
Tartan in conjunction with the Stipulation are substantially
underestimated, and thus can lead to the trapping of customers
when the true costs are reflected in subsequent rate cases.
While it is possible that the Propane Dealers are correct and
these costs have been underestimated, the Commission is of the
opinion that the rates established by Tartan and Staff are
objectively reasonable, and that the Stipulation as a whole
adequately protects customers from bearing the cost of such an
underestimation. The gas rate in particular may instead be
overestimated, as it includes the cost of propane for a propane
plant that is no longer a part of Tartan's proposal. With
respect to the nongas costs, the Commission emphasizes that these
costs cannot be known with any certainty prior to the development
of the system.
Another matter which the Propane Dealers claim leads to
the underestimation of the true cost of natural gas service is
the propane air plant, referenced above, which was included in
Tartan's original proposal. While the record is not clear as to
why the peak shaving propane air plant was included in Tartan's
original plans, testimony was adduced at the hearing which
indicted that there would be no need for peaking capacity until
at least two years, and that a determination could be made at
that time with respect to which peaking solution would be
cheaper--contracting for additional firm transportation, or
building a propane air plant. Given that the Propane Dealers'
main argument has been that Tartan will not be able to obtain
enough conversions or reach the stipulated volume level, it is
unclear why they are so concerned that peaking capacity be
available at the outset. The Commission deems the decision to
defer action on peaking capacity until a period of time closer to
the actual need therefor to be a reasonable one. The Propane
Dealers also expressed concern about the circumstances
surrounding Tartan's arrangements for firm transportation
capacity. Tartan indicated that it had made a bid to Williams
for firm transportation service on April 29, 1994, and that it
had entered into an agreement with Williams on July 29, 1994.
The concern of the Propane Dealers on this issue has merit. The
evidence presented is very sketchy with respect to the details of
Tartan's arrangements with Williams. The broad outlines of
Tartan's plan are contained in numbered paragraph 3 of the
Stipulation. Because the Stipulation anticipates that Staff will
be provided a signed firm transportation contract with Williams
prior to the approval of Tartan's tariffs, the Commission is of
the opinion that incorporating such a condition as part of this
Report and Order will adequately address the concerns raised on
this issue.
The Propane Dealers also attached to their initial
briefs an extra-record Notice of Complaint by the Federal Energy
Regulatory Commission (FERC) advising of a complaint filed on
August 11, 1994, by City Utilities against Williams with respect
to a bid made by Tartan to Williams on April 29, 1994 for firm
transportation service. The Commission is not convinced that it
is appropriate to consider a document which is outside of the
record, even though it is aware that there was no dilatoriness on
the part of the Propane Dealers in bringing the matter to the
Commission's attention, as the Notice was issued after the
conclusion of the hearing in this case. Nevertheless, at some
point the record must close and a decision made based on the
evidence presented, which will always be reflective of the
situation at a given point in time.
In spite of its reservations, the Commission has
reviewed this point, and is of the opinion that it is unnecessary
to delay its decision until after the resolution of the FERC
complaint. As both Tartan and Williams will of necessity be
aware of the complaint filed by City Utilities, each may act
according to its perception of its best interest. The existence
of the FERC complaint does not fundamentally alter the merits of
Tartan's proposed project. Shortly after Tartan's April 29th bid
to Williams, for example, Tartan submitted prefiled testimony in
which it considered the possibility that City Utilities might
match its bid, as City Utilities was entitled to do. In that
event, Tartan "would secure the necessary firm transportation
service to serve the proposed service area by entering into a 15-
year agreement with WNG [Williams] in which WNG would agree to
expand the capacity of its 16" pipeline serving the Springfield
area, and SMGC [Tartan, d/b/a Southern Missouri Gas Company]
would build the 8-mile lateral pipeline from the end of WNG's
Springfield 16" pipeline to SMGC's trunk pipeline in eastern
Greene County." Exh. #3 at 5. The effect of such a contingency
occurring would delay the completion of the project by one
construction season. Id. at 6. While a successful prosecution
of the complaint may affect Tartan's current plans for the
project, the Commission determines based on the above that the
mere existence of the FERC complaint does not render the project
infeasible. This evidence also demonstrated why it is unfair to
view the FERC complaint in isolation: the other parties have not
had an opportunity to present evidence regarding the impact of
the complaint on the project, including alternate sources of firm
transportation.
The Commission has considered the above points and the
evidence presented, and is of the opinion that there is
sufficient evidence from which to find that Tartan's proposal, as
modified by the Stipulation, represents a viable project. Both
Staff witness Craig Jones and Public Counsel witness Ryan Kind
were present for much of the cross-examination by the Propane
Dealers with respect to the points described above. When asked
if they had changed their minds about the Stipulation, neither
recanted or repudiated the Stipulation. AS was similarly noted
by the Commission in Re UtiliCorp United, Inc., d/b/a Missouri
Public Service, Case No. GA-94-235 (Report and Order issued
August 22, 1994) at 6, in this case Tartan bears most of the risk
if it has underestimated the economic feasibility of its project,
and the public benefit outweighs the potential for
underestimating these costs.
(5) Promotion of the Public Interest
The requirement that an applicant's proposal promote
the public interest is in essence a conclusory finding as there
is no specific definition of what constitutes the public
interest. Generally speaking, positive findings with respect to
the other four standards will in most instances support a finding
that an application for a certificate of convenience and
necessity will promote the public interest. From a review of the
evidence as a whole, the Commission has received the distinct
impression that Tartan's original application was prematurely
filed. For example, many of the required elements were filed on
a tardy basis. The Propane Dealers expressed concern prior to
the beginning of the hearing that the Commission's actions in
this case might encourage future applications to view the initial
application process as a "trial balloon" with respect to their
initial proposals. The Commission does not agree that Tartan's
proposal changed quite as drastically as the Propane Dealers
would suggest. Indeed, it may be inevitable that a certain
amount of change and fine-tuning will occur as the review of an
application proceeds; certainly the Commission has in the past
seen applications which have changed much more drastically that
the present one. However, the Propane Dealers have raised a
valid point, and the Commission puts future applications on
notice that applications which change drastically or are filed
without the required documents will not be looked upon favorably.
In reviewing the myriad contentions of the Propane
Dealers, it is quite apparent to the Commission that the Propane
Dealers seek to require Tartan to prove that its application is
virtually risk-free. This is an impossibility, as estimates will
always remain just that -- estimates. It is difficult to truly
calculate cost-based rates for a start-up company, since the
actual costs are not and cannot be known with any certainty until
the company is up and running. The question, therefore, becomes
whether the estimates given are reasonable.
The Commission has considered the evidence presented to
it, and determines that the overall proposal submitted by Tartan,
as modified by the Stipulation, is reasonable. While the
application process may have been imperfect, the Commission
agrees with Tartan that there presently exists a "window of
opportunity" to bring natural gas to south central Missouri. The
Commission is of the opinion that the biggest risk facing Tartan
is that it may take more time than predicted to obtain the
necessary conversions, not that the project is not viable at all.
Tartan is aware of the risk and has chosen to accept it. It
agreed to the imputed volume levels contained in the Stipulation
and also agreed that he provision involving imputation of volume
levels be binding on its successors and assigns. Tartan also
conducted a sensitivity analysis which showed that in the event
conversions took place at a lower rate than anticipated, Tartan's
return on its investment would be reduced to a single-digit
level. Tartan seems willing to accept this risk. In spite of
any flaws in the application process, the Commission is of the
opinion that Tartan is serious about bringing natural gas to
south central Missouri, and has access to the wherewithal to do
so.
While the Propane Dealers have expressed both
legitimate concerns and meritless arguments with respect to
Tartan's project, the fact remains that the Propane Dealers will
almost never have an incentive to sign a stipulation that
recommends the granting of a certificate of convenience and
necessity to any entity attempting to bring natural gas into
areas where propane is a main energy source. Instead the primary
and understandable interest of the Propane Dealers is in
protecting their businesses from competition. This is apparent
in the contradictory arguments made by the Propane Dealers: on
the one hand, they argue that natural gas cannot compete with
propane in the proposed service area; on the other hand, they
also argue that the advent of natural gas will destroy their
businesses, and that this is a factor the Commission should
consider in reaching a determination of the public interest. The
facileness of these arguments with respect to the interest of the
Propane Dealers is easily shown. If in fact natural gas can
compete with propane in the proposed service area, then the
residents of south central Missouri will clearly benefit by
having another energy source available, and perhaps by enjoying
more competitive prices among all the available fuel sources.
Propane will of necessity have a smaller share of the market than
it currently enjoys, and to the extent that it is required to cut
prices in order to remain competitive, its profit margin may be
smaller. However, if in fact natural gas cannot compete with
propane, the worst effect likely to be experienced by the Propane
Dealers is again the possibility of a smaller profit margin to
the extent the Propane Dealers cut costs to drive natural gas out
the market.
The extent to which the businesses of the Propane
Dealers are adversely affected by the grant of a certificate to
provide natural gas service to the proposed service area is not a
determining factor in the Commission's decision as to whether it
is appropriate to issue such a certificate. As was aptly stated
by the Missouri Court of Appeals in a case in which liquified
petroleum gas distributors appealed the award of a certificate of
convenience and necessity to a natural gas distributor, "We think
the Commission properly rejected this contention. [That the
certificate be conditioned upon the natural gas distributor
relieving the liquified petroleum gas distributors of their
financial loss.] LPG must give way to natural gas just as the
mule breeding business vanished upon the advent of the farm
tractor and truck; just as wood stoves gave way to LPG. Such
casualties are the price paid for 'progress'." State ex rel.
Webb Tri-State Gas Company vs. Public Service Commission, 452
S.W.2d 586, 588 (Mo. App. 1970). It is interesting to note that
as far back as 1970, almost 25 years ago, the advent of natural
gas was considered a mark of progress.
Natural gas is a preferred energy source for both
economic and environmental reasons, and Missouri is fortunate to
be geographically located near several natural gas producing
states. The Commission deems it to be in the long-term public
interest of south central Missouri and the entire State of
Missouri to encourage the availability of natural gas.
Nevertheless, the posture of Tartan's application is
such that a certificate of convenience and necessity cannot be
issued absent the imposition of some reasonable conditions:
1. that the certificate of convenience and necessity
shall not be effective until Tartan's tariffs are
approved;
Prior to the approval of Tartan's tariffs:
2. that prior to the approval of Tartan's tariffs,
Tartan file with the Commission a certificate from
the Missouri Secretary of State that it is
authorized to do business in the State of
Missouri;
3. that prior to the approval of Tartan's tariffs,
Tartan file with the Commission an affidavit of
its president indicating whether Tartan is owned
by Torch Energy Advisors, Inc. or Torch Energy
Marketing, Inc. If the latter, the affidavit
shall indicate whether Tartan has precisely the
same relationship with Torch Energy Marketing,
Inc. that Tartan testified it had with Torch
Energy Advisors, Inc. at the hearing, and whether
Torch Energy Marketing, Inc. has precisely the
same relationship with Torchmark Corporation that
Tartan testified Torch Energy Advisors, Inc. had
at the hearing, specifically: whether Torch
Energy Marketing, Inc.
-- has an 85 percent ownership interest in Tartan;
-- has $350 million invested in energy-related
assets;
-- has invested at least $625,000 in Tartan;
-- has supplied Tartan with 45 days of working
capital on a monthly basis in the approximate
amount of $75,000;
-- is a wholly-owned subsidiary of Torchmark.
4. that prior to the approval of Tartan's tariffs,
Tartan submit to the Commission's Procurement
Analysis Department a signed firm transportation
contract with Williams Natural Gas Company as
required in numbered paragraph 3 of the
Stipulation;
Prior to the commencement of construction of any gas facilities:
5. that prior to the commencement of construction of
any gas facilities, Tartan file with the
Commission a resolution of the Board of Directors
of Torch Energy Advisors, Inc. or Torch Energy
Marketing, Inc. -- whichever company is an actual
owner of Tartan -- committing itself to issue a
minimum of $15 million of equity to Tartan, or
more if needed to supply sufficient equity to
enable Tartan to achieve a 40-42 percent common
equity to total capital ratio, and committing to
supply this equity to Tartan within two years of
the issuance of the certificate of convenience and
necessity contemplated by this Report and Order,
so that Tartan may obtain the 40-42 percent ratio
as contemplated in numbered paragraph 8 of the
Stipulation;
6. that prior to the commencement of the construction
of any gas facilities, Tartan file certified
copies of the required approval of other
governmental agencies, per Rule 4 CSR 240-
2.060(2)(A)10 B, eg., FERC approval of
arrangements with Williams, Missouri Highway
Department approval of the use of the highway
right-of-way, etc.;
Miscellaneous:
7. that the certificate as it applies to the City of
Mountain View shall be contingent upon voter
ratification of the franchise granted to Tartan.
Tartan may not construct distribution facilities
therein or serve residents therein until such time
as Tartan has filed with the Commission an
affidavit showing that the voters ratified the
franchise in the voter ratification election;
8. Tartan may not construct distribution facilities
to serve residents in the unincorporated portions
of the Counties within its service territory
unless it has first obtained any necessary county
franchises authorizing it to do so, and has filed
an affidavit to that effect with the Commission;
9. In addition, Tartan shall comply with all of the
other conditions contained in the Stipulation,
within the time frames contemplated by the
Stipulation.
10. that upon receipt of the above-referenced
documents, the Staff shall -- as soon as possible
but in no event later than 30 days after receipt -
- submit a brief report to the Commission, stating
its recommendation as to whether the documents
submitted show compliance with the conditions of
this Report and Order. In the event Tartan is in
compliance, the Commission shall issue an order
authorizing construction after receipt of Staff's
report to that effect.
The Commission determines that the conditions listed
above are necessary and appropriate to protect the public
interest. The conditions listed embrace the spirit of what was
intended by the Stipulation, if not the actual language used, and
merely require that the prerequisites demanded of all applicants
under the applicable Commission rule be met. These conditions
are particularly important given that Tartan is a new company
with no known track record upon which the Commission may rely.
Thus, the Commission finds that it is in the public interest to
issue to Tartan a certificate of convenience and necessity
subject to the conditions set forth above, and the conditions
contained in the Stipulation.
Variance Request
In the request for variance from the Commission's
promotional practice rules filed on January 20, 1994, Tartan
proposed a conversion incentive program as follows:
-- Tartan would provide customers with the service
line, meters, regulators, labor, and other
equipment necessary for the customer to utilize
natural gas service;
-- would extend the service lines from the mains to
the customers' meters and premises;
-- would provide and install necessary orifices for
existing appliances;
-- would provide minor appliance upgrades or
modifications;
-- would provide testing and repair of gas piping
from the meter to various gas appliances within
the residence;
-- Tartan would offer the above-listed conversion
incentives up to an average of $200, with any
additional conversion or appliance upgrade costs
provided to the customer to be paid by the
customer, with payments spread over a period of 24
months with no interest;
-- Tartan would make available to customers natural
gas appliances at cost with payments spread over a
24-month period at Tartan's cost of money; and
-- the conversion incentive program would be offered
for a limited period of 24 months during the
construction of Tartan's distribution system.
As good cause for the variance, Tartan stated the following:
-- that the program would contribute to safety due to
the limited number of qualified contractors
available for conversion in the proposed service
area;
-- that the program would allow conversions to be
done economically while contractors and
construction crews, personnel, supervisors, and
inspectors are already in the area constructing
the backbone gas distribution system;
-- that economic advantages will result from the
ordering of large bulk quantities of various parts
and materials;
-- that the program will help low income and fixed
income customers convert, who might otherwise not
have the wherewithal to convert;
-- that customers would gain access to natural gas
more quickly, effectively, and efficiently;
-- that the program would encourage a faster demand
for natural gas, which would benefit customers who
convert both in the near-term and long-term; and
-- no regulated public utilities are in the proposed
service area which would be directly affected by
the program.
Originally Tartan sought to include 100 percent of the
cost associated with its conversion incentive program in rate
base for ratemaking purposes. Pursuant to the Stipulation
entered into with Staff and Public Counsel, one-half of the costs
would be booked below-the-line for ratemaking purposes, with the
remaining one-half of the costs to be treated as a start-up cost
and included in rate base for ratemaking purposes. The Propane
Dealers conducted extensive cross-examination on this issue at
the hearing. They stressed that conversions at no or low cost
could "trap" customers who could not easily reconvert once the
alleged higher cost of gas service becomes apparent, that the
program is discriminatory because it is temporary in nature, and
that it is unfair to charge all ratepayers a portion of
conversion costs through rate-basing. In addition, Tartan's
witnesses were also questioned as to whether the conversion
incentive program would extend to industrial customers.
The evidence indicated that the cost of the conversion
incentive program would be approximately $1.2 to $1.3 million.
The 24-month period for the program would not begin until gas was
available in a given community, therefore the commencement date
of the 24-month period would be staggered from community to
community. Tartan would be required to keep track of the actual
costs for the conversions, and could not impute the $200 limit to
a particular customer, non offset costs from household to
household in the event the conversion costs for a particular
customer were less or more than the $200 limit. There was also
testimony that the conversion incentive program would benefit all
ratepayers by attracting as many customers as quickly as
possible, which would speed the overall development of the
system. In addition, Tartan's witness Michael N. Trusty
specifically stated, "I had not envisioned it [the conversion
incentive program] extending to industrial customers." Tr. at p.
227. It is unlikely in any event that the conversion incentive
program would be effective if applied to industrial customers,
given the $200 limit.
Cross-examination of the witnesses also sought to
convey the impression that there was some uncertainty as to the
details of the plan, or that Staff and Public Counsel disagreed
with Tartan on some of the particulars of the plan. However,
Tartan's witnesses clearly testified that the only change to the
conversion incentive program from what it originally proposed was
that one-half of the costs associated with the program would be
the responsibility of the shareholders. It was also noted that
some minor changes to the specimen tariffs dealing with the
conversion incentive program might be necessary, but that this
was a function of utilizing another company's tariffs as a
starting point for its specimen tariffs, and that any needed
corrections could be made prior to or during Staff's review of
the actual tariffs filed.
The Commission has reviewed Tartan's application for a
variance and the evidence adduced at the hearing, and is of the
opinion that Tartan has demonstrated the requisite good cause for
a variance. It is undenied that Tartan will be competing with an
unregulated propane industry, or that the conversion incentive
program could increase the conversion rate, which in turn would
allow Tartan to spread its fixed costs over a larger base. With
regard to the argument of "entrapment," a customer who converts
under the conversion incentive program would be no worse off, and
might be in a better situation, than a customer who converted
after the expiration of the program and who bore the entire
amount of initial conversion costs, in the event that both wanted
to reconvert to their original fuel source.
As a practical matter, it is inevitable that some
people will convert at an earlier point in time than others. The
early converters enable the system to get up and running as
quickly as possible, thus making future conversions more economic
and efficient. The Commission deems the conversion incentive
program to provide benefits to future customers, and thus it is
not unduly discriminatory. The Commission further determines
that the provision in the Stipulation providing for a 50-50
sharing of costs between ratepayers and shareholders is a
reasonable compromise, and adequately addresses the concerns
expressed by the Staff and the Public Counsel.
Although variance requests are reviewed by the
Commission on a case-by-case basis, the Commission notes that the
conversion incentive program proposed by Tartan is similar to
other programs approved by the Commission in previous cases.
See, e.g., Re the application of UtiliCorp United, Inc. d/b/a
Missouri Public Service, Case No. GA-94-325 (Report and Order
issued August 22, 1994), and Re the application of Fidelity
Natural Gas, Inc., Case No. GA-91-299 (Report and Order issued
December 31, 1991).
Conclusions of Law
The Missouri Public Service Commission has arrived at
the following conclusions of law:
Tartan Energy Company, L.C., d/b/a Southern Missouri
Gas Company has sought authority to do business as a public
utility in the State of Missouri, and, therefore, would be
subject to the general jurisdiction of the Commission pursuant to
Chapters 386 and 393, RSMo 1986, as amended.
The Commission has authority under Section 393.170,
RSMo 1986 to grant permission and approval for the construction
of gas plant and the exercise of a franchise relating thereto
whenever the Commission determines after due hearing that such
construction or franchise is necessary or convenient for the
public service. The Commission also has authority under this
section to impose such condition or conditions as it may deem
reasonable and necessary.
Pursuant to Section 536.060, RSMo 1986, the Commission
may also approve a stipulation and agreement concluded among the
parties as to any issues in a contested case. The standard for
Commission approval of a stipulation and agreement is whether it
is just and reasonable. Since the Stipulation and Agreement was
nonunanimous, the nonsignatory parties in this case have had an
opportunity for due hearing through the presentation of their own
witnesses and the cross-examination of the witnesses for the
signatory parties with respect to both the original proposal
before the Commission and the proposal as modified by the
Stipulation.
Orders of the Commission must be based on competent and
substantial evidence on the record as a whole, must be
reasonable, and must not be arbitrary and capricious or contrary
to law. In this regard, the Commission has considered all the
competent, substantial, and relevant evidence in this matter and
concludes that the Nonunanimous Stipulation is just and
reasonable and should be adopted, subject to the conditions set
forth in the body of this Report and Order, which conditions are
intended to further clarify the provisions of the Stipulation as
said provisions were explained during the hearing.
In addition, the Commission has authority to grant a
variance from the Commission's rule on promotional practices
pursuant to 4 CSR 240-14.010(2). The Commission concludes that
Tartan should be granted a variance for its conversion incentive
program under the terms agreed to in the Nonunanimous Stipulation
and Agreement.
IT IS THEREFORE ORDERED:
1. That the Nonunanimous Stipulation and Agreement
filed on July 22, 1994, and signed by Tartan Energy Company,
L.C., d/b/a Southern Missouri Gas Company, the Staff of the
Missouri Public Service Commission, and the Office of the Public
Counsel, which is attached hereto as Attachment 1 and
incorporated herein by reference, be and is hereby approved,
subject to the conditions set forth in the body of this Report
and Order.
2. That Tartan Energy Company, L.C., d/b/a Southern
Missouri Gas Company be and is hereby granted a certificate of
convenience and necessity authorizing it to construct, install,
own, operate, control, manage, and maintain gas facilities and to
render gas service in and to the residents of certain areas of
Wright, Texas, Howell, Webster, Greene, and Douglas Counties,
including the incorporated municipalities of Cabool, Houston,
Licking, Mountain Grove, West Plains, Ava, Mansfield, Marshfield,
and Willow Springs, Missouri, as well as Mountain View, Missouri
if the franchise granted by Mountain View is ratified by its
voters, subject to the limitations and conditions contained in
the Nonunanimous Stipulation and Agreement and this Report and
Order. Said certificate shall be in conformity with Attachment
2, attached hereto and incorporated herein by reference, which
describes the service area by county, range, township, and
section, and Attachment 3, attached hereto and incorporated
herein by reference, which is a map which generally depicts the
service area.
3. That prior to the commencement of construction of
any gas facilities in the State of Missouri, Tartan Energy
Company, L.C., d/b/a Southern Missouri Gas Company shall file
with the Missouri Public Service Commission all documents
necessary to show compliance with the conditions set forth in the
body of this Report and Order. Upon receipt of the above-
referenced documents, the Staff shall -- as soon as possible but
in no event later than thirty (30) days after receipt -- submit a
brief report to the Commission, stating its recommendation as to
whether the documents submitted show compliance with the
conditions of this Report and Order. In the event Tartan is in
compliance, the Commission shall issue an order authorizing
construction immediately after receipt of Staff's report to that
effect.
4. That in the operation of the above-stated service
areas, Tartan Energy Company, L.C., d/b/a Southern Missouri Gas
Company shall use the nongas rates specified in the Nonunanimous
Stipulation and Agreement and this Report and Order.
5. That Tartan Energy Company, L.C., d/b/a Southern
Missouri Gas Company be and is hereby authorized to file tariffs
in accordance with the provisions of the Nonunanimous Stipulation
and Agreement and this Report and Order, effective for service on
or after October 1, 1994.
6. That the certificate of convenience and necessity
referenced in Ordered Paragraph #2 shall become effective
simultaneously with the effective date of the tariffs required to
be filed and approved pursuant to Ordered Paragraph #5.
7. That Tartan Energy Company, L.C., d/b/a Southern
Missouri Gas Company be and is hereby granted a variance from the
promotional practices rule of this Commission to the extent and
limits as set forth in the Nonunanimous Stipulation and Agreement
and this Report and Order.
8. That Tartan Energy Company, L.C., d/b/a Southern
Missouri Energy Company be and is hereby authorized to account
for one-half of the allowed $200.00 maximum per customer
conversion incentive program costs above-the-line, and include
those costs in rate base, as set forth in the Nonunanimous
Stipulation and Agreement and this Report and Order.
9. That the Commission makes no finding as to the
prudence or ratemaking treatment to be given any costs or
expenses incurred as the result of the granting of this
certificate of convenience and necessity, except those costs and
expenses dealt with specifically in the Nonunanimous Stipulation
and Agreement and this Report and Order, and reserves the right
to make any disposition of the remainder of those costs and
expenses which it deems reasonable, in any future ratemaking
proceeding.
10. That this order shall become effective on
October 1, 1994.
BY THE COMMISSION
[signed]
David L. Rauch
Executive Secretary
(SEAL)
McClure, Perkins and
Kincheloe, CC., Concur.
Mueller, Chm., and Crumpton, C.,
Absent.
Dated at Jefferson City, Missouri,
on this 16th day of September, 1994.
STATE OF MISSOURI
PUBLIC SERVICE COMMISSION
At a session of the Public Service
Commission held at its office
in Jefferson City on the 14th
day of April, 1995.
- - - - - - - - - - - - - - - - - - - - x
In the matter of the application of :
Tartan Energy Company, L.C., d/b/a
Southern Missouri Gas Company, for a :
certificate of convenience of
necessity authorizing it to construct, :
install, own, operate, control, manage
and maintain gas facilities and to : CASE NO. GA-94-127
render gas service in and to residents
of certain areas of Wright, Texas, :
Howell, Webster, Greene and Douglas
Counties, including the incorporated :
municipalities of Seymour, Cabool,
Houston, Licking, Mountain Grove, :
Mountain View, West Plains, Ava,
Mansfield, Marshfield and Willow :
Springs, Missouri.
- - - - - - - - - - - - - - - - - - - - x
ORDER APPROVING TARIFFS AND AUTHORIZING THE COMMENCEMENT OF
CONSTRUCTION OF GAS FACILITIES
On September 16, 1994, the Commission issued a Report
and Order which granted Tartan Energy Company, L.C., d/b/a
Southern Missouri Gas Company (Tartan) a Certificate of
Convenience and Necessity authorizing it to construct, install,
own, operate, control, manage and maintain gas facilities and
render gas service in and to the residents of certain areas of
Wright, Texas, Howell, Webster, Greene, and Douglas Counties,
including the incorporated municipalities of Seymour, Cabool,
Houston, Licking, Mountain Grove, West Plains, Ava, Mansfield,
Marshfield, and Willow Springs, Missouri, as well as Mountain
View, Missouri if the franchise granted by Mountain View was
ratified by its voters. The Report and Order contained a number
of conditions, and stated that the Certificate of Convenience and
Necessity would become effective simultaneously with the
effective date of the tariffs Tartan was required to file, while
in turn indicating that Tartan's tariff would not be approved
until a number of conditions had been met. In addition, the
Report and Order also stated that Tartan was required to show
compliance with a further set of conditions prior to the
commencement of construction of any gas facilities. Tartan also
was required to comply with the terms of the Nonunanimous
Stipulation and Agreement. The various conditions are listed in
detail on pages 27-28 of the Commission's Report and Order. On
October 12, 1994, Tartan filed tariff sheets to comply with the
Commission's Report and Order, with a proposed effective date of
November 14, 1994. Since that time, the effective date of the
tariffs have been extended by Tartan on numerous occasions, with
a current effective date of April 15, 1995. On March 29, 1995,
Tartan filed a document styled Applicant's Motion for Order
Authorizing Commencement of Construction of Natural Gas
Distribution System.
On April 7, 1995, the Staff of the Missouri Public
Service Commission (Staff) filed a memorandum entitled Staff
Recommendation and Report on Items and Tariffs Submitted in
Compliance with the Commission's Report and Order. Staff's
memorandum serves a threefold purpose: (1) it provides Staff's
recommendation with respect to the tariffs filed by Tartan;
(2) it provides a brief report to the Commission on Tartan's
compliance with the conditions of the Report and Order as
required by the Report and Order; and (3) it provides a
recommendation with respect to Tartan's motion for authorization
to commence construction of its gas system. Staff first explains
that the purpose of the extension of the effective date of the
tariffs was to allow Tartan additional time to provide Staff with
the documents required by the Stipulation and Agreement which the
Commission approved in its Report and Order. In addition, Staff
adds that since the original filing of the tariffs, Tartan has
filed substitute tariff sheets on a number of occasions.
Staff states that the tariff sheets filed by Tartan
contain the rates, rules, and regulations under which natural gas
service will be provided to its service area in south-central
Missouri. The material contained in the filing, according to
Staff, includes a table of contents, a map, metes and bounds
descriptions, rate tariff sheets, a Purchased Gas Adjustment
Clause, and general Rules and Regulations. Staff indicates that
this filing also includes Tartan's Promotional Practice
provisions and incorporates material consistent with the most
revisions of the Commission's Chapter 13 rules on Service and
Billing Practices. In addition, Staff notes that on February 15,
1995, the company submitted to the Commission's Gas Safety Staff
an Operations and Maintenance Manual, including requirements for
transmission O&M and a Drug Testing Program pursuant to paragraph
5(c) of the Stipulation, and also notes that on March 23, 1995,
the company submitted to the Procurement Analysis Staff a copy of
a signed firm transportation contract between Tartan and Williams
Natural Gas Company pursuant to paragraph 3 of the Stipulation.
Additionally, Staff mentions it has received unofficial
notification from Tartan that the franchise for Mountain View was
ratified by the voters in the April 4, 1995 election.
In conclusion, Staff states that it has reviewed the
documents which comprise the conditioned items required to be
produced prior to the granting of the Certificate and
authorization of construction, and believes that they are in
satisfactory compliance with the Commission's Report and Order.
The Staff also indicates that it has examined the proposed tariff
sheets and has determined that they are in compliance with the
Commission's Report and Order and should be approved. The Staff
therefore recommends that the Commission approve the Certificate
and tariff sheets filed by Tartan to become effective with
service to be rendered on and after April 15, 1995, and grant
Tartan's request for an order authorizing the commencement of
construction.
The Commission has reviewed all of the material filed
by Tartan subsequent to the issuance of the Report and Order, and
has reviewed the recommendation of Staff, and finds that Tartan
is in substantial compliance with the conditions precedent to the
approval of its tariffs; that Tartan's tariffs are in substantial
compliance with the Commission's Report and Order; and that
Tartan is in substantial compliance with the conditions precedent
to Commission authorization of the commencement of construction
of Tartan's gas facilities.
More specifically, prior to the approval of Tartan's
tariffs, Tartan was required to file a certificate of authority
to do business in the State of Missouri, an affidavit of its
President detailing the relationship between Tartan, Torch Energy
Advisors, Inc., and Torch Marketing, Inc., and a signed firm
transportation contract with Williams Natural Gas Company. On
October 14, 1994, Tartan filed the required certificate, and the
affidavit of Tom M. Taylor,<F1> which substantially comply
____________________
<F1> In addition to the required information, Mr. Taylor's
affidavit notes that Tartan, which will be doing business in
the State of Missouri under the name of Southern Missouri
Gas Company, is required under Missouri state law to
identify itself as a limited liability company, and
therefore should be referred to as Southern Missouri Gas
Company, L.C. The Commission will use the designation
"Southern Missouri Gas Company, L.C." in the remainder of
its order and in the future.
with the Commission's directive. On March 23, 1995, Tartan filed
a copy of the contract with Williams Natural Gas with the
Commission's Procurement Analysis Department, in compliance with
the Nonunanimous Stipulation and Agreement and the Commission's
Report and Order. Thus all the prerequisites to approval of
Tartan's tariffs have been met. The Commission finds that upon
review of the tariff sheets filed on October 12, 1994, as
substituted on March 16, 1995 and March 20, 1995, and upon review
of Staff's recommendation, the tariff sheets as substituted are
in compliance with the Commission's Report and Order, and the
rates contained in the tariff sheets as substituted are just and
reasonable.
In addition, prior to the commencement of any gas
facilities, Tartan was required by the Commission's Report and
Order to provide a commitment for the infusion into Tartan of
common equity sufficient to achieve a 40-42 percent common equity
to total capital ratio, and was required to file certified copies
of the required approval of other governmental agencies. The
required financial commitment was filed as an exhibit to Tartan's
motion, and is in substantial compliance with the Commission's
Report and Order. Also attached to Tartan's motion as exhibits
are the required approvals of other governmental agencies,
including: (1) Missouri Highway and Transportation Commission
permits; (2) nationwide permits from the Department of the Army,
U.S. Corp of Engineers; and (3) the affidavit of Tom M. Taylor,
with attached county franchises authorizing use of county
facilities in unincorporated areas of Douglas, Howell, and
Webster Counties. These also appear to be in substantial
compliance with the Commission's Report and Order.
While county franchises are not a prerequisite to the
commencement of construction by Tartan, the Commission's Report
and Order does require any necessary county franchises prior to
the construction by Tartan of distribution facilities to serve
residents in the unincorporated portions of the counties within
its service territory. Tartan explains in its motion that it
does not yet have county franchises for the Counties of Texas and
Wright, but states that it has met with the County Commissions in
Texas and Wright Counties and expects to receive authorization in
the very near future. Tartan adds that it will file the county
authorizations when they are available. The Commission is of the
opinion that lack of county franchises for Texas and Wright
Counties is not an impediment to Tartan's commencement of
construction of trunkline facilities. As Tartan correctly states
in its motion, since Tartan's trunkline facilities will be
constructed along a public highway right-of-way for which
approval has been received from the Missouri Highway and
Transportation Department, the trunkline facility and the
municipal distribution facilities may be constructed with the
governmental permits and franchises which have been obtained to
date. In addition, Tartan may construct distribution facilities
to serve residents in the unincorporated portions of Douglas,
Howell, and Webster Counties.
For purposes of clarity, the Commission determines
there are only three areas where Tartan may not yet commence
construction: Tartan may not construct distribution facilities
to serve residents in the unincorporated portions of Texas and
Wright Counties unless it has obtained any necessary county
franchises authorizing it to do so, and has filed either a
certified copy of the county franchise or an affidavit indicating
that the county franchise has been obtained, and Tartan may not
construct distribution facilities to serve residents in the city
of Mountain View until it files with the Commission a certified
copy of the franchise ratified by the voters of Mountain View, or
an affidavit indicating that the voters ratified the franchise in
the voter ratification election.<F2>
____________________
<F2> While Staff's recommendation indicates it received
unofficial notification that the franchise was ratified by
voters on April 4, 1995, Tartan is still required to file
with the Commission either the franchise or an affidavit.
The Commission concludes that it is appropriate to
approve Tartan's tariffs for service on and after April 15, 1995;
to authorize Tartan's Certificate of Convenience and Necessity to
become effective simultaneously with the effective date of its
tariffs on April 15, 1995; and to authorize commencement of
construction of Tartan's trunkline facilities, municipal
distribution facilities in the incorporated municipalities
contained within its Certificate of Convenience and Necessity,
with the exception of Mountain View, and distribution facilities
to serve unincorporated areas in Douglas, Howell, and Webster
Counties.
IT IS THEREFORE ORDERED:
1. That the following tariff sheets filed by Tartan
Energy Company, L.C., d/b/a Southern Missouri Gas Company, L.C.
on October 12, 1994, as substituted by the tariff sheets of March
16, 1995 and March 20, 1995, be and are hereby approved to become
effective April 15, 1995:
P.S.C. MO. No. 1
Title Page
Original Sheet Numbers i through x Inclusive
Original Sheet Numbers 1 through 71 Inclusive
2. That the Certificate of Convenience and Necessity
granted to Tartan Energy Company, L.C., d/b/a Southern Missouri
Gas Company, L.C. in the Commission's Report and Order of
September 16, 1994, shall become effective simultaneously with
the effective date of the tariffs approved in Ordered Paragraph
No. 1 above, on April 15, 1995.
3. That Tartan Energy Company, L.C., d/b/a Southern
Missouri Gas Company, L.C., be and is hereby authorized to
commence construction of its trunkline facilities; municipal
distribution facilities in the incorporated municipalities
contained within its Certificate of Convenience and Necessity,
with the exception of Mountain View; and distribution facilities
in the unincorporated portions of Douglas, Howell, and Webster
Counties.
4. That this order shall become effective on
April 15, 1995.
BY THE COMMISSION
David L. Rauch
Executive Secretary
(S E A L)
Mueller, Chm., McClure, Perkins,
Kincheloe and Crumpton, CC., Concur.
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing Under the Public Utility Holding Company Act of 1935
______________, 1995
MCN Corporation (70- )
MCN Corporation ("MCN"), 600 Griswold Street, Detroit,
Michigan 48226 has filed an Application and Declaration on Form
U-1 under Sections 9(a)(2) and 10 of the Public Utility Holding
Company Act of 1935 (the "Act") requesting authorization from the
Securities and Exchange Commission (the "Commission") to acquire
(the "Acquisition") a 1% general partnership interest in Southern
Missouri Gas Company, L.P., a Missouri limited partnership (the
"Partnership") which will construct, own and operate a gas
pipeline and distribution system in southern Missouri that is
currently under construction and owned by Tartan Energy Company
of Missouri, L.C., a Missouri limited liability company ("TEC").
Prior to the Acquisition, the ownership of the system will be
transferred to the Partnership.
MCN is a public utility holding company exempt from all
provisions of the Act except Section 9(a)(2) under Section
3(a)(1) pursuant to Rule 2. MCN owns all of the issued and
outstanding common stock of two public utility companies as
defined under the Act: (a) Michigan Consolidated Gas Company, a
gas utility engaged in the distribution, transmission and storage
of natural gas to approximately 1.1 million customers in Michigan
and (b) Citizens Gas Fuel Company, a gas utility that provides
service to the City of Adrian, Michigan.
MCN has entered into a letter of intent with two other
parties outlining the terms on which MCN intends to acquire a 1%
general partnership interest and a 46.5% limited partnership
interest in the Partnership. The remaining interests in the
Partnership will be owned as follows: 1% general partnership and
4% limited partnership interest owned by Tartan Management
Company of Missouri L.C. or its successor ("Tartan") and 47.5%
limited partnership interest owned by Torch Energy Marketing,
Inc. ("Torch"). Tartan will also serve as operator of the
Partnership project.
The Partnership initially will distribute gas to the
residents of approximately fifteen communities in Greene,
Webster, Wright, Howell, Douglas and Texas counties, Missouri,
all of which are located in south-central Missouri. TEC has
obtained fifteen local franchises, all of which will be held by
the Partnership pursuant to a merger of TEC with and into the
Partnership, with the Partnership as the surviving entity. The
merger of TEC with and into the Partnership is subject to the
approval of the Missouri Public Service Commission (the "MPSC").
When fully developed, the Partnership system will have over 300
miles of trunk pipeline and distribution piping, serving over
10,000 customers. It is expected that the Partnership system
will be fully developed by early 1997.
The MPSC has already approved TEC's application for the
first $39 million in expenditures for developing the system to
serve approximately 9,000 customers in the ten franchised
communities. Effective upon the merger of TEC and the
Partnership, the terms of the MPSC order will be applicable to
the Partnership. Pursuant to the MPSC order, the maximum
financing for the construction of the project will be $24 million
(plus interest during construction). The financing may be with
recourse to the Partnership project only. The remaining $15
million of project funding will be in the form of equity
contributions from the project partners. MCN and Torch will
contribute equally to the equity funding for construction of the
project.
MCN's current budget and projections for the next ten
years indicate that MCN's 47.6% share of the capital expenditures
of the Partnership will amount to $6 million in 1996, less than
$400,000 in 1997 and around $120,000 per year for the following
eight years. Moreover, MCN's share of the assets of the
Partnership are not projected to exceed $20 million at any time
in this period.
MCN currently has approximately $2 billion in assets on
a consolidated basis and in excess of $1 billion in utility
assets.
For the Commission, by the Division of Investment
Management, pursuant to delegated authority.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Statement of Income and the Consolidated Statement of Financial
Position and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<CASH> 44,458
<SECURITIES> 0
<RECEIVABLES> 207,614
<ALLOWANCES> 21,040
<INVENTORY> 87,549
<CURRENT-ASSETS> 417,127
<PP&E> 2,772,538
<DEPRECIATION> 1,168,099
<TOTAL-ASSETS> 2,256,635
<CURRENT-LIABILITIES> 411,762
<BONDS> 706,225
<COMMON> 660
100,000
0
<OTHER-SE> 654,320
<TOTAL-LIABILITY-AND-EQUITY> 2,256,635
<SALES> 0
<TOTAL-REVENUES> 831,092
<CGS> 0
<TOTAL-COSTS> 711,880
<OTHER-EXPENSES> 697
<LOSS-PROVISION> 8,948
<INTEREST-EXPENSE> 26,862
<INCOME-PRETAX> 81,086
<INCOME-TAX> 27,182
<INCOME-CONTINUING> 63,902
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,902
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 0
</TABLE>
