File No. 70-8731
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3
TO
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 exclusively in Missouri, will not account for a
material part of MCN's income<F1> and thus, MCN and each
public utility subsidiary from which it derives a material part
of its income will continue to be organized and operating
predominantly in the state of Michigan.
____________________
<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).
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 and was
acquired by MCN in 1990, is engaged in the distribution of
natural gas in the city of Adrian, Michigan, 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 conduct virtually all of their
operations 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 26, 1996, 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 is
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 is
engaged in the distribution of natural gas in to the City of
Adrian, Michigan and surrounding communities. MichCon and
Citizens provide retail gas distribution services primarily to
residential and small volume commercial customers and
transportation services to large volume commercial. MichCon also
provides transportation services to industrial customers as well
as intrastate 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 originates in
the Midcontinent and Southern basins, 40% in Michigan, 10% in
Canada and 4% from other sources. Similarly, approximately 55%
of Citizen's gas supply originates in the Midcontinent and
Southern basins, 35% 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. or its successor ("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 2/3rds of the interests of the
limited partners.<F2> On September 25, 1995, Torch
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.
____________________
<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.
It is expected that the Partnership 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. 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 and serving the fifteen franchised communities,
the System will have over 300 miles of trunk pipeline and
distribution piping, serving over 10,000 customers. The
Partnership will operate exclusively in the state of Missouri and
as the System becomes operational, will be subject to MPSC
regulation with regard to rates and other corporate matters.
The MPSC has already approved TEC's application for the
first three years of expenditures for developing the system
(estimated to be $39 million at the time of the application) to
serve approximately 9,000 customers in ten of the franchised
communities and construction for the first seven communities
began in March 1995 (the "Phase One Construction"). Attached as
Exhibit D-4 is a copy of this order, which was initially issued
to TEC's predecessor (the "MPSC April Order"). The MPSC has
recently approved construction of the system for an additional
five communities and construction to these five additional
communities plus one of the original ten communities should be
completed in late 1996 ("Phase Two Construction"). As the result
of planned highway construction, the Partnership is unable to
predict when construction to the final two communities will take
place ("Final Construction"). Attached as Exhibit D-5 is a copy
of this recent order (the "MPSC September Order"). The Phase One
Construction, the Phase Two Construction and the Final
Construction are referred to here in collectively as the
"Construction Phase". The cost of the Phase One Construction is
currently estimated to be $35 million and it is estimated that
the cost of the Phase Two Construction will be approximately $8
million, which additional amount has been taken into account by
the MPSC in the MPSC September Order. Effective upon the
consummation of the transactions described below, the terms of
the MPSC April Order and the MPSC September Order will be
applicable to the Partnership.
Pursuant to the MPSC April Order, the maximum financing
for the construction of the project to the original ten
communities will be $24 million (plus interest during
construction). The financing may be with recourse to the System
only. The MPSC April Order and the MPSC September Order both
require that the Partnership maintain a 40% equity level and thus
approximately $17.2 million of project funding ($15 million for
Phase I Construction and $2.2 million for Phase II Construction)
must be in the form of equity contributions from the project
partners. In accordance with the MPSC April Order, the project
partners must make an equity contribution for at least the
initial $8 million in project funding, which may be followed by
the expenditure of up to $24 million in debt financing, with
construction finally being completed with at least $7 million in
equity funds. The MPSC September Order permits additional debt
financing for the additional construction.
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 to the Partnership in order 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 to $8 million each in apportioning equity by
the end of 1996.<F3> As a result, the Partnership will have
received $16 million in equity contributions from Torch and MCN.
In order to maintain the 40% equity level of the Partnership, MCN
and Torch will contribute an additional $600,000 each toward the
Phase Two Construction costs. No determination has been made as
to the source of any additional equity required for Final
Construction, if it occurs.<F4> In order to facilitate the
initial debt financing of the Partnership at the request of the
Partnership's bank, MCN has agreed to provide credit support to
the Partnership during the Construction Phase. Specifically, MCN
has agreed to cause the Partnership to maintain a positive net
worth and has agreed to provide the Partnership with funds
(either as equity or a loan) if the Partnership is unable to make
timely payments under its credit facility. Although the parties
do not expect that any payments will be required under this
credit support arrangement, Torch has agreed to contribute to MCN
50% of any payments made by MCN thereunder. Finally, Tartan has
contributed its interest in the Missouri franchises to the
Partnership as consideration for its general partnership
interest.
____________________
<F3> The funds for MCN's equity contributions will come from
funds allocated to MCN's capital expenditure program for the
appropriate fiscal year.
<F4> The planned highway construction by unaffiliated third
parties may be located in the area where the Partnership
intends to build the System for these two communities. As a
result, until the final plans for the highway become public,
the Partnership will be unable to ascertain the route for
the Final Construction or the related costs. Although the
partners intend to construct the full system, at this point
it is possible that the highway construction may make it
uneconomical to complete construction to the final two
communities. The Partnership currently estimates that the
Final Construction will cost approximately $3 million
(requiring an additional $600,000 in equity contribution
from each of MCN and Torch, if the parties decide to fund in
the same manner as before) and in any event will not exceed
$10 million (requiring an additional $2 million in equity
contributions from each of MCN and Torch, again following
the previous funding pattern).
The merger of TEC into the Partnership has been
approved by 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: Phase One Construction from May
1995 to June 1996 and Phase Two Construction from March 1996 to
December 1996. Except for construction to the final two
communities which may be delayed as discussed above, it is
expected that the System will be fully developed in early 1997.
The System began commercial operation in six communities in
December 1995. No current plans to expand the System beyond the
fifteen franchised communities exist and any such expansion, and
the financing therefore, would require the approval of the MPSC.
In addition, MCN will obtain any additional authorization
required from the Commission in connection with expansion of the
System.
All of 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. The section of the Williams pipeline to which the
System will be connected runs out of the Midcontinent basin and
is interconnected with ANR, Panhandle and other pipelines which
run out of the Midcontinent basin. It is expected that at least
between one-half and two-thirds of the System's gas supply will
originate from the Midcontinent basin. At the moment, the System
as it is operating is receiving all of its gas supply from the
Midcontinent basin through the Williams pipeline.
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 (from the initial equity contribution of MCN),
less than $400,000 in 1997 and around $120,000 per year for the
following eight years (which amounts the parties intend to be
taken from the profits of the Partnership and not additional
equity contributions). Moreover, MCN's share of the assets of
the Partnership are not projected to exceed $20 million at any
time in this period. For purposes of their internal analysis,
MCN and Torch have estimated the projected revenues and net
operating income for the Partnership as follows:
($ 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 . . . . . . . . . . . . . . . . . . . . . 50,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . 5,000
Total . . . . . . . . . . . . . . . . . . 57,000
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.
In its determinations as to whether or not a price meets such
standard, the Commission has considered whether the price was
decided as the result of arms length negotiations,<F5>
whether the purchaser's Board of Directors has approved the
purchase price,<F6> the opinions of investment
bankers<F7> and the earnings, dividends, book and market
value of the shares of company to be acquired.<F8>
____________________
<F5> In the Matter of American Natural Gas Company, HCAR No.
15620 (Dec. 12, 1966).
<F6> Consolidated Natural Gas Company, HCAR No. 25040 (Feb. 14,
1990).
<F7> Id.
<F8> In the Matter of Northeast Utilities, HCAR No. 15448
(Apr. 13, 1966).
In this case, MCN will make a capital contribution of
at least $8.6 million, and up to $10.6 million, for its 47.5%
aggregate interest in the Partnership. The other partners will
make capital contributions of various intangible property (i.e.,
the franchises) as well as a total of at least $8.6 million, and
up to $10.6 million, for an aggregate 52.5% in interests.
Because the Partnership is a newly formed, privately held entity
and, as part of the parties efforts to minimize costs, no outside
investment bankers are involved in the Transaction, the
Commission cannot look to investment banker opinions or publicly
traded stock information to review the reasonableness of the
price. However, the price to be paid was determined as a result
of arm's length negotiations and was reviewed by the respective
Boards of Directors of each party. Furthermore, these financing
arrangements have been essentially mandated by the MPSC and any
permanent financing will require additional approval of the MPSC.
The staff of the Michigan PSC has reviewed and 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 as in the public interest 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
satisfy the integration standard setf orth in Section 2(a)(29)(B)
of the Act because MCN's three utility subsidiaries will
constitute a system so located and related that substantial
economies may be effectuated by their operation as a single
coordinated system confined in its operation to a single area or
region not so large as to impair the advantages of localized
management, efficient operation, and the effectiveness of
regulation. The Acquisition will also result in economies and
efficiencies accruing to the benefit of the Partnership,
Citizens, MCN and its integrated system and thus 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,<F9> has looked to such issues as from whom
the distribution companies within the system receive much,
although not all, of their gas supply,<F10> and has
considered both purchases of gas from a common pipeline<F11>
as well as from different pipeline's when the gas originates from
the same gas field.<F12> 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.
____________________
<F9> 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").
<F10> 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).
<F11> In the Matter of the North American Company, HCAR No.
10320 (1950) (finding Panhandle Eastern pipeline to be
a common source of supply).
<F12> 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 run 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 a significant amount of their gas from a
common source of supply as defined in Section 2(a)(29)(B). As
previously mentioned, MichCon receives approximately 46% and
Citizens approximately 55% 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 running out of the Midcontinent basin. Moreover, all
of the Partnership's current gas supply originates from the
Midcontinent basin and when fully developed, the Partnership will
continue to receive at least 70-90% of its gas supply from the
Midcontinent basin through the Williams pipeline. In addition,
when the System is fully developed, it is anticipated that its
gas purchasing needs may become significant enough for economic
efficiencies to arise by having CoEnergy Trading Co. ("CoEnergy
Trading"), the MCN subsidiary that provides gas to Citizens, meet
part of the Partnership's gas purchasing needs.<F13> Thus,
some of Citizens' and the Partnership's gas supply will be
handled by the same entity and on a coordinated basis.<F14>
Although these 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,<F15> it can be expected that each of
the Partnership, Citizens and MichCon will continue to purchase
approximately half, or more in the case of the Partnership, of
their respective gas supply from the same fields and that much of
the rest of their respective gas supply 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.
____________________
<F13> CoEnergy Trading intends to purchase gas supply for the
Partnership to the extent it can do so reliably and
economically. The Partnership will, however, have the
option to continue to purchase a part of its gas supply
from other marketers if it can do so more efficiently.
<F14> Although MichCon and Citizens do exchange information
on the subject, MichCon's and Citizens' gas purchasing
operations are basically separate from each other.
<F15> In other words, the purchasing entity will purchase the
most economical gas for the Partnership without regard
to where it originates and not more expensive gas
solely for the sake of purchasing from a common source
of supply. However, because it is frequently more
economical to purchase gas in large quantities, it is
likely that the purchasing entity will purchase a large
quantity of gas from one source and such gas will be
used by the Partnership, Citizens and/or MichCon do not
officially coordinate their gas purchases in order to
take advantage of these economics, they have on many
occasions purchased gas from the same source.
Moreover, the combination of the Partnership and the
MCN systems will tend toward the economic and efficient
development of a coordinated gas system in that there either is
or will be centralized computer and customer service systems,
marketing and operations planning and consulting between the
Partnership and Citizens.<F16> It is also expected that
Citizens and the Partnership will have centralized gas purchasing
through CoEnergy Trading. It should be noted that at the current
point in time, the Partnership's system remains primarily in a
construction and early development stage and Citizens' management
and engineering personnel have been closely involved in the
process of making day-to-day determinations with regard to the
installation of the Partnership's main pipeline and distribution
system as well as planning the Partnership's transition to
primarily an operating utility. For example, potential customers
in the Partnership's service territory are currently using
propane gas and in order to become customers of the Partnership,
the piping in each house or building must be converted for
natural gas use. Citizens' personnel have been in Missouri using
their engineering expertise to recommend types of piping best
suited for the needs of the System. Similarly, Citizens has
worked with the Partnership to decide the type of meter reading
system to be used by the Partnership and has used its expertise
with both automated and labor intensive meter reading systems to
evaluate the best option for the Partnership. Citizens has also,
among other things, studied how to put together the most
efficient work crews for this conversion process and has provided
advice with respect to water heaters and lining for flues. In
each instance, Citizens has provided the Partnership with
existing expertise in operating a local distribution system in
this decision making process, which allows the Partnership to
develop an efficient system in an efficient manner.
____________________
<F16> The Commission has previously determined that MichCon
and Citizens constitute an integrated gas system within
the meaning of Section 2(a)(29)(B) of the Act as they
share computer consulting, management, legal and
financial services provided by MCN. See MCN
Corporation, HCAR No. 25124 (July 27, 1990). MCN will
also provide tax and financial accounting services to
SMGC, especially in those areas where Citizens'
personnel have less experience (i.e., accounting issues
relating to construction). MCN's computer system serves
as the centralized back-up for MichCon and Citizens,
and as a result, SMGC. It is expected that MCN will
also be able to provide insurance to SMGC.
Similarly, as a new service in its territory, the
Partnership's marketing plans are of particular importance. Here
again, centralized planning has and will occur to the benefit of
the Partnership. The Partnership's initial promotional material
and informational booklets distributed to potential customers
were modeled on (and are virtually identical to) those used by
Citizens. Citizens oversees, and will continue to oversee, the
advertising, promotions and direct mailings for the Partnership
and develop incentive programs for the Partnership.<F17>
____________________
<F17> For example, Citizens recently developed a new customer
promotion for use in both Michigan and Missouri that
creates a spreadsheet allowing each potential customer
to compare their propane costs with their projected
natural gas costs.
Significant day-to-day centralization between the
Partnership and the existing MCN system occurs via Citizen's
computer information system ("CIS System"). The CIS System
handles all customer-related information needs, including account
information, billing records and gas consumption monitoring. The
Partnership has a direct line to the CIS System and each customer
inquiry every day is handled through the database and equipment
in Michigan. Moreover, Citizens' CIS System personnel provide
frequent consulting services to the Partnership's personnel on
how to operate their link with the CIS System and how to handle
other customer service related matters. The Partnership's
billing system is also partially centralized with Citizens'
billing system. Although data entry is handled in Missouri, the
printing, folding and stuffing of the Partnership's bills occurs
at Citizens. Citizens also regularly provides consulting
services to the data-entry operator in Missouri. Citizens'
personnel has and will provide significant and regular accounting
services to Citizens, both in terms of financial statement
preparation and in calculating, for example, sales tax liability.
Finally, although the Partnership will always be able to purchase
its gas from unaffiliated marketers to the extent that such
purchases are more efficient for the Partnership, it is expected
that CoEnergy Trading will make a significant amount of the gas
purchases for the Partnership, as it now does for Citizens.
The Partnership System will also meet the requirement
that it be "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." In In The Matter of American Natural Gas
Company, HCAR No. 15620 (Dec. 12, 1966), the Commission found
that the American Natural System would meet the above requirement
after its acquisition of an Indiana gas utility as:
Although American Natural will provide
certain central facilities, equipment and
personnel ... Central Indiana will retain its
own local management and board of directors,
a majority of whom will be residents of
Indiana. Central Indiana will continue to be
subject to regulation by the Public Service
Commission of Indiana.
The Partnership will be operated in a similar manner. While, as
discussed above, the Partnership will receive a number of
centralized services from Citizens (i.e., computer and customer
information services, billing, marketing and operations
consulting), allowing it to capture economies and efficiencies
for the System, the System will be operated on a day-to-day basis
by a local operator (Tartan), and the System will be regulated by
the MPSC with regard to rates and other corporate matters.<F18>
Thus, the Partnership will be locally operated and locally regulated,
but will have the economic advantage of certain centralized services.
____________________
<F18> See also Consolidated Natural Gas Company, HCAR No.
25040 (Feb. 14, 1990) ("As noted above, VNG's Board of
Directors will consist of, among others, senior members
of Consolidated management. However, VNG will continue
to be locally managed and operated as a business unit
with autonomy.")
MCN's ownership of an interest in the Partnership will
be beneficial to the management and operations of the
Partnership's system and will result in the requisite economies
and efficiencies. In general, it is important to remember that
the operator of the Partnership's system has limited expertise in
operating a local distribution system. At each step in the
construction, development, operation, marketing and promotion of
the System as well as the provision of accounting and customer
services, the Partnership is financially benefitting from
Citizens' existing expertise in these areas. If the Partnership
were not in the MCN system, it would have had to hire consultants
to provide the ongoing training of its personnel as well as hire
additional personnel to conduct these operations.<F19> In
addition, outside the MCN system, the Partnership would have to
develop its own customer service and billing systems, again at
significant cost. Although MCN has not engaged any experts to
quantify all of these savings, it has on its own quantified a
minimum of approximately $300,000.00 in savings, some of which
are ongoing (discussed below) and the actual efficiencies created
by this coordinated system are expected to result in even greater
savings.
____________________
<F19> For example, all of the forms that the Partnership uses
for day-to-day internal operations and customer service
requests as well as its information booklet are
virtually identical to those used at Citizens, with
minor modifications to reflect local requirements. If
this existing material were not available to the
Partnership, it would have hired consultants to develop
forms and marketing programs specifically for it at a
significant extra cost.
As previously discussed, the Partnership is directly
interconnected, and uses exclusively the CIS System. Because
Citizens had both available computer space and necessary
personnel on staff already, the Partnership is only paying for
the direct expenses (i.e., time and material) relating to its use
of the CIS system. If the Partnership were to attempt to develop
its own CIS system, it would require additional costs for the
computer (approximately $160,000) and the software (approximately
$60,000). In addition, the Partnership would have to hire at
least one employee to operate the computer, at a minimum
additional annual cost of $60,000 in salary and benefits. Other
personnel and personnel training costs could also be incurred.
This arrangement also benefits Citizens by permitting it to more
efficiently use existing personnel and computer resources.
Second, Citizens has expanded its billing system to meet the
needs of the Partnership by printing, folding and stuffing the
Partnerships bills, saving the Partnership approximately $25,000
in capital expenditure costs to develop a system for preparing
its own bills in this manner as well as additional overtime
personnel costs. Finally, as previously discussed, MCN's
management, through MichCon and Citizens, is highly trained and
experienced in providing gas distribution services and has
brought its technological, operations, gas purchasing, customer
service and regulatory expertise to the Partnership, and can pass
on that expertise to Tartan, the local operator of the
Partnership project. To date, Citizens has developed the
marketing plan used by the Partnership and is providing extensive
consulting services, on an at-cost basis, to Tartan which does
not have an equivalent level of experience in operating a local
gas distribution company. Although the parties have not tried to
quantify the value of these services, they believe that having
experienced management advice readily available to the
Partnership at low cost has increased the efficiency of the
Partnership's operations significantly and has also permitted MCN
to use its personnel in a more efficient manner. In addition, it
is expected that MCN's access to gas supplies both through
CoEnergy Trading, its specialized gas marketing subsidiary, and
through MichCon, which together make significant and regular gas
purchases in the market<F20>, will prove useful to the
Partnership, and complements the financial strength MCN brings to
the Partnership's operations. Similarly, by increasing the
purchasing power of MCN as a result of its providing gas and
other purchasing services to the System, the addition of the
System to MCN's existing system will create a larger combined
system able to capture greater economies of sale in such
purchasing activities.
____________________
<F20> In the fiscal year ended December 31, 1995, on a
consolidated basis MCN spent approximately $786 million
on gas supplies, approximately $300 million of which
related to gas purchases by CoEnergy Trading.
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 as well as the merger which will result in ownership of the
System and the related franchises and certificates being
transferred to the Partnership. 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
The Commission issued and published the requisite
notice under Rule 23 with respect to the filing of this
Application on February 16, 1996, and no intervention occurred
within the specified time period. The Commission may therefore
issue an order granting and permitting the Application to become
effective.
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 (previously filed).
B-2 Formation Agreement (previously filed).
B-3 Construction and Operation Agreement (previously
filed).
C-1 Form U-3A-2 of MCN (Incorporated herein by
reference to Form U-3A-2 filed by MCN on February
26, 1996 (File No. 69-352).
D-1 Letter from the staff of the State of Michigan
Public Service Commission dated September 18, 1995
(previously filed).
D-2 Order of the Missouri Public Service Commission,
dated September 29, 1995 (previously filed).
D-3 Order of the Missouri Public Service Commission,
dated September 16, 1995 (previously filed).
D-4 Order of the Missouri Public Service Commission,
dated April 15, 1995 (previously filed).
D-5 Order of the Missouri Public Service Commission,
dated September 13, 1995 (previously filed).
D-6 Order of the Missouri Public Service Commission,
dated April 9, 1996.
F-1 Opinion of Counsel (previously filed).
F-2 "Past Tense" Opinion of Counsel (to be filed by
amendment).
G-1 Proposed Form of Public Notice (previously filed).
b) Financial Statements
1.1 Balance Sheet MCN (consolidated), as of December
31, 1995 (Incorporated herein by reference to Form
10-K filed by MCN on March 1, 1996).
1.2 Statement of Income and Retained Earnings MCN
(consolidated), for the years ended December 31,
1995 (Incorporated herein by reference to Form
10-K filed by MCN on March 1, 1996).
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
Vice President, General
Counsel and Secretary
Date: May 9, 1996
STATE OF MISSOURI
PUBLIC SERVICE COMMISSION
At a Session of the Public Service
Commission held at its office
in Jefferson City on the 9th
day of April, 1996.
In the matter of the application of )
Southern Missouri Gas Company, L.P., a )
proposed Missouri limited partnership, ) CASE NO. GM-96-175
for authority to acquire, control, and )
merge with Tartan Energy Company of )
Missouri, L.C., d/b/a Southern )
Missouri Gas Company, L.C., a Missouri )
limited liability company. )
ORDER APPROVING MERGER
On November 27, 1995, Tartan Energy Company of
Missouri, L.C., d/b/a Southern Missouri Gas Company, L.C.
(Tartan) and Southern Missouri Gas Company, L.P. (SMG) filed a
joint application pursuant to Section 393.190, RSMo 1994, and 4
CSR 240-2.060(6), seeking authorization of the Missouri Public
Service Commission (Commission) to merge Tartan into SMG, with
SMG being the surviving entity. Tartan's predecessor, Tartan
Energy Company, L.C., d/b/a Southern Missouri Gas Company, L.C.
(TEC), with which Tartan merged in Case No. GM-96-61, was granted
certificates of convenience and necessity to serve 15 communities
and certain unincorporated areas in southern Missouri, pursuant
to Case Nos. GA-94-127 and GA-95-349.
Tartan is a limited liability company organized under
the laws of Missouri with its principal place of business located
at 301 East 17th Street, Mountain Grove, Missouri 65711, and is a
gas corporation and public utility as defined in Section
386.020(16) and (32), RSMo 1994, and as such is subject to the
jurisdiction of the Commission. SMG is a proposed Missouri
limited partnership proposed to be formed on the effective date
of the merger, and as the surviving entity will become a gas
corporation and public utility subject to the jurisdiction of the
Commission.
The purpose of the joint application is to change the
ownership and structure of the public utility serving the service
area approved in Case Nos. GA-94-127 and GA-95-349, through the
merger of Tartan into SMG, and to expand the equity owners to
include MCN Corporation, Torch Energy Marketing, Inc., and Tartan
Management Company of Missouri, L.C. (collectively SMG Partners).
Following the merger, Applicants state that SMG will have
improved access to capital markets, and SMG will adopt and
operate under the rates, terms, and conditions of the tariffs of
Tartan and otherwise abide by all the terms and conditions of the
certificates of convenience and necessity granted in Case Nos.
GA-94-127 and GA-95-349, and GM-96-61.
Applicants explain in the joint application that MCN
Corporation (MCN) is a public utility holding company exempt from
all the provisions of the Public Utility Holding Company Act
(PUHCA) except for Section 9(a)(2) of the Act. MCN owns other
gas utility companies, and as of December 31, 1994, had
consolidated total assets of approximately $2.2 billion,
including utility assets in excess of $1 billion. Torch Energy
Marketing, Inc. (TEMI) is a wholly-owned subsidiary of Torch
Energy Advisors Incorporated (TEAI), which is in turn a wholly-
owned subsidiary of United Investors Management, Inc., which is
owned by Torchmark Corporation, a public company. TEMI's parent
company, TEAI, is a registered investment advisor specializing in
the acquisition and management of oil and gas assets, and
provides a full range of engineering, geological, geophysical,
production, land, legal, product marketing, tax, insurance,
environmental, and financial services. In addition, TEAI
actively manages three publicly traded entities, two exploration
and production companies and a royal trust. Applicants state
that TEMI will bring expertise in gas gathering to SMG, and that
the synergies created between TEMI and SEMG will be beneficial to
SMG's customers. Tartan Management Company of Missouri, L.C.
(Tartan Management) is a Missouri limited liability company
wholly-owned by three individuals, Tom M. Taylor, Michael N.
Trusty, and James K. Boyles. Tartan Management has entered into
an agreement with Tartan to provide for the construction,
management, and long-term operation of the Tartan distribution
system.
In addition, Applicants claim that the proposed merger
is not detrimental to the public interest because SMG will adopt
and operate under the existing approved rates, rules, and
regulations of Tartan, and SMG will be fully regulated by the
Commission. Applicants add that the merger will not result in
any reduced level of service or reliability for Missouri
customers. A copy of the proposed plan of corporate merger is
attached to the application as Exhibit A. The balance sheets of
Tartan and SMG showing the results of the merger pursuant to the
agreement are attached to the application as Exhibit D.
Applicants state that certified copies of the resolutions of the
board of directors for Tartan and SMG will be late-filed as
Exhibit C.
The Staff of the Missouri Public Service Commission
(Staff) filed a memorandum containing its recommendations on
February 20, 1996. Staff's recommendation states that the effect
of the proposed merger is to change the ownership and structure
of Tartan and to expand the equity owners to include MCN, TEMI,
and Tartan Management. Staff indicates that Applicants claim the
merger is beneficial because ownership by the SMG partners will
allow SMG improved access to capital markets under better terms
and conditions than is available to Tartan without the merger.
Additionally, expansion of the equity ownership to include MCN
will strengthen the existing management's ability to provide
efficient construction and operation as a public utility. In
addition, Staff states that it has reviewed the application for
compliance with Commission rules. Staff notes that a certified
copy of the resolution of the board of directors for each
Applicant must still be provided. Staff also states that it
believes it is reasonable to waive the requirement of filing a
pre-merger balance sheet and income statement for SMG, as SMG has
not yet been formed. SMG Partners propose to form the
partnership on the effective date of the merger. In addition,
balance sheets and income statements have been provided for
Tartan prior to the merger, and for SMG following the merger.
Staff also notes that the pro forma merged capital structure of
SMG will not change from Tartan's pre-merger capital structure,
and no impact is expected on the tax revenues of the State of
Missouri.
Staff has no objection to the merger request, as it
does not perceive any detriment to customers pursuant to the
request. Staff therefore recommends that in the event the
Commission approves the merger, the Commission include the
following in its order: (1) order SMG to file an adoption notice
adopting the existing tariff of Tartan; (2) order that all
records pertaining to this merger be made available to the Staff
at the next rate proceeding; and (3) order that a certified copy
of the resolution of the board of directors of each Applicant be
submitted to the official case file as soon as practicable.
Staff further recommends that the merger become effective
concurrent with the adoption notice tariff sheet.
The Commission has received no requests for
intervention in this proceeding, and no party to this case has
requested a hearing. Thus, the Commission concludes that no
hearing is necessary in this case, and will base its decision
upon the verified application and attachments, and the
recommendation of Staff. State ex rel. Rex Deffendarfer
Enterprises, Inc. v. Public Service Commission, 776 S.W.2d 494,
496 (Mo App. 1989).
Upon review of the verified application and attachments
thereto, and Staff's recommendation, the Commission finds that
the proposed merger will allow the surviving entity, SMG, to
strengthen its financial position, and thus provide more stable
operation as a public utility. The Commission also finds that
while the ownership and structure of Tartan will change, no other
changes are expected from the proposed merger. However, while
the Commission has no objection to the actual merger itself, the
method chosen by Applicants to accomplish the merger presents
serious logistical difficulties.
Ordinarily the Commission would, as recommended by
Staff, approve the merger to become effective concurrent with the
effective date of either an adoption notice tariff sheet or new
tariff. In addition, the Commission would customarily either
cancel the old certificate and grant a new certificate, or
transfer the old certificate -- depending upon circumstances --
with the effective date of the cancellation, grant, or transfer
to be concurrent with the effective date of the adoption notice
or new tariff. Under usual circumstances, a proposed merger will
involve either a certificated company or a noncertificated
company, but in any event an entity which is already in legal
existence.
In this case the Applicants propose to form SMG on the
effective date of the merger. Thus, the Commission notes that to
the extent SMG purports to be a joint applicant in this
proceeding, it does so as a nonexisting entity with no legal
standing. The core of the problem is that if SMG is not formed
until the effective date of the merger, there will be a gap
during which neither entity could legally provide service to
customers. This is so because Tartan will no longer exist as an
entity after the merger, and SMG will not have an appropriate
tariff on file with the Commission, as it would be impossible to
have SMG's tariff filed, reviewed by Staff, and approved by the
Commission on the same day. Likewise, it is not possible for SMG
to file an adoption notice prior in time to the effective date of
the merger, since this is also the date of its creation as an
entity, and it is not appropriate for a nonentity to file tariffs
with the Commission.
The Commission therefore finds that it cannot approve
the proposed merger as it is currently designed to be
implemented. Rather, the Commission finds that it can and will
approve the merger only upon the following conditions:
1. The proposed Missouri limited partnership known as SMG
must be formed and must exist in the State of Missouri
prior to the merger.
2. That after the formation of SMG and prior to the
merger, SMG shall forthwith submit to the Commission a
certified copy of its partnership agreement.
3. That after the formation of SMG and prior to the
merger, SMG shall forthwith file an adoption notice
adopting the existing tariff of Tartan. The adoption
notice shall contain an effective date concurrent with
the planned date of the merger, and the adoption notice
shall be filed at least fifteen (15) days in advance of
the planned date of merger.
The Commission determines that the conditions listed
above are necessary and appropriate to protect the public
interest. The Commission finds that the proposed merger, as
modified by the conditions contained in this order, is not
detrimental to the public interest. In the event the merger
proceeds under the aforesaid conditions, the Commission further
finds that the certificates of convenience and necessity granted
to Tartan in Case Nos. GA-94-127, GA-95-349 and GM-96-61 should
be transferred to the surviving entity, SMG, subject to all of
the terms and conditions applicable to those certificates,
including, but not limited to, the terms of the Stipulation and
Agreement approved in Case No. GA-94-127.
IT IS THEREFORE ORDERED:
1. That Tartan Energy Company of Missouri, L.C.,
d/b/a Southern Missouri Gas Company, L.C. shall forthwith file a
certified copy of the resolution of its board of directors
authorizing the proposed merger.
2. That the application for approval of the proposed
merger of Tartan Energy Company of Missouri, L.C., d/b/a Southern
Missouri Gas Company, L.C. with and into Southern Missouri Gas
Company, L.P., with Southern Missouri Gas Company, L.P. as the
surviving entity, is hereby approved, subject to the conditions
set forth in the body of this order, and in the remaining ordered
sections.
3. That the proposed Missouri limited partnership of
Southern Missouri Gas Company, L.P. shall be formed as a legal
entity in the State of Missouri sufficiently in advance of the
planned date of merger to enable it to comply with the remaining
ordered paragraphs.
4. That after Southern Missouri Gas Company, L.P. has
formed as a legal entity, it shall forthwith file a certified
copy of its partnership agreement with the Commission.
5. That after Southern Missouri Gas Company, L.P. has
formed as a legal entity, it shall forthwith file an adoption
notice adopting the existing tariff of Tartan Energy Company of
Missouri, L.C., d/b/a Southern Missouri Gas Company, L.C. The
adoption notice shall contain an effective date concurrent with
the planned date of merger, and the adoption notice shall be
filed at least fifteen (15) days in advance of the planned date
of merger.
6. That the certificates of convenience and necessity
granted to Tartan Energy Company of Missouri, L.C., d/b/a
Southern Missouri Gas Company, L.C. in Case Nos. GA-94-127, GA-
95-349, and GM-96-61 shall be transferred to Southern Missouri
Gas Company, L.P., subject to all the terms and conditions of
those certificates, including, but not limited to, the terms of
the Stipulation and Agreement approved in Case No. GA-94-127, as
of the effective date of the adoption notice required to be filed
in Ordered Paragraph 5 above.
7. That Southern Missouri Gas Company, L.P. shall
file a pleading with the Commission indicating the date the
merger was completed, within ten (10) days after the completion
of the merger.
8. That all records pertaining to this merger shall
be made available to the Staff of the Missouri Public Service
Commission during the next rate proceeding.
9. That the effective date of the authority to merge
granted in Ordered Paragraph 2 above shall be concurrent with the
effective date of the adoption notice required to be filed by
Ordered Paragraph 5 above.
10. That this Order shall become effective on
April 19, 1996.
BY THE COMMISSION
David L. Rauch
Executive Secretary
(S E A L)
Zobrist, Chm., McClure, Kincheloe,
Crumpton, and Drainer, CC., Concur.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 19,259
<SECURITIES> 0
<RECEIVABLES> 331,710
<ALLOWANCES> 13,765
<INVENTORY> 71,763
<CURRENT-ASSETS> 615,496
<PP&E> 3,160,554
<DEPRECIATION> 1,223,808
<TOTAL-ASSETS> 2,898,640
<CURRENT-LIABILITIES> 652,328
<BONDS> 993,407
96,449
0
<COMMON> 664
<OTHER-SE> 664,112
<TOTAL-LIABILITY-AND-EQUITY> 2,898,640
<SALES> 0
<TOTAL-REVENUES> 1,584,940
<CGS> 0
<TOTAL-COSTS> 1,388,715
<OTHER-EXPENSES> 2,964
<LOSS-PROVISION> 13,698
<INTEREST-EXPENSE> 57,378
<INCOME-PRETAX> 134,708
<INCOME-TAX> 37,952
<INCOME-CONTINUING> 96,756
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 96,756
<EPS-PRIMARY> 1.49
<EPS-DILUTED> 0
</TABLE>
