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Exhibit 99.2
SECURITIES AND EXCHANGE COMMISSION
(RELEASE NO. 35-26744; 70-8907)
HOUSTON INDUSTRIES INCORPORATED, ET AL.
MEMORANDUM OPINION AND ORDER GRANTING EXEMPTION TO HOLDING COMPANY
JULY 24, 1997
Houston Industries Incorporated ("HI"), an exempt public utility
holding company, and its electric utility subsidiary company, Houston Lighting
& Power Company ("HL&P"), both of Houston, Texas, have filed an application
under section 3(a)(2) of the Public Utility Holding Company Act of 1935, as
amended ("Act"). HI and HL&P intend to merge, with the surviving entity being
renamed Houston Industries Incorporated ("Houston"), and Houston will then
acquire NorAm Energy Corp. ("NorAm"), a gas utility company, as a new
subsidiary company. The application requests that the Commission issue an
order to the effect that, upon consummation of the merger transactions, Houston
and its subsidiaries will be exempt, under section 3(a)(2) of the Act, from all
provisions of the Act except section 9(a)(2).
The Commission issued a notice of the filing of the application on
October 18, 1996 (Holding Co. Act Release No. 26594). On November 8, 1996, the
Arkansas Public Service Commission filed a Motion to Intervene. The Arkansas
commission did not comment on the application but reserved the right to do so
in the future. No further comments were received from the Arkansas commission.
On November 12, 1996, Entergy Services, Inc. filed a Motion for Leave to
Intervene,(1) which was withdrawn on December 5, 1996.
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(1) The Motion for Leave to Intervene was filed on behalf of Entergy
Arkansas, Inc., Entergy Gulf States, Inc., Entergy Louisiana, Inc., Entergy
Mississippi, Inc., Entergy New Orleans, Inc., Entergy Power, Inc., and
Entergy Power Marketing Corp.
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I. BACKGROUND
HI, which is incorporated and maintains its principal place of
business in Texas, is a public utility holding company(2) that is exempt under
section 3(a)(1) from most provisions of the Act.(3) HI owns all of the common
stock of its subsidiary company, HL&P, an electric utility company(4) that is
incorporated in Texas and conducts all of its utility operations within that
state. HL&P is engaged in the generation, transmission, distribution and sale
of electric power to 1.5 million customers in a 5,000 square-mile area of the
Texas Gulf Coast, including the City of Houston.
HL&P is subject to original jurisdiction of the Public Utility
Commission of Texas over retail rates and service in unincorporated areas and
in incorporated municipalities that have relinquished original jurisdiction.
The remaining incorporated municipalities, including the City of Houston, have
original jurisdiction over retail rates and service, with the Public Utility
Commission of Texas having appellate jurisdiction. The utility operations
currently engaged in by HL&P will continue to be subject to this regulatory
jurisdiction after consummation of the merger transactions described
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(2) A "holding company" is defined in section 2(a)(7) of the Act to
include any company that directly or indirectly owns 10% or more of the
outstanding voting securities of a public utility company. Section 2(a)(5)
defines a "public-utility company" to mean an electric utility company or a gas
utility company.
(3) Section 3(a)(1) provides an exemption if the holding company and
all of its material utility subsidiaries operate substantially in one state, in
which they are all incorporated.
(4) Section 2(a)(3) defines an "electric utility company" to mean
any company that owns or operates facilities used for the generation,
transmission or distribution of electric energy for sale.
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below.
HL&P accounts for a substantial part of the consolidated income and
common stock equity of HI. HI's other significant subsidiary, Houston
Industries Energy, Inc. ("HI Energy"), participates in the development and
acquisition of foreign independent power projects and the privatization of
foreign generation, transmission and distribution facilities.(5) HI also has a
nonutility subsidiary company, Houston Industries Power Generation, Inc., which
participates in domestic power generation projects, and another nonutility
subsidiary company formed to engage in providing energy-related services.
For the year ended December 31, 1996, HI had consolidated revenues of
approximately $4.095 billion and consolidated operating income of approximately
$990 million, of which $4.025 billion and $732 million, respectively, were
attributable to HL&P's utility operations. As of December 31, 1996, HI had
consolidated assets of $12.288 billion, of which $10.596 billion represented
HL&P's utility assets.
NorAm, which is incorporated in Delaware and maintains its principal
executive offices in Texas, is a gas utility company(6) that provides retail
natural gas service to over 2.7 million
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(5) Each foreign project in which HI Energy has invested or
otherwise holds an interest is either a "foreign utility company" ("FUCO")
pursuant to section 33 of the Act or a foreign "exempt wholesale generator"
("EWG") pursuant to section 32 of the Act. HI has direct and indirect
interests in FUCOs and foreign EWGs in Argentina, Brazil and India, in which it
had invested $557 million as of December 31, 1996.
(6) Section 2(a)(4) defines a "gas utility company" to include any
company that owns or operates facilities used for the distribution at retail of
natural gas for heat, light or power.
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customers in six states. NorAm's natural gas distribution business operates
through three divisions -- (i) Entex, which distributes natural gas in
Houston and in other areas in Texas, Louisiana, and Mississippi;(7) (ii) Arkla,
which distributes natural gas to retail customers in Arkansas, Louisiana,
Oklahoma, and Texas;(8) and (iii) Minnegasco, which distributes natural gas to
retail customers in Minnesota(9). These divisions are subject, as appropriate,
to the jurisdiction of the Arkansas Public Service Commission, the Louisiana
Public Service Commission, the Minnesota Public Utilities Commission, the
Mississippi Public Service Commission, and the Oklahoma Corporation Commission
with respect to retail rates and certain other matters. In Texas, Entex and
Arkla are subject to the jurisdiction of the Texas Railroad Commission with
respect to retail rates charged to customers for gas delivered outside of
incorporated cities and towns and certain other matters; and to the original
jurisdiction of the relevant city council with respect to retail rates within
incorporated cities and towns, with appellate jurisdiction by the Texas
Railroad Commission. NorAm will continue to be subject to this regulatory
jurisdiction after consummation of the proposed merger transactions described
below.
NorAm also owns several nonutility subsidiary companies engaged in
gas-related activities. NorAm operates interstate gas pipeline facilities
through two subsidiary companies, NorAm Gas Transmission Company and
Mississippi River Transmission Corporation, and operates natural gas gathering
assets in Oklahoma, Louisiana, Arkansas and Texas through NorAm Field Services
Corp.
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(7) Entex serves approximately 127,000 customers in the southern
half of Louisiana, approximately 116,000 customers in the southern half of
Mississippi and approximately 1,166, 000 customers in Texas.
(8) Arkla serves approximately 425,000 customers in 59 counties in
Arkansas, 132,335 customers in the northern half of Louisiana, 111,000
customers in 35 counties and 96 communities in Oklahoma, and 46,700 customers
in Texas.
(9) Minnegasco serves approximately 625,000 customers in 200
communities in Minnesota.
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NorAm Energy Services, Inc. ("NorAm Services") markets natural gas and electric
power in wholesale markets and provides risk management services. Finally,
NorAm Energy Management, Inc. provides retail energy services to industrial and
large commercial concerns.
For the year ended December 31, 1996, NorAm had revenues of
approximately $4.788 billion and operating income of approximately $314
million, of which $2.114 billion and $178 million were attributable to utility
operations. As of December 31, 1996, its total assets were $4.017 billion,
including utility assets of $1.921 billion.
On August 11, 1996, HI, HL&P and a new HI subsidiary company, HI
Merger, Inc. ("HI Merger"), entered into an Agreement and Plan of Merger with
NorAm. Under the agreement, as amended on October 23, 1996 ("Merger
Agreement"), HI will merge with HL&P and the outstanding common stock of HI
will be converted into common stock of HL&P, which will be renamed Houston
Industries Incorporated. Thereafter, NorAm will merge with HI Merger, which
will be renamed NorAm Energy Corp. After these two mergers ("Basic Mergers"),
the electric utility business of HL&P will be conducted by Houston under the
name of HL&P, and the new NorAm Energy Corp. will be a wholly owned subsidiary
company of Houston.
The applicants state that the proposed merger is not driven by the
potential for near-term cost savings, which are expected to be modest and
offset by related costs. Instead, the applicants state that the merger is
desirable because the combined entity will be better positioned to respond more
rapidly and effectively to the changing nature of the electric and gas
industries and to take advantage of opportunities presented by the convergence
of the electricity and natural gas markets. NorAm and HI believe that benefits
will accrue to shareholders, customers and employees as a result of an
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increased customer base and opportunities to provide additional energy-related
services to these customers, combination and expansion of expertise and skills,
increased financial strength, and complementary development strategies.
Each state, except Texas, (10) in which NorAm conducts utility
operations must review the proposed transaction. Orders have been obtained
from the Arkansas Public Service Commission,(11) the Louisiana Public Service
Commission,(12) the Minnesota Public Utilities Commission,(13) the Mississippi
Public Service Commission,(14) and the Oklahoma Corporation Commission.(15)
Where
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(10) Texas state regulators do not formally review the merger. The
applicants state that they have discussed the Basic Mergers with the
commissioners and staff of the Public Utility Commission of Texas and the Texas
Railroad Commission, have furnished them with copies of orders issued by other
state regulators, and have committed to provide Texas ratepayers with the same
commitments as have been made for the benefit of ratepayers in other
jurisdictions.
(11) The Arkansas Public Service Commission issued an order on
November 6, 1996 (Dkt. No. 96-286-U, Order No. 7), approving the proposed
transactions, conditioned on there being no provisions in other regulatory
approvals that are detrimental or unfair to Arkansas customers. On March 12,
1997, a final, unconditional order approving the transactions was issued (Order
No. 8), incorporating the conditions contained in the order of the Minnesota
Public Utilities Commission, discussed below. In approving the transaction,
the Arkansas commission was required to find that the transaction is not
detrimental to the customers of the domestic utility and is in the public
interest.
(12) The Louisiana Public Service Commission issued a letter of
nonopposition dated December 23, 1996, as amended January 23, 1997, in which it
states that the merger will not impair its ability to regulate and audit the
Louisiana operations of NorAm effectively.
(13) The Minnesota Public Utilities Commission issued an order dated
February 24, 1997 (Dkt. No. G-008/PA-96-950), approving the merger
transactions, subject to various conditions, including agreements to provide
local access to books and records required for Minnesota regulatory purposes,
not to seek recovery of merger-related costs from ratepayers and to reduce
corporate cost allocations in the next rate case below those currently allowed.
(14) The Mississippi Public Service Commission issued a final order on
December 11, 1996 (Dkt. No. 96-UA-0438), finding, among other things, that the
merger is consistent with the public interest.
(15) The Oklahoma Corporation Commission issued a final order on
October 15, 1996 (Order No. 406074, Cause No. PUD 960000264), finding, among
other things, that the transactions are consistent with the public interest and
the interest of NorAm's Oklahoma customers.
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required, municipalities that have issued franchises to NorAm (including the
City of Houston) have approved the transactions or the transfer of the
franchise.(16) Various other regulatory approvals have also been obtained.(17)
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(16) On October 2, 1996, the City Council of Stafford, Texas adopted
an ordinance approving the Basic Mergers. The City Council of Longview, Texas,
adopted an ordinance approving the transfer of Arkla's franchise and
recognizing the Basic Mergers on November 7, 1996. On December 15, 1996,
approval of an application to the City of Tyler, Texas, for transfer of the
franchise became effective by operation of law. On December 18, 1996, the
Houston City Council adopted an ordinance approving the transfer of Entex's
franchise.
(17) On December 9, 1996, the Nuclear Regulatory Commission ("NRC")
notified HL&P that the staff believes that no NRC action is required to be
taken in connection with the proposed transactions, other than a technical
amendment of the operating license for the South Texas Project Electric
Generating Station, for which HL&P is the project manager, to reflect HL&P's
change of name in connection with the Basic Mergers. Notifications under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 were submitted on August
26, 1996 to the Department of Justice and the Federal Trade Commission. The
required waiting period expired on October 31, 1996 and, unless the Department
of Justice takes affirmative action to prevent it, the Basic Mergers may be
consummated at any time during the succeeding 12-month period.
Finally, certain filings have been made with the Federal Energy Regulatory
Commission ("FERC") in connection with NorAm Services' wholesale energy
marketing activities. NorAm Services is authorized by the FERC to make
wholesale electric power and energy sales in interstate commerce at market-based
rates by order dated July 25, 1994. On September 30, 1996, NorAm Services and
HI filed with the FERC a notice of the proposed transactions and requested
authorization to continue power marketing activities at market-based rates after
consummation of the merger. The FERC issued an order on February 5, 1997
ordering NorAm Services either to file a response stating why it believes the
FERC does not have jurisdiction over the merger under the Federal Power Act, or
to file an application for FERC approval of the merger. In its response filed
March 7, 1997, NorAm Services stated that it believes the FERC does not have
jurisdiction over the merger. On March 27, 1997, without conceding the
jurisdictional issue, NorAm Services filed an application for FERC approval of
the merger under the Federal Power Act. On April 30, 1997, the FERC issued an
Order Asserting Jurisdiction over the proposed merger between Houston and NorAm.
79 FERC paragraph 61, 108. The FERC concluded that the proposed merger involves
the disposition of NorAm Services' jurisdictional facilities through a change of
control of those facilities, and thus falls within the jurisdiction of the FERC
under section 203 of the Federal Power Act. The application for FERC approval of
the proposed merger is pending. The Commission's order in this matter granting
Houston the requested exemption under section 3(a)(2) of the Act is conditioned
on NorAm Services' receiving an order of the FERC that approves the proposed
merger transactions without imposing any conditions that change the facts
underlying the Commission's decision.
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Upon completion of the proposed transactions, Houston would be both a
public utility company under the Act, by virtue of HL&P's electric operations,
and a holding company, by virtue of its ownership of 100% of the voting
securities of NorAm.
II. DISCUSSION
The applicants request that the Commission grant Houston and its
subsidiaries an exemption, pursuant to section 3(a)(2), from the provisions of
the Act (except section 9(a)(2)). Under section 3(a)(2), the Commission will
exempt a holding company and its subsidiaries from any provision or provisions
of the Act that would apply to such companies if it finds that "such holding
company is predominantly a public-utility company whose operations as such do
not extend beyond the state in which it is organized and states contiguous
thereto . . . ", unless it finds the exemption "detrimental to the public
interest or the interest of investors or consumers . . . ." The Commission
finds that the standards of section 3(a)(2) are satisfied with respect to
Houston and that the requested exemption should be granted.
By its terms, section 3(a)(2) has no specific numerical test to
determine when a company is "predominantly" a utility rather than a holding
company. In making this determination, the
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Commission has often used numerical indicators to compare the utility
operations of the holding company, as a separate entity, and the utility
operations of its subsidiaries, with the greatest emphasis placed on the
relative gross revenues of the companies in question.(18) Other indicia, such as
operating income and utility assets, have also been considered in determining
whether to grant an exemption.(19) The Commission has noted that, in
considering whether the exemption under section 3(a)(2) is available, it must
"construe the statute according to a fair interpretation of its terms."(20) In
this case, the Commission has examined all of the factors indicative of the
relative size of the utility operations of Houston and NorAm and on the basis
of all of these particular facts and circumstances finds that Houston is
predominantly a utility rather than a holding company within the meaning of
section 3(a)(2).
As of December 31, 1996 and for the year then ended, NorAm's utility
operating revenues were 52.5% of HI's, its utility operating income was 24.3%
of HI's, and its utility assets were 18.1% of HI's. The ratios of operating
income and utility assets are consistent with ratios in prior orders granting
an exemption. The ratio of operating revenues is higher than the same ratio in
past cases
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(18) See, e.g., Union Electric Co., 40 SEC 1072 (1964). When
applying these criteria, the Commission has generally granted exemptions where
the ratio of the subsidiaries' gross utility revenues to those of its parent
was not more than approximately 25%. See, e.g., Ohio Edison Co., Holding Co.
Act Release No. 21019 (Apr. 26, 1979) (16.9%); Delmarva Power & Light Co.,
Holding Co. Act Release No. 19717 (Oct. 19, 1976) (25.8%); and Washington Gas
Light Co., Holding Co. Act Release No. 1964 (Mar. 5, 1940) (23.7%).
Exemptions have generally been denied in cases where this ratio was 35% or
more. See, e.g., Union Electric Co., 5 SEC 252 (1939) (35.7%); and Wisconsin
Electric Power Co., Holding Co. Act Release No. 8741 (Dec. 20, 1948) (54.7%).
(19) See, e.g., Union Electric Co., 40 SEC 1072, 1077 (1962); and
Northern States Power Co., Holding Co. Act Release No. 22334 (Dec. 23, 1981).
(20) Union Electric Co., 5 SEC 252, 261 (1939).
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where exemptions were granted; even in this category, however, Houston is
approximately twice as large as NorAm.(21)
This legal conclusion is supported by the underlying policy and
purposes of the Act. The applicants have demonstrated that Houston will not be
an unregulated entity through which potential abuses could be perpetrated, but
will instead be a public utility, with utility operations in only one state,
subject to regulation by the Public Utility Commission of Texas and by the City
of Houston, Texas, and various other municipalities that have granted a utility
franchise to HL&P. There appears to be little possibility in this case that
the holding company structure will be used to evade state and local regulation,
or that regulation under the Act is needed to supplement state regulation in
order to prevent detriment to the interests protected by the Act.(22)
Various state and local regulatory bodies that have continuing
jurisdiction over the utility operations of Houston and NorAm have formally
authorized the proposed business combination.(23)
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(21) As HI's utility operations are entirely electric and NorAm's
are entirely gas, a comparison of units of energy sold is not relevant.
Similarly, because HI's customer mix is significantly different from that of
NorAm, the relative number of customers is not indicative of the size of the
two utility businesses.
(22) See Order of the Minnesota Public Utilities Commission, Dkt. No.
G-008/PA-96-950 (Feb. 24, 1997) (noting possible exemption from the Act, and
stating that "the merger would not impair Minnesota regulators' ability to
perform their duties under the [Minnesota statute], since the holding company
structure that would result from the merger has not been a barrier to the
effective regulation of other Minnesota utilities."). See also Northern States
Power Co., 36 SEC 1 (1954) (finding that granting an exemption would not create
a "regulatory gap" that would be detrimental to the public interest or the
interest of investors or consumers); and Union Electric Co., 5 SEC 252, 262
(1939) (section 3(a)(2) must be construed in light of the fundamental policy of
the Act that mandates federal regulation where state regulation cannot be
effective).
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All were aware that Houston was seeking an exemption from most provisions of
the Act.(24) In each case where a specific finding to the effect that the
transaction is consistent with, or not opposed to, the public interest was
required, such a finding was made. The Commission traditionally has given
great weight to the views of the states in this regard.(25)
III. CONCLUSION
The Commission has carefully examined the request for an exemption for
Houston, has considered the complete record before it under the applicable
standards of the Act, and has concluded that granting the exemption is
consistent with those standards and does not require adverse findings.
Fees, commissions or expenses of approximately $200,000 are expected
to be incurred in connection with the application for exemption.
Due notice of the filing of the application has been given in the
manner prescribed in rule 23 under the Act, and no hearing has been requested
or ordered by the Commission. Upon the basis of the facts in the record, it is
hereby found that the applicable standards of the Act and rules thereunder
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(23) As described above, the Arkansas Public Service Commission, the
Louisiana Public Service Commission, the Minnesota Public Utilities Commission,
the Mississippi Public Service Commission and the Oklahoma Corporation
Commission, which have jurisdiction over various aspects of NorAm's gas utility
operations in their respective states, have each issued an order or a statement
of nonopposition to the transaction. The transaction has also been reviewed by
the City Councils of Houston and of several other Texas municipalities that
have granted utility franchises to NorAm.
(24) See, e.g., Order of the Arkansas Public Service Commission, Dkt.
No. 96-286-U, Order No. 7 (Nov. 6, 1996), at 3 (noting that the parties filed an
application for an order finding Houston to be an exempt holding company under
section 3(a)(2) of the Act); and Order of the Minnesota Public Utilities
Commission, cited in note 22 above.
(25) See, e.g., Northern States Power Co., 36 SEC 1 (1954)
(conclusions of state and local regulators should be given "great weight" in
determining whether a combination utility system will have an adverse effect on
the public interest).
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are satisfied, and that no adverse findings are necessary:
Provided, that NorAm Services shall have received an order of the FERC
approving the proposed merger transactions between Houston and NorAm without
imposing any conditions that change the facts underlying the Commission's
decision in this matter, IT IS ORDERED, pursuant to the applicable provisions
of the Act and rules thereunder, that the application be, and it hereby is,
granted.
By the Commission.
Jonathan G. Katz
Secretary