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Exhibit 10(O)(vi)
As filed with the Securities and Exchange Commission
July 13, 1994
File No. -
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
APPLICATION FOR DECLARATION
OF NON-HOLDING COMPANY STATUS
PURSUANT TO SECTION 2(a)(7)
OF THE PUBLIC UTILITY HOLDING
COMPANY ACT OF 1935
Cabot Corporation
75 State Street
Boston, MA 02109
------------------------------------------
(name of company filing this statement and
address of principal executive offices)
Robert Rothberg
Vice-President and General Counsel
Cabot Corporation
75 State Street
Boston, MA 02109
---------------------------------------
(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
125 West 55th Street
New York, NY 10019
P. Dexter Peacock, Esq. C. Michael Harrington, Esq.
Andrews & Kurth L.L.P. Vinson & Elkins L.L.P.
4200 Texas Commerce Tower 2500 First City Tower
Houston, TX 77002 1001 Fannin
Houston, TX 77002
David M. Carmichael William S. Garner
American Oil and Gas Corporation K N Energy, Inc.
333 Clay Street 370 Van Gordon Street
Suite 2000 Lakewood, CO 80228
Houston, TX 77002
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Cabot Corporation ("Cabot" or the "Company") hereby applies to
the Securities and Exchange Commission (the "Commission") for an order
declaring that Cabot will not become a public utility holding company as
defined under Section 2(a)(7) of the Public Utility Holding Company Act of 1935
(the "Act") in connection with its ownership of shares of K N Energy, Inc.
("KNE") following a proposed merger transaction (the "Merger") between American
Oil and Gas Corporation ("AOG") and KNE, provided that Cabot agrees to certain
conditions with regard to its share ownership. The Merger is expected to be
consummated on July 13, 1994 or within a few days thereafter. In support of
such application, Cabot states as follows:
I. Background
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A. Description of Companies Involved
---------------------------------
Cabot Corporation, a Delaware corporation having its principal
office in Massachusetts, is primarily engaged in manufacturing specialty
chemicals and materials and energy products. Cabot and its affiliates have
manufacturing facilities in the United States and more than 20 other countries.
The specialty chemicals and materials businesses manufacture carbon black,
fumed silica, various refractory metals, plastic concentrates and personal
safety, environmental enhancement and energy absorbing products. Cabot
subsidiaries also import liquefied natural gas ("LNG") to a terminal in
Everett, Massachusetts from which it is sold to power producers, local
distribution companies and industrial customers in the north-
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eastern U.S. TUCO Inc., a wholly owned subsidiary, purchases coal in Wyoming
and has it transported for sale in Texas.
Cabot previously was engaged in the oil and gas business.
Several years ago, Cabot made a strategic decision to divest its oil and gas
assets (while continuing its separate LNG business), and has engaged in various
transactions to do so. The largest parts of Cabot's former oil and gas
properties are now owned by Cabot Oil & Gas Corporation, a New York Stock
Exchange listed company in which Cabot has no interest, and AOG, to which Cabot
disposed of its gas transmission properties in 1989 in exchange for AOG
securities and cash.
In 1986, Cabot obtained a special legislative exemption from
the 1935 Act in connection with its ownership of a small public gas utility in
West Virginia. Cabot was ordered by the West Virginia Public Service
Commission to reorganize this gas utility, which mainly supplied gas to Cabot's
in-state operations but which sold excess capacity to the public and accounted
for approximately 1% of Cabot's revenues, as a subsidiary. However, upon
reorganization, Cabot would have become a "public utility holding company"
under the Act and subject to the diversification restrictions thereunder.(1) In
order to avoid this result, Cabot obtained a special exemption from the U.S.
Congress that allowed it to retain this particular subsidiary without violating
the terms of the 1935 Act.(2) As of this date, Cabot has divested its
____________________
1 132 Cong. Rec. H8673-02 (Sept. 29, 1986).
2 Pub. L. 99-648 (Nov. 10, 1986).
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interest in the West Virginia gas utility that was the subject of the
legislative exemption.
For the fiscal year ended September 30, 1993, Cabot had
consolidated revenues of $1,618,540,000 and net income applicable to common
stock of $7,669,000. The comparable figures for the fiscal year ended
September 30, 1992 were $1,562,203,000 and $58,514,000 respectively. Cabot is
not presently a "public utility company", a "holding company," or an
"affiliate" of a "public utility company" as such terms are defined under the
Act.
AOG is a Delaware corporation with its principal executive
offices in Texas. AOG is engaged in the business of gathering, processing,
transporting, storing and marketing natural gas and natural gas liquids. It
owns an intrastate pipeline (the Westar pipeline system) in West Texas and the
Texas Panhandle as well as gas processing plants and gathering lines
complementary to this pipeline. AOG also owns a natural gas storage reservoir
in West Texas, a 75 percent interest in an intrastate pipeline system (the Red
River pipeline system) in West Texas as well as gathering and transmission
systems in South and East Texas. In addition, AOG owns 55 miles of pipeline
used for gas deliveries from Oklahoma to the Westar and Red River pipeline
systems. For the fiscal year ended December 31, 1993, AOG had consolidated
revenues of $539,345,000 and net income applicable to common stock of
$6,551,000. The comparative figures for the fiscal year ended December 31,
1992 were $430,098,000 and $14,762,000, respectively.
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Cabot is the largest single holder of AOG common stock. There
is one other shareholder holding in excess of 5% of AOG common stock. The
Prudential Insurance Company of America, which holds 7.8% (including shares
issuable upon the exercise of certain warrants). AOG is not presently a
"holding company," or an "affiliate" of a "public utility company" as such
terms are defined under the Act. AOG is not itself a "public utility" because
it does not distribute gas at retail.
KNE, a Kansas corporation, is a natural gas services company
engaged in gas reserves development, gas gathering, processing, storage,
transportation and wholesale and retail sales. KNE operates in seven states
with direct retail customers in Colorado, Kansas, Nebraska and Wyoming, which
is where KNE's pipeline system is located. For the fiscal year ended December
31, 1993, KNE's total revenues were $493,349,000 while net income available for
common stock was $23,465,000. The comparable numbers for the fiscal year ended
December 31, 1992 were $391,819,000 and $18,604,000. As a result of its
distribution of gas at retail, KNE is a gas utility company as defined in the
Act, but is not a "holding company" or an "affiliate" of any other "public
utility company."
Cabot does not have any business relationship with KNE and
following the Merger no Cabot affiliate will have a formal business
relationship with KNE beyond what is disclosed in this Application.
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B. Cabot's Interest in AOG
-----------------------
Cabot currently owns approximately 34.5% of the issued and
outstanding shares of common stock of AOG (approximately 37.7% in the event of
the exercise of certain warrants held by Cabot which expire in 1999). Common
stock is the only class of outstanding voting stock of AOG.
As stated above, Cabot acquired its interest in AOG in 1989
when it sold its Texas pipeline business to AOG as part of Cabot's long-term
strategy to divest its oil and gas businesses. In connection with the 1989
transaction, Cabot and AOG agreed to a liability sharing arrangement primarily
covering certain contingent liabilities and potential gas contract losses of
the acquired business. Cabot and AOG have agreed to bear an equal amount of
such liabilities up to $20 million each; Cabot bears these liabilities above
that amount. Cabot has provided AOG with a revolving credit facility
(approximately $15 million outstanding) for the funding of cash requirements in
resolving such liabilities. Upon settlement with Cabot, AOG will be
responsible for the payment to Cabot of one-half of the amount of liabilities.
AOG has asserted certain claims related to environmental
matters against Cabot under acquisition agreements related to assets previously
owned by Cabot (including assets acquired in the 1989 transaction). KNE and
AOG have agreed not to commence any litigation, arbitration or other
proceedings against or involving Cabot with respect to such claims, or in
connection with settlement of the liability sharing arrangement
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described above, until such time as either Cabot owns less than ten percent of
the voting stock of KNE or Cabot receives an order from the Commission that
expressly permits Cabot to take all actions deemed appropriate to resolve such
claims without such actions causing Cabot to be treated as a public utility
holding company under the Act.
In addition, in connection with the 1989 transaction, Cabot
and AOG entered into a Standstill and Registration Rights Agreement (the
"Standstill Agreement") which, for a period from 1989 until November 1994
imposes certain restrictions on the acquisition by Cabot or its subsidiaries of
additional voting securities of AOG and on Cabot's right to vote such
securities. Other than the arrangements described above, Cabot conducts no
material business with AOG nor does it own any facilities or conduct any
operations related to the AOG business.
Cabot currently has two nominees on the AOG Board, although
under the Standstill Agreement it is entitled to three such representatives.
Cabot also has registration rights associated with the AOG Common Stock it
presently owns and any AOG Common Stock received upon the exercise of the AOG
warrants that it presently owns. Other than the registration rights and
related indemnification provisions, the Standstill Agreement will cease to have
effect upon consummation of the Merger.
It should be noted that the Cabot representatives on the AOG
board of directors have, naturally, participated in board discussions and votes
on various issues in connection with the Merger. In addition, Cabot has been
involved in some aspects of
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the Merger negotiation process especially as it related to the management
structure of the combined companies and the issue of Cabot's status under the
Act.
C. Proposed Merger Transaction
---------------------------
Pursuant to a Merger Agreement dated March 24, 1994 among KNE,
its wholly-owned subsidiary KNE Acquisition Corporation and AOG, AOG would be
merged with KNE Acquisition Corporation. As a result of the Merger, AOG would
become a wholly- owned subsidiary of KNE, and each issued and outstanding share
of AOG common stock would be exchanged for 0.47 shares of newly issued KNE
common stock. The Merger Agreement provides for the exchange of outstanding
AOG options and warrants for KNE options and warrants on a similar basis. The
issued and outstanding shares of KNE would not be affected by the Merger. The
Merger is expected to be consummated on July 13, 1994 or within a few days
thereafter.
As of the effective date of the Merger, the KNE Board will be
expanded from 10 to 14, and four current AOG directors will be added to the KNE
Board. In addition, a Cabot designee will be appointed an advisory director of
KNE. Following the Merger, (i) the Chairman of the Board of KNE and the
President of KNE will continue in office, (ii) the current President of KNE
will also be named Chief Executive Officer, and (iii) the current Chairman of
the Board of AOG will become Vice Chairman of the Board of KNE. In addition,
there will be a Management Committee consisting of the KNE Chairman, the KNE
President and Chief Executive Officer, the KNE Vice Chairman (i.e., the former
AOG
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Chairman, who will chair the Management Committee) and one of the former AOG
directors. No officer, director or employee of Cabot will serve as an officer
or full director of KNE.
As a result of the Merger, Cabot will own approximately 15.2%
of the outstanding voting stock of KNE, and will own warrants which if
exercised (and assuming no other options or warrants were exercised by any
other parties) would bring Cabot's ownership to approximately 17.2%.
The Merger is subject to the approval of the shareholders of
both KNE and AOG expected to be received on July, 13, 1994, and KNE's issuance
of shares in connection with the Merger is also subject, among other approvals,
to the approvals of the Colorado Public Utility Commission and the Wyoming
Public Service Commission, both of which have been obtained.
II. Conditions on Cabot's Stock Ownership Rights
--------------------------------------------
In order to ensure that, following the Merger, Cabot does not
exercise a controlling influence over KNE while at the same time ensuring that
Cabot can adequately monitor its investment, Cabot proposes that the Section
2(a)(7) order being applied for hereunder be issued subject to the following
conditions:
1. Cabot may from time to time have one (but not more than
one) designee (who may be an officer, director or employee of Cabot)
serve as an advisory director of KNE. Such an advisory director shall
not be permitted to vote on any matter submitted to the Board of
Directors of KNE. Such
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advisory director shall not be the chairperson of the Board of
Directors or of any committee thereof.
2. In all matters submitted to the shareholders of KNE for a
vote, Cabot (a) may vote in its sole discretion the shares owned by
it, up to 9.99% of the number of voting shares outstanding, and (b)
shall either not vote any shares owned by it in excess of 9.99% of the
number of voting shares outstanding (the "Excess Shares") or shall
make arrangements for the Excess Shares to be voted in the same
proportions as the other shares (excluding Cabot's other shares) of
KNE are voted on such matter. The grant by Cabot of a proxy to the
proxies selected by the directors of KNE directing that the Excess
Shares be so voted shall be deemed adequate compliance with this
provision. Notwithstanding the foregoing, if Cabot opposes any action
as to which the dissenting shareholders would be entitled to appraisal
rights under applicable law, Cabot shall be free to vote any or all of
its shares against the approval of such action or otherwise take any
action that may be required to perfect appraisal rights under
applicable law.
3. Cabot will not enter into any transaction with KNE or any
of its affiliates without the consent of the Staff, except as follows:
(a) Settlement of the existing liability sharing
obligations and environmental claims
described in this letter;
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(b) Exercise of KNE warrants received in exchange
for the existing AOG warrants presently held
by Cabot;
(c) Reimbursement of expenses incurred in
connection with attendance at Board meetings
in accordance with KNE's general policies;
and
(d) Registration of Cabot's shares in KNE under
federal and state securities laws for sale
by Cabot.
After it engages in any such transaction, Cabot shall provide
the Staff with notice that such transaction occurred, except Cabot
will not be obligated to provide notice of the reimbursement of
expenses discussed in (c) above. Notwithstanding the foregoing,
without notice to or consent of the Staff, Cabot and Cabot's
subsidiaries may take any and all actions Cabot deems appropriate to
resolve any claims that Cabot or Cabot's subsidiaries may have against
KNE or KNE's subsidiaries (including without limitation AOG after the
Merger), or which may be asserted by KNE or KNE's subsidiaries against
Cabot or Cabot's subsidiaries, including without limitation meetings
and discussions with KNE, AOG and their respective officers, directors
or other representatives, initiating or defending litigation or
arbitration, participating in mediation efforts, or otherwise.
4. Cabot will not solicit proxies with respect to any voting
securities of KNE without the consent of the Staff.
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5. Cabot will not acquire any additional shares of common
stock or other securities of KNE without the consent of the Staff
except acquisitions pursuant to (i) stock dividends or splits that do
not result in any material (i.e., greater than 1%) increase in Cabot's
ownership percentages of KNE's common stock or (ii) shares acquired
upon exercise of KNE warrants received in exchange for the existing
AOG warrants presently held by Cabot.
6. Subject to compliance with the Securities Act of 1933, as
amended, Cabot will be free to sell its shares of KNE without
restriction in all circumstances except that Cabot will give the
Commission and Staff at least 10 days advance notice of any proposed
sale of its shares of KNE to any Cabot affiliate (as defined in the
Act). If the Commission's Staff notifies Cabot within those 10 days
that it objects to the sale to an affiliate, the sale will not be
consummated until the Commission's Staff has withdrawn its objection.
7. The foregoing conditions will not apply at such time or
times as Cabot does not own directly or indirectly 10% or more of the
voting securities of KNE.
8. Cabot will receive reasonable notice, and an opportunity
to be heard, prior to any modification of the foregoing conditions or
withdrawal of the Commission's order exempting Cabot under Section
2(a)(7)(B) of the Act.
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III. Discussion
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A. The Relevant Legal Standard for a 2(a)(7) Order
-----------------------------------------------
Following the Merger, Cabot will own approximately 15.2% of
the outstanding voting stock of KNE, or 17.2% assuming the exercise of all KNE
warrants issued to Cabot in exchange for its AOG warrants. Although clause A
of Section 2(a)(7) creates a presumption that a company controlling 10% or more
of the voting securities of a public utility company is a holding company,
under clause B of Section 2(a)(7) of the Act, the Commission is authorized to
declare, by order upon application that such a company is not a holding company
if it:
(i) does not, either alone or pursuant to an
arrangement or understanding with one or more
other persons, directly or indirectly control
a public utility or holding company ... by
any means or device whatsoever,
(ii) is not an intermediary company through which
such control is exercised, and
(iii) does not, directly or indirectly, exercise
(either alone or pursuant to an arrangement
or understanding with one or more persons)
such controlling influence over the
management or policies of any public utility
or holding company as to make it necessary or
appropriate in the public interest or for the
protection of investors or consumers that the
applicant be subject to the obligations,
duties, and liabilities imposed in this title
upon holding companies.
This section of the Act also authorizes the Commission to
grant an order of exemption under Section 2(a)(7) that contains conditions
requiring the applicant to "refrain from doing such acts or things, in respect
of exercise of voting rights, control over proxies, designation of officers and
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directors, existence of interlocking officers, directors and other
relationships, and submission of periodic or special reports ..., as the
Commission may find necessary or appropriate."
There is no question that Cabot satisfies clauses (i) and (ii)
of these requirements for exemption. With only approximately 15.2% ownership
of the outstanding voting securities of KNE, Cabot will not be able directly or
indirectly to control a public utility, nor will it be an intermediary company
through which such control is exercised. Thus, the only question to be
discussed is whether Cabot exercises the type of controlling influence
described in clause (iii) above.
The term "controlling influence" as used in this Section as
well as Section 2(a)(8) of the Act has been defined as "the act or process, or
power of producing an effect which may be without apparent force or direct
authority and is effective in checking or directing action or exercising
restraint or preventing free action." DETROIT EDISON CO. V. S.E.C., 119 F.2d
730, 738-39 (6th Cir. 1941).
The Commission has previously granted many orders pursuant to
Section 2(a)(7) of the Act declaring that a company owning more than 10% of the
outstanding voting securities of a public utility is not a holding company
because it did not exercise the type of controlling influence that required
registration under the Act.
In some instances such orders have been granted without
conditions. For example, in IN THE MATTER OF THE LEHIGH COAL AND
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NAVIGATION COMPANY, 1 SEC 1489 (1936), the Commission granted a Section 2(a)(7)
order to a company that owned 12.8% of a public utility's voting securities.
In this case, the Commission did not find it necessary to attach any conditions
to the order.
A more recent Commission order granting an exemption under
Section 2(a)(7) of the Act is IN THE MATTER OF KANEB PIPE LINE COMPANY, 43 SEC
976 (1968). In that case, Kaneb Pipe Line Company ("Kaneb") acquired 19.48% of
the common stock of Kansas-Nebraska Natural Gas Company, the predecessor in
name of KNE. Kaneb openly admitted its intention to force a merger between
Kaneb and KNE, although KNE's management had rejected all such offers to date.
Kaneb filed an application with the Commission under Section 2(a)(7) of the Act
to be declared not a holding company despite the fact that it owned more than
10% of a utility company's outstanding voting securities. KNE's management
objected to Kaneb's filing of the application, arguing that since Kaneb,
against their wishes, was actually trying to gain control over KNE already it
therefore was clearly attempting to exercise a controlling influence so the
application was made in bad faith. Id. at 984. The Commission, however, noted
that wanting to exercise a controlling influence differs from actually being
able to do so, and found that "the record shows an absence of the business,
financial or personal relationships between the two managements that are often
referred to as indicative of a controlling influence, other than stock
ownership. Id. at 979.
As a result, the Commission granted Kaneb's application and
issued the order but made it subject to a number of detailed
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conditions which were apparently negotiated in advance, to ensure that any
controlling influence available to Kaneb did not exceed an acceptable level.
These conditions concerned, among other things, prohibiting future service,
sale or construction contracts between Kaneb and KNE; requiring that Kaneb file
advance notification with the Commission before selling its KNE stock; and
prohibiting Kaneb from acquiring additional KNE stock without first giving the
Commission fifteen days advance notice and, if notified in those fifteen days
that the Commission questioned the sale, not making the purchase until it
applied for and received permission to do so from the Commission.
Cases where the Commission has denied applications under
Section 2(a)(7) invariably have involved situations with extensive business,
personal or financial interests between the holding company and its
subsidiaries. SEE E.G., KOPPERS UNITED CO. V. SEC, 138 F.2d 577 (D.C. Cir.
1943) (denying 2(a)(7) order where subsidiary bought all key raw material from
holding company, sold all surplus product to holding company and holding
company had board representation).
As previously mentioned, the term "controlling influence" can
also be found in Section 2(a)(8) which allows the Commission to issue an order
declaring a company not to be a subsidiary of a holding company if, among other
requirements, the management of the applicant is not subject to a controlling
influence by the holding company. There are a number of cases where the
Commission has denied applications under Section 2(a)(8) by finding a
controlling influence to exist. In
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each case, however, the Commission based its finding on evidence that the
subsidiary and holding companies had significant business, personal and
financial relationships in the past. SEE E.G., IN THE MATTER OF PAUL SMITH'S
ELECTRIC LIGHT AND POWER AND RAILROAD COMPANY, 9 SEC 648 (1941) (finding
exclusive inter-company service contracts and over 49% share ownership by
holding company as evidence of controlling influence); IN THE MATTER OF PACIFIC
GAS AND ELECTRIC COMPANY, 10 SEC 39 (1941) (existing inter-company service
contracts and election of holding company's officer as president of subsidiary
company evidence of controlling influence); PUBLIC SERVICE CORPORATION OF NEW
JERSEY V. SEC, 129 F.2d 899 (3rd Cir. 1942) (finding engineering, purchasing
and advisory service contracts, board representation and 28.4% stock ownership
as evidence of controlling influence by holding company). Since there is no
history of such contacts between Cabot and KNE, and Cabot has agreed to limit
its rights as a shareholder to ensure that no such influence shall develop in
the future, Cabot meets the requirements of Section 2(a)(7)(B) and an order
pursuant to this Section of the Act is appropriate.
Indeed, strong arguments can be made that, with the
restrictions discussed in section II above, which effectively make the KNE
shares owned by Cabot in excess of 9.99% non-voting shares as long as they are
owned directly or indirectly by Cabot, Cabot should not be considered a holding
company under Section 2(a)(7)(A) of the Act following the Merger even without
application of the Section 2(a)(7)(B) test. Section 2(a)(7)(A) specifies that
"any company which directly or indirectly owns,
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controls, or holds with power to vote, 10 percentum or more of the outstanding
voting securities of a public utility company..." is presumed to be a holding
company. "Voting security" is defined in Section 2(a)(17) of the Act as "any
security presently entitling the owner or holder thereof to vote in the
direction or management of the affairs of a company...." The conditions
specified in section II above are such that Cabot has effectively transformed
what could have been voting securities into non-voting securities.
Under these conditions, Cabot will not hold voting securities
in excess of 9.99% and thus will not become a holding company under Section
2(a)(7)(A). However, the Commission need not address this point if it agrees
that the arrangements are sufficient to preclude a controlling influence by
Cabot.
B. Cabot Will Not Exercise a Controlling Influence
over KNE
-----------------------------------------------
Following the Merger, the KNE Board will consist of the
current 10 KNE directors plus 4 directors drawn from the current AOG Board who
are not affiliated with Cabot. While Cabot does not believe it has any
controlling influence over the 4 AOG directors, it clearly does not have any
such influence over the 10 KNE directors. Similarly, following the Merger both
the Chairman of the Board and the President and Chief Executive Officer of KNE
will be drawn from the current KNE management, with whom Cabot has no
pre-existing relationship. Under the circumstances, Cabot will not be in a
position to exercise a controlling influence over KNE even without restrictions
on its
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ability to do so. Nevertheless, in order to eliminate any question with
respect to its qualification for exemption, the applicant has proposed, in
section II above, a set of conditions which it is prepared to accept and have
embodied in a Commission order under Section 2(a)(7) of the Act.
While its investment is substantial and Cabot does want to
monitor its investment as would any substantial shareholder, Cabot has no
intention of or interest in asserting control over KNE. In any event, the
conditions proposed above would make it impossible for Cabot to do so.
C. Granting this Application is in the Public Interest
---------------------------------------------------
Section 2(a)(7) provides that an application will be denied
because of a "controlling influence" only where it is necessary or appropriate
to protect the public interest or investors. In this case, no public or
investor interest would be harmfully affected by Cabot's stock ownership in
KNE.
Cabot's stock ownership of 15.2% of KNE's outstanding stock
will not have any adverse effect on KNE as a company nor on its ability to
provide services to its gas utility customers. In addition, in view of the
restrictions on Cabot's rights as a shareholder that will be included in the
Commission's order (see section II above), Cabot's stock ownership will not
have a deleterious impact on other investors' rights in KNE.
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IV. Exhibits
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A. Form of Notice
B. Original Acquisition Agreement
C. Standstill Agreement
D. Annual Report of Cabot
E. Annual Report of AOG
F. Annual Report of KNE
G. Merger Agreement
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V. Signature
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The Company has caused this Application to be duly signed on
its behalf by its authorized officer in the city of Boston, the State of
Massachusetts, on this 11th day of July, 1994.
CABOT CORPORATION
By /s/ Samuel W. Bodman
----------------------
Name: Samuel W. Bodman
Title: Chairman and President
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