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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): AUGUST 6, 1997
---------------------------------------------
HOUSTON INDUSTRIES INCORPORATED*
(Exact name of registrant as specified in its charter)
TEXAS 1-7629 74-1885573
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (713) 207-3000
---------------------------------------------
HOUSTON LIGHTING & POWER COMPANY*
(Exact name of registrant as specified in its charter)
TEXAS 1-3187 74-0694415
(State or other jurisdiction (Commission (I.R.S. Employer
of incorporation) File Number) Identification No.)
1111 LOUISIANA
HOUSTON, TEXAS 77002
(Address of principal executive offices) (ZIP Code)
Registrant's telephone number, including area code: (713) 207-1111
---------------------------------------------
*On August 6, 1997, Houston Industries Incorporated merged with and into
Houston Lighting & Power Company, which was renamed "Houston Industries
Incorporated."
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The combined Form 8-K is separately filed by Houston Industries Incorporated
(Company) and Houston Lighting & Power Company (HL&P).
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On August 6, 1997, the Company merged with and into HL&P, and
NorAm Energy Corp. (NorAm) merged with and into HI Merger, Inc., a subsidiary
of the Company. Upon consummation of the mergers (collectively, the Merger),
HL&P, the surviving corporation of the Company/HL&P merger, was renamed
"Houston Industries Incorporated" (Houston) and HI Merger, Inc., the surviving
corporation of the NorAm/HI Merger, Inc. merger, was renamed "NorAm Energy
Corp." and became a wholly owned subsidiary of Houston.
NorAm is principally engaged in the distribution and
transmission of natural gas, including the gathering, storage and marketing of
natural gas. Through its Entex, Arkla and Minnegasco distribution divisions,
NorAm is the nation's third-largest natural gas utility in terms of customers
served, with over 2.7 million customers in six states. NorAm operates
interstate gas pipeline facilities through NorAm Gas Transmission Company and
Mississippi River Transmission Corporation. It also owns natural gas gathering
assets in Oklahoma, Louisiana, Arkansas and Texas and is engaged in various
other energy-related businesses, including natural gas and electric wholesale
trading, gas storage, wholesale electric services and providing unregulated
retail energy services to industrial and large commercial customers.
Based on an order of the Securities and Exchange Commission
(SEC) issued on July 24, 1997, Houston will continue to be exempt from
regulation under Section 3(a)(2) of the Public Utility Holding Company Act of
1935 (1935 Act), except with respect to the (i) acquisition of certain voting
securities of other domestic public utility companies and utility holding
companies and (ii) the provisions of Section 33 of the 1935 Act regarding the
acquisition, ownership and financing of foreign utility companies. On July 30,
1997, the Federal Energy Regulatory Commission (FERC) issued an order approving
the Merger without conditions and authorizing NorAm Energy Services, Inc., a
subsidiary of NorAm engaged in the power marketing business, to continue its
market-based rate schedules in effect. For additional information regarding
the FERC and SEC orders, reference is made to Exhibits 99.2 and 99.3 filed
with this Report on Form 8-K, which exhibits are incorporated herein by
reference.
Merger Consideration. Under the terms of the Agreement and
Plan of Merger dated as of August 11, 1996, as amended (Merger Agreement),
among the Company, HL&P, HI Merger, Inc. and NorAm, each share of NorAm common
stock outstanding immediately prior to the effective time of the Merger was
converted, upon consummation of the Merger, into the right to receive (i)
0.74963 shares of the common stock, without par value, of Houston (including
associated preference stock purchase rights, Houston Common Stock) or (ii) cash
consideration of $16.3051, representing cash consideration of $16.00 plus simple
interest of two percent per quarter from May 11, 1997 to August 6, 1997 (Cash
Consideration). Under the terms of the Merger Agreement, the exchange ratio for
the stock consideration (Stock Consideration) was based on $16.00 per share
without interest and the average daily closing price on the New York Stock
Exchange of $21.3438 for the common stock of the Company during the 20
consecutive trading days commencing on July 1, 1997. The Merger Agreement also
provides that each holder of an unexpired employee stock option to purchase
NorAm common stock, along with any tandem stock appreciation rights, outstanding
at the effective time of the Merger was entitled to elect either to have, upon
consummation of the Merger, all or any portion of his or her NorAm stock
options canceled in exchange for cash or to have all or any portion of such
options assumed by Houston at a conversion rate specified in the Merger
Agreement.
Based upon preliminary information regarding cash and stock
elections made by NorAm shareholders and after giving effect to preliminary
proration adjustments, the aggregate
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consideration for the Merger consisted of (i) approximately 47.8 million shares
of Houston Common Stock and (ii) approximately $1.4 billion in Cash
Consideration. In addition, Houston has issued to NorAm employees options to
purchase up to 887,804 shares of Houston Common Stock and paid approximately
$4.9 million in exchange for cancelled NorAm options.
After the Merger, NorAm's existing debentures and convertible
securities will remain outstanding as the securities of NorAm, a wholly owned
subsidiary of Houston (and will not be assumed by Houston except with respect
to the conversion of certain NorAm debt securities into Houston common stock as
described below), and NorAm will continue to be a reporting company under the
Securities Exchange Act of 1934 (Exchange Act).
As a result of the Merger, NorAm's 6% Convertible Subordinated
Debentures due 2012 and NorAm's 6 1/4% Convertible Junior Subordinated
Debentures (collectively, Convertible Securities) will be convertible into (in
lieu of NorAm common stock) the amount of Stock Consideration and Cash
Consideration that the holder of such Convertible Securities would have had the
right to receive (i) if such Convertible Securities had been converted into
NorAm common stock immediately prior to the Merger and (ii) if, following
conversion, the holder had received Stock Consideration with respect to 50
percent of his or her shares of NorAm common stock and Cash Consideration with
respect to the remaining 50 percent of such holder's shares of NorAm common
stock.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
Financial Statements:
The following documents, previously filed with the SEC pursuant to the
Securities Exchange Act of 1934, as amended, are hereby incorporated by
reference:
1. The Company's and HL&P's Combined Annual Report on
Form 10-K for the year ended December 31, 1996 (File
Nos. 1-7629 and 1-3187)
2. The Company's and HL&P's Combined Quarterly Report on
Form 10-Q for the quarter ended March 31, 1997 (File
Nos. 1-7629 and 1-3187)
3. NorAm's Annual Report on Form 10-K for the year ended
December 31, 1996 (File No. 1-3751)
4. NorAm's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1997 (File No. 1-3751)
Unaudited Pro Forma Combined Financial Statements:
The unaudited pro forma combined condensed financial
statements included as Exhibit 99.1 give effect to the Merger. The unaudited
pro forma condensed balance sheet as of March 31, 1997 is presented as if the
Merger had occurred on that date. The unaudited pro forma condensed statements
of income for the year ended December 31, 1996 and the three months ended March
31, 1997 assume that the Merger occurred at the beginning of each of the
periods presented. The acquisition of NorAm will be treated as a purchase for
accounting purposes. The assets acquired and liabilities assumed will be
recorded at their fair values.
The unaudited pro forma financial statements included as
Exhibit 99.1 should be read in conjunction with the historical financial
statements and related notes of the Company and NorAm and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
the Company and NorAm incorporated by reference herein. The unaudited pro
forma condensed statements of income are not necessarily indicative of the
financial results that would have occurred had the Merger been completed on the
indicated dates, nor are they necessarily indicative of future financial
results. Results for interim periods do not necessarily indicate results for
the full year.
The pro forma adjustments are based on assumptions and
estimates made by the Company's management and do not reflect adjustments for
anticipated operating efficiencies and cost savings the Company expects to
achieve as a result of the Merger. The actual allocation of the consideration
paid for NorAm may differ from that reflected in the unaudited pro forma
combined condensed financial statements after a more extensive review of the
fair value of the assets acquired and liabilities assumed has been completed.
Amounts allocated will be based upon the estimated fair values at the effective
time of the Merger, which could vary significantly from the amounts as of March
31, 1997.
As described in Item 2 above, the ratio of shares of Houston
Common Stock issued to Cash Consideration paid differed from that reflected in
these unaudited pro forma combined condensed financial statements. If the actual
ratio was reflected in the unaudited pro forma financial statements, pro forma
common stock equity would decrease by approximately 4% and pro forma long-term
debt would increase by approximately 3%. Pro forma earnings per common share
would increase by no more than 2% for the year ended December 31, 1996.
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EXHIBITS
Exhibit No. Exhibits (Exhibits designated by an asterisk
(*) are incorporated herein by reference to a
separate filing as indicated.)
*2(a) Agreement and Plan of Merger dated as of
August 11, 1996, by and among Houston
Industries Incorporated, Houston Lighting &
Power Company, HI Merger, Inc. and NorAm
Energy Corp. (Incorporated by reference to
Exhibit 2(a) to Form 8-K Combined Current
Report of Houston Industries Incorporated and
Houston Lighting & Power Company dated August
11, 1996).
*2(b) Amendment to Agreement and Plan of Merger
(incorporated by reference to Exhibit 2(c) to
Registration Statement on Form S-4 of Houston
Industries Incorporated and Houston Lighting &
Power Company (Reg. No. 333-11329).
2(c) Agreement dated August 5, 1997, amending
Agreement and Plan of Merger.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand L.L.P.
99.1 Unaudited Pro Forma Combined Financial
Statements
99.2 Memorandum and Opinion and Order Granting
Exemption to Holding Company dated July 24,
1997, and issued by the Securities and
Exchange Commission.
99.3 Order of the FERC dated July 30, 1997.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON INDUSTRIES INCORPORATED
(Registrant)
/s/ Mary P. Ricciardello
------------------------------
Mary P. Ricciardello
Vice President and Comptroller
Date: August 7, 1997
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HOUSTON LIGHTING & POWER COMPANY
(Registrant)
/s/ Mary P. Ricciardello
-------------------------------
Mary P. Ricciardello
Vice President and Comptroller
Date: August 7, 1997
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INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
Exhibits (Exhibits designated by an asterisk (*) are incorporated herein by reference
to a separate filing as indicated.)
*2(a) Agreement and Plan of Merger dated as of August 11, 1996, by and among Houston
Industries Incorporated, Houston Lighting & Power Company, HI Merger, Inc. and NorAm
Energy Corp. (Incorporated by reference to Exhibit 2(a) to Form 8-K Combined Current
Report of Houston Industries Incorporated and Houston Lighting & Power Company dated
August 11, 1996).
*2(b) Amendment to Agreement and Plan of Merger (incorporated by reference to Exhibit 2(c)
to Registration Statement on Form S-4 of Houston Industries Incorporated and Houston
Lighting & Power Company (Reg. No. 333-11329)).
2(c) Amendment dated August 5, 1997, amending Agreement and Plan of Merger.
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Coopers & Lybrand LLP
99.1 Unaudited Pro Forma Combined Financial Statements
99.2 Memorandum and Opinion and Order Granting Exemption to Holding Company dated July 24,
1997, and issued by the Securities and Exchange Commission.
99.3 Order of the FERC dated July 30, 1997.
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Exhibit 2(c)
AGREEMENT
WHEREAS, NorAm Energy Corp. ("NorAm"), Houston Industries
Incorporated ("HI"), Houston Lighting & Power Company and HI Merger Inc.
(together, the "Parties") have entered into that certain Agreement and Plan of
Merger dated as of August 11, 1996 (the "Merger Agreement"); and
WHEREAS, NorAm and HI have subsequently discussed continuing
the participation of NorAm employees in certain annual variable pay plans
through December 31, 1997, rather than making pro-rated payments to
participants under such plans as provided in Section 5.10(e) of the Merger
Agreement.
NOW, THEREFORE, the Parties hereby agree as follows:
1. Section 5.10(e) of the Merger Agreement is hereby amended to read as
follows:
"For the calendar year ending December 31, 1996, NorAm will pay to
each employee of NorAm and the NorAm Affiliates who is a participant
in a NorAm annual incentive compensation plan or a variable pay
program the amount of annual incentive compensation or variable pay
awarded to such employee for 1996 based on the level of performance
goals actually attained by NorAm. The amount of such incentive
compensation or variable pay will be determined in accordance with
normal practice and will be paid on or before March 15, 1997.
For the calendar year ending December 31, 1997, annual incentive
compensation and annual variable pay awarded to employees of NorAm and
the NorAm Affiliates under any plan or program including, without
limitation, Section 9 of the 1994 Incentive Equity Plan (also known as
the Annual Incentive Award Plan), the All Employee Incentive Plan
(also known as the All Employee Incentive Opportunity Plan) and the
Gas Marketing Incentive Plan (the "Plans") will be paid to such
employees in accordance with the terms and conditions on which the
awards were originally based, subject to the following modifications:
(1) In no event shall any individual who is an employee
of NorAm or any affiliate of NorAm at the close of business on
August 5, 1997 be paid less than an amount equal to 218/365
multiplied by the amount of the award that would have been
payable to the employee had the applicable performance goals
been achieved at the target level of performance. Any
individual whose employment with NorAm and its affiliates
terminates on or after the Effective Time and prior to
December 31, 1997, shall be paid the award contemplated hereby
as soon as practicable following termination of employment,
but in no event later than 10 days following termination of
employment.
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(2) Performance with respect to any goals based on (i)
earnings per share, or (ii) cash flow (where applicable),
shall be measured utilizing the following assumptions:
(A) The number of shares and the level of
convertible securities outstanding at any applicable
time shall be deemed to be the same as the number of
shares and level of convertible securities
outstanding immediately prior to the Effective Time.
(B) Interest expense and distributions on
convertible securities will be calculated from August
6, 1997 through December 31, 1997 as if the balances
outstanding on August 6, 1997 remained outstanding
through December 31, 1997.
(C) Corporate overhead expenses will be
determined from August 6, 1997 through December 31,
1997 in accordance with NorAm's 1997 budget.
(D) No costs directly related to the Merger, and
no costs related to amortization of new goodwill will
be taken into account.
(3) Performance with respect to any goals based on (i)
return on capital employed or (ii) cash flow shall be measured
assuming continuation of dividend payments with the frequency
that such payments were made from August 1, 1996 through
August 1, 1997, at the level most recently paid prior to
August 6, 1997.
(4) Any other goals that cannot be accurately measured
following the Merger without utilization of assumptions
similar to those set forth above shall be measured utilizing
such assumptions as the appropriate officers of HL&P deem fair
and equitable in their sole discretion."
2. NorAm hereby represents that Exhibit A hereto is a true and
correct representation of all of the performance goals originally
applicable under the Plans for 1997 annual awards.
3. This Agreement may be executed in two or more counterparts,
all of which shall be considered one and the same agreement, it being
understood that all parties need not sign the same counterpart.
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IN WITNESS WHEREOF, each Party has caused this Agreement to be signed
by its duly authorized officer this 5th day of August, 1997.
NORAM ENERGY CORP.
By: /s/ T. Milton Honea
----------------------------------------
Name: T. Milton Honea
------------------------------------
Title: Chairman of the Board, President
-----------------------------------
and Chief Executive Officer
HOUSTON INDUSTRIES INCORPORATED
By: /s/ Hugh Rice Kelly
-----------------------------------------
Name: Hugh Rice Kelly
------------------------------------
Title: Executive Vice President, General
-----------------------------------
Counsel and Corporate Secretary
HOUSTON LIGHTING & POWER COMPANY
By: /s/ Hugh Rice Kelly
-----------------------------------------
Name: Hugh Rice Kelly
------------------------------------
Title: Senior Vice President, General
-----------------------------------
Counsel and Corporate Secretary
HI MERGER, INC.
By: /s/ Stephen W. Naeve
-----------------------------------------
Name: Stephen W. Naeve
------------------------------------
Title: President
-----------------------------------
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EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We hereby consent to the incorporation by reference in this Current Report on
Form 8-K of Houston Industries Incorporated ("HII") and Houston Lighting &
Power Company ("HL&P") of our reports dated February 21, 1997, appearing in the
Annual Reports on Form 10-K of HII and HL&P for the year ended December 31,
1996.
DELOITTE & TOUCHE LLP
Houston, Texas
August 6, 1997
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EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this current report on Form 8-K
of our report dated March 25, 1997, on our audits of the consolidated financial
statements of NorAm Energy Corp. and Subsidiaires as of December 31, 1996 and
1995, and for the three years ended December 31, 1996, which report is included
in NorAm Energy Corp. and Subsidiaries Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Houston, Texas
August 7, 1997
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EXHIBIT 99.1
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1997
(THOUSANDS OF DOLLARS)
ASSETS
HISTORICAL PRO FORMA
-------------------------- ------------------------------
HI NORAM ADJUSTMENTS COMBINED
----------- ----------- ------------- -----------
Net Property, Plant, and Equipment ................. $ 8,702,379 $ 2,434,677 $ 438,277 (d) $11,575,333
----------- ----------- ----------- -----------
Current Assets:
Cash and cash equivalents ....................... 15,351 34,599 (34,599)(e) 15,351
Accounts and notes receivable - net ............. 105,765 752,849 -- 858,614
Inventories ..................................... 184,508 56,377 -- 240,885
Other ........................................... 19,783 29,108 -- 48,891
----------- ----------- ----------- -----------
Total ..................................... 325,407 872,933 (34,599) 1,163,741
----------- ----------- ----------- -----------
Investments and Other Assets:
Investment in Time Warner securities ............ 1,033,250 -- -- 1,033,250
Deferred plant costs - net ...................... 580,906 -- -- 580,906
Investments in and advances to
unconsolidated affiliates - net ............. 501,636 -- -- 501,636
Goodwill ........................................ 463,392 (463,392) (e) 1,746,425
1,746,425 (e)
Other ........................................... 1,076,561 219,928 19,600 (i) 1,316,089
----------- ----------- ----------- -----------
Total ..................................... 3,192,353 683,320 1,302,633 5,178,306
----------- ----------- ----------- -----------
Total ................................ $12,220,139 $ 3,990,930 $ 1,706,311 $17,917,380
=========== =========== =========== ===========
CAPITALIZATION AND LIABILITIES
Capitalization:
Common stock equity ............................. $ 3,814,240 $ 864,720 $ 1,228,968 (a) $ 5,043,208
(864,720) (e)
Preferred stock - not subject to mandatory
redemption ................................... 9,740 -- -- 9,740
HL&P obligated mandatorily redeemable
securities of subsidiary trusts holding solely
subordinated debentures of HL&P .............. 340,810 -- -- 340,810
NorAm obligated mandatorily redeemable,
convertible preferred securities of
subsidiary trust ............................. 164,427 (164,427) (e)
Long-term debt, less current maturities ......... 3,026,580 1,047,469 1,261,103 (b) 5,370,321
35,169 (c)
----------- ----------- ----------- -----------
Total ..................................... 7,191,370 2,076,616 1,496,093 10,764,079
----------- ----------- ----------- -----------
Current Liabilities:
Notes payable ................................... 1,439,622 312,000 -- 1,751,622
Accounts payable ................................ 102,094 478,348 -- 580,442
Taxes accrued ................................... 85,703 94,698 -- 180,401
Interest accrued ................................ 69,894 30,772 -- 100,666
Dividends declared .............................. 92,548 -- -- 92,548
Current portion of long-term debt and
preferred stock ............................. 63,054 278,000 -- 341,054
Other ........................................... 121,184 112,265 -- 233,449
----------- ----------- ----------- -----------
Total ..................................... 1,974,099 1,306,083 -- 3,280,182
----------- ----------- ----------- -----------
Other Liabilities and Deferred Credits:
Accumulated deferred income taxes ............... 2,273,235 339,363 114,418 (e) 2,727,016
Unamortized investment tax credit ............... 368,870 -- -- 368,870
Other ........................................... 412,565 268,868 95,800 (i) 777,233
----------- ----------- ----------- -----------
Total ..................................... 3,054,670 608,231 210,218 3,873,119
----------- ----------- ----------- -----------
Total ................................ $12,220,139 $ 3,990,930 $ 1,706,311 $17,917,380
=========== =========== =========== ===========
See Notes to Unaudited Pro Forma Financial Statements.
Page 99.1-1
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UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
---------------------------- -------------------------------
HI NORAM ADJUSTMENTS COMBINED
----------- ----------- ------------ -----------
Operating Revenues:
Electric ........................................ $ 4,025,027 -- -- $ 4,025,027
Gas ............................................. -- $ 4,788,462 -- 4,788,462
Other ........................................... 70,250 -- -- 70,250
----------- ----------- ----------- -----------
Total ..................................... 4,095,277 4,788,462 -- 8,883,739
----------- ----------- ----------- -----------
Operating Expenses:
Electric fuel and purchased power ............... 1,347,208 -- -- 1,347,208
Gas purchased ................................... -- 3,667,954 -- 3,667,954
Operation and maintenance ....................... 888,699 524,736 $ (4,482) (i) 1,408,953
Depreciation and amortization ................... 550,038 142,362 29,474 (e) 736,483
14,609 (d)
Taxes other than income taxes ................... 246,288 116,600 -- 362,888
Other ........................................... 72,578 22,344 -- 94,922
----------- ----------- ----------- -----------
Total ..................................... 3,104,811 4,473,996 39,601 7,618,408
----------- ----------- ----------- -----------
Operating Income ................................... 990,466 314,466 (39,601) 1,265,331
----------- ----------- ----------- -----------
Other Income (Expense):
Litigation settlements .......................... (95,000) -- -- (95,000)
Time Warner dividend income ..................... 41,610 -- -- 41,610
Other ........................................... (2,022) (14,577) -- (16,599)
----------- ----------- ----------- -----------
Total ..................................... (55,412) (14,577) -- (69,989)
----------- ----------- ----------- -----------
66,032 (c)
Interest and Other Charges ......................... 307,382 138,399 (5,842) (f) 505,971
----------- ----------- ----------- -----------
From Continuing Operations:
Income before income taxes ...................... 627,672 161,490 (99,791) 689,371
Income taxes .................................... 200,165 66,352 (24,611) (h) 241,906
----------- ----------- ----------- -----------
Income before preferred dividends ............... 427,507 95,138 (75,180) 447,465
Preferred dividends ............................. 22,563 3,597 -- 26,160
----------- ----------- ----------- -----------
Income available for common stock ............... $ 404,944 $ 91,541 $ (75,180) $ 421,305
=========== =========== =========== ===========
Weighted average common shares
outstanding (000) ............................. 244,443 131,648 -- 299,802 (g)
Earnings per common share ....................... $ 1.66 $ 0.70 -- $ 1.41
See Notes to Unaudited Pro Forma Financial Statements.
Page 99.1-2
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UNAUDITED PRO FORMA CONDENSED STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(THOUSANDS OF DOLLARS EXCEPT PER SHARE AMOUNTS)
HISTORICAL PRO FORMA
---------------------------- -------------------------------
HI NORAM ADJUSTMENTS COMBINED
----------- ----------- --------------- -----------
Operating Revenues:
Electric ................................. $ 856,534 -- -- $ 856,534
Gas ...................................... -- $ 1,924,182 -- 1,924,182
Other .................................... 21,567 -- -- 21,567
----------- ----------- ----------- -----------
Total .............................. 878,101 1,924,182 -- 2,802,283
----------- ----------- ----------- -----------
Operating Expenses:
Electric fuel and purchased power ........ 320,322 -- -- 320,322
Gas purchased ............................ -- 1,579,178 -- 1,579,178
Operation and maintenance ................ 183,633 127,640 $ (1,121) (i) 310,152
Depreciation and amortization ............ 130,990 35,988 7,368 (e) 177,998
3,652 (d)
Taxes other than income taxes ............ 62,811 36,155 -- 98,966
Other .................................... 24,129 -- -- 24,129
----------- ----------- ----------- -----------
Total .............................. 721,885 1,778,961 9,899 2,510,745
----------- ----------- ----------- -----------
Operating Income ............................ 156,216 145,221 (9,899) 291,538
----------- ----------- ----------- -----------
Other Income (Expense):
Time Warner dividend income .............. 10,403 -- -- 10,403
Other .................................... (1,762) 6,309 -- 4,547
----------- ----------- ----------- -----------
Total .............................. 8,641 6,309 -- 14,950
----------- ----------- ----------- -----------
16,508 (c)
Interest and Other Charges .................. 82,630 38,177 (2,705) (f) 134,610
----------- ----------- ----------- -----------
From Continuing Operations:
Income before income taxes ............... 82,227 113,353 (23,702) 171,878
Income taxes ............................. 20,482 44,943 (5,717) (h) 59,708
----------- ----------- ----------- -----------
Income before preferred dividends ........ 61,745 68,410 (17,985) 112,170
Preferred dividends ...................... 2,125 -- -- 2,125
----------- ----------- ----------- -----------
Income available for common stock ........ $ 59,620 $ 68,410 $ (17,985) $ 110,045
=========== =========== =========== ===========
Weighted average common shares
outstanding (000) ...................... 233,689 137,956 -- 289,048 (g)
Earnings per common share ................ $ 0.26 $ 0.50 -- $ 0.38
See Notes to Unaudited Pro Forma Financial Statements.
Page 99.1-3
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NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) NorAm Common Stock to be exchanged:
(THOUSANDS EXCEPT
PRICE PER SHARE)
----------------
NorAm common shares outstanding at March 31, 1997.................................. 138,229
Common stock equivalents and other dilutive securities assumed to be converted or
exercised prior to closing:
NorAm obligated mandatorily redeemable, convertible preferred securities of
subsidiary trust ("Convertible Preferred Securities") - 3.289 million
shares outstanding at March 31, 1997, to be converted at a rate of
4.1237 shares of common stock per share of preferred stock, $50 par
value ......................................................................... 13,563
NorAm stock options and restricted stock at March 31, 1997....................... 1,829
----------
Pro forma NorAm common stock and stock equivalents outstanding at
March 31, 1997................................................................... 153,621
Purchase price per share........................................................... $ 16
----------
Total consideration................................................................ $2,457,936
==========
Value of HI common stock consideration......................................... $1,228,968
==========
Cash consideration............................................................. $1,228,968
==========
Total consideration is calculated assuming a purchase price of $16 per
share of NorAm Common Stock, an average HI Common Stock price per share of
$22.20 (the average of the closing prices of HI Common Stock during a
20-trading-day period commencing 25 trading days prior to March 31, 1997),
conversion of all NorAm Convertible Preferred Securities, exercise of all
outstanding NorAm stock options with exercise prices less than or equal to
$16 per share and that the number of shares of NorAm Common Stock
outstanding at the effective date of the acquisition is equal to that
outstanding on March 31, 1997.
Total consideration is dependent upon the number of shares of NorAm Common
Stock outstanding as of the effective date of the acquisition and the
price per share of HI Common Stock. The actual number of equivalent HI
common shares exchanged will depend upon the average daily closing price
of HI Common Stock on the NYSE during a 20-trading-day period commencing
25 trading days prior to the effective date of the acquisition ("Average
Price"). The Stock Consideration will have a value (based upon the average
closing price) of $16.00 per share of NorAm Common Stock if the Average
Price of HI Common Stock is greater than or equal to $21.25 and less than
or equal to $26.00. The Stock Consideration will have a value (based on
the average closing price) greater than $16.00 per share of NorAm Common
Stock if the Average Price of HI Common Stock is greater than $26.00, and
a value (based on average closing price) less than $16 per share of NorAm
Common Stock if the Average Price of HI Common Stock is less than $21.25.
(b) Acquisition debt is calculated based on the following assumptions:
(THOUSANDS)
-----------
Cash consideration - see note (a).............................................. $1,228,968
Transaction costs.............................................................. 32,000
Severance costs................................................................ 44,000
Less:
NorAm cash balance as of March 31, 1997.................................... (34,599)
Proceeds from exercise of NorAm stock options.............................. (9,266)
----------
Total acquisition debt..................................................... $1,261,103
==========
Page 99.1-4
5
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS - (CONTINUED)
(c) Interest expense and fair value adjustments for long-term debt are as
follows:
(THOUSANDS)
-----------
Acquisition debt - see note (b).................................................. $1,261,103
Assumed interest rate on acquisition debt........................................ 6.07% (1)
----------
Adjustment to 1996 interest expense for acquisition debt....................... 76,549
----------
Adjustment to interest expense for acquisition debt for the first
three months of 1997....................................................... 19,137
----------
NorAm long-term debt assumed at March 31, 1997:
Principal amount...................................................... $ 1,325,469
Fair value............................................................ 1,360,638
-----------
Revaluation adjustment of debt assumed to fair value.................. $ 35,169
===========
Adjustment to 1996 interest expense for revaluation of long-term debt
assumed (using the effective interest method).................................. (10,517)
----------
Adjustment to interest expense for revaluation of long-term debt assumed
for the first three months of 1997............................................. (2,629)
-----------
Total interest expense adjustment for 1996......................................... $ 66,032
===========
Total interest expense adjustment for the first three months of 1997............... $ 16,508
===========
(1) For purposes of the unaudited pro forma condensed statements of
income, the annual interest rate on the acquisition debt is assumed
to be 6.07%. A 1% change in the interest rate on the acquisition
debt would change 1996 interest expense by $12.6 million and
interest expense for the first three months of 1997 by $3.15
million. The cash portion of the consideration is expected to be
obtained through a bank loan under a revolving credit and letter of
credit facility which has been negotiated with a syndicate of banks
and financial institutions. The annual interest rate will be based
upon either the London interbank offered rate ("LIBOR") plus .25%
or the greater of the federal funds rate plus .5% or prime rate,
plus a .125% facility fee. LIBOR was 5.69% at March 31, 1997.
At the date of the Merger, August 6, 1997, LIBOR was 5.63%.
(d) Based on preliminary analyses, the following adjustments have been made to
reflect the fair value of property, plant and equipment:
(THOUSANDS)
-----------
Revaluation of property, plant and equipment to fair value......................... $ 438,277
==========
Adjustment to 1996 depreciation expense (assumes 30 year average depreciable life). $ 14,609
==========
Adjustment to depreciation expense for the first three months of 1997.............. $ 3,652
==========
Page 99.1-5
6
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS - (CONTINUED)
(e) The excess of the total purchase price over the allocation of fair value to
the net assets will be recorded as goodwill. HI's calculation of goodwill
is based on the following assumptions and calculations:
(THOUSANDS)
-----------
Value of HI Common Stock consideration - see note (a) ............................... $ 1,228,968
Acquisition debt - see note (b) ..................................................... 1,261,103
Net asset value of NorAm at March 31, 1997:
Total stockholders' equity ........................................................ (864,720)
Conversion of NorAm Convertible Preferred Securities .............................. (164,427)
NorAm cash (used to offset acquisition debt) ...................................... 34,599
-----------
Initial purchase price in excess of historical net asset value ...................... 1,495,523
Increase (decrease) from fair value allocations:
Property, plant and equipment - see note (d) ...................................... (438,277)
Elimination of NorAm historical goodwill .......................................... 463,392
Unrecognized pension liability (asset) - see note (i) ............................. (19,600)
Unrecognized postretirement benefits liability - see note (i) ..................... 95,800
Debt assumed - see note (c) ....................................................... 35,169
Deferred income tax on fair value allocation adjustments .......................... 114,418
-----------
Total goodwill ................................................................ $ 1,746,425
===========
Increase in goodwill amortization expense (assumes 40 year life) .................... $ 43,661
Less NorAm historical goodwill amortization ......................................... (14,187)
-----------
Adjustment to 1996 amortization expense ..................................... $ 29,474
===========
Adjustment to amortization expense for the first three months of 1997 ....... $ 7,368
===========
(f) Assumes full conversion of NorAm Convertible Preferred Securities into
shares of NorAm Common Stock and cash at the effective date of the
acquisition (see note (a)). Because of the assumed conversion, $5,842,000
and $2,705,000 of preferred dividends of subsidiary trust have been
eliminated for 1996 and the first three months of 1997, respectively.
(g) Pro forma number of common shares outstanding represents the historical
weighted average shares outstanding of HI Common Stock in addition to the
pro forma number of shares of HI Common Stock assumed to be issued in
exchange for the NorAm Common Stock and stock equivalents. The pro forma
number of shares assumed to be issued is 55,359,000.
(h) Represents the tax effect at the statutory rate of all pre-tax pro forma
adjustments after excluding nondeductible goodwill amortization.
(i) Pension and postretirement benefits liabilities:
(THOUSANDS)
-----------
Unrecognized pension liability (asset) - see note (e) ............................... $(19,600)
========
Unrecognized postretirement benefits liability - see note (e) ....................... $ 95,800
========
Adjustment to 1996 operation and maintenance expense (assumes 17-year
amortization period) ................................................................ $ (4,482)
========
Adjustment to operation and maintenance expense for the first three months of
1997 ................................................................................ $ (1,121)
========
Page 99.1-6
1
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.
- ----------------------------
(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.
2
2
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
- ----------------------------
(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.
3
3
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
- ----------------------------
(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.
4
4
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.
- ----------------------------
(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.
5
5
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
6
6
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
- ----------------------------
(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.
7
7
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)
- ----------------------------
(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.
8
8
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
9
9
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
- ----------------------------
(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).
10
10
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)
- ----------------------------
(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).
11
11
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
- ----------------------------
(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).
12
12
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
1
EXHIBIT 99.3
UNITED STATES OF AMERICA
FEDERAL ENERGY REGULATORY COMMISSION
Before Commissioners: James J. Hoecker, Chairman;
Vicky A. Bailey, William L. Massey,
and Donald F. Santa, Jr.
NorAm Energy Services, Inc. ) Docket No. EC97-24-000
)
NorAm Energy Services, Inc. ) Docket No. ER94-1247-010
ORDER APPROVING DISPOSITION
OF JURISDICTIONAL FACILITIES AND
ACCEPTING FOR FILING CODE OF CONDUCT, AS MODIFIED
(Issued July 30, 1997)
On March 27, 1997, NorAm Energy Services, Inc. (NorAm), a power
marketer authorized to sell power at wholesale at market-based rates, (1) filed
an application pursuant to section 203 of the Federal Power Act (FPA) (2) for
an order approving the merger of NorAm's parent company, NorAm Energy
Corporation (NorAm Energy), which is principally engaged in the distribution
and transmission of natural gas, with: (1) Houston Industries, Inc. (Houston
Industries), an exempt holding company; and (2) Houston Industries' subsidiary,
Houston Lighting & Power Company (HL&P), an electric utility located in the
Electric Reliability Council of Texas (ERCOT) engaged in the generation,
transmission, distribution, and sale of electric energy within the State of
Texas.
On April 30, 1997, the Commission issued an order in Docket No.
EL97-25-000 (3) asserting jurisdiction over the disposition of the
jurisdictional facilities of NorAm that would occur as a
- ----------------------------------
(1) NorAm Energy Services, Inc., Docket No. ER94-1247-000, Letter Order
(issued July 25, 1996) (unpublished).
(2) 16 U.S.C. # 824b (1994).
(3) NorAm Energy Services, Inc., 79 FERC 61,108 (1997), reh'g pending
(April 30 Order). The Commission initiated its jurisdictional inquiry
concerning the proposed merger by order issued on February 5, 1997.
NorAm Energy Services, Inc., 78 FERC 61,111 (1997).
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Docket Nos. EC97-24-000
and ER94-1247-010 -2-
consequence of the merger of NorAm Energy and Houston Industries and HL&P. (4)
While the Commission's jurisdictional inquiry was pending, NorAm filed the
instant merger application conditioned upon the Commission asserting
jurisdiction over the merger.
As discussed more fully below, the proposed corporate realignment
involves the disposition of NorAm's jurisdictional facilities. We conclude
that it is unlikely that the proposed disposition of NorAm's facilities will
create or enhance horizontal or vertical market power in the most relevant
market, i.e., the wholesale generation market within ERCOT. Therefore, we will
approve the proposed disposition of facilities, as discussed below. We will
also accept NorAm's proposed code of conduct, as modified by this order.
I. Description of the Corporate Realignment, Participants, and Contents
of the Application
A. Description of Corporate Realignment Participants
1. NorAm Energy and Its Affiliates
NorAm, a wholly-owned subsidiary of NorAm Energy, is a wholesale
electric power marketer. It also engages in wholesale gas marketing. NorAm
makes wholesale electric power sales at market-based rates in both interstate
and intrastate commerce. The application states that NorAm owns no generation
or transmission assets and is not party to any contracts that would give it the
ability to control energy generation or transmission in any way.
NorAm Energy also owns interstate gas transmission companies that
originate in Texas, Oklahoma, Arkansas, and Louisiana. (5) These are NorAm Gas
Transmission Co. (NGT) and Mississippi River Transmission Corp. (MRT). Both
NGT and MRT are open-access pipelines and are regulated by the Commission.
Only a minor quantity of their sales is to customers within ERCOT.
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(4) In that order, the Commission noted that it was not exercising
jurisdiction over the merger between NorAm Energy and Houston
Industries.
(5) The application does not specify where these pipelines operate, but it
states that they deliver gas to customers, which, with a few
insignificant exceptions, are located outside of ERCOT. Application,
Vol. 1, Attachment 1 (Affidavit of Dr. Pace), p. 11.
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Docket Nos. EC97-24-000
and ER94-1247-010 -3-
NorAm Energy's intrastate retail operations include three gas local
distribution companies (LDCs) -- Arkla, Minnegasco, and Entex -- plus two
intrastate pipelines, Unit Gas Transmission Company (Unit Gas) and Industrial
Gas Supply Corporation (IGS). Entex serves very much the same service area as
the electric service territory of HL&P. Arkla's service territory is in
Arkansas, Louisiana, and Texas (outside ERCOT). Minnegasco serves an area
entirely in Minnesota. The two intrastate pipelines serve large-volume
customers within ERCOT but do not serve any electric generators connected to
ERCOT.
NorAm also owns a small gas gathering operation, NorAm Field Services,
that amounts to 2.9 percent of its total business.
2. Houston Industries and Its Affiliates
As noted, Houston Industries is an exempt holding company under the
Public Utility Holding Company Act of 1935 (PUHCA). HL&P, the principal
subsidiary of Houston Industries, is a member of ERCOT and is also
interconnected with the Southwest Power Pool (SPP). HL&P is a traditional
electric generation, transmission, and distribution company, but it is not a
public utility under the FPA. Its open access transmission and wholesale
transactions are regulated principally by the Public Utility Commission of
Texas (Texas Commission). HL&P has a "to, from, and over" (TFO) tariff on file
with the Commission for high voltage direct current (HVDC) transmission service
between ERCOT and SPP. HL&P has recently filed a revised tariff application to
reflect changes in the pro forma tariff adopted in Order No. 888-A. (6)
Houston Industries has two other subsidiaries, Houston Industries
Energy (HI Energy) and HI Power Generation. HI Energy owns interests in
foreign utilities, foreign exempt wholesale generators, and two qualifying
facilities. HI Power Generation's purpose is to invest in domestic generation
projects; it had no investments as of the date of NorAm's application.
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(6) See Promoting Wholesale Competition Through Open Access
Nondiscriminatory Transmission Services by Public Utilities; Recovery
of Stranded Costs by Public Utilities and Transmitting Utilities, 62
Fed. Reg. 12,274 (March 14, 1997), FERC Stats. & Regs., Regs.
Preambles 31,048 (1997), reh'g pending.
The Commission conditionally accepted for filing HL&P's current TFO
tariff by order issued on November 1, 1996 in Docket No.
ER96-2960-000, Houston Lighting & Power Company, 77 FERC 61,113
(1996). On April 11, 1997, as amended on May 23, and June 20, 1997,
HL&P filed a revised TFO tariff to reflect changes in the pro forma
tariff in Order No. 888-A.
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Docket Nos. EC97-24-000
and ER94-1247-010 -4-
B. Description of the Corporate Realignment
Under the proposed merger, Houston Industries would be merged into
HL&P; HL&P, renamed Houston Industries, Inc. (New Houston Industries), would be
the surviving corporation. NorAm Energy would then be merged into HI Merger,
Inc. (HI Merger), a wholly-owned subsidiary of New Houston Industries; HI
Merger, renamed NorAm Energy Corporation (New NorAm Energy), would be the
surviving corporation. As a result, New Houston Industries would be the parent
company, with HL&P operating as a division of New Houston Industries, and HI
Energy and New NorAm Energy as subsidiaries. NorAm thus would become a second-
tier, wholly owned subsidiary of New Houston Industries and a wholly-owned
subsidiary of New NorAm Energy. (7)
NorAm states that to date, Houston Industries and NorAm Energy have
received all the necessary state and local approvals required to close the
transaction, including approvals from the state commissions of Arkansas,
Louisiana, Minnesota, Mississippi, and Oklahoma and from various
municipalities. In addition, NorAm states that the merging parties,
application to the SEC for an exemption from the registration requirement under
PUHCA is unopposed, and the United States Department of Justice (DOJ) concluded
its investigation of the proposed merger without raising any concerns.
II. Notice of Filing and Interventions
Notice of NorAm's application was published in the Federal Register,
(8) with protests or motions to intervene due on or before May 27, 1997.
Notices of intervention raising no substantive issues were filed by the
Arkansas Public Service Commission (Arkansas Commission) and the Mississippi
Public Service Commission (Mississippi Commission). Timely motions to
intervene raising no substantive issues were filed by Southern Union Gas
Company (Southern Union) and Electric Clearinghouse, Inc. (Clearinghouse).
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(7) NorAm states that if the Securities and Exchange Commission (SEC) does
not find that the merged entity will qualify for exemption from
registration under section 3 of PUHCA, then alternative merger plans
would be used to effect the merger of the companies. Under one
alternative merger plan, NorAm Energy would be merged into a Houston
Industries subsidiary, with the Houston Industries subsidiary as the
surviving company. Under the other alternative, NorAm Energy and
Houston Industries would be merged with and into HL&P, with HL&P as
the surviving corporation.
(8) 62 Fed. Reg. 16,801 (1997).
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Docket Nos. EC97-24-000
and ER94-1247-010 -5-
The Texas Commission filed a notice of intervention stating that it is
investigating whether it has any authority over the corporate restructuring or
merger under state law and whether the merger may tend to restrict or impair
competition in Texas.
On June 6, 1997, Anoka Electric Cooperative (Anoka) filed a motion to
intervene out of time raising no substantive issues.
III. Discussion
A. Procedural Matters
Pursuant to Rule 214 of the Commission's Rules of Practice and
Procedure, (9) the notices of intervention and timely, unopposed motions to
intervene serve to make the Arkansas Commission, the Mississippi Commission,
the Texas Commission, Southern Gas and Clearinghouse parties to this
proceeding. Further, due to the early stage of this proceeding and the absence
of any undue prejudice or delay, we will grant the late, unopposed motion to
intervene of Anoka.
B. Standard of Review Under Section 203 of the FPA
1. Statutory Criteria
Section 203 of the FPA reads in pertinent part:
(a) No public utility shall sell, lease, or otherwise
dispose of the whole of its facilities subject to the
jurisdiction of the Commission, or any part thereof of a value
in excess of $50,000, or by any means whatsoever, directly or
indirectly, merge or consolidate such facilities or any part
thereof with those of any other person, or purchase, acquire,
or take any security of any other public utility, without
first having secured an order of the Commission authorizing it
to do so. . . . After notice and opportunity for hearing, if
the Commission finds that the proposed disposition,
consolidation, acquisition, or control will be consistent with
the public interest, it shall approve the same.
(b) The Commission may grant any application for an order
under this section in whole or in part and upon such terms and
conditions as it finds necessary or appropriate to secure the
maintenance of
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(9) 18 C.F.R. # 385.214 (1996).
6
Docket Nos. EC97-24-000
and ER94-1247-010 -6-
adequate service and the coordination in the public interest
of facilities subject to the jurisdiction of the Commission.
The Commission may from time to time for good cause shown make
such orders supplemental to any order made under this section
as it may find necessary or appropriate.
2. Merger Policy Statement
The Commission's Merger Policy Statement (10) sets forth the criteria
and considerations for evaluating applications under section 203. The
Commission examines three factors in analyzing whether a merger is consistent
with the public interest: the effect on competition; the effect on rates; and
the effect on regulation. (11) The Merger Policy Statement also recognized that
new forms of mergers would occur as a result of the changes in the industry:
[A]s the industry evolves to meet the challenges of a
more competitive marketplace, new types of mergers
and consolidations will be proposed. For example, in
addition to mergers between public utilities, market
participants already are considering restructuring
options that include mergers between public utilities
and natural gas distributors and pipelines,
consolidations of electric power marketer businesses
with other electric or gas marketer businesses, and
combinations of jurisdictional electric operations
with other energy services. As a consequence, our
merger policy must be sufficiently flexible to
accommodate the review of these new and innovative
business combinations that are subject to our
jurisdiction under section 203 and to determine their
implications on competitive markets. We believe that
the analytical framework in this Policy Statement
provides a suitable methodology for determining
whether such mergers will be consistent with the
public interest. [(12)]
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(10) Inquiry Concerning the Commission's Merger Policy Under the Federal
Power Act: Policy Statement, Order No. 592, 61 Fed. Reg. 68,595 (Dec.
30, 1996), FERC Stats. & Regs. 31,044 (1996) (Merger Policy
Statement), order on reconsideration, Order No. 592-A, 62 Fed. Reg.
33,341 (1997), 79 FERC 61,321 (1997).
(11) Merger Policy Statement at 30, 111.
(12) Merger Policy Statement at 30,113 (footnotes omitted).
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Docket Nos. EC97-24-000
and ER94-1247-010 -7-
C. Evaluation of the Proposed Disposition of Facilities
1. Jurisdiction
As noted above, on April 30, 1997, the Commission issued an order in
which it determined that the corporate realignment of NorAm Energy and Houston
Industries would result in the disposition (via a transfer of control) of the
jurisdictional facilities of NorAm, which requires Commission authorization
under section 203 of the FPA. (13)
2. Effect on Competition
In the Merger Policy Statement, the Commission adopted the DOJ and
Federal Trade Commission (FTC) Horizontal Merger Guidelines (Guidelines) as the
analytical framework for evaluating the effect of a proposed merger on
competition. (14) Our analysis of the competitive issues follows the general
framework in the Merger Policy Statement and our specific framework for
evaluating market power arising from vertical mergers first enunciated in San
Diego Gas & Electric Company and Enova Energy, Inc., 79 FERC 61,372 (1997)
(Enova).
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(13) Because we have already determined that the Commission has
jurisdiction over the proposed transaction under section 203 of the
FPA by virtue of the proposed disposition of NorAm's jurisdictional
facilities, we do not need to reach the question of whether the
proposed transaction also involves a direct or indirect merger or
consolidation of NorAm's jurisdictional facilities with those of any
other person.
(14) The Guidelines set out five steps for merger analysis: (1) define the
markets likely to be affected by the merger and measure the
concentration and the increase in concentration in those markets; (2)
evaluate whether the extent of concentration and other factors that
characterize the market raise concerns about potential adverse
competitive effects; (3) assess whether entry would be timely, likely,
and sufficient to deter or counteract any such concern; (4) assess any
efficiency gains that reasonably cannot be achieved by other means;
and (5) assess whether either party to the merger would be likely to
fail without the merger, causing its assets to exit the market.
8
Docket Nos. EC97-24-000
and ER94-1247-010 -8-
a. Horizontal Market Power Issues
The three potential horizontal market power concerns are: (1) whether
the consolidation of HL&P's generating facilities with NorAm's electricity
marketing activities will result in enhanced market power for the merged
company in wholesale generation markets; (2) whether the merger will lead to
increased opportunities for the exercise of transmission market power; and (3)
whether the consolidation of HL&P's electric retail franchise with Entex's gas
retail franchise will result in enhanced market power for the merged company in
the end use energy services market.
Generation Market Power
In the Merger Policy Statement, the Commission stated that:
it will not be necessary for the merger applicants to perform
the screen analysis or file the data needed for the screen
analysis in cases where the merging firms do not have
facilities or sell relevant products in common geographic
markets. In these cases, the proposed merger will not have an
adverse competitive impact (i.e., there can be no increase in
the applicants' market power unless they are selling relevant
products in the same geographic markets) so there is no need
for a detailed data analysis. [(15)]
NorAm generally followed the Merger Policy Statement's Appendix A analytical
framework although, in light of the factual circumstances of this case, NorAm
did not fully explore certain aspects of the Appendix A analysis. (16) We
find that this was an appropriate approach in this case, and we have relied on
the information contained in the application to reach the conclusions set forth
herein. (17)
NorAm's witness, Dr. Pace, contends that this merger raises no
horizontal market power issues in the short-term capacity, long-term capacity,
or the non-firm energy markets. He looked at
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(15) Merger Policy Statement at 30,113.
(16) Because NorAm owns no generation, as described below, Dr. Pace only
analyzed non-firm energy market concentration before and after the
merger. See Application, Vol. 1, Attachment 1 (Affidavit of Dr.
Pace), p. 14-16.
(17) See, e.g., Duke Power Company and PanEnergy Corp., 79 FERC 61,236
at 62,037 (1997) (Duke/PanEnergy).
9
Docket Nos. EC97-24-000
and ER94-1247-010 -9-
two geographic markets: the HL&P service area and ERCOT. (18) He
calculates a zero or negligible change in the Herfindahl-Hirschman Index (HHI)
(19) from the merger in any of these markets. His general conclusion is that
adding NorAm Energy's marketing activity (through NorAm) would have no effect
on HL&P's market position because: (1) NorAm controls no generation or
transmission facilities, physically or contractually; (2) NorAm's first sales
in the ERCOT territory were in 1996 and are estimated to comprise less than one
percent of the non-firm energy market in ERCOT; and (3) the electric power
marketing business is easy to enter.
Our concern is whether the consolidation of HL&P's generating
facilities with NorAm's power marketing activities will enhance the ability of
the merged company to exercise market power in the relevant product market.
NorAm's analysis supports the conclusion that the proposed corporate
realignment will not contribute to an increase in generation market power. We
agree, and note that no party has offered evidence contradicting this
conclusion. Our conclusion is based on the following evidence and analysis.
While we do not necessarily agree with NorAm concerning the definition
of the relevant product market or the concentration analysis performed by Dr.
Pace, we accept NorAm's representation that it does not own or control
generation resources by virtue of its purchase power contracts or its
interconnection agreements with entities from which it buys power. NorAm
states that if it tried to withhold generation that it had under purchase
contracts from other sellers in order to exercise market power, the seller
would be free to sell the generation. Thus, NorAm states that its contracts do
not give it the ability to withhold generation from the market. No one
disputes this assertion. Therefore, we find that the consolidation of HL&P's
generation resources with NorAm's power marketing activities will not enhance
generation market power.
Transmission Market Power
We find that the proposed merger will not result in increased
transmission market power. NorAm does not own or control any transmission
facilities, and the proposed transaction therefore will have no effect on
control of transmission.
We also note that transmission service provided by HL&P within
ERCOT is provided under a tariff regulated by the Texas Commission. This
service is subject to the open access
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(18) Dr. Pace states that he "adopted this truncated approach rather than
going through all the steps of a detailed delivered price analysis
since NorAm neither owns nor controls any generation or electric
transmission facilities." Application, Vol. 1, Attachment 1, p. 14.
(19) The HHI is a measure of market concentration.
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Docket Nos. EC97-24-000
and ER94-1247-010 -10-
requirements of the Texas Commission, which requires utilities within ERCOT to
offer third parties open access transmission services at rates, and on terms
and conditions, comparable to those available to the transmission-owning
utilities. In addition to service within ERCOT, HL&P also provides
transmission service to, from and over the HVDC interties with the Southwest
Power Pool (SPP) under its TFO tariff.
Gas-Electric Competition in End Use Markets
Competition between gas and electricity occurs primarily in retail
markets. The proposed transaction can change the incentive and ability to
discourage the substitution by end users of one fuel (gas or electricity) for
the other. Here, there is almost complete overlap between HL&P's retail
electricity franchise service territory and Entex's retail gas franchise
service territory. After the merger, the merged firm will be the single
supplier of both gas and electricity in the Houston area. As such, the merged
company will be able to discourage and possibly prevent the substitution of
whichever fuel is most profitable to the firm's interests to sell or deliver.
However, we emphasize that it is unlikely that such effects of the
transaction at issue here could spill over into wholesale power markets and
affect competition in those markets. Additionally, no state commission has
indicated that it is not capable of addressing retail-related competition
issues or asked us to consider such issues. In these circumstances, we see no
need to further consider this issue in this proceeding.
b. Vertical Market Power Issues
Vertical mergers pose different concerns than horizontal mergers.
While a vertical combination may result in efficiencies from integrating input
and output operations, it may also increase a merged firm's incentives to use
its market position in one segment of its vertically integrated business to
adversely affect competition in a related segment of its business. The
consolidation of facilities in an "upstream," or input, market with facilities
in a "downstream," or output, market raise potential concerns regarding the
vertical effects on market power.
As we have explained in recent orders, (20) the Commission has
developed a framework for evaluating the competitive effects of vertical
mergers. This framework, which is consistent with our Merger Policy Statement,
is informed by the DOJ/FTC approach to evaluating the competitive effects
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(20) See Enova, 79 FERC at _______________, slip op. at 17-24; Destec
Energy, Inc. and NGC Corporation, 79 FERC 61,373 at _______________,
slip op. at 12-17 (1997) (Destec).
11
Docket Nos. EC97-24-000
and ER94-1247-010 -11-
of vertical mergers. (21) However, the Commission's approach to evaluating the
competitive effects of vertical mergers is evolving. Additional experience
will undoubtedly bring new insights to bear in refining our analysis.
Vertical mergers raise three types of general competitive concerns:
(1) denying rival firms access to inputs or raising their input costs; (22) (2)
increased anticompetitive coordination; and (3) regulatory evasion. These
potential actions can affect competition through higher prices or reduced
output in the downstream output market. (23)
As a starting point for evaluating the vertical effects of the
proposed transaction, we have used the basic principles laid out in the 1992
Horizontal Merger Guidelines and adopted in the Commission's Merger Policy
Statement, applied to both the upstream market and downstream wholesale power
market to determine whether those markets are conducive to the exercise of
market power after the merger. The Commission views this approach as the
correct framework in which to evaluate the competitive effects of vertical
mergers. This framework generally includes the following steps: (1) define
relevant product and geographic markets; (2) examine the competitive
circumstances in the upstream market; (3) examine the competitive circumstances
in the downstream market; and (4) determine, based on the circumstances in the
upstream and downstream markets, whether the likely net effect of the merger
would be to significantly raise wholesale electricity prices.
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(21) The 1984 Guidelines, which are incorporated by reference in the 1992
Horizontal Merger Guidelines discussed at length in the Merger Policy
Statement, describe four concerns raised by vertical mergers and the
corresponding basis upon which DOJ would challenge a merger. Those
four concerns are: elimination of potential entrants, barriers to
entry, facilitating collusion, and evasion of rate regulation. The
first two of these concerns can be restated as foreclosure/raising
rivals costs. The third and fourth concerns can be restated as
increased anticompetitive coordination and regulatory evasion,
respectively.
(22) A related concern is denying or giving rival firms limited access to
downstream customers.
(23) For a vertical merger to have a potentially adverse effect on
competition in the wholesale electricity market, resulting in lower
output or higher prices, it is necessary for the downstream market in
which the merging firm controls facilities to be served by the
upstream market in which the merging firm controls inputs or
facilities necessary for delivering those inputs. The upstream market
and downstream wholesale power market generally need to be conducive
to the exercise of market power after the merger. A vertical merger
is unlikely to have an adverse effect on competition unless the merged
company has the incentive and ability to affect prices or quantities
in the upstream and downstream markets. See, e.g., Destec, 79 FERC at
_______, slip op. at 16.
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Docket Nos. EC97-24-000
and ER94-1247-010 -12-
Relevant Markets
Product Market
NorAm does not identify the relevant product markets in its vertical
analysis, and it does not provide any analysis which could be used to determine
the relevant product markets. For purposes of our vertical analysis, the
relevant product in the upstream market is delivered gas. It is the input
product that the merged company could conceivably exercise some control over
and thereby affect competition in the downstream market.
With respect to the downstream market, for purposes of our analysis,
the relevant product is wholesale electric energy and capacity, because it is
these downstream products that could be affected by the potential exercise of
market power in the upstream delivered gas market. (24)
Geographic Market
NorAm does not identify the geographic market in the discussion of
vertical market power and has not performed a delivered price test which could
be used to define the geographic market. In its analysis of horizontal market
power, NorAm identifies two relevant geographic markets -- HL&P's control area
and ERCOT. We use NorAm's identification of these two geographic markets as a
starting point for determining the appropriate geographic markets for both the
upstream and downstream markets. NorAm identified the HL&P control area as the
smallest plausible geographic market within which HL&P competes to make
wholesale sales. In addition, it is roughly the same geographic area as the
area in which HL&P and Entex's retail franchise service territories overlap.
For these reasons, we will accept the HL&P control area as a relevant
geographic market. NorAm also identified ERCOT as a relevant market because:
all of HL&P's facilities are located within ERCOT; currently, HL&P makes all of
its wholesale sales within ERCOT; and there is open access transmission service
provided by HL&P within ERCOT subject to the jurisdiction of the Texas
Commission. On this basis, we also accept ERCOT as a relevant geographic
market.
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(24) We note that in this case it does not matter whether the relevant
downstream product is specified as electric energy or capacity. As
discussed below, our analysis shows that the merged company is unable
to exercise market power in the upstream delivered gas market, and the
merger therefore will not enhance the merged company's market power
for any conceivable product in the downstream market. As a general
matter, the relevant product in the downstream market includes any
product for which control of inputs in the upstream market could
affect competition.
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Docket Nos. EC97-24-000
and ER94-1247-010 -13-
Upstream Market: Competitive Conditions
NorAm argues that NorAm Energy is a minor supplier of delivered gas to
gas-fired generators in the relevant geographic markets. In addition, it
argues that in all of Texas, but particularly in the Houston area, the
delivered gas market is highly competitive, and entry into this market is easy.
A number of non-affiliated gas pipelines criss-cross the Gulf Coast of Texas,
including HL&P's service territory, and these pipelines have excess capacity.
Therefore, NorAm Energy companies could not profitably deny access to or raise
the cost of delivered gas to new gas-fired generators that compete with the
merged company in the relevant market, because those new generators would have
significant alternatives to NorAm Energy companies for delivered gas.
We agree with NorAm's analysis for the following reasons. FERC Form
423 data show that NorAm Energy companies are not suppliers for any gas-fired
generators owned by ERCOT electric utilities. (25) Within the HL&P area,
NorAm Energy claims that only one small cogenerator (6.4 mW) in this market
capable of selling power into the grid takes delivered gas service from a NorAm
Energy company (Entex). (26) We therefore conclude that any attempt by the
NorAm Energy companies to restrict delivered gas to wholesale market generators
that could compete with HL&P would be unsuccessful. Because HL&P does not own
or control any gas facilities, the proposed transaction will not change this
situation. We thus have no need to examine entry conditions.
Downstream Markets: Competitive Conditions
Because NorAm Energy cannot exercise market power in the relevant
upstream market, we conclude that the merger does not affect the merged
company's opportunity to exercise market power in the relevant downstream
market.
3. The Effect on Rates
The Merger Policy Statement explains that the protection of wholesale
ratepayers and transmission customers is the Commission's primary concern
regarding the effects of a section 203 transaction on rates. (27) The Merger
Policy Statement also describes various commitments which may, in particular
cases, be an acceptable means of protecting ratepayers, such as hold harmless
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(25) Form 423 collects monthly data on the cost and quality of fossil fuels
delivered to electric generating plants.
(26) The output of this facility is generally consumed by the owner (Rice
University).
(27) See Merger Policy Statement at 30, 123.
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Docket Nos. EC97-24-000
and ER94-1247-010 -14-
provisions, open seasons for wholesale customers, rate freezes, and/or rate
reductions. (28)
NorAm argues that its market-based rates fluctuate based on market
forces rather than NorAm's underlying costs, and cannot be affected by the
proposed merger. Therefore, it argues that there will be no change in its
rates as a result of the proposed merger. It further argues that no other
jurisdictional rates will be affected by the proposed merger, because: (1) the
merger will not cause, directly or indirectly, the merger or consolidation of
any NorAm Energy facilities with those of any other entity for ratemaking
purposes; (29) (2) HL&P commits not to increase rates for wholesale
transmission service under its TFO tariff for four years following the close of
the merger, thus protecting TFO customers from any merger-related costs; and
(3) regulatory authorities in the various states in which NorAm Energy and HL&P
operate have broad authority to review and set rates for the NorAm Energy and
HL&P utility operations within their jurisdiction and can ensure that the rates
are not adversely affected by the merger.
There will be jurisdictional rates in two sectors of the merged
company that are of concern to us with regard to the proposed transaction.
They are NorAm's rates for electric marketing and the TFO transmission rates of
HL&P.
NorAm charges market-based rates for its electricity marketing. The
application argues correctly that NorAm will only be able to recover market
prices in its rates. (30)
As to HL&P's commitment not to increase its TFO tariff transmission
rates for four years after the completion of the merger, the Commission has
found similar provisions acceptable to protect transmission customers from the
costs of a merger. (31) No party has alleged that such a commitment is an
inadequate protection measure. Therefore, on these facts we find HL&P's
commitment acceptable.
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(28) Id. at 30, 123-24.
(29) As noted supra, we make no determination herein concerning whether the
proposed merger between NorAm Energy and Houston Industries involves
an indirect merger or consolidation under section 203 of the FPA.
(30) See, e.g., Enron, 78 FERC at 61,738 n.45.
(31) See, e.g., Duke/PanEnergy, 79 FERC at 62,039-40.
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Docket Nos. EC97-24-000
and ER94-1247-010 -15-
4. The Effect on Regulation
By order issued on July 24, 1997, the SEC determined that, after the
Houston Industries-NorAm Energy merger, the newly formed holding company would
be an exempt holding company under PUHCA. (32) Consequently, we find that
federal regulatory authority would not be impaired by the proposed corporate
realignment.
The Merger Policy Statement also expresses concern with the impact of
mergers on state regulatory authority. (33) NorAm states that post-merger,
NorAm Energy and New Houston Industries will continue to be subject to the
jurisdiction of the state commissions and municipalities which currently
exercise jurisdiction over their respective operations, and no regulatory
agency's legal or practical power over the regulated entities will be affected
by the transaction. The Texas Commission, however, said that it "is
investigating whether it has jurisdiction to protect Texas' ratepayers by
determining whether it has authority over the corporate restructuring or merger
under state law." As noted above, although the Texas Commission is
investigating that issue, no state or local regulatory authority, including the
Texas Commission, has asked for our assistance in this regard. Consequently,
we find no need to further investigate this issue.
5. Other Matters
As noted above, NorAm's notice of change of status filing, in Docket
No. ER94-1247-010, contained a proposed code of conduct governing its
relationship with its prospective affiliate HL&P so that NorAm could continue
to make sales at market-based rates. NorAm has included a provision which
provides for the simultaneous disclosure of all non-public market information.
However, NorAm has limited the provision to apply only to HL&P employees
engaged in marketing or transmission service and only to information which HL&P
shares with NorAm. Consistent with UtiliCorp United, Inc., 75 FERC 61,168
(1996), NorAm, shall revise its code of conduct to provide that any
communication between any employee of NorAm and HL&P concerning non-public
market information must be simultaneously communicated to all non-affiliates.
Therefore, we will accept NorAm's proposed code of conduct, as modified above.
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(32) Houston Industries Incorporated, et al., SEC Release Nos. 35-26744,
70- 8907, 1997 SEC LEXIS 1536 (July 24, 1997) (order granting
exemption to holding company pursuant to section 3 (a) (2) of PUHCA)
(33) See Merger Policy Statement at 30,125 (if the state lacks authority to
act on a merger and raises concerns about the effect on regulation,
the Commission may set the issue for hearing; the Commission will
address this issue on a case-by-case basis).
16
Docket Nos. EC97-24-000
and ER94-1247-010 -16-
The Commission orders:
(A) We hereby accept HL&P's commitment not to increase its TFO
tariff transmission rates for four years after the completion of the merger.
(B) The proposed disposition of NorAm's jurisdictional facilities
is hereby approved.
(C) NorAm's code of conduct is hereby accepted for filing, as
modified by this order, effective as of the date of this order, (34) and NorAm
is hereby directed to modify the code of conduct as discussed herein within 30
days.
(D) The Commission retains authority under section 203(b) of the
FPA to issue supplemental orders as appropriate.
(E) The foregoing authorization is without prejudice to the
authority of this Commission or any other regulatory body with respect to
rates, service, accounts, valuation, estimates, determinations of cost, or any
other matter whatsoever now pending or which may come before this Commission.
(F) Nothing in this order shall be construed to imply acquiescence
in any estimate or determination of cost or any valuation of property claimed
or asserted.
(G) NorAm is hereby directed to promptly notify the Commission
when the disposition of jurisdictional facilities is effectuated.
By the Commission.
( S E A L )
/s/ Lois D. Cashell
-------------------------
Lois D. Cashell,
Secretary.
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(34) Rate Schedule Designation:
NorAm Energy Services, Inc.
(1) Rate Schedule FERC No. 1
(2) Supplement No. 1 to Rate Schedule FERC No. 1 (Code of Conduct)
