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File No. 70-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM U-1
JOINT APPLICATION OR DECLARATION
UNDER THE
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Pacific Enterprises Enova Corporation
555 West Fifth Street, 101 Ash Street
Suite 2900 San Diego, California 92101
Los Angeles, California
90013-1001
(Names of companies filing this statement and
addresses of principal executive offices)
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None
(Name of top registered holding company parent)
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Richard D. Farman Stephen L. Baum
President and Chief President and Chief
Executive Officer Executive Officer
Pacific Enterprises Enova Corporation
555 West Fifth Street, 101 Ash Street
Suite 2900 San Diego, California
Los Angeles, California 92101
90013-1001
(Names and addresses of agents for service)
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application or
Declaration to:
Donald C. Liddell, Esq. Richard M. Farmer, Esq.
David L. Huard, Esq. Andrew F. MacDonald, Esq.
Pacific Enterprises William C. Weeden
633 West Fifth Street, Reid & Priest LLP
Suite 5200 40 West 57th Street
Los Angeles, California New York, New York
90071 10019
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION.
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1.1. Introduction and Description of Applicants' Business.
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Pacific Enterprises ("Pacific") and Enova Corporation
("Enova") are exempt holding companies pursuant to Section
3(a)(1) of the Public Utility Holding Company Act of 1935, as
amended (the "Act").(1) Through an indirect, jointly-owned,
subsidiary, Frontier Pacific, Inc. ("Frontier Pacific"),(2)
Pacific and Enova are proposing to acquire up to 90.1% of the
membership interests of Frontier Energy LLC ("Frontier"), a North
Carolina limited liability company formed to construct and
operate a small gas distribution system in North Carolina. The
remaining membership interests in Frontier would be acquired by
Frontier Utilities of North Carolina, Inc. ("Frontier
Utilities"), a North Carolina corporation and an indirect,
majority-owned subsidiary of ARB, Inc., a closely-held California
corporation.(3)
Pacific's predominant subsidiary, Southern California Gas
Company ("SoCalGas"), purchases, transports and distributes
natural gas in southern California. At December 31, 1997,
Pacific reported consolidated total assets of $4.977 billion, of
which approximately $3.154 billion consisted of net gas plant.
For the year ended December 31, 1997, Pacific reported $2.738
billion in operating revenues (including revenues from
transportation-only customers) and $184 million in net income.
--------------------------
1/ Pacific (formerly Pacific Lighting Corporation) is exempt by
order issued pursuant to Section 3(a)(1). See Pacific Lighting
Corporation, 1 S.E.C. 275 (1936). Enova claims an exemption
under Section 3(a)(1) pursuant to Rule 2. See File No. 69-393.
In a separate proceeding (File No. 70-9033), Enova and Pacific
are seeking SEC approval for a business combination pursuant to
which the two companies would become subsidiaries of a new
holding company to be called Sempra Energy. Sempra Energy is
also requesting an exemption under Section 3(a)(1) in that
proceeding.
2/ All of the issued and outstanding common stock of Frontier
Pacific is held by Sempra Energy, LLC, a California limited
liability company whose membership interests are, in turn, held
directly by Pacific and Enova.
3/ ARB, Inc. is not now a "holding company" or an "affiliate"
of any "holding company" or "public-utility company," as those
terms are defined under Section 2 of the Act.
2
Enova's principal subsidiary, San Diego Gas & Electric
Company ("SDG&E"), provides electric and natural gas service in
San Diego and surrounding areas. At December 31, 1997, Enova
reported consolidated total assets of $5.2 billion, of which
approximately $2.49 billion consists of net electric plant and
$449 million consists of net gas plant. For the year ended
December 31, 1997, Enova reported operating revenues of $2.2
billion (81.6% from electricity sales and 18.4% from gas sales
(including revenues from transportation only customers)), and
$252 million in net income.
Pacific and Enova derive substantially all of their gas
requirements from sources outside of California. Approximately
58% of their combined system gas requirements are met from
production in the Permian Basin, which is located in west Texas,
and the San Juan Basin, which is located primarily in New Mexico
and Colorado in the "Four Corners" area. Most of the gas
produced in these supply basins is delivered to California by El
Paso Natural Gas Company ("El Paso") and Transwestern Pipeline
Company ("Transwestern") under long-term transportation
agreements.
1.2 Description of Frontier and Its Properties.
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By order issued January 30, 1996, Frontier Utilities was
granted a final certificate of public convenience and necessity
(the "Certificate Order") from the North Carolina Utilities
Commission ("NCUC") to construct, test, market, own and operate a
new natural gas distribution system in a four-county area in
northwestern North Carolina comprised of Surrey, Watauga, Wilkes
3
and Yadkin Counties (the "Four-County Area").(4) Subsequently,
by order dated August 16, 1996,(5) the NCUC added Ashe and
Allegheny Counties, which are located in the same region, to
Frontier Utilities' certificated territory, and by order dated
March 27, 1997,(6) granted Frontier Utilities a certificate of
convenience and necessity to construct and operate a gas
distribution system in Warren County, which is to the east of the
Four-County Area. By further order dated March 9, 1998 (the
"Financing Order"), the NCUC approved various proposals by
Frontier Utilities and Frontier relating to financing of
construction of a gas system in the Four-County Area and Warren
County, including the participation of Frontier Pacific as an
equity investor in Frontier, and the transfer by Frontier
Utilities to Frontier of the certificates to serve the Four-
County Area, as well as Ashe, Allegheny and Warren Counties.(7)
Copies of Frontier Utilities' application to the NCUC and the
Financing Order are attached hereto as Exhibits D-1 and D-2,
respectively.
--------------------------
4/ In the Matter of Application of Frontier Utilities of North
Carolina, Inc. for Certificate of Public Convenience and
Necessity, NCUC Docket No. G-38, January 30, 1996 (Order Granting
Final Certificate), 166 PUR 4th 565. The order was affirmed on
appeal by the Supreme Court of North Carolina on a challenge by
Piedmont Natural Gas Company, Inc., whose competing proposal the
NCUC had rejected. State of North Carolina v. Piedmont Natural
Gas Company, Inc., 488 S.E. 2d 591 (N.C. Sup. Crt. 1997).
5/ In the Matter of Commission Proceeding to Implement G.S. 62-
36A(b1), NCUC Docket No. G-100, Sub. 69 (August 16, 1996). This
was a generic proceeding in which the NCUC implemented a new law
that required that the NCUC grant certificates to provide gas
service to all unfranchised areas in North Carolina or, in the
absence of any applications for such certificates, that the NCUC
assign to the incumbent utilities in the state franchises
covering all such uncertificated areas. Because of their
proximity to the Four-County Area, the franchises for Ashe and
Allegheny Counties were assigned to Frontier Utilities.
6/ In the Matter of Frontier Utilities of North Carolina, Inc.
for Certificate of Public Convenience and Necessity, NCUC Docket
No. G-38, Sub. 1, March 27, 1997 (Order Awarding Certificate and
Approving Rates).
7/ Order Approving Final Financing Plan, Transfer of
Certificates, and Security Bond and Preliminarily Approving Debt
Financing, NCUC Docket Nos. G-38, Sub 3 and G-40 (March 9, 1998).
Although Frontier has indicated that it intends to build out a
system in Ashe and Allegheny Counties at such time as it becomes
feasible to do so, the financing plan approved by the NCUC does
not include the system to be built in those counties.
4
Frontier commenced construction in the Four-County Area
during the second quarter of 1998. Construction in Warren County
will commence at a later date, subject to receipt of further NCUC
approvals. When complete, the Four-County Area system will
consist of approximately 140 miles of transmission mains,
including a 40-mile lateral tap off the interstate pipeline
facilities of Transcontinental Gas Pipe Line Corp. ("Transco"),
and at least 320 miles of distribution mains. Frontier will
purchase at least 50% of its gas requirements from production in
the San Juan and Permian Basins. Gas will be delivered to
Frontier by Transco under a long-term transportation contract.
Frontier is projecting that, by the end of the fifth year
following commencement of construction, it will serve 13,250
residential, 1,054 small commercial, 300 poultry farm, and 55
large commercial and industrial customers. (Exhibit D-1, p. 10).
As a public utility under North Carolina law, Frontier will be
subject to regulation by the NCUC as to rates, service,
securities issuances and other matters.
The Certificate Order contains various findings and
conclusions as to technical issues, the financial feasibility of
the Four-County Area system, and the public interest to be
served. Two of the central issues in the proceeding concerned
the optimum size of the Four-County Area system and the
likelihood that customers would convert from propane and heating
oil to natural gas. These issues were critical in the NCUC's
evaluation of Frontier Utilities' proposal, which assumed that
the proposed system could support traditional financing, and of
the competing proposal made by Piedmont Natural Gas Company, Inc.
("Piedmont"), an existing franchised gas utility company in North
Carolina, which was made contingent upon the availability of
5
"expansion funds" provided for under North Carolina law.(8)
With regard to the financial feasibility of Frontier Utilities'
proposed system in the Four-County Area, the NCUC considered a
detailed market study prepared by an independent consultant
(Heath and Associates) which evaluated the potential customers
and loads in the Four-Country Area and the likelihood of
converting these customers to gas at the rates and rate designs
proposed by Frontier Utilities. During the hearings, witnesses
for Heath and Associates and Frontier Utilities were cross-
examined at length concerning the data used and assumptions made
in the Heath and Associates study and an earlier study prepared
by Frontier Utilities. Despite certain discrepancies between the
Health and Associates study and Frontier Utilities' initial study
as to likely number of customers, the configuration of the
system, conversion rates and other matters, the NCUC concluded
that "the market study performed by Heath and Associates provides
a fair and unbiased assessment of the potential customers and
loads resulting from an extensive rural distribution system in
the Four-County area at the rates that Frontier proposed to
offer." (Certificate Order, p. 19).
1.3 Description of Frontier's Ownership Structure and
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Management Plan.
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It is contemplated that Frontier Pacific and Frontier
Utilities will each acquire 50% of the membership interests of
Frontier, and that the economic interests of the members will
--------------------------
8/ See N.C. Gen. Stat. Sections 62-158 (Michie, 1997).equity
investments by the members of Frontier, including cash and in-
kind contributions of pipeline and other property, totaling
approximately $12 million. In addition, the NCUC has given its
preliminary approval for $40 million in debt financing by
Frontier.
9/ Heath and Associates forecast that the gas system would have
8,553 customers in year 10 and sales of 4 million dekatherms per
year. Certificate Order, p. 13. Frontier offered testimony
showing that it would be economically feasible to serve an
additional 5000 customers outside of the areas included in the
Heath and Associates analysis.
6
equal their membership interests.(10) Under the Financing Order,
the NCUC authorized the equity investments by the members of
Frontier, including cash and in-kind contributions of pipeline
and other property, totaling approximately $12 million. In
addition, the NCUC has given its preliminary approval for $40
million in debt financing by Frontier.
Under Frontier's Operating Agreement (attached hereto as
Exhibit A-2), the economic interest of a member is defined as
that member's interest in the profits and losses of Frontier and
right to receive distributions from Frontier. The membership
interest of a member means that member's economic interest, plus
the right to participate in management of Frontier, including the
right to vote. The Operating Agreement specifically contemplates
that Frontier Pacific and Frontier Utilities may adjust or change
their respective economic and membership interests whenever
necessary in order, for example, to limit the percentage of
overall voting rights held by a member. Pacific and Enova are
seeking approval herein to acquire, indirectly through Frontier
Pacific, up to 90.1% of the membership interests of Frontier,
representing 90.1% of the voting interests in Frontier. This
will enable Frontier Utilities, should it choose to do so, to
maintain its percentage interest in Frontier's voting securities
at below 10%.
It is anticipated that the day-to-day operations of Frontier
will be under the control of its General Manager, who will be
located at Frontier's corporate headquarters in Elkin, North
Carolina. The General Manager will report to the President, who
will be located in San Diego, California. It is also anticipated
that Frontier will be staffed by a combination of current
employees of the members of Frontier and their respective
subsidiaries and new hires from the local community in North
Carolina.
--------------------------
10/ An organizational chart showing the ownership structure of
Frontier and its members is set forth at page 5 of Frontier
Utilities' Application for Approval of Financing Plan (Exhibit D-
1 hereto).
7
The North Carolina and California systems will be
coordinated administratively in order to enable Frontier to enter
the natural gas business with an experienced management team in
place. In addition, Pacific and Enova will be able to provide
Frontier with greater financial, operational and technical
resources. In accordance with one or more service agreements,
administrative and consulting services provided by the members of
Frontier and their utility and non-utility affiliates will be
directly assigned, distributed or allocated to Frontier by
activity, project, program, work order or other appropriate
basis. Employees of the members and their affiliates will
record transactions utilizing the data capture and accounting
systems of Frontier. Costs of the members and their affiliates
will be accumulated in their respective accounts and directly
assigned, distributed and allocated to Frontier in accordance
with the guidelines set forth in the service agreements. Such
agreements are required to be filed with the NCUC.
Affiliates of members will provide administrative and
consulting services to Frontier as well as other affiliates and
third parties. The consulting services will include, among other
things, assistance with: project financing, procurement/materials
and quality assurance, regulatory and governmental affairs,
finance and accounting, human resources, information and
technology, technical and design engineering, legal, training and
general administrative support.
ITEM 2. FEES, COMMISSIONS AND EXPENSES.
------------------------------
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with the Transaction,
inclusive of legal fees and expenses, are estimated at not more
than $75,000.
8
ITEM 3. APPLICABLE STATUTORY PROVISIONS.
--------------------------------
3.1 General Overview of Applicable Statutory Provisions.
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Because Pacific and Enova are exempt holding companies, each
of them will require approval of the SEC under Sections 9(a)(2)
and 10 of the Act to acquire, directly or indirectly, 5% or more
of the voting securities of Frontier, which will become a "gas-
utility company" within the meaning of Section 2(a)(4) of the Act
on or after the date on which it commences making residential and
commercial sales of gas. Further, following the acquisition of
10% or more of Frontier's voting securities, and the commencement
by Frontier of residential and small commercial sales, Frontier
will become an additional gas-utility subsidiary company of both
Pacific and Enova. However, because neither Pacific nor Enova
will derive "any material part of its income" from Frontier, and
will each remain "predominantly" a California holding company,
their "intrastate" exemptions under Section 3(a)(1) of the Act
will not be affected.(11)
The relevant standards for approval of an application under
Section 10 are set forth in subsections (b), (c) and (f) thereof.
Section 10(b) provides that, if the requirements of Section
10(f) are satisfied, the Commission shall approve an acquisition
under Section 9(a) unless the Commission finds that:
(1) such acquisition will tend towards interlocking
relations or the concentration of control of public-utility
companies, of a kind or to an extent detrimental to the
public interest or the interest of investors or consumers;
(2) in case of the acquisition of securities or
utility assets, the consideration, including all fees,
commissions, and other remuneration, to whomsoever paid, to
--------------------------
11/ Under the Operating Agreement, Pacific and Enova
collectively will have a 50% economic interest in Frontier.
Based on current projections, the proportionate share of
Frontier's income attributable to Pacific and Enova is expected
to account for far less than 1% of the consolidated income of
Pacific and Enova on a pro forma basis.
9
be given, directly or indirectly, in connection with such
acquisition is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of
the utility assets to be acquired or the utility assets
underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the
capital structure of the holding company system of the
applicant or will be detrimental to the public interest or
the interest of investors or consumers or the proper
functioning of such holding company system.
Section 10(f) provides that the Commission:
shall not approve any acquisition . . . unless it appears to
the satisfaction of the Commission that such State laws as
may apply in respect of such acquisition have been complied
with, except where the Commission finds that compliance with
such State laws would be detrimental to the carrying out of
the provisions of section 11.
Finally, Section 10(c) of the Act provides that,
notwithstanding the provisions of Section 10(b), the Commission
shall not approve:
(1) an acquisition of securities or utility assets, or
of any other interest, which is unlawful under the
provisions of Section 8 or is detrimental to the carrying
out of the provisions of Section 11; or
(2) the acquisition of securities or utility assets of
a public-utility or holding company unless the Commission
finds that such acquisition will serve the public interest
by tending towards the economical and the efficient
development of an integrated public-utility system.
An "integrated public-utility system" is defined in Section
2(a)(29)(B), as applied to a gas utility system, to mean:
. . . a system consisting of one or more gas utility
companies which are so located and related that substantial
economies may be effectuated by being operated as a single
coordinated system confined in its operations to a single
area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or
region affected) the advantages of localized management,
efficient operation, and the effectiveness of regulation:
Provided, That gas utility companies deriving natural gas
from a common source of supply may be deemed to be included
in a single area or region.
For the reasons set forth below, Pacific and Enova believe
that the requirements of Section 10(f) have been met; that their
10
acquisition of Frontier's voting securities will satisfy the
integration standards under Sections 10(c) and 2(a)(29)(B); and
that there is no basis for the Commission to make any of the
negative findings enumerated in Section 10(b). As a preliminary
matter to the discussion that follows concerning the integration
standards of the Act, as applied to this transaction, however,
the Applicants believe that it is important to understand the
current "state of the art" in the natural gas industry and to
review the dramatic changes that have occurred in the gas
industry since 1935, and especially in the past decade.
3.2 Historical Perspective on the "State of the Art" in the
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Natural Gas Industry in the United States.
-----------------------------------------
Although natural gas has been used as a fuel for thousands
of years, the growth of the natural gas industry in the United
States can be traced in large part to the development of pipeline
systems through which large volumes of natural gas could be
transported from the wellhead (i.e., the gas producing areas) to
distant markets.(12) In the early days of the U.S. natural gas
industry (1870-1930), natural gas was seldom transported more
than 50 to 75 miles. In some areas, gas produced as an incident
to oil drilling operations was simply burned, or "flared," in the
oil fields, rather than being piped to nearby cities or towns.
Eventually, efforts were made to find commercial uses for this
"waste" gas, but the technological difficulties and cost of
transporting gas long distances were limiting factors. Thus, in
most communities where gas service was available, the source of
supply was from locally manufactured gas or from a nearby oil
--------------------------
12/ A more detailed history and analysis may be found in
"Regulation of the Natural Gas Industry," Ed. by American Gas
Association (Matthew Bender, 1997), Volume 1.
11
field. The first iron pipeline was reportedly built in 1872 to
transport "waste" gas to Titusville, Pennsylvania, from nearby
oil fields, where it was used chiefly for street lighting and
some industrial applications. The first long distance, high
pressure, gas pipeline, consisting of two parallel 8-inch
wrought iron lines approximately 120 miles in length, was
constructed in 1891 by Indiana Natural Gas and Oil Company.
A. Developments in the 1920s and 1930s. As indicated,
-----------------------------------
prior to the 1930s, natural gas service to cities and towns was
quite often provided from only one local source or field. In
many cases, little was known about the extent of gas reserves in
a producing area, which tended to limit the willingness of
investors to commit the large amounts of capital required to
build pipelines to distant markets. By the 1920s, however,
technological advances had been made in the manufacture of large
diameter pipeline which could withstand high pressures. This
made it technologically and economically feasible to construct
long-distance gas pipelines which could move gas from the
developing oil fields in Texas, Oklahoma and other Southwestern
states to the population centers in the Midwest and eastern U.S.
This was the first significant change in the "state of the art"
in the gas industry.
In the 1930s, the first of what we now know of as the
modern-day, long distance, pipelines were constructed to
transport the "casinghead" gas that was being produced in the
developing Texas oil fields to Midwest markets.(13) By 1934,
utilizing improved pipeline and compression technologies, some
150,000 miles of high-pressure transmission lines were in place.
--------------------------
13/ In 1931, Natural Gas Pipeline Company of America ("NGPL")
completed a 24-inch line more than one thousand miles long
running from the producing areas in Texas to Chicago, and in
1936, Panhandle Eastern Pipeline Company completed a thousand
mile pipeline that terminated in Detroit.
12
Nevertheless, in 1935, when the Act was passed, the natural gas
pipeline industry consisted of only two long interstate lines
extending to the upper Midwest. For the most part, the pipeline
industry in the U.S. still consisted of relatively short lines
used to transport gas from local producing areas directly to
nearby markets. Natural gas was generally unavailable in the
more populous areas on the East Coast and in the Northeast, where
local distribution gas companies, or "LDCs," continued to
distribute low-Btu gas produced from coal.
For the most part, the interstate pipelines remained free
from federal regulation until 1938, when the Natural Gas Act
("NGA") was passed.(14) Under the NGA, the Federal Power
Commission ("FPC") was given broad authority to regulate
interstate pipelines under a public utility model. This
included, importantly, certificate authority over construction of
pipelines and authority to set "just and reasonable" rates for
sales of gas for resale (i.e., wholesale rates). For almost 50
years following passage of the NGA, there were few if any changes
in the basic structure of the natural gas industry or the
framework of federal regulation. The Federal Energy Regulatory
Commission ("FERC"), the successor to the FPC, has characterized
the structure of the natural gas industry regulated under the NGA
during this period as "simple:"
The producers would sell their natural gas in the production
area to the interstate pipeline at Commission-determined
just and reasonable rates. The pipelines would
-------------------
transport their purchased gas and their own production to
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the city gate for sale to local distribution companies
------------------------------------------------------
(LDCs) at Commission-determined just and reasonable rates
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which recovered both the pipelines' cost of gas and cost of
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transmission. In addition, the pipelines would sell gas to
------------
--------------------------
14/ 52 Stat. 821-833 (1938), 15 USC Sections 717-717W, as
amended. In 1906, Congress had amended the Interstate Commerce
Act to specifically exclude pipelines for the transportation of
natural gas from the jurisdiction of the Interstate Commerce
Commission. 30 Stat. 584 (1906). H.R. 5423, the original
House bill introduced in 1935 which contained the Public Utility
Holding Company Act and amendments to the Federal Power Act, also
included, as Title III, provisions which would have subjected the
interstate gas pipelines to federal regulation as common
carriers. During the hearings on H.R. 5423, however, Title III
was widely criticized as being unworkable, and was not reported
out of committee.
13
end users in non-jurisdictional sales with an appropriate
allocation of costs to the non-jurisdictional services.
Producer sales to LDCs or end users in the production area,
with the pipeline providing only the transportation, were
rare. The central features of the NGA-regulated natural gas
industry were Commission-determined just and reasonable
prices and interstate pipeline sales of gas for resale to
LDCs at the city gate at those prices in transactions that
combined or bundled into one package the pipelines' gas
supply and transmission costs. (Emphasis added.) (Footnotes
omitted.)(15)
The "source of supply" of natural gas at the time the Act
was passed and for most of the next 50 years must be understood
in the context of the relationship that existed between the
pipelines and LDCs: the pipelines were in almost all instances
the exclusive suppliers to the LDCs, which had little opportunity
to contract with producers or other sellers. This was the "state
of the art" in the gas industry.
B. Developments After World War II. Although significant
-------------------------------
changes in the regulation of the industry were still many years
away, the natural gas pipeline industry underwent rapid expansion
in the decades after 1938, and especially following World War II,
when the steel pipe manufacturing capacity in the U.S., which had
been diverted to the war effort, was again available for pipeline
fabrication. Also in this period, significant new gas
discoveries were developed, particularly in West Texas and along
the onshore and offshore Gulf Coast areas. Significantly, it was
not until after World War II that the market for natural gas
-----
developed to the point at which it could support gas exploration
and production on a stand-alone basis, separate and apart from
the economies associated with oil production.
When World War II ended, the consumption of natural gas was
still concentrated within the six principal gas-producing states
--------------------------
15/ See FERC Order No. 636, FERC Stats. & Regs. Paragraph
30,939, "Pipeline Service Obligations and Revisions to
Regulations Governing Self-Implementing Transportation; and
Regulation of Natural Gas Pipelines After Partial Wellhead
Decontrol," 57 Fed. Red. 13,267 at 13,270 (April 16, 1992), aff'd
in part, United Distribution Cos. v. FERC, 88 F.3d 1105 (D.C.
Cir. 1996).
14
of Texas, Louisiana, California, Oklahoma, West Virginia and
Kansas, which, in 1945, produced 87% and consumed 68% of all the
natural gas marketed in the United States.(16) In the populous
Mid-Atlantic Region, including North Carolina, where there was
little or no indigenous supplies, natural gas was either not
available or at most mixed with manufactured gas to upgrade its
Btu content.
Proven reserves of natural gas in the U.S. totaled about 148
trillion cubic feet (TCF) at the end of 1945 and total annual
marketed production was only about four TCF, of which more than
half was produced in the four Gulf States. Thus, there were vast
reserves, mostly in the Southwest, available to support the
expansion of the interstate pipeline system. The primary
limiting factor was the lack of the pipeline capacity needed to
reach distant markets.
In 1947, Texas Eastern Transmission Corporation purchased
and converted to gas the "War Emergency" "Big Inch" and "Little
Big Inch" lines that were built during the war to transport oil.
During the same period, other companies secured the necessary gas
reserves and built large diameter pipelines to waiting markets,
while many of those already in existence extended their systems.
It was during this period in which the El Paso and Transwestern
pipelines were built to transport gas from west Texas to the
rapidly growing California market, and in which Transco built a
pipeline running from the Gulf Coast along the Eastern Seaboard
to New York City.
By 1966, natural gas service was available in all of the 48
contiguous States and the District of Columbia. The gas industry
--------------------------
16/ See "Regulation of the Natural Gas Industry", supra n. 12,
at Section 3.02. Louisiana, Texas, Oklahoma and New Mexico still
account for approximately three-quarters of all domestic
production. See Energy Information Administration, Natural Gas
Annual - 1996, DOE/EIA-0131(96) (Washington, D.C., September
1997), p. 9.
15
was no longer a local business. The primary forces behind this
development were the surplus of reserves in the Southwest, the
low prices for such gas, the subsequent discovery and development
of additional reserves in the Southwest and elsewhere, and the
price advantage that natural gas enjoyed over other competing
fuels, such as heating oil and propane, in most uses. Some of
the price advantage that natural gas enjoyed over other fuels was
inherent in the efficiency of transporting gas in high pressure
pipelines with low associated labor costs.
As the LDCs converted from manufactured gas to natural gas,
they in effect exited the supply side of the business in favor of
becoming customers of the interstate pipelines. The pipelines
transported their own gas and gas produced by others, which the
pipelines purchased at the well-head, and re-sold such gas to
LDCs at the city-gate and to large industrial customers. This
development, particularly in the heavily populated areas along
the Eastern Seaboard, created a large and significant purchaser
group that had a vital interest in keeping the city gate price
for gas at levels where retail prices were competitive with other
fuels. For LDCs that had historically sold natural gas obtained
from local sources, such as in the Appalachian Mountain producing
basins and adjacent areas, the growth in demand after World War
II quickly outstripped the availability of local supplies. These
LDCs were among the first to seek gas from the more plentiful
producing areas in the Southwest.
The 25-year period following World War II is sometimes
referred to as the "Golden Age of Growth" in the natural gas
industry. As indicated, during this period, there was a rapid
expansion of the interstate pipelines systems from the Southwest
and other producing areas in the West to Midwest and Eastern
markets. Also, it was during this period that the FPC extended
16
its jurisdiction and the comprehensiveness of its regulation in
the gas industry, including asserting jurisdiction over gas
production.(17) The FPC also developed comprehensive regulations
for the certification of pipeline construction and operation
pursuant to Section 7(c) of the NGA, as well as for rates and
terms and conditions of services provided by interstate
pipelines.
C. The 1970s - An Industry in Transition. In the 1970s,
-------------------------------------
the natural gas industry was suddenly faced with the prospect of
massive gas shortages, as gas demand in some markets
significantly outstripped available production. During this
period, the availability of natural gas to the interstate market
was so significantly restricted that the principal issue
presented to the FPC concerned the curtailment of deliveries by
the interstate pipelines. In a sense, the "state of the art"
became how to deal with the massive curtailments that threatened
the very survival of the industry. The shortages, however, were
not due to the unavailability of gas in the ground. Rather, at
the artificially constrained well-head price established by the
FPC, many producers were simply unwilling to produce gas for sale
into the interstate market and to make the capital investment
needed to develop new reserves. In response to the gas shortages
of the 1970s, Congress, in 1978, enacted a group of statutes
jointly referred to as the Natural Energy Acts. Among these acts
was the Natural Gas Policy Act of 1978 ("NGPA").(18) The NGPA
set in motion the process for gradual de-control of well-head
price regulation by the FERC. That process was completed in
1989, when Congress passed the Natural Gas Wellhead Decontrol
Act,(19) which eliminated all well-head price and non-price
controls.
--------------------------
17/ See Phillips Petroleum Co. v. Wisconsin, 347 U.S. 672
(1954).
18/ 92 Stat. 3350 (1978); 15 USC Section 3301, et. seq.
19/ 103 Stat. 157 (1989).
17
Of particular importance to the current "state of the art,"
the NGPA also included provisions (Sections 311 and 312)
authorizing certain sales and transportation in intra- and
interstate commerce, which, as implemented through FERC
regulations, has effectively merged the intra- and interstate
transportation markets into a single "seamless" grid without
unnecessary jurisdiction or restrictions.
This began an extremely rapid change in the "state of the
art" which culminated in a revolutionary change in the previous
paradigm: the "common source of supply" for LDCs was no longer
purchasing gas from the pipeline at the city-gate at "just and
reasonable" rates established by the FERC. LDCs and other
purchasers could now contract directly with producers. The
pipelines were becoming nothing more than transporters of gas
owned by others.
D. The 1980s - the Move Towards Competition. The
----------------------------------------
implementation of Sections 311 and 312 of the NGPA began a move
to a more market-driven transportation sector for the natural gas
industry. Building upon the market-responsive goals of Section
311, the FERC issued a series of orders, beginning with Order No.
436 in 1985(20) and culminating in Order No. 636 in 1992, that
mandated "open access" transportation. This shift in regulatory
policy sought to encourage competition within the natural gas
industry. Under revised regulations, most recently promulgated
in Order No. 636, many gas transactions that once required prior
approval from the FERC now can begin as soon as the pipeline and
shipper reach agreement. Transportation of natural gas in
interstate commerce still requires FERC authorization, but that
authorization usually takes the form of "blanket" certificate
--------------------------
20/ FERC Stats. & Regs. Paragraph 30,665, "Regulation of Natural
Gas Pipelines After Partial Wellhead Decontrol," 50 Fed. Reg.
42,408 (October 18, 1985).
18
approvals under the terms and conditions established in Order No.
636.(21)
With the issuance of Order No. 636, the FERC completed the
process of transforming the supply end of the natural gas
industry into a fully competitive industry. The FERC's stated
policy goal was to promote competition among all natural gas
suppliers, including interstate pipelines to the extent that they
still act in a gas sales (or merchant) capacity. The FERC's
primary objectives were two-fold: to enhance competition in the
natural gas industry and to maintain an adequate and reliable
supply.
Under Order No. 636, pipelines were required to "unbundle,"
or separate, their merchant function from their transportation
function. The order requires that this unbundling take place at
an upstream point, near the production area. Pipelines are now
obligated to provide all transportation service on a basis that
is equal in quality for all gas supplies, whether purchased from
the pipeline or from another gas supplier.(22) To assure
comparability in the quality of service, pipelines are required
to provide a variety of essential, or ancillary, transportation
services, such as storage, on a non-discriminatory basis, and to
--------------------------
21/ Under the FERC's regulations, there are two distinct types
of self-implementing transportation service. The first is
commonly referred to as "Section 311 Transportation." Under this
authority, interstate pipelines are authorized to commence
transportation service on behalf of any intrastate pipeline or
any LDC without any specific prior approval. The second type of
self-implementing transportation is referred to as a Section 7
"blanket" certificate service. " Blanket" certificates are issued
under Section 7 of the NGA and are available to interstate
pipelines and end-users. Regulations governing both sets of
transportation are included in Part 284 of the FERC's regulations
(18 CFR Part 284). The FERC's regulations define
"transportation" to include both storage and exchanges of natural
gas.
22/ Although Order No. 436, issued in 1985, provided for open-
access, non-discriminatory, transportation service to enable LDCs
and others to purchase gas directly from producers at the
wellhead, the FERC subsequently concluded that firm
transportation made available by the pipelines to LDCs and others
was "inferior in quality to the firm transportation embedded
within the pipelines' bundled, city-gate, firm sales service," in
that there was no obligation on the pipelines' part to provide
transportation-only customers with other essential services and
facilities, such as storage, on a non-discriminatory basis.
Order No. 636, 57 Fed. Reg. at 13,272. In Order No. 636, FERC
mandated various changes in the terms and conditions that must be
offered by an open-access pipeline in order to assure that all
gas purchasers would receive comparable transportation service.
19
implement capacity release programs so that firm shippers can
release their firm capacity on a short or long term basis.(23)
E. The Development of Market Centers, Hubs and Pooling
---------------------------------------------------
Areas. Another important feature of Order No. 636 was FERC's
-----
pronouncement that it would not allow actions that would inhibit
the natural development of market centers, hubs, and pooling
areas.(24) In a study issued by the FERC's Office of Economic
Policy in 1991,(25) which was cited in Order No. 636, the staff
of the FERC had reported on the growing importance of market
centers and recommended that there was a need to foster their
development. The FERC staff believed that market centers were
necessary to facilitate market-driven transactions between buyers
and sellers while at the same time making unnecessary the
construction of additional high-cost facilities. In the view of
the FERC staff, the organization of market centers would (i) help
--------------------------
23/ Traditionally, LDCs and other shippers were required to
reserve, on a long-term basis, enough "firm" capacity on the
supplying pipeline to meet their maximum requirements. Pipeline
capacity utilization was inefficient because there was no
mechanism in place to allow for the shifting of reserved "firm"
capacity from one pipeline customer to another at times when it
was in excess of current needs. The capacity release mechanism
contemplated by Order No. 636 was intended to correct this
situation. It allows an LDC or other shipper (the "primary
shipper") to permanently or temporarily release and sell some or
all of its reserved "firm" capacity, which the pipeline must then
offer to others. Conversely, it provides a prospective purchaser
(the "replacement shipper") with access to "firm" capacity that
would otherwise not be available to it. Although the primary
shipper remains liable on its contract with the pipeline, it is
entitled to a credit to the extent released capacity is resold to
a replacement shipper. See Order No. 636, 57 Fed. Reg. at 13,284
- 13,286. The capacity release program has had a significant
impact on the contracting practices of LDCs and other purchasers
since 1993. It is estimated that, based on full utilization of
released capacity by replacement shippers, 36% of all gas
delivered to consumers in the U.S. could have moved under
released capacity. See Energy Information Administration,
"Deliverability on the Interstate Natural Gas Pipeline System,"
DOE/EIA-0618(98) (Washington, D.C., May 1998), pp. 83 - 85.
24/ Market centers, hubs and pooling areas all serve a similar
purpose, namely, to facilitate transactions between gas buyers
and sellers through information exchanges, physical exchanges of
gas, providing transportation related services (e.g., storage,
parking), the aggregation of supplies by all merchants, etc.
Market centers may or may not be associated with any physical
facilities, but are situated so as to be easily accessed from
many parts of the country. They can be used to arrange storage
or transportation or other ancillary services. Hubs, in
contrast, operate as the physical transfer points where several
different pipelines are interconnected. At a hub, gas can be
physically rerouted from one pipeline to another. Pooling areas,
most often located in production areas, facilitate the
aggregation of supplies from many producers. Title to gas
frequently passes from the producers to the shippers (i.e., LDCs
or other purchasers) in the pooling areas.
25/ "Importance of Market Centers," Office of Economic Policy,
FERC (Washington, DC), August 21, 1991.
20
to eliminate the traditional receipt point inflexibility of the
interstate pipelines by allowing shippers (i.e., buyers and
sellers) to receive and deliver gas at any point on the pipeline
where the receipt and delivery of gas is possible, (ii) provide
better responses to supply disruption, (iii) eliminate
difficulties in reselling long-term contracted gas, and (iv)
foster the development of market intermediaries (brokers and
traders), such as exist in other commodities markets, who would
facilitate transactions among buyers and sellers in the market.
Thus, the development, evolution and operation of market centers
and hubs is at the very heart of the current, and radically
different, "state of the art."
Of particular interest, the FERC staff identified several
natural market centers and hubs which will be instrumental in the
coordination of gas supply between SoCalGas and Frontier. These
include (i) the Blanco, New Mexico, market center near the
San Juan Basin; (ii) the Waha Hubs, near Midland, Texas, formed
at the point where the Transwestern and El Paso pipelines
interconnect with NGPL and numerous intrastate pipelines;
(iii) the Katy Hub, in east Texas; and (iv) the Henry Hub,
located in southern Louisiana.(26) At these market centers and
hubs, gas can be bought, sold, exchanged for gas at another
location, or stored. Services are provided by independent
brokers at such points to arrange deals, and producers or owners
of gas at these centers often have significant marketing staffs
to maximize the value and liquidity of the commodity.
--------------------------
26/ The FERC staff noted that the Waha hub is located at a point
that is within 70 miles of 2.74 Bcf per day of deliverable gas
production and nearly 1 Bcf per day of peak storage
deliverability. The staff noted that, at the Katy Hub alone, 23
pipelines (including Transco) are interconnected within a radius
if 70 miles of over 12 Bcf per day of deliverable gas production,
and that there is nearly 17 Bcf per day of working storage
capacity at the hub. Finally, at the Henry Hub in South
Louisiana, the staff noted that a total of 28 pipelines
interconnect within 50 miles of more than 19 Bcf per day of
deliverable gas production. See also "North American Gas Market
Centers 1994," produced by Hart's Gas Transactions Report.
21
Pooling areas facilitate the transfer of title to gas at
both production and market points. Transco, El Paso, and
Transwestern all operate pooling areas on their systems. In
addition to the operation of pooling areas by interstate
pipelines, several marketing companies provide services by which
interested buyers and sellers can exchange gas at such pooling
points for a fee. At some market centers, hub services, such as
parking, loaning, wheeling, and, in some instances, title
transfer, are also available.(27)
Why are market centers, hubs and pooling areas so vital to
the current "state of the art?" The importance of these creative
market mechanisms is clear. A producer in one producing basin
may, through such mechanisms, sell gas to a buyer several
pipeline systems away without the payment of additional
transportation costs, thus making gas produced in one basin more
competitive with gas produced in a geographically closer locale.
This represents a significant change from the days throughout
most of the last 50 years when LDCs typically bought all of their
gas at the city-gate from the interconnecting pipeline. As an
example, low cost San Juan Basin gas, combined with its tax
incentives and creative transactional mechanisms, can be priced
cheaper to a market in North Carolina than gas produced in the
Gulf Coast or the Alabama Black Warrior Basin, which are both
physically closer to North Carolina. Such creative arrangements,
however, are dependent upon the existence of significant physical
interconnections and market centers between the production area
and ultimate delivery point. While these conditions may not
--------------------------
27/ "Parking" is essentially a short-term interruptible storage
service. "Loaning" is a service by which a party with gas will
provide the gas to another party with a specific date for the
return of such gas at either that location or another location
under mutually agreeable terms and conditions (in effect, the
inverse of parking). "Wheeling" is the provision of
transportation by a hub operator from one system to another
system. Finally, title transfer services allow parties to
exchange title to gas that is already within a pipeline system
for gas that is at a different point on the same pipeline system
or for gas that is on another pipeline system. No physical
movement occurs.
22
currently exist throughout all of the contiguous 48 States, they
do exist throughout the southern tier of States, both west and
east, all of which depend for a large percentage of their total
gas supplies upon production in the Southwest producing basins.
F. The Development of "High Deliverability" Storage.
------------------------------------------------
Another important development in the gas industry is in storage
technology and the development of a market for "un-bundled"
storage services. The ability to store gas has always been
critical to the economic and efficient operation of a gas system
because of the seasonal nature of demand, particularly by
residential customers. Most "seasonal" storage is in depleted
oil and gas fields, such as exist in the Appalachian region. In
the last five years, however, there has been significant new
development of so-called "high deliverability," or salt-dome,
storage caverns, which in some cases are owned and operated
independent of the pipelines. The importance of "high
deliverability" storage is not so much in the absolute volume of
the working storage capacity that they represent, but rather in
their operational characteristics, which allow for rapid
injection and withdrawals of gas ("cycling"). This provides LDCs
with considerably more flexibility in responding to changes in
demand without the need to maintain high inventory levels and
enables LDCs to take advantage of price volatility.(28)
G. New Pipeline Construction. The nation's interstate
-------------------------
pipeline system, which experienced such dramatic growth in the
decades immediately following World War II, continues to expand
at a significant rate, in terms of both long-haul capacity and
--------------------------
28/ See Energy Information Administration, Natural Gas 1996:
Issues and Trends, DOE/EIA-0560(96) (Washington, D.C., December
1996), p. 15; Energy Information Administration, Natural Gas
Annual - 1996, DOE/EIA-0131(96) (Washington, D.C., September
1997), p. 21.
23
interregional interconnections. Between 1990 and the end of
1997, capacity additions on the long-haul pipeline systems (viz.
the pipelines running from the production areas to end markets)
totaled 12.4 billion cubic feet (Bcf) per day, an increase of
about 17%, while interregional capacity additions totaled 11.4
Bcf per day, or about 15%, in the same period. More than 40
projects were completed in 1997 alone.(29) Several new expansion
projects have been announced to alleviate capacity constraints in
those few areas of the country where they still exist. Moreover,
as previously described, market centers and storage capacity are
becoming increasingly integrated into the pipeline network. In
summing up the current state of the nation's pipeline delivery
system, taking into account completion by the end of the year
2000 of projects that will expand transportation capacity from
the Rocky Mountain, New Mexico, and West Texas producing areas to
Midwest and Northeast markets, the Department of Energy has
observed that "the interstate natural gas pipeline network will
------------------------------------------------
come closer to being a national grid where production from almost
-----------------------------------------------------------------
any part of the country can find a route to customers in almost
---------------------------------------------------------------
any area." (Emphasis added).(30)
--------
3.3 The Standards for Approval under Section 10(c).
-----------------------------------------------
A. Section 10(c)(1). Section 10(c)(1) provides that the
---------------
Commission may not approve an acquisition that "is unlawful under
the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11." In this case, the transaction
will not be unlawful under Section 8, as it will not lead to
common ownership of gas and electric properties serving the same
--------------------------
29/ See Energy Information Agency, "Deliverability on the
Interstate Natural Gas Pipeline System," DOE/EIA-0618(98)
(Washington, D.C., May 1998), pp. 32 -34.
30/ Id. at p. 34.
24
area in North Carolina. Nor will approval of the transaction be
detrimental to the carrying out of the provisions of Section 11,
which provides, in subsection (b)(1) thereof, that every
registered holding company and its subsidiaries shall limit their
operations "to a single integrated public-utility system . . . ."
As indicated above, Pacific and Enova are both exempt holding
companies and will continue to be entitled to their current
exemptions even following the acquisition of Frontier's voting
securities. In this regard, the Commission has held on several
occasions that, because Section 11 by its terms applies only to
registered holding companies, Section10(c)(1) does not preclude
----------
an acquisition by an exempt holding company of the securities of
------
another public-utility company, even though the existing
properties of the exempt holding company and those of the company
to be acquired together would not constitute a single integrated
------
system, provided that the acquisition is not unlawful under
Section 8 and would have the integrating tendencies required by
Section 10(c)(2). See Union Electric Company, 44 SEC 489, 501
(1974), aff'd without opinion sub nom., City of Cape Girardeau v.
SEC, 521 F.2d 324 (D.C. Cir. 1975); WPL Holdings, Inc., 40 SEC
Docket 491 at 497 (February 26, 1988), aff'd in part and rev'd in
part sub nom., Wisconsin's Environmental Decade, Inc. v. SEC, 882
F.2d 523 (D.C. Cir. 1989), reaffirmed 49 SEC Docket 1255
(September 18, 1991); Gaz Metropolitan, Inc., et al., 58 SEC
Docket 190 at 192 (November 23, 1994); TUC Holding Company, et
al., 65 SEC Docket 301 at 305 (August 1, 1997); and BL Holding
Corp., Holding Co. Act Rel. No. 26875 (May 15, 1998).
Accordingly, as long as the acquisition of Frontier by Pacific
and Enova would have the integrating tendencies required by
Section 10(c)(2), discussed below, it is of no consequence that
other existing properties of Pacific and Enova (e.g., San Diego's
electric system) would not form a part of the same integrated
system as Frontier's gas properties.
25
B. Section 10(c)(2).
----------------
Under Section 10(c)(2), the Commission must affirmatively find
that the acquisition of the voting securities of Frontier by
Pacific and Enova "will serve the public interest by tending
towards the economical and the efficient development of an
integrated public-utility system . . ., " which, as applied to a
gas system, is defined in Section 2(a)(29)(B). The acquisition
of Frontier by Pacific and Enova will satisfy the integration
standards of Sections 10(c)(2) and 2(a)(29)(B) for all of the
following reasons:
() The indirect investment by Pacific and Enova in
Frontier, and their ongoing involvement with Frontier's
operations, will be instrumental to the development of
a gas utility system in an area in which natural gas
service is not now available.
() Frontier and the operating utility subsidiaries of
Pacific and Enova will share a "common source of
supply" (the San Juan and Permian Basins) and will be
operated as a "single coordinated system."
() Frontier will achieve "substantial economies" in gas
supply through the increased buying power that it will
attain by being part of the larger Pacific and Enova
systems; Frontier and its customers will also benefit
by gaining access to Pacific's and Enova's expertise in
such areas as procurement/materials management; finance
and accounting; and gas system engineering and
construction management.
() Taking into account the current "state of the art": the
area or region served by Pacific and Enova's
subsidiaries in California and Frontier will not be "so
large as to impair . . . the advantages of localized
management, efficient operation, and the effectiveness
of regulation." To the contrary, the day-to-day
operations of Frontier will be under the direction of
its General Manager. The management of Frontier will
be independent of, but coordinated with (in order to
promote efficient operation), Pacific and Enova, and
will be subject to effective local regulation by the
NCUC. This project enjoys the strong support of the
NCUC.
() Because of Frontier's size, Pacific and Enova will
continue to qualify for exemption under Section 3(a)(1)
as "intrastate" holding companies even after acquiring
Frontier's voting securities. Under these
circumstances, and because the acquisition of Frontier
will have the integrating features required by Sections
10(c)(2) and 2(a)(29)(B), the Commission should approve
the transaction.
26
1. Given the Existence of a Common Source of Supply and
----------------------------------------------------
Changes in the State of the Art in the Gas Industry,
---------------------------------------------------
the Commission Should Find that the Pacific and Enova
-----------------------------------------------------
Systems and Frontier's System Together Will Constitute
------------------------------------------------------
an Integrated Gas System.
------------------------
Although the retail gas service areas of Frontier in
North Carolina and of SoCalGas and SDG&E in California are
separated by a substantial distance and are located in non-
contiguous States, such factors, by themselves, are not
determinative. On the contrary, it is clear that Section
2(a)(29)(B), which defines an "integrated" gas-utility system,
does not require that the States comprising the "single area or
region" even adjoin each other. In MCN Corporation, 62 SEC
Docket 2379 (September 17, 1996), for example, the Commission
approved an acquisition of an interest in a gas-utility company
in Missouri by an exempt gas-utility holding company whose
service area is located more than 500 miles distant in Michigan,
a non-adjoining State. Moreover, Section 2(a)(29)(B)
specifically contemplates that "gas utility companies deriving
natural gas from a common source of supply may be deemed to be
-------------------
included in a single area or region." (Emphasis added). Thus,
-----------------------------------
the Commission was given broad discretion to interpret the
"single area or region" standard in a flexible manner that should
take into account the tremendous changes that have occurred since
1935 in the production and transportation of natural gas.
Likewise, in considering whether an "area or region" is so large
as to impair "the advantages of localized management, efficient
operation, and the effectiveness of regulation . . .," the
Commission is called upon to consider the "state of the art" in
the industry.
Because of the dramatic changes in the "state of the art" in
the gas industry that have taken place in recent years, the
distance between two LDCs has become much less relevant,
particularly when compared to the days when LDCs depended for
27
their supplies upon essentially local sources or upon the same
interconnecting pipeline, in its merchant capacity. Thus, based
on all of the facts and circumstances of this case, as more fully
developed below, the Commission should conclude that the gas
utility operations of SoCalGas and SDG&E in southern California
and those of Frontier in western North Carolina together will be
"confined to a single area or region in one or more States," and
that such area or region will not be "so large as to impair the
advantages of localized management, efficient operation and the
effectiveness of regulation." It is important to underscore that
such a conclusion is consistent with the literal terms of Section
2(a)(29)(B).
Moreover, in order to make the findings required by Sections
10(c)(2) and 2(a)(29)(B), as applied to the specific facts of
this case, the Commission need not address or decide the broader
question of whether an integrated gas market now exists
throughout all of the 48 contiguous States or even whether all
LDCs purchasing gas in the same supply basins could be part of
one integrated gas system.
Common Source of Supply: Historically, in determining
whether two gas companies share a "common source of supply," the
Commission has attached greatest importance to whether the gas
supply of the two companies is derived from the same gas
producing areas (or basins), recognizing that the most
significant economies and efficiencies that two entities can
achieve is through the coordination and management of gas supply.
The Commission has also considered whether the two entities
receive gas deliveries from a common pipeline. However, the
Commission has properly found an integrated gas system to exist
where two entities take delivery from different pipelines which
originate in the same gas producing area and/or interconnect at
various points along the transportation route. See MCN
28
Corporation, supra, 62 SEC Docket at 2383-2384; American Natural
Gas Company, et al., 43 S.E.C. 203 at 205-207 n. 5 (1966);
Central Power Company, et al., 8 S.E.C. 425 at 431 (1941). These
decisions, and especially MCN Corporation, reflect the fact that
an LDC's gas supply is no longer purchased at the city-gate from
the interconnecting pipeline. The key factor to be considered by
the Commission, given the current "state of the art," is the
"common source of supply."
As indicated, SoCalGas and SDG&E currently derive
approximately 58% of their combined gas requirements from the
Permian and San Juan Basins, and it is expected that Frontier
will purchase at least 50% of its gas supplies from production in
the same two supply basins. Further, although SoCalGas and SDG&E
and Frontier will take delivery from different interstate
pipelines (Transco in the case of Frontier and El Paso and
Transwestern in the case of SoCalGas and SDG&E), those pipelines
all transport gas that originates in the Permian and San Juan
Basins. The "common source of supply" is therefore in the
Permian and San Juan Basins. In one case, the method of
transportation is Transco, and, in the other case, El Paso and
Transwestern.
The El Paso and Transwestern pipelines transport gas out of
the Permian and San Juan Basins for ultimate consumption in both
California and eastern U.S. markets.(31) Transco's interstate
pipeline does not itself extend into either such basin. However,
it intersects at various points in Texas with intrastate
--------------------------
31/ In recent years, although production in the San Juan area
has increased significantly, the demand for both San Juan and
Permian Basin gas at the California border has declined due, in
part, to the increased availability in California of cheaper gas
from western Canada and the Rocky Mountain region. However, the
decline in demand for Permian and San Juan Basin gas in the
California market, which has led to significant capacity "turn-
backs" on the El Paso and Transwestern systems, has been largely
offset by growing demand elsewhere, primarily in eastern U.S.
markets. To meet this demand, El Paso and Transwestern have both
sought and received certificate authority from the FERC under
Section 7 of the NGA for expansions in the San Juan area that now
provide much better access from the eastern ends of their
respective systems to various market centers and hubs in Texas,
from which gas can be shipped to eastern U.S. markets. See El
Paso Natural Gas Company, 70 FERC Paragraph 61,295 (1995);
Transwestern Pipeline Company, 75 FERC Paragraph 61,107 (1996).
29
pipelines (including the Oasis, Valero-TECO and Valero-Lone Star
pipelines), which transport gas from those basins for consumption
by Transco's ultimate customers. San Juan and Permian Basin gas
also moves through the Henry Hub, on the Louisiana Gulf Coast, as
well as the Katy Hub in Texas, where Transco and other pipelines
transport it to Mid-Atlantic and East Coast markets. (See
Exhibit E - Map of Gas Pipelines and Producing Areas).
Accordingly, there is substantial evidence that SoCalGas, SDG&E
and Frontier will share a "common source of supply," roughly
equidistant from each of them.
It should be recognized that the concept of a "common source
of supply" has a very different meaning today than it did in 1935.
In 1935 and for most of the 50 years that followed, LDCs generally
purchased natural gas at the city-gate directly from the interstate
pipeline that served them at FERC (and earlier FPC) approved
wholesale rates that reflected both the cost of the commodity and
the related cost of transportation. Hence, two LDCs serving
non-contiguous areas could in most instances demonstrate that
they shared a "common source of supply" only if they purchased
their gas from the same pipeline, in its capacity as both gas
merchant and transporter. LDCs did not, and in most instances
could not, purchase their gas in upstream markets and arrange
separately with the pipeline for transportation. The "single
area or region" served was therefore defined in terms of the
pipeline delivery points (i.e., the city-gate), where the LDCs
purchased their gas, rather than in terms of the upstream gas
production areas or pipeline receipt points.
In contrast, today, most LDCs do not purchase their gas
supply from the pipeline serving them. Instead, LDCs, and many
industrial customers as well, purchase gas directly from
producers (or independent marketers or other middlemen), and
30
contract separately for transportation on the pipeline that
serves them, as well as on other upstream pipelines that
transport gas out of the producing basins.(32) Although
transportation costs and pipeline capacity constraints are
economic factors which may limit an LDC's ability to contract for
gas produced in any particular supply basin, the legal
impediments no longer exist, and LDCs, no matter where they are
located, are entitled to non-discriminatory transportation
service. The transportation arrangements entered into by two
different LDCs are unimportant for purposes of determining
whether or not they share a "common source of supply," inasmuch
as the pipelines that serve them are no longer the suppliers in
any event. The relevant inquiry should instead be whether the
two LDCs purchase substantial quantities of gas produced in the
same supply basins, and whether that gas is "deliverable" (i.e.,
whether there is sufficient transportation capacity available in
the marketplace to assure delivery on an economic and reliable
basis).(33)
State of the Art in the Gas Industry: As previously
described, the natural gas industry has undergone fundamental
changes, with the pronounced trend in the past decade towards
increased competition in gas supply and the development of a
seamless natural gas delivery system throughout most of the
United States.(34) This trend is the direct result of several
--------------------------
32/ By 1995, the Department of Energy could report that
interstate pipeline gas sales were "virtually non-existent," and
that transportation (as opposed to sales) accounted for 74% of
all deliveries to industrial customers by local companies (LDCs
and intrastate pipelines). See Energy Information
Administration, Natural Gas 1996: Issues and Trends, DOE/EIA-
0560(96) (Washington, D.C., December 1996), p. 17.
33/ "Deliverability" may be defined in terms of the physical
capacity of the U.S. natural gas pipeline network, as well as of
the contractual structure governing the transportation of gas on
that system, which is largely the product of Order No. 636. See
Energy Information Administration, "Deliverability on the
Interstate Natural Gas Pipeline System," DOE/EIA-0618(98)
(Washington, D.C., May 1998), p. 79.
34/ As previously indicated, although there is substantial
evidence that a fully integrated natural gas market now exists
throughout most of the United States, that is not a question that
this Commission would need to address in order to make the
findings required by Sections 10(c)(2) and 2(a)(29)(B), as
applied to the specific facts of this case.
31
developments, including, most importantly, de-control of gas
prices at the well-head; the "un-bundling" of the commodity and
transportation functions of interstate pipelines; the
construction of significant new pipeline capacity, which has
eliminated transportation bottlenecks in most parts of the
country; the emergence of gas brokers and marketers and
development of an efficient gas futures market, which now enable
LDCs and other large gas purchasers to manage price volatility
and secure gas supplies without regard to its physical source;
and increased inter-basin competition for sales to the market,
due in part to the effects of imports into the U.S. of low-cost
Canadian gas.(35) It is important to stress that the paradigm
for the gas industry today is fundamentally and irreversibly
different than earlier this century.
The Commission has already taken notice of these and other
regulatory and technological changes that have reshaped the
natural gas industry. See "The Regulation of Public-Utility
Holding Companies," Report of the Division of Investment
Management (June 1995), pp. 29 - 31. In light of such changes,
the Division of Investment Management has recommended that the
Commission continue to interpret the "single area or region"
requirement of Section 2(a)(29) flexibly to take into account
technological advances, and that the focus of the SEC's inquiry
under Section 10(c)(2) should be on whether a proposed
acquisition would promote the economic and efficient development
of a utility system and on whether the resulting system would be
subject to effective regulation. Id. at 72 -74.
As discussed above, the traditional source of supply for
both California and the Mid-Atlantic states is in the producing
--------------------------
35/ Canadian production, as a percentage of total U.S.
consumption, increased in each of the ten years prior to 1996.
In 1995, net imports of gas (mostly from Canada) accounted for
13% of all U.S. consumption. The western region of the U.S.
received by far the largest share (41%) of all Canadian imports.
See Energy Information Administration, Natural Gas Monthly,
DOE/EIA-0130(96/10) (Washington, D.C., November 1996).
32
basins in the Southwest. The primary producing basins in the
Southwest that can be accessed by both the Mid-Atlantic region
and California include the Permian and San Juan Basins. Today,
because LDCs in most States (including California and North
Carolina) can purchase gas in these Southwest producing basins
(or purchase gas pegged to production in those areas) from a
producer or marketer at the city-gate off of the interstate
pipeline system, there is significant competition for markets
between producers in the San Juan and Permian Basins and
producers in other U.S. and Canadian basins. For the California
market, for example, gas produced in western Canada and the
Overthrust producing areas in the Rocky Mountain region now
provides stiff competition for the Southwest basin supplies.
This basin-to-basin competition and the development of additional
interstate pipeline capacity through the construction of the Kern
River pipeline and the expansion of Pacific Gas Transmission
Company and Northwest Pipeline Corporation from Canada have, in
fact, caused 2 Bcf/day of excess pipeline capacity to the
California market.
The competition for the California market by other producing
basins and pipelines was directly responsible for significant
"turn-backs" on the El Paso and Transwestern systems in the mid-
1990s.(36) It was in response to this competition and the need
--------------------------
36/ Under Order No. 636, the "restructuring rule," the "firm"
sales contracts between a pipeline and its customers were
converted into the rights to receive "firm" transportation. As
these "firm" transportation contracts expire, however, some LDCs
will elect to reduce or release that "firm" capacity that they
previously reserved. Such capacity "turn-backs" have led to the
situation in some parts of the country where available "firm"
pipeline capacity exceeds customer commitments. Unless a
pipeline can remarket "turned-back" capacity, it faces a
potential loss of revenues. Following the adoption of Order No.
636, two of the largest capacity "turn-backs" were on the El Paso
and Transwestern systems. As indicated, those companies
responded to this situation by altering the utilization of
existing pipeline capacity to move gas out of the Southwest
producing areas to eastern markets, where such gas would be
competitive with other available supplies. For a more detailed
of discussion of the impact of pipeline capacity releases and the
industry's response, see Energy Information Administration,
Natural Gas 1996: Issues and Trends, DOE/EIA-0560(96)
(Washington, D.C., December 1996), ch. 2.
33
to find new customers for the "turned-back" capacity that El Paso
and Transwestern have both expanded their systems out of the San
Juan Basin in order to move gas to eastern markets, such that,
today, there are periods when the net flow of gas out of the San
Juan Basin is to the east rather than to the west. These actions
were also driven by certain operational characteristics of San
Juan Basin production which require producers to maintain high
production levels without regard to demand in the California
market.(37) Further, El Paso and Transwestern have incentives to
discount transportation for gas transported to new markets in the
east, thus limiting delivery costs. As a result, San Juan Basin
gas can be priced at a rate below its competitors in most other
basins even with additional delivery costs.
The Attorney General of the State of California addressed
the integrated pipeline market from an economic perspective in
its Opinion on Competitive Effects of Proposed Merger between
Pacific Enterprises and Enova Corporation, submitted to the
California Public Utilities Commission ("CPUC") on November 20,
1997.(38) The Attorney General used a correlation and
co-integration analysis to determine that FERC actions have
created a network of transmission suppliers connecting purchasers
at the wholesale level with middlemen and well operators at the
production level. The Attorney General concluded that, from an
economic perspective, markets are integrated where the price of
supplies remain closely linked (taking into account
transportation and other transaction costs) and that there is
"direct" evidence that prices at delivery points within the four
basin area (including the Permian and San Juan Basins) remain
--------------------------
37/ San Juan Basin gas is produced from coal seam formations.
The technology used to produce gas from coal seam formations
requires maintaining a steady state of production. The
significant tax benefits granted to coal seam gas is a further
incentive for maintaining high production levels.
38/ The Attorney General's Opinion has been filed as Exhibit D-9
in File No. 70-9033.
34
co-integrated within arbitrage bounds on a nearly national grid
basis.
Due to the restructured natural gas transportation market,
gas can be moved from the San Juan and Permian Basins to both
California and North Carolina physically as well as contractually
in a variety of ways. As discussed above, both Transwestern and
El Paso access the Permian and San Juan Basins and have
traditionally moved their gas west to California. SoCalGas is
the largest holder of capacity on both of those systems and
purchases a significant portion of its supply portfolio from
those two basins. However, as indicated, natural gas from the
San Juan and Permian Basins also moves east and north to serve
Midwest and Mid-Atlantic markets.
Both El Paso and Transwestern interconnect at numerous
points in West Texas with major intrastate Texas pipelines
including the Valero, Oasis, and other pipelines. Through these
intrastate pipelines, gas is physically transported to the
eastern half of the State of Texas where the intrastate pipelines
connect with, among others, Transco. Thus, gas can and does
physically flow from the Southwest producing basins which provide
the principal supply of gas to SoCalGas and to the developing
North Carolina market represented by Frontier.(39)
While physical delivery is possible from the common supply
basins to both SoCalGas and Frontier, more flexible and efficient
transactions are available utilizing marketing tools created by
the FERC in Order No. 636. As previously indicated, one of the
more important outgrowths of FERC Order No. 636 has been the
development of market centers, hubs and pooling points, which
--------------------------
39/ Further, El Paso and Transwestern interconnect with NGPL,
the first major interstate pipeline company constructed in the
United States, in west Texas through NGPL's major western
trunkline. NGPL also accesses Gulf Coast reserves through its
eastern trunkline which is connected by a major crossover through
Oklahoma and north Texas to its western trunkline. On its
eastern trunkline, NGPL interconnects at two points with Transco.
35
allows LDCs operating in a much larger area or region of the
country to realize the operating economies and efficiencies from
coordinated gas supply that were once thought to be achievable
only by contiguous or nearly contiguous gas companies supplied by
the same interstate pipelines. In fact, the opportunities to
achieve operating economies may be even greater where the two
companies seeking to combine have significantly different load
profiles (e.g., non-coincident seasonal peaks, substantially
different customer mix, different projected growth patterns,
etc.).
2. Frontier will Realize Significant Economies and
-----------------------------------------------
Efficiencies from its Affiliation with the Much Larger
------------------------------------------------------
Pacific and Enova Systems.
-------------------------
Section 10(c)(2) requires that the Commission find that
a proposed acquisition will produce economies and efficiencies.
Although some of the anticipated economies and efficiencies will
be fully realized in the longer term, they are properly
considered in determining whether the standards of Section
10(c)(2) are met. See American Electric Power Co., 46 SEC 1299,
1320-21 (1978). Further, although some potential benefits cannot
be precisely estimated, they too are entitled to consideration.
As the Commission has stated, "[s]pecific dollar forecasts of
future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., 35 SEC Docket
769 at 775 (April 29, 1986). Finally, there is no requirement in
Section 10(c)(2) that the specific dollar estimates of future
savings be large in relation to the gross revenues of the
companies involved. See American Natural Gas Company, supra, 43
S.E.C. at 206-207.
In this case, there can be little doubt that significant
benefits will be realized by Frontier as a result of becoming a
part of the much larger Pacific and Enova systems, particularly
36
in the areas of gas supply, increased purchasing power, and the
ability to utilize the expertise and resources available from
Pacific and Enova. Exhibit I hereto outlines specific areas in
which the affiliation of Frontier with Pacific and Enova is
likely to produce substantial economies and efficiencies over
time, and dollar estimates of such savings. Pacific and Enova
have estimated that Frontier will realize total start-up cost
savings of $1.8 million due to its integration into the Pacific
and Enova systems and ongoing annual operating cost savings of at
least $300,000 per year. On a yearly basis, Pacific and Enova
estimate that Frontier will save approximately 19% on its
operating costs due to the affiliation. The total estimated
savings are quite significant relative to the size of the
transaction. Projected annual operating savings appear to be
greater than those in the SEC's MCN Corporation decision, which
involved an investment in a gas system of roughly comparable size
to the Frontier system.
It should be emphasized that the savings that will be
realized by Frontier will not be at the expense of California
utility customers of SoCalGas and SDG&E. In this connection, the
CPUC recently adopted affiliate transaction rules that permit
corporate support services provided both to a California utility
and to its affiliates, including affiliates outside California.
See Opinion Adopting Standards of Conduct Governing Relationships
Between Utilities and Their Affiliates, CPUC Decision No. 97-12-
088, 1997 Cal. PUC LEXIS 1139 (December 16, 1997). For example,
the CPUC rule permits such shared services as: payroll, taxes,
shareholder services, insurance, financial reporting, financial
planning and analysis, corporate accounting, corporate security,
human resources (compensation, benefits, employment policies),
employee records, regulatory affairs, lobbying, legal, and
pension management. Decision No. 97-12-088, App. A, mimeo, p.
11. All of the services described on Exhibit I are permitted
37
under the CPUC's rules. To ensure that the use of shared
services does not result in cross-subsidization, the CPUC
specifically required that "[a]ny shared support shall be priced,
reported and conducted in accordance with the Separation and
Information Standards set forth herein, as well as other
applicable Commission Pricing and Reporting requirements." Id.
In the same decision, the CPUC adopted extensive accounting rules
to prevent cross-subsidization. Id. at 14.
3. The System Formed by the Affiliation of Pacific and
---------------------------------------------------
Enova and Frontier will not be So Large as to Impair
----------------------------------------------------
the Advantages of Localized Management, Efficient
-------------------------------------------------
Operation, and the Effectiveness of Regulation.
-----------------------------------------------
The resulting integrated gas system to be formed by adding
Frontier's gas system to the substantially larger SoCalGas and
SDG&E systems will not be "so large as to impair (considering the
state of the art and the area or region affected) the advantages
of localized management, efficient operation, and the
effectiveness of regulation." As in MCN Corporation, this case
involves the development and financing of a small, start-up, gas
distribution system designed to serve a predominantly rural
population. As described in greater detail in Item 1.3, the day-
to-day operations of Frontier will be under the direct
supervision of its General Manager. Its operations, however,
will be coordinated with those of SoCalGas and SDG&E in order to
provide operating efficiencies and savings. Local regulation is
and will continue to be effective. In fact, every aspect of
Frontier's development and financing has been or will be
specifically considered by the NCUC, beginning with the NCUC's
selection of Frontier's proposal for the new gas system over a
competing proposal submitted by an existing North Carolina gas
company. While Pacific and Enova will bring to the table much
needed skills and expertise in the areas of construction and gas
supply management, pipeline technology and maintenance,
38
procurement, operating expertise, and marketing, among others,
Frontier will maintain its separate corporate identity and local
presence and have its own management and work force.
4. The Acquisition of Frontier's Voting Securities Will
----------------------------------------------------
Have No Effect on Pacific's and Enova's Current
-----------------------------------------------
Exemptions under Section 3(a)(1).
--------------------------------
Frontier will be a small utility compared to Pacific and
Enova. (see fn. 11, above). The acquisition and ownership of
its voting securities by Pacific and Enova will therefore have no
impact on the continuing entitlement of Pacific and Enova to
their exemptions under Section 3(a)(1) of the Act. Given that
there is substantial evidence that the acquisition will have
integrating features (e.g., common source of supply, local
management, realization of substantial economies and efficiencies
through coordinated operation, strong local support and effective
local regulation) and that exempt holding companies, like Pacific
---
and Enova, are not subject to the strict integration standards of
Section 11(b)(1), the Commission should have little reason to
interpret the integration standards of Section 10(c)(2) and
Section 2(a)(29)(B), as applied to this transaction, in a narrow
or restrictive manner. In other recent cases involving
acquisitions by exempt holding companies, such as Gaz
Metropolitan, Inc., et al., TUC Holding, et al., and MCN
Corporation, the Commission has exhibited a willingness to
interpret the integration standards of Section 10(c)(2) flexibly,
focusing instead on the demonstrated benefits of the transaction
from the perspectives of both investors and consumers. It should
do the same here.
3.4 Section 10(b).
--------------
Section 10(b) provides that, if the requirements of Section
10(f) are met, then the Commission shall approve a proposed
acquisition unless it finds that the transaction would have any
one of several enumerated adverse effects. In this case, there
39
is no basis for the Commission to make any adverse findings under
Section 10(b).
A. Section 10(b)(1). Section 10(b)(1) was intended to
----------------
avoid "an excess of concentration and bigness" in the utility
industry at the expense of competition while preserving the
"opportunities for economies of scale, the elimination of
duplicative facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations"
afforded by certain acquisitions. See American Electric Power
Co., Inc., 46 S.E.C. 1299, 1309 (1978). The transaction proposed
herein will not add meaningfully to the size of Pacific and
Enova, both of which are much larger companies than Frontier and
will derive only a de minimis part of their income from
Frontier's operations. The approximately 15,000 residential,
industrial and commercial customers that Frontier projects having
at the end of its fifth year of operation represents about one-
quarter of 1% of the approximately 6 million retail and
industrial gas customers (including transportation-only
customers) that SoCalGas and SDG&E now serve in California. On
the other hand, the transaction will benefit Frontier's customers
and create a modestly larger and more diverse asset and customer
base, which will create opportunities for operating efficiencies.
Further, although the transaction proposed herein will
result in creating a link between Pacific and Enova, on the one
hand, and Frontier, on the other, it will not lead to the type of
concentration of control over utilities, unrelated to operating
efficiencies, that Section 10(b)(1) was intended to prevent.(40)
In fact, far from limiting or restricting competition, the
--------------------------
40/ See Section 1(b)(4) of the Act (finding that the public
interest and interests of consumers and investors are adversely
affected "when the growth and extension of holding companies
bears no relation to economy of management and operation or the
integration and coordination of related operating properties . .
. .").
40
transaction proposed herein is the outgrowth of proceedings in
North Carolina in which the NCUC carefully evaluated competing
proposals to construct and operate a gas system in the Four-
County Area. Finally, although the management interlocks that
will be created are necessary and desirable in order to integrate
Frontier fully into Pacific's and Enova's systems, Frontier will
have its own local management team and work force.
B. Section 10(b)(2). The Commission may not approve the
----------------
proposed transaction if it determines pursuant to Section
10(b)(2) that the consideration (including fees and expenses of
the transaction) to be paid, indirectly, by Pacific and Enova in
connection with the transaction is not reasonable or does not
bear a fair relation to investment in and earning capacity of the
utility assets underlying the securities being acquired. In this
case, the equity investments by Frontier Pacific and Frontier
Utilities in Frontier, a newly-formed entity with no preexisting
business, have been expressly approved by the NCUC, which has
also conducted extensive hearings on the overall economic
feasibility of Frontier at the rates and rate design proposed by
Frontier. The amounts to be invested were the result of direct,
arms'-length, negotiations between private investors, and no fees
to outside investment bankers will be paid.
C. Section 10(b)(3). Section 10(b)(3) requires the
----------------
Commission to determine whether the transaction will unduly
complicate the capital structure of Pacific and Enova or will be
detrimental to the public interest, the interest of investors or
consumers or the proper functioning of the Pacific and Enova
holding company systems. The intent of these requirements is to
assure the financial soundness of the holding company system,
which particular regard to the proper balance of debt and equity.
The transaction proposed herein will have a virtually
undetectable impact on the capitalization and earnings of Pacific
41
and Enova, and will not introduce any complexity into the capital
structure of either holding company system. With regard to the
latter, the debt and other obligations incurred or to be incurred
by Frontier will not be recourse, directly or indirectly, to
either SoCalGas or SDG&E.
Moreover, as set forth more fully in the discussion of the
standards of Section 10(c)(2), supra, and elsewhere in this
Application or Declaration, the transaction will create
opportunities for Frontier to achieve substantial savings,
chiefly in the areas of coordinated gas supply and economies
associated with greater buying power and the availability of
managerial and technical expertise that will be needed by
Frontier. The transaction will therefore be in the public
interest and the interest of investors and consumers, and will
not be detrimental to the proper functioning of the resulting
holding company system.
3.5 Section 10(f).
-------------
Frontier has obtained the required NCUC approvals for the
equity investment by Pacific and Enova, through Frontier Pacific,
in Frontier. The requirements of Section 10(f) have therefore
been satisfied.
ITEM 4. REGULATORY APPROVALS.
--------------------
The construction and financing of Frontier's gas
distribution system is subject to the jurisdiction of the NCUC,
which has issued various approvals referred to in Item 1. No
other State or Federal commission has jurisdiction over any
aspect of the transaction.
42
ITEM 5. PROCEDURE.
---------
The Commission is requested to publish a notice under Rule
23 with respect to the filing of this Application or Declaration
as soon as practicable. Pacific and Enova request that the
Commission's Order be issued as soon as practicable, and that
there should not be a 30-day waiting period between issuance of
the Commission's order and the date on which the order is to
become effective. Pacific and Enova hereby waive a recommended
decision by a hearing officer or any other responsible officer of
the Commission and consent that the Division of Investment
Management may assist in the preparation of the Commission's
decision and/or order, unless the Division opposes the
Transaction.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS.
---------------------------------
A - EXHIBITS.
--------
A-1 Articles of Organization of Frontier Energy LLC.
A-2 Operating Agreement of Frontier Energy LLC.
D-1 Application of Frontier Utilities of North
Carolina and Frontier Energy LLC for Approval of
Final Financing Plan, to Transfer Certificates,
and for Approval of Waiver of Security Bond (NCUC
Docket Nos. G-38, Sub. 3 and G-40).
D-2 Order of the NCUC in Docket Nos. 38, Sub. 3, and
G-40, dated March 9, 1998.
E Map of natural gas service areas of SoCalGas,
SDG&E and Frontier, common supply basins, major
interstate pipelines and market centers and hubs.
(To be filed by amendment - paper format filing).
F-1 Preliminary opinion of Reid & Priest LLP, special
counsel to Pacific and Enova. (To be filed by
amendment).
F-2 Past-tense opinion of Reid & Priest LLP, special
counsel to Pacific and Enova. (To be filed by
amendment).
43
H Proposed form of Federal Register notice.
I Description of Economies and Efficiencies and
Estimated Dollar Savings.
B. FINANCIAL STATEMENTS.
--------------------
FS-1: Pacific Enterprises Consolidated Balance
Sheet as of March 31, 1998 (incorporated by
reference to the Quarterly Report on Form 10-
Q of Pacific Enterprises for the fiscal
quarter ended March 31, 1998, in File No. 1-
0040).
FS-2: Enova Corporation Consolidated Balance Sheet
as of March 31, 1998 (incorporated by
reference to the Quarterly Report on Form 10-
Q of Enova Corporation for the fiscal quarter
ended March 31, 1998, in File No. 1-11439).
FS-3: Pacific Enterprises Consolidated Statement of
Income for the quarter ended March 31, 1998
(incorporated by reference to the Quarterly
Report on Form 10-Q of Pacific Enterprises
for the fiscal quarter ended March 31, 1998,
in File No. 1-0040).
FS-4: Enova Corporation Consolidated Statement of
Income for the quarter ended March 31, 1998
(incorporated by reference to the Quarterly
Report on Form 10-Q of Enova Corporation for
the fiscal quarter ended March 31, 1998, in
File No. 1-11439).
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.
----------------------------------------
The transaction does not involve a "major federal action"
nor will it "significantly affect the quality of the human
environment" as those terms are used in section 102(2)(C) of the
National Environmental Policy Act. The transaction that is the
subject of this Application or Declaration will not result in
changes in the operation of the Applicants or their respective
subsidiaries that will have an impact on the environment. The
Applicants are not aware of any federal agency that has prepared
or is preparing an environmental impact statement with respect to
the transaction.
44
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, as amended, the undersigned companies have
duly caused this Application or Declaration filed herein to be
signed on their behalf by the undersigned thereunto duly
authorized.
PACIFIC ENTERPRISES
By: /s/ Warren I. Mitchell
-----------------------
Name: Warren I. Mitchell
Title: Executive Vice President
ENOVA CORPORATION
By: /s/ Donald E. Felsinger
------------------------
Name: Donald E. Felsinger
Title: President and Chief
Operating Officer
Date: June 15, 1998
45
EXHIBIT INDEX
Exhibit Description
------- -----------
A-1 Articles of Organization of Frontier Energy LLC.
A-2 Operating Agreement of Frontier Energy LLC.
D-1 Application of Frontier Utilities of North
Carolina and Frontier Energy LLC for Approval of
Final Financing Plan, to Transfer Certificates,
and for Approval of Waiver of Security Bond (NCUC
Docket Nos. G-38, Sub. 3 and G-40).
D-2 Order of the NCUC in Docket Nos. 38, Sub. 3, and
G-40, dated March 9, 1998.
"P" E Map of natural gas service areas of SoCalGas,
SDG&E and Frontier, common supply basins, major
interstate pipelines and market centers and hubs.
(To be filed by amendment - paper format filing).
F-1 Preliminary opinion of Reid & Priest LLP, special
counsel to Pacific and Enova. (To be filed by
amendment).
F-2 Past-tense opinion of Reid & Priest LLP, special
counsel to Pacific and Enova. (To be filed by
amendment).
H Proposed form of Federal Register notice.
I Description of Economies and Efficiencies and
Estimated Dollar Savings.
C-0445838
----------------------
FILED
1:56 PM
EFFECTIVE DEC 29, 1997
------------
ELAINE F. MARSHALL
SECRETARY OF STATE
NORTH CAROLINA
ARTICLES OF ORGANIZATION
97 363 9082
OF
FRONTIER ENERGY, LLC
Pursuant to Section 57C-2-20 of the General Statutes of North Carolina,
the undersigned do hereby submit these Articles of Organization for the purpose
of forming a limited liability company.
1. The name of the limited liability company is Frontier Energy, LLC.
2. The latest date on which the limited liability company is to dissolve is
December 31, 2047.
3. The name and address of each organizer executing these Articles of
Organization is as follows:
Frontier Pacific, Inc. Frontier Utilities of North Carolina,
Inc.
633 West Fifth Street, Suite 5200 1919 North Bridge Street
Los Angeles, California 90071 Elkin, North Carolina 28621
4. The street address, which is also the mailing address, and county of
the initial registered office of the limited liability company is 225
Hillsborough Street, Raleigh, Wake County, North Carolina 27603.
5. The name of the initial registered agent is C T Corporation System.
6. All of the members by virtue of their status as members shall be
managers of this limited liability company.
7. These Articles will be effective upon filing.
This the 29th day of December, 1997.
FRONTIER PACIFIC, INC., Organizer FRONTIER UTILITIES OF NORTH
CAROLINA, INC., Organizer
By: /s/ Donald C. Liddell By: /s/ Robert J. Oxford
------------------------------------ ------------------------------
Name: Donald C. Liddell Name: Robert J. Oxford
------------------------------------ ------------------------------
Title: Secretary Title: President
------------------------------------ ------------------------------
FRONTIER ENERGY LLC
OPERATING AGREEMENT
THIS FRONTIER ENERGY LLC OPERATING AGREEMENT (this "Agreement") is made
and entered into as of December 15, 1997 (the "Effective Date"), by and among
----------- -
Frontier Utilities of North Carolina, a North Carolina corporation ("FUNC"), and
Frontier Pacific, Inc., a Delaware corporation ("Pacific"). Capitalized terms
used herein and not otherwise defined shall be used with the meanings given them
in Exhibit A to this Operating Agreement.
---------
WHEREAS, the Frontier Energy LLC (the "Company") was formed for the
purpose of designing, engineering, financing, constructing, testing, managing,
marketing, owning and operating a local gas distribution company in the
certificated area in North Carolina (the "Project" or the "System");
WHEREAS, FUNC is a wholly-owned subsidiary of Frontier Utilities, Inc.,
a Colorado corporation ("Frontier Colorado"), a majority owned subsidiary of
ARB, Inc., a California corporation ("ARB"). As a condition to its execution of
this Operating Agreement, Energy Pacific required Frontier Colorado to execute
and deliver to it a Funding Agreement, and to be bound under certain other
obligations under this Operating Agreement;
WHEREAS, Pacific is a wholly-owned subsidiary of Energy Pacific LLC, a
California limited liability company ("Energy Pacific"), which is owned 50-50 by
subsidiaries of each of Pacific Enterprises and Enova Corporation. As a
condition to its execution of this Operating Agreement, Frontier Colorado
required Energy Pacific to execute and deliver to it an Agreement to Fund
Certain Obligations, and to be bound under certain other obligations under this
Operating Agreement;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Members agree as follows:
SECTION 1 - DEFINITIONS
For the purposes of this Agreement, the definitions shall be as set
forth in Exhibit A attached hereto and incorporated herein by reference.
---------
SECTION 2 - FORMATION OF COMPANY
2.1. Formation. Pacific and FUNC constitute themselves as Members under
---------
the North Carolina Limited Liability Company Act for the purpose of designing,
engineering, financing, constructing, testing, managing, marketing and operating
the System.
2.2. Name. The Company shall operate under the name "Frontier Energy
----
LLC", or such other name as the Board of Directors may select. Either Member
shall execute any assumed or fictitious name certificate or certificates
required by law to be filed in connection with the formation of the Company and
shall cause such certificate or certificates to be filed in the appropriate
offices as required by law.
2.3. Place of Business. The principal place of business for the Company
-----------------
is Elkin, North Carolina or such other place or places as shall be unanimously
agreed upon by the Members.
2.4. Company Property. All Company Property shall be deemed owned by
----------------
the Company as an entity, and no Member, individually, shall have any ownership
of such property. The Members hereby expressly covenant and agree to waive any
and all rights to partition the Company Property or cause a dissolution of the
Company except to the extent provided in Section 5.10(c), below. A Member who
breaches this covenant shall be liable to the non-breaching Member for damages,
including, without limitation, reasonable costs and attorneys' fees. A Member's
interest in the Company shall be considered personal property for all purposes.
2.5. No Other Agreement Or Restriction. Except as expressly provided
---------------------------------
herein, this Agreement does not limit the power or rights of any Member hereto
to carry on its business for its own sole benefit.
SECTION 3 - MEMBERSHIP AND ECONOMIC INTERESTS; CAPITAL
CONTRIBUTIONS;
ADDITIONAL CAPITAL CONTRIBUTIONS
3.1. Membership and Economic Interests. (a) Each Member's "Economic
---------------------------------
Interest" shall be that Member's ownership share in the Company's Profits and
Losses, and the Member's interest in and right to receive distributions of the
Company's assets pursuant to this Agreement and the Act, but shall not include
any right of the Member to participate in the management or affairs of the
Company. Each Member's "Membership Interest" shall mean that Member's Economic
Interest and any and all right of that Member to participate in the management
or affairs of the Company, including without limitation all of the Member's
voting rights. Each Member's Economic Interest and Membership Interest shall be
as set forth on Schedule 3.1, as it may be amended from time to time to reflect
------------
changes in such interests.
(b) The Members agree to amend Schedule 3.1 whenever necessary.
------------
Membership Interests and Economic Interests may be changed only by amendment of
Schedule 3.1. Until agreed otherwise by all of the Members, each Member's
- ------------
Economic Interest shall be a percentage determined by dividing such Member's
aggregate Capital Contributions by the aggregate Capital Contributions
contributed by all Members. Notwithstanding the foregoing, with respect to
capital contributions made following the funding of the first $12,000,000 of
capital contributions by the Members, such additional capital contributions
shall, to the extent they are made in any manner disproportionate with the
Members' Economic Interests immediately prior to such contribution, impact the
percentage Economic Interests of the Members in the manner set forth in Section
3.4(b).
3.2. Initial Capital Contributions; Conditions Precedent to Capital
--------------------------------------------------------------
Contributions. As of the date hereof, Pacific and FUNC have made the Capital
- -------------
Contributions shown on Schedule 3.1. Pacific's Capital Contribution shall be
------------
made in cash. FUNC's Capital Contribution shall be made by contribution of the
Certificates of Public Convenience and Necessity (the "Certificates") issued to
FUNC with respect to the construction and operation of a System for local
natural gas distribution in the certificated area in North Carolina counties by
the North Carolina Utilities Commission (the "NCUC"). The Members have reviewed
the Certificates, the conditions to which they are subject, the efforts
undertaken and financial resources expended to obtain the Certificates and the
market conditions for the System and have determined that the Certificates have
a fair value to the Company in monetary terms equal to the initial Capital
Contribution as shown on Schedule 3.1.
------------
3.3. Further Budgeted Capital Contributions. (a) In addition to the
--------------------------------------
initial Capital Contributions referenced in Section 3.2, the Members agree that
they shall make, in the aggregate, additional Capital Contributions ("Further
Contributions") in the aggregate amount set forth with respect thereto on
Schedule 3.1. Of such Further Contributions, FUNC shall contribute not less than
- ------------
$2,000,000 to the Company and FUNC may at its election make additional capital
contributions in an amount that, when aggregated with Further Contributions
required to be made in accordance with the foregoing, equal one-half of all
Further Contributions. Pacific shall contribute, in the aggregate, one-half of
all Further Contributions plus the amount, if any, of the Further Contributions
that FUNC is entitled to contribute but fails to contribute.
(b) Further Contributions shall be made from time to time at such times
as determined by the Board of Directors for purposes of funding the construction
and development of the System as found necessary and approved by the Board of
Directors.
(c) The parties Capital Contributions and Further Contributions have
been determined with reference to the construction and development budget for
the Project, the general outline of which is set forth as Appendix 3.3, which
------------
construction budget shall be finalized by the Board of Directors within 30 days
following the Effective Date ("Construction Budget"). On approval by the Board
of Directors, the Construction Budget as approved shall be and supersede
Appendix 3.3 and shall provide the general timing for making Further
- ------------
Contributions.
3.4. Capital Calls. (a) If the Board of Directors shall determine that
-------------
(i) additional equity capital is needed immediately for the activities of the
Company, beyond that which had been contemplated for Further Contributions, (ii)
the Company would incur material liabilities or otherwise suffer serious harm if
the capital were not made available, (iii) the capital is not reasonably
available from any other source, and (iv) all Further Contributions have been
made in accordance with the terms herein, then the Board of Directors shall give
each Member a written notice (the "Call Notice") setting forth (1) the aggregate
amount of Additional Capital needed (the "Additional Capital"), (2) each
Member's proportionate share of such Additional Capital and (3) the due date
(the "Due Date") of such contribution, such Due Date to be not less than 15 days
after the deemed delivery date of such Call Notice; provided however, that the
amount of any such capital call made pursuant to this Section shall not exceed
the amounts set forth in the Construction Budget approved by the Board of
Directors. Not later than the Due Date, each Member shall contribute cash in an
amount equal to the product of Additional Capital called times such Member's
Economic Interest.
(b) If either Member fails to make any contribution of Additional
Capital within 10 days after the Due Date, the other Member shall be given the
opportunity to make the needed Capital Contribution and upon any such Capital
Contribution the Economic Interests of the Members shall be adjusted to the
percentages determined with respect to each Member by calculating (i) such
Member's Economic Interest expressed as a percentage multiplied by the Market
Value of the Company determined immediately prior to and without giving effect
to the additional contribution, plus (ii) the amount of the additional
contributions actually made that are represented by such Member's contribution,
and dividing such sum by (iii) the aggregate of the Market Value (as determined
in (i) above), plus the amount of contributions actually made.
3.5. Withdrawal Election. Notwithstanding the foregoing, each Member,
-------------------
respectively, may, upon written notice to the other, elect to be excused from
making any Further Contributions or contributions of Additional Capital as
otherwise provided herein or, at its election, may immediately terminate this
Agreement upon the occurrence of any of the events set forth below (each, a
"Withdrawal Event"). Such election may be exercised only by written notice given
by the electing Member to the other Member and to the Company within 15 days of
the occurrence of the Withdrawal Event. The following shall constitute
Withdrawal Events:
i. with respect only to Pacific, assertion by the SEC that
Pacific's ownership interest in the System could affect the exemption
from PUHCA of Pacific Enterprises (or its successor in interest as a
result of a merger which is pending as of the date hereof) or result in
initiation of an enforcement action by the SEC; and
ii. with respect only to FUNC, assertion by the SEC that
FUNC's ownership interest in the System could affect the exemption of
FUNC or any of its affiliate corporations from PUHCA or result in
initiation of an enforcement action by the SEC.
Upon exercise by a Member of such withdrawal election, such Member's interests
shall be subject to the provisions of Sections 10.1 and 13.4 below.
SECTION 4 - ALLOCATIONS AND DISTRIBUTIONS
4.1 Profits. Profits for any fiscal year shall be allocated to
--- -------
the Members in proportion to their Economic Interests.
4.2 Losses. Losses for any fiscal year shall be allocated to the
--- ------
Members in proportion to their Economic Interests.
4.3 Special Allocations. The special allocations under Regulations
--- -------------------
Section 1.704-2(f) under the Code shall be made in the order set forth in
Exhibit B attached hereto and specifically incorporated by reference as if
- ---------
separately set forth herein.
4.4 Tax Allocations: Code Section 704(c). If there is any variance
--- -----------------------------------
between the adjusted basis (for federal income tax purposes) of any property
contributed to the Capital of the Company and its initial Gross Asset Value,
then income, gain, loss, and deductions with respect to such property shall,
solely for tax purposes, be allocated among the Members in the manner which is
most equitable to both Members, in accordance with Code Section 704(c) and the
Regulations thereunder.
In the event the Gross Asset Value of any Company Asset is adjusted pursuant to
the definition of Gross Asset Value, and such adjustment results in a variance
between the adjusted basis of such asset for federal income tax purposes and its
Gross Asset Value, then subsequent allocations of income, gain, loss, and
deduction with respect to such asset shall similarly be made in the manner which
is most equitable to both Members, in accordance with Code Section 704(c) and
the Regulations thereunder.
Any elections or other decisions relating to such allocations shall be made by
the CFO, subject to the limitations in Section 6.5 and following the receipt of
advice from the Company's accountants, in any manner that reasonably reflects
the purpose and intention of this Agreement and is consistent with the
requirements of law.
4.5 Tax Distributions. During the first ten (10) days of each month
--- -----------------
during which a quarterly estimated tax payment is due under the Code, the Board
of Directors shall, subject to any limitations or covenants of any loan or
credit agreements of the Company, cause to be distributed to the Members, in
proportion with their Economic Interests, forty-two percent (42%) of the
Company's pre-tax income (determined in accordance with generally accepted
accounting principles applied on a consistent basis).
4.6 Distributions - Net Cash From Operations. Except as otherwise
--- -------------
provided in Section 10 hereof, Net Cash From Operations, if any, and all other
distributions other than those made in connection with a liquidation of the
Company shall be distributed, at such times as the Board of Directors may
determine, to the Members in proportion to their Economic Interests.
4.7 Distributions - Net Cash From Sale, etc.. Net cash from the sale,
--- ----------------------------------------
condemnation, casualty loss adjustment or other disposition of all or a
substantial part of the Property following the occurrence of a Liquidating Event
shall be distributed as provided in Section 10.2 hereof.
4.8 Allocation of Profits and Losses from Sale, etc..
--- ------------------------------------------------
(a) The Profits arising from the sale, condemnation, casualty
loss adjustment or other disposition of all or a substantial part of the
Property or upon a termination of the Company shall be allocated among the
Members as follows:
First, if any Members have an Adjusted Capital Account
Deficit, Profits shall be credited to the Capital Accounts of such
Members in proportion to such deficits until such time as the Adjusted
Capital Account Deficits of all such Members equal zero;
Second, Profits shall be allocated pro rata to the Members
until the balance in each Member's Capital Account equals the amount of
such Member's Capital Contribution; and
Third, the balance of such Profits shall be allocated to the
Members pro rata in accordance with their respective Economic
Interests.
(b) The Losses arising from the sale, condemnation, casualty
loss or other disposition of all or a substantial part of the Company's assets
or upon a termination of the Company shall be allocated among the Members as
follows:
First, if the Capital Accounts of any Members have a positive
balance, Losses shall be allocated to the Capital Accounts of such
Members in proportion to such positive balances, until such time as the
Capital Accounts of all such Members equal zero; and
Second, the balance of such Losses shall be allocated to the
Members pro rata in accordance with their respective Economic
Interests.
4.9. Amounts Withheld. All amounts withheld pursuant to the Code or any
--- ----------------
provision of any state or local tax law with respect to any payment or
distribution to the Company or the Members shall be treated as amounts
distributed to the Members pursuant to Section 4.5 for all purposes under this
Agreement. The CFO, subject to the limitations in Section 6.5, may allocate any
such amounts among the Members in any manner that is in accordance with
applicable law.
SECTION 5 - MEMBERS; BOARD OF DIRECTORS
5.1 Voting Rights. All Members who have not Dissociated shall be
-------------
entitled to vote on any matter submitted to a vote of the Members. There shall
be one hundred (100) voting points, and each Member shall have one point for
each percentage point of Economic Interest held by such Member from time to time
with changes in voting points effective at the same time as the corresponding
changes in the parties' Economic Interests.
5.2 Management by Board of Directors. The business and affairs of the
--------------------------------
Company shall be managed under the direction and control of a Board of
Directors, consisting of three directors appointed by Pacific and three
appointed by FUNC; provided that if the Restructuring occurs and is not
rescinded (a) Pacific shall only appoint one Director and (b) management of the
Company shall be vested in a Manager. Any Member, at any time and from time to
time, may remove any Director appointed by it and may designate an individual to
replace a Director previously serving as appointee of such Member. Neither
Member may take any action on behalf of the Company, other than voting as a
Member and appointing its Directors, without the approval of the Board of
Directors, as provided below. Each Member delegates to the Board of Directors
the exclusive authority to manage the Company's business except as to those
matters as to which (a) the approval of the Members is expressly required by
this Agreement or by the Act, (b) the Board of Directors fails or refuses to
act, or (c) the Board of Directors submits the matter for approval to the
Members. The authority of the Board of Directors shall be delegated to officers
to the extent provided in Section 6, subject to the limitations provided
therein. Decisions of the Board of Directors within the scope of its authority
shall be binding on the Company and each Member. Any Member who takes any action
or binds the Company in violation of this Section 5.2 shall be solely
responsible for any loss and expense incurred as a result of the unauthorized
action and shall indemnify and hold the Company and the other Member harmless
with respect to the loss or expense arising out of or relating thereto.
5.3 Chair. The Directors shall elect a chair for a one-year term. The
-----
chair shall alternate each year between Pacific and FUNC. The chair shall
preside at all meetings of the Board, and shall have the power to call meetings,
but no other authority as chair.
5.4 Meetings; Minutes.
-----------------
(a) Members. Meetings of the Members for any purpose may be called
-------
by the President appointed pursuant to Section 6 or by any Member.
(b) Board of Directors. Meetings of the Board of Directors may be
------------------
called by the President appointed pursuant to Section 6, the Chairman or any
Director, provided that the Board of Directors as a group shall have the
authority to establish a regular meeting schedule.
Attendance at meetings of either the Members or the Board of Directors may be by
speaker telephone or other communications device whereby all those participating
in the meeting may hear each other. The Board of Directors shall keep written
minutes of all meetings, and the minutes of each meeting shall be signed by the
Directors attending or participating by conference call. The minutes shall be
included in the records of the Company.
5.5 Place of Meetings; Notice. The call for each meeting shall specify
-------------------------
the location for the meeting, which may be either within or outside the State of
North Carolina. If no designation is made, the place of meeting shall be the
principal executive office of the Company. Written Notice stating the place, day
and hour of the meeting and the purpose or purposes for which the meeting is
called shall be sent not less than three (3) nor more than sixty (60) days
before the date of the meeting, by or at the direction of the President or
person calling the meeting, to each Member or Director entitled to vote at such
meeting. In lieu thereof, special meetings may be called on telephonic notice
given not less than 48 hours prior to the time for the meeting.
5.6 Meeting of All Members or Directors. If all of the Members or
-----------------------------------
Directors shall meet at any time and place and consent to the holding of a
meeting at such time and place, such meeting shall be valid without call or
notice, and at such meeting lawful action may be taken.
5.7 Rules and Guidelines; Project Implementation Plan. The Board of
-------------------------------------------------
Directors may adopt such rules and guidelines governing the operation of the
Company and the construction of the System ("Rules and Guidelines") as it deems
appropriate. The Board of Directors shall finalize a Project Implementation Plan
within ninety (90) days of the Effective Date. Any amendment to the Project
Implementation Plan or material deviation therefrom shall require approval of
the Board of Directors as provided in Section 6.4(p), below.
5.8 Record Date. For the purpose of determining Members entitled to
--- -----------
notice of or to vote at any meeting of Members or any adjournment thereof, or
Members entitled to receive payment of any distribution, or in order to make a
determination of Members for any other purpose, the record date for the
determination of Members shall be the date on which notice of the meeting is
mailed or the date on which the resolution declaring such distribution is
adopted, as the case may be. When a determination of Members entitled to vote at
any meeting of Members has been made as provided in this Section, such
determination shall apply to any adjournment thereof.
5.9 Quorum. (a) Members. Attendance by all Members shall constitute
--- ------ -------
a quorum at any meeting of Members.
(b) Directors. Attendance by at least one Director appointed by each
---------
Member shall constitute a quorum at any meeting of the Board of Directors.
5.10 Manner of Acting. (a) Members. If a quorum is present, the
---------------- -------
affirmative vote of Members holding 51% of the Economic Interests represented in
person or by proxy shall be the act of the Members, unless the vote of a greater
or lesser proportion or number is otherwise required by the Act, by the
Certificate or by this Agreement. In no event shall the percentage of Economic
Interests required to be voted in favor of an issue be less than the percentage
of Director votes that would be required if the same matter were submitted to
the Board of Directors.
(b) Directors. The Directors shall vote as representatives of the
---------
Members, in the same proportion as the Members' Economic Interests. If three (3)
Directors representing a Member are present at a meeting, each Director shall
vote one-third of the voting points allocated to such Member. If two (2)
Directors representing a Member are present at a meeting, each Director shall
vote one-half of the voting points allocated to such Member. If only one such
Director is present, that Director shall vote all of the points allocated to
such Member. The affirmative vote of Directors voting 51 points shall be the act
of the Board.
(c) Deadlocks. A deadlock shall be deemed to exist if, with respect to
---------
any material issue submitted to either the Members or the Board of Directors
concerning the Company's affairs or management, both Members are represented and
there are not sufficient votes for resolving the issue as a result of each
Member or its Director(s) voting differently from the other Member or its
Director(s) on such issue. If a deadlock occurs and is not resolved, then the
issue shall promptly, and in no event any later than thirty (30) days after the
first occurrence of such deadlock, be submitted for resolution to a panel of the
chief executive officers of the second tier parent entities of each Member (as
of the date of this Agreement, ARB and Energy Pacific). In the case of any issue
referred to such a panel, representatives of each Member shall be given an
opportunity to make a presentation concerning the issue to the chief executive
officer with respect to the other Member. If they are unable to resolve the
matter within thirty (30) days of submission, they shall try to agree on a
neutral third party to whom the matter may be submitted for resolution. If they
are unable to agree on the selection of the neutral third party within sixty
(60) days after the date on which the matter was originally referred to them,
(i) either party may submit the matter to Arbitration, or (ii) the Company shall
be dissolved and its assets sold, as provided in Section 10.2, below. Any
decision of either the chief executives jointly or of the neutral third party or
pursuant to an Arbitration, shall be final and binding on the Members. The
Members agree that neither they nor any of their Affiliates nor any entities in
which they have an ownership or controlling interest shall purchase, lease or
otherwise acquire the assets of the Company in any sale resulting from the
dissolution of the Company pursuant to option (ii) above in this subsection (c).
Notwithstanding the foregoing, either Member or any of its Affiliates may
purchase the assets of the Company or all of the Membership Interests of the
other Member, on terms agreed to with such other Member, at any time before
option (ii) is reached.
For the purposes hereof, "Arbitration" shall mean the following
procedures: the dispute shall first be submitted to non-binding mediation in
accordance with the rules established by the American Arbitration Association.
If mediation does not result in the resolution of such dispute within thirty
(30) days, the matter shall be submitted to binding arbitration administered by
the American Arbitration Association under its Commercial Arbitration Rules, as
further provided in Section 21 hereof. Both the mediation and the arbitration
shall be held in Los Angeles, California. Judgment on any award rendered by
either the neutral third party referenced in the fourth sentence of this
subsection (c) or the arbitrator(s) may be entered in any court having
jurisdiction.
(d) Votes by Interested Member or Director. Unless otherwise expressly
--------------------------------------
provided herein or required under applicable law, a Member, or Directors
appointed by a Member who has or have an interest (economic or otherwise) in the
outcome of any particular matter upon which the Members or Directors,
respectively, vote or consent, may vote or consent upon any such matter, without
regard to such interest.
5.11 Proxies. At all meetings of Members, a Member may vote in person
-------
or by proxy executed in writing by the Member or by a duly authorized
attorney-in-fact. Such proxy shall be filed with the President before or at the
time of the meeting.
5.12 Action Without a Meeting. Action required or permitted to be taken
------------------------
at a meeting of Members or Directors may be taken without a meeting if the
action is evidenced by one or more written consents describing the action taken,
signed by each Member or Director, as the case may be, entitled to vote and
delivered to the President for inclusion in the minutes or for filing with the
Company records. Action taken under this Section is effective when all Members
or Directors, as the case may be, entitled to vote have signed the consent,
unless the consent specifies a different effective date. The record date for
determining Members entitled to take action without a meeting shall be the date
the first Member signs a written consent.
5.13 Waiver of Notice. When any notice is required to be given to any
----------------
Member or Director, a waiver thereof in writing signed by the person entitled to
such notice, whether before, at, or after the time stated therein, shall be
equivalent to the giving of such notice.
5.14 Liability of Members. No Member shall be liable as such for the
--------------------
liabilities of the Company. The failure of the Company to observe any
formalities or requirements relating to the exercise of its powers or management
of its business or affairs under this Agreement or the Act shall not be grounds
for imposing personal liability on the Members for liabilities of the Company.
5.15 (a) Indemnification of Parties. The Company shall indemnify a
--------------------------
Person who was or is a party or is threatened to be made a party to a
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, because that Person is or was a
Member, Director, employee or agent of the Company or is or was serving at the
request of the Company as a director, officer, trustee, partner, fiduciary,
employee or agent of another corporation, partnership, joint venture, trust, or
other enterprise, against expenses, including reasonable attorneys' fees
(subject to Section 5.15(e) below), judgments, fines and amounts paid in
settlement actually and reasonably incurred by that Person in connection with
such an action, suit or proceeding; provided that no indemnification may be
provided for a Person with respect to a matter for which that Person is finally
adjudicated:
i. Not to have acted honestly or in the reasonable belief
that that Person's action was in, or not opposed to, the best interests
of the Company or its Members;
ii. With respect to a criminal action or proceeding, to have
had reasonable cause to believe that that Person's conduct was
unlawful; or
iii. To have acted in a grossly negligent or fraudulent
manner, or to have engaged in willful misconduct.
A final adjudication as to any one of items i, ii or iii above shall be
sufficient to relieve the Company from any obligation to indemnify. The
termination of an action, suit or proceeding by judgment, order or conviction
adverse to that Person, or by settlement or plea of nolo contendere or its
equivalent, does not of itself create a presumption that that Person did not act
honestly or in the reasonable belief that that Person's action was in or not
opposed to the best interests of the Company or its Members and, with respect to
a criminal action or proceeding, had reasonable cause to believe that that
Person's conduct was unlawful.
(b) Indemnification Prohibited if Party Liable to Company; Exception.
----------------------------------------------------------------
Notwithstanding any provision of subsection (a), the Company shall not indemnify
a Person with respect to a claim, issue or matter asserted by or in the right of
the Company for which that Person is finally adjudicated to be liable to the
Company unless the court in which the action, suit or proceeding was brought
determines that, in view of all the circumstances of the case, that Person is
fairly and reasonably entitled to indemnity for such amounts as the court
determines reasonable.
(c) Indemnification Proper and in the Best Interests of the Company.
---------------------------------------------------------------
Any indemnification under subsection (a), may be made by the Company only as
authorized in the specific case upon a determination by the Board of Directors
or Members that indemnification of the Member, Director, employee or agent is
proper in the circumstances and in the best interests of the Company.
(d) Payment of Expenses in Advance. Expenses incurred in defending a
------------------------------
civil, criminal, administrative or investigative action, suit or proceeding
shall be paid by the Company in advance of the final disposition of that action,
suit or proceeding upon a determination made in accordance with the procedure
established in subsection (c) that, based solely on the facts then known to
those making the determination and without further investigation, the Person
seeking indemnification satisfied the standard of conduct prescribed by
subsection (a), and upon receipt by the Company of: (i) a written undertaking by
or on behalf of the Member, Director, employee or agent to repay that amount if
that Person is finally adjudicated not to be entitled to indemnification under
this Agreement, and (ii) a written affirmation by the Member, Director, employee
or agent that the Person has met the standard of conduct necessary for
indemnification by the Company as authorized in this section. The undertaking
required by subsection (i) must be an unlimited general obligation of the Person
seeking the advance but need not be secured and may be accepted without
reference to financial ability to make the repayment.
(e) Restrictions on Payment for Separate Counsel. The Company shall not
--------------------------------------------
pay for counsel for any Person when such counsel is not also counsel for the
Company in the proceeding unless expressly approved in advance.
(f) Intent; Amendments. It is not the intent of the foregoing to
------------------
provide for indemnification outside the scope of what is permitted under
applicable law, including the Act, as it may be amended from time to time. If
any future amendment to the Act or other applicable law reduces the scope of
permitted indemnification, this Section 5.15 shall be deemed to be amended to
eliminate any provision which is not thereafter permitted. The right to
indemnification under this Section 5.15 shall be fully vested with respect to
any matter occurring while this Section 5.15 was in effect in its current form.
5.16 Conflicts of Interest. A Member, a Director, or an Affiliate of
---------------------
either Member, does not violate a duty or obligation to the Company merely
because the Member's or the Director's or such Affiliate's conduct -- which
conduct may include lending money to, or transacting other business with, the
Company -- furthers the Member's or the Director's or such Affiliate's own
interest. A Member, Director or Affiliate of either Member may enter into
agreements, transactions, contracts, instruments or other transactions with the
Company so long as any agreement, contract, instrument or other transaction
between the Company and the Member, Director or such Affiliate is either (i)
entered into pursuant to FUNC's preferential bidding rights, as provided for in
Section 5.20, or (ii) at no greater than market rates, on commercially
reasonable terms and conditions such as are no less favorable to the Company
than would be available in a bona fide arm's length transaction with a Person
which is not an Affiliate, and has been approved by the Board of Directors or
the Members (such approval not to be unreasonably withheld if it has been
determined that the proposed transaction meets the other conditions of this
subsection (ii)).
The rights and obligations of a Member or a Director who thus lends
money to or transacts business with the Company are the same as those of a
person who is not a Member or Director, subject to other applicable law and the
terms of this Agreement. No transaction with the Company shall be voidable
solely because a Member, a Director or an Affiliate of either Member has a
direct or indirect interest in the transaction if either the transaction is fair
to the Company, or the Board of Directors or the Members, in either case knowing
the material facts of the transaction and the Member's or Director's or
Affiliate's interest, authorize, approve, or ratify the transaction.
5.17 Pacific Responsibilities and Rights.
-----------------------------------
(a) Responsibilities. Pacific will provide at its expense, from its own
----------------
resources or that of its Affiliates, the services of its Directors and, at any
time before Restructuring or after rescission of Restructuring, its Officers.
All other support provided by Pacific or its Affiliates to the Company shall be
provided pursuant to a Support Services Agreement.
(b) Matters to be Undertaken by Pacific at the Company's Expense.
------------------------------------------------------------
Pacific shall provide, by itself or through its Affiliates, certain services
pursuant to a Support Services Agreement, at the Company's expense. The
following areas are areas of primary and not exclusive authority. FUNC shall be
allowed reasonable participation in and shall have an obligation to cooperate
with Pacific in connection with the implementation of the business objectives of
the Company. Pacific's areas of primary responsibility are as follows:
i. Through its Affiliate Energy Pacific, will provide primary
system design and system planning activities in consultation with
FUNC's Affiliate, ARB. All work completed by Pacific, or its
Affiliates, will be undertaken pursuant to a separate support services
agreement that will define each activity and the cost for the work to
be completed prior to work beginning.
ii. Responsibility for system engineering will be shared by
Energy Pacific and ARB to ensure construction flexibility yet maintain
proper controls for the Company.
iii. Responsibility for marketing, sales and customer service,
as well as regulatory compliance and local franchise agreements and
government relations.
iv. Responsibility for negotiation of gas supply and
transportation agreements, for development of operating manuals and
procedures.
v. Each Member agrees that neither it nor any of its
Affiliates will provide any Gas Distribution Service in or to any
community in the Selected Market or to any entity providing such
service without first receiving the approval of the other Member.
5.18 FUNC's Responsibilities and Rights.
----------------------------------
(a) Matters to be Undertaken at FUNC Expense; Name. FUNC will provide
----------------------------------------------
at its expense, from its own resources or that of its Affiliates, the services
of its Directors and, at any time before Restructuring or after recission of
Restructuring, its Officers. All other support provided by FUNC or its
Affiliates to the Company shall be provided pursuant to a Support Services
Agreement. In addition, FUNC hereby permits and licenses the Company to use as
part of its name the word "Frontier". Such permit and license shall continue
after the transfer provided for in Section 3.2.
(b) Matters to be Undertaken by FUNC at the Company's Expense. FUNC
---------------------------------------------------------
shall provide, by itself or through its Affiliates, certain services pursuant to
a Support Services Agreement, at the Company's expense. The following areas are
areas of primary and not exclusive authority. Pacific shall be allowed
reasonable participation in and shall have an obligation to cooperate with FUNC
in connection with the implementation of the business objectives of the Company.
FUNC's areas of primary responsibility are as follows:
i. An Affiliate of FUNC, ARB, will contract with the Company
for the construction of the gas transmission and distribution system.
The contract will be on a fixed price or cost plus a fixed fee basis
for completion of the work and will provide for quality and safety
inspections by the Company. In addition, ARB will provide system design
and system planning activities in support of Energy Pacific activities.
The foregoing activities are not expected to be the exclusive
responsibilities of ARB as Pacific may participate as appropriate. All
work completed by ARB, or its affiliates, will be undertaken pursuant
to a separate support services agreement that will define each activity
and the cost for the work to be completed prior to work beginning. The
cost of the work is expected to be consistent with market value.
ii. Responsibility for system engineering will be shared by
Energy Pacific and ARB to ensure construction flexibility yet maintain
proper controls for the Company.
iii. Each Member agrees that neither it nor any of its
Affiliates will provide any Gas Distribution Service in or to any
community in the Selected Market or to any entity providing such
service without first receiving the approval of the other Member.
5.19 Procurement of Goods and Services. FUNC may elect to make
---------------------------------
available any of its assets and services, or those of its Affiliates to the
Company. Except as provided herein for specific items, all goods and services
acquired by the Company shall, whenever practical, be acquired on a competitive
bid basis. Notwithstanding any other provision of this Agreement, any services
of either Member used by the Company whose pricing is not explicitly provided
for elsewhere in this Agreement or in a Support Services Agreement will be
purchased at Market Value.
SECTION 6 - OFFICERS
6.1. Appointment of Officers.
-----------------------
(a) President. The day-to-day affairs of the Company shall be managed
---------
by a President and such other officers, appointed to such positions and on such
terms as the Board of Directors determines; provided that no officer shall have
a title that includes the word "manager", it being the intent that no person
shall be a manager for purposes of the Act. Whenever in this Agreement the word
"President" is used, it shall also mean such other duly authorized officer as is
appointed by the Board of Directors to act in the absence of the President. The
President shall be jointly selected by the Members.
(b) Chief Financial Officer. The Chief Financial Officer ("CFO") shall
-----------------------
be jointly selected by the Members. The CFO shall have such duties as are
provided by the Board of Directors and in this Agreement.
6.2. Annual Budget. No later than forty-five (45) days before the end
-------------
of each fiscal year, the President shall prepare and send to the Board of
Directors proposed annual budgets of operations, maintenance, administrative and
marketing expenses, capital expenditures, revenues and cash flows for the next
fiscal year. Such budgets shall be acted on by the Board of Directors prior to
the end of the fiscal year; provided that should the Board of Directors fail to
approve any budget prior to the end of the fiscal year, then the budget for the
following year shall be based on the budget presented by the President, subject
to the following limitations (i) no line item in the budget shall be increased
year to year over the amount for such line item in the previous year's budget by
in excess of 15% and (ii) the aggregate budgeted amounts for operations,
maintenance, administrative and marketing expenses for the budget year shall not
exceed 110% of the budgeted expenses for the previous year and (iii) capital
expenditures shall be based on the Project Implementation Plan. The budget
proposed by the President as adjusted as provided above or by agreement of the
Board of Directors shall remain in effect for the balance of the next fiscal
year unless modified by action of the Board of Directors. The President shall
manage the business of the Company in accordance with such budget and shall not
take any action that materially varies from a budgeted item without the approval
of the Board of Directors except upon compliance with the provisions of Section
6.4(g).
6.3. Authority and Duties of President.
---------------------------------
(a) Authority. The President shall manage the Company under the
---------
supervision of the Board of Directors. Subject to the specific limitations on
the authority of the President set forth in Section 5 and Section 6.4 hereof,
the President shall have the power, on behalf of the Company, to do all things
necessary or convenient to carry out the business and affairs of the Company and
implement the decisions of the Board of Directors, including, without
limitation:
i. The institution, prosecution and defense of any Proceeding
in the Company's name;
ii. The purchase, receipt, lease or other acquisition, ownership,
holding, improvement, use and other dealing with, Property, wherever
located;
iii. The sale, conveyance, mortgage, pledge, lease, exchange, and
other disposition of Property;
iv. Entering into contracts and guaranties; incurring of
liabilities; borrowing money, issuance of notes, bonds, and other
obligations; and the securing of any of its obligations by mortgage or
pledge of any of its Property or income;
v. The lending of money, investment and reinvestment of the
Company's funds, and receipt and holding of Property as security for
repayment, including, without limitation, the lending of money to, and
otherwise helping officers, employees and agents;
vi. The conduct of the Company's business, the establishment
of Company offices, and the exercise of the powers of the Company
within or without the State;
vii. The appointment of employees and agents of the Company,
the defining of their duties and authority, the establishment of their
compensation;
viii. The payment of compensation, or additional compensation
to any or all employees on account of services rendered to the Company,
whether or not an agreement to pay such compensation was made before
such services were rendered; and
ix. The taking of any other action that furthers the business
and affairs of the Company.
(b) Duties. The President, either individually or together with such
------
other officers as are appointed by the Board of Directors, will have the
following duties:
i. evaluation, selection and purchase of System equipment
subject to prior Board of Directors approval of all capital
expenditures in excess of $100,000, individually, or in excess of
$300,000, in the aggregate, in any six month period;
ii. supervision of System design, engineering and buildout within
the design approved by the Board of Directors;
iii. construction management;
iv. timeline and budget management;
v. reporting (at scheduled or noticed meetings) to the Board of
Directors on the construction and operation of the System;
vii. all the work to be performed under the Project
Implementation Plan to build the System and all matters relating
thereto;
viii. responsibility for the compliance by the Company with
all applicable North Carolina and federal laws, rules and regulations
relating to the construction, maintenance and operation of the System,
including, without limitation, all laws, rules, regulations and
licensing requirements relating to the provision of engineering advice
and services in the State of North Carolina;
ix. coordinating the activities undertaken by the Members and
their Affiliates pursuant to Sections 5.17 and 5.18 with the other
activities of the Company; and
x. such other duties as the Board of Directors may, from time
to time, designate.
6.4. Restrictions on Authority of the President. Notwithstanding
------------------------------------------
anything to the contrary in Sections 6.2, 6.3 or elsewhere in this Agreement,
neither the President nor any other officer shall have any authority to take any
of the following actions without first obtaining the consent of the Board of
Directors as provided in Section 5, above; for all matters listed below, the
vote required shall be 51 voting points:
(a) Contracts with Members or Affiliates. Approval, pursuant to Section
------------------------------------
5.16, of the terms of any material agreement, contract, instrument or other
transaction between the Company and any Member or any Affiliate of a Member,
except as explicitly provided for elsewhere herein.
(b) Merger, Sale of Assets. Authorization of the merger or
----------------------
consolidation of the Company with any Person, any liquidation or dissolution of
the Company, any change to the form of the organization of the Company or any
sale, lease, exchange, transfer of all or substantially all of the assets of the
Company (disagreement on such vote can trigger the "put" rights in Section
13.5).
(c) Indebtedness, Including System Loan and Bonds. Authorization of the
---------------------------------------------
incurrence, assumption or guaranty by the Company of, or suffering the existence
by the Company of, the System Loan, the Bonds, and any other indebtedness except
for (A) not more than two hundred and fifty thousand dollars ($250,000) in the
aggregate during any one fiscal year and at any one time outstanding, (B)
indebtedness secured by Permitted Liens and (C) any other indebtedness in an
operating budget previously approved by the Board of Directors or otherwise
permitted under subsection (g) below.
(d) Material Agreements.
-------------------
(i) Approval of the terms of a "Material Agreement" (as
defined below),
(ii) Any material amendment or modification of any Material
Agreement,
(iii) Waiver of compliance with any material provision of a
Material Agreement,
(iv) Termination, assignment of any material rights the
Company may have under, or consenting to or permitting the assignment
by any other Person of any material right such Person may have under a
Material Agreement, or
(v) Giving consents or exercising any other material rights
under a Material Agreement.
"Material Agreement" shall mean any agreement for the construction,
installation, operation, maintenance or provision of other services to
the System with a value of over two hundred fifty thousand dollars
($250,000), or the purchase of equipment with a value of over two
hundred fifty thousand dollars ($250,000), or any other material
agreement to which the Company is a party.
(e) Contracts; Borrowing; Guaranties. Entering into contracts (i)
--------------------------------
relating to matters other than those specifically enumerated within the
definition of "Material Agreement" above that call for the payment by the
Company in excess of $100,000, or (ii) with respect to the guaranty by the
Company of the obligations of any other Person.
(f) Liens. Creating or otherwise allowing any Lien to be imposed on, or
-----
otherwise to affect, any of the Company's Property, except Permitted Liens.
(g) Litigation. Instituting, prosecuting and defending the Company in
----------
any Proceeding in the Company's name, except with the approval and direction of
the Board of Directors.
(h) Settlements. Confessing a judgment or entering into any settlement
-----------
of any dispute, where the amount of the resulting liability of the Company is
greater than fifty thousand dollars ($50,000).
(i) Budget and Capital Improvements. Approval of the annual budgets as
-------------------------------
provided in Section 6.2, and of capital expenditures exceeding the limits
therein or as otherwise approved hereunder. Notwithstanding the foregoing, the
President may authorize capital expenditures or indebtedness arising out of an
emergency which requires immediate action, so long as the President gives notice
to the Directors as soon as possible of the incurrence of such expenditures and
obtains any requisite consent to the continuation of any such expenditures after
the immediate emergency has passed.
(j) Charges. Annual approval (at the same time as the budget is
-------
approved as per paragraph (i) above) of all charges under the agreements or
contracts referenced in paragraphs (a), (d) or (i) above, and any exercise of
any material rights or elections under such agreements or contracts.
(k) Bankruptcy Filing. (i) Commencing, or causing the Company to
-----------------
commence any case, proceeding or other action (A) under any existing or future
law of any jurisdiction, domestic or foreign, relating to bankruptcy,
insolvency, reorganization or relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to adjudicate it a bankrupt or
insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or its
debts, or (B) seeking appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial part of its assets, or
making a general assignment for the benefit of its creditors; or (ii) if there
shall be commenced against the Company any case, proceeding or other action of a
nature referred to in clause (i) above, taking any action in furtherance of, or
indicating its consent to, approval of, or acquiescence, therein, or (iii)
admitting in writing its inability to pay its debts as they become due.
(l) Sale of Valuable Assets. The sale, assignment or other transfer of
-----------------------
title to any asset, or any group of assets in the same transaction, or in
related transactions, having an aggregate value in excess of fifty thousand
dollars ($50,000).
(m) Acts in Contravention of This Agreement. Knowingly do any act in
---------------------------------------
contravention of this Agreement.
(n) Thwarting Ordinary Business. Knowingly do any act which would make
---------------------------
it impossible, or materially more difficult, to carry on the ordinary business
of the Company, except as otherwise provided in this Agreement.
(o) Possessing Property for Non-Company Purpose. Possess property, or
-------------------------------------------
assign rights in specific property, for other than a Company purpose.
(p) Jeopardizing Tax Treatment. Knowingly take any steps that could
--------------------------
jeopardize the treatment of the Company as a partnership under the Code.
(q) Deviating from Project Implementation Plan. Taking any action which
------------------------------------------
materially deviates from the Project Implementation Plan, or making any
amendment to the Project Implementation Plan.
(r) Usurpation of Board Function. Taking any step within the realm
----------------------------
normally governed by boards of directors of corporations, including but not
limited to the setting of basic policies and the setting of the President's
compensation and benefits.
6.5. Limitations on Authority of CFO. Any delegation of authority to
-------------------------------
the CFO in this Agreement with regard to tax matters shall be subject to the
requirement that the CFO determine if any proposed action is likely to have a
material adverse effect on either Member, and if it does, to obtain the approval
of the Board of Directors or such Member before taking any such action.
6.6. Liability for Certain Acts. The President and other officers shall
--------------------------
exercise their powers and discharge their duties in good faith with a view to
the interests of the Company and its Members with that degree of diligence, care
and skill that ordinarily prudent persons would exercise under similar
circumstances in like positions. No officer shall be liable, responsible or
accountable in damages or otherwise to the Company or to any Member for any
action taken or any failure to act on behalf of the Company within the scope of
the authority conferred on the officer by this Agreement or by law; provided
that the officer shall be liable if it is reasonably determined by the Board of
Directors that the relevant action or failure to act would disqualify the
officer for indemnification under the provisions of Section 5.15.
6.7. Bank Accounts. The President or CFO may from time to time open
-------------
bank accounts in the name of the Company. The manual signatures of two (2)
officers shall be required for all disbursements over a level to be determined
by the Board of Directors; in the absence of such determination, such level
shall be five thousand dollars ($5,000). Any withdrawal of funds in excess of
one hundred fifty thousand dollars ($150,000.00), other than transfers between
Company accounts, shall require approval of the Board of Directors if the
expenditure is not contemplated by the Project Implementation Plan or a budget
approved as provided in Section 6.2.
6.8. Removal. At a Board of Directors meeting called expressly for that
-------
purpose, any officer may be removed at any time, with or without cause, if the
votes for removal are not less than 49 voting points.
SECTION 7 - BOOKS AND RECORDS; TAX RETURNS; INSURANCE
7.1. Books and Records. All books, records and financial accounts of
-----------------
the Company shall be kept by the President and the CFO at the principal place of
business of the Company (as provided in Section 2.3, above), or at such other
location as is determined by the Board of Directors.
7.2. Audit. A periodic audit (or, if agreed upon, review) of the books
-----
and records of the Company shall be made by an independent firm of certified
public accountants or by such individuals and at such intervals as may be
selected by the Board of Directors, and a like audit or review shall be made
upon completion of the System. The cost of any audits or reviews shall be borne
by the Company. Upon the completion of the System, a true and correct accounting
shall be rendered to the Members of all costs, expenses, and other data relating
to the performance and affairs of the Company.
7.3. Inspection of Records. Each Member shall have the right at all
---------------------
reasonable times, during usual business hours, to have its independent
accountant or any other agent or employee audit, examine and, at such Member's
expense, make confidential copies of or extracts from the books and records
maintained in connection with the Company. Such Member shall bear all expenses
incurred in its examination.
7.4. Maintenance of Records after Winding-up. To the extent that the
---------------------------------------
books and records of the Company are required to be kept subsequent to its
winding-up, they shall be kept at such place or places as the President or other
Person responsible for such winding-up may from time to time determine. The cost
of maintaining and storing the books and records after the winding-up of the
Company shall be paid from the funds set aside pursuant to subsection (iii) of
Section 10.2, below.
7.5. Fiscal Year. The fiscal year of the Company shall be the calendar
-----------
year, except as otherwise required by the Code.
7.6. Income Tax Returns.
------------------
i. All income tax returns of the Company shall be prepared by
accountants selected by the Board of Directors.
ii. Any provision hereof to the contrary notwithstanding, for
federal income tax purposes, the Members hereby recognize and agree
that the Company will be treated as a partnership in accordance with
the provisions of the Code, as the same may from time to time be
amended; provided, however, that the filing of partnership tax returns
shall not be construed to extend the purposes of the Company or expand
the obligations or liabilities of the Members.
iii. The CFO shall cause to be prepared all tax returns and
statements, if any, which are required to be filed on behalf of the
Company with the appropriate taxing authorities. Such returns and
statements shall be submitted by the CFO to the Members in draft, in
time for the approval of the Board of Directors to be made by May 1 of
each year, and in final form prior to filing, and when approved by the
Board of Directors, shall be filed promptly.
iv. Pacific shall serve as the tax matters Member of the Company
for purposes of the Internal Revenue Code.
7.7. Insurance. The Company shall maintain such insurance as the Board
---------
of Directors deems appropriate.
SECTION 8 - INVESTMENT OF FUNDS
All cash Capital Contributions made to the Company by the Members and all
revenues received by the Company shall be deposited in an account or accounts in
the name of the Company at such bank or other financial institution as the Board
of Directors may select, or shall be invested in such short-term, investment
quality investments as shall be selected by the Board of Directors. Such funds
shall be withdrawn on such signatures as the Board of Directors shall determine
as provided in Section 6.7, above.
SECTION 9 - DISSOCIATION OF A MEMBER
9.1. Dissociation. A Person shall cease to be a Member ("Dissociate")
------------
upon the happening of any of the following events:
(a) an Insolvency Event occurs with respect to the Member or any
Affiliate which directly or indirectly owns more than 50% of the Member's voting
equity, as provided in Section 9.2 below;
(b) in the case of a Member who is a natural person, the death of the
Member or the entry of an order by a court of competent jurisdiction
adjudicating the Member incompetent to manage the Member's personal estate;
(c) in the case of a Member who is acting as a Member by virtue of
being a trustee of a trust, the termination of the trust (but not merely the
substitution of a new trustee);
(d) in the case of a Member that is a separate entity other than a
corporation, the dissolution and commencement of winding up of the separate
entity;
(e) in the case of a Member that is a corporation, the filing of a
certificate of dissolution, or its equivalent, for the corporation or the
revocation of its charter;
(f) in the case of an estate, the distribution by the fiduciary of the
estate's entire interest in the Company; or
(g) a change of control of a Member, or of any Affiliate (other than
ARB) which directly or indirectly owns more than 50% of the Member's voting
equity, other than transfers to Affiliates of the transferring Affiliate (For
purposes of this paragraph, a change of control shall mean the transfer of
greater than 50 percent of the voting equity of a party; provided, however, that
with respect to Pacific Enterprises, a change of control shall mean that Pacific
Enterprises is acquired in a transaction or series of transactions in which
Pacific Enterprises or its successor ceases to be a publicly traded company, and
with respect to Frontier Colorado shall mean that ARB shall cease to own,
directly or indirectly, at least 50% of Frontier Colorado's voting equity.
9.2. Effect of Insolvency Event and Other Acts of Dissociation on
------------------------------------------------------------
Membership Interest.
- -------------------
(a) Effective at the time when an Insolvency Event occurs with respect
to a Member or an Affiliate described in Section 9.1(a), such Member's voting
rights and rights to participate in the management of the affairs of the Company
shall cease and such Member's Membership Interest shall thereafter consist
solely of such Member's Economic Interest.
(b) The Membership Interest of any Dissociating Member shall be subject
to Sections 13.4 (offer to the other Members) and 13.6 (sale of voting rights to
the Company).
SECTION 10 - DISSOLUTION AND WINDING UP
10.1. Liquidating Events. (a) The Company shall dissolve and commence
------------------
winding up and liquidating upon the first to occur of any of the following
(each, a "Liquidating Event"):
i. The sale of all or substantially all of the Company's
Property.
ii. The vote by the Members to dissolve, wind up, and
liquidate the Company.
iii. Either Member elects not to make further Capital
Contributions under Section 3.5, and within 180 days thereafter,
neither of the following occurs -- (A) the other Member buys all
interests of the electing Member under Section 13.4, or (B) the
electing Member sells all of its interests to another party who agrees
to continue making Capital Contributions at the agreed-upon schedule,
including making any Capital Contributions previously due.
iv. A deadlock is reached, pursuant to the procedures
described in Section 5.10(c) above, and the parties are unable to
reach any resolution of the deadlock and agree not to submit the
matter to arbitration.
(b) The Members hereby agree that, notwithstanding any provision of
the Act, the Company shall not dissolve prior to the occurrence of a Liquidating
Event. If it is determined by a court of competent jurisdiction that the Company
has dissolved prior to the occurrence of a Liquidating Event, the Members hereby
agree to continue the business of the Company without a winding up or
liquidation.
10.2. Winding Up. Upon the occurrence of a Liquidating Event, the
----------
Company shall continue solely for the purposes of winding up its affairs in an
orderly manner, liquidating its assets, and satisfying the claims of its
creditors and Members. No Member shall take any action that is inconsistent
with, or not necessary to or appropriate for, the winding up of the Company's
business and affairs. The President (or, in the event that at the time of such
Liquidating Event, there is no President, any Member elected by the Members)
shall be responsible for overseeing the winding up and dissolution of the
Company and shall take full account of the Company's liabilities and Company
Property and the Company Property shall be liquidated as promptly as is
consistent with obtaining the fair value thereof, and the proceeds therefrom, to
the extent sufficient therefor, shall be applied and distributed in the
following order:
i. First, to the payment and discharge of all of the Company's
debts and liabilities to creditors other than Members;
ii. Second, to the payment and discharge of all of the Company's
debts and liabilities to Members;
iii. Third, the Company shall fund reserves for contingent
liabilities to the extent deemed reasonable by the Board of Directors
or other Person responsible for the winding up;
iv. Fourth, to each Member with a positive balance in its
Capital Account (determined after taking into account all applicable
allocations, including but not limited to those in Section 4.8), in
proportion to such balances until such balances are reduced to zero;
and
v. Fifth, the balance, if any, to the Members in proportion to
their Membership Interests.
Except upon the specific approval of the Board of Directors, no Member
shall receive any additional compensation for any services performed pursuant to
this Section 10.
10.3. Compliance With Timing Requirements of Regulations. If any Member
--------------------------------------------------
has a deficit balance in its Capital Account (after giving effect to all
contributions, distributions and allocations for all taxable years, including
those made pursuant to Section 10.2, above, and other distributions made in the
year during which such liquidation occurs), such Member shall have no obligation
to make any contribution to the capital of the Company with respect to such
deficit, and such deficit shall not be considered a debt owed to the Company or
to any other Member for any purpose whatsoever. In the discretion of the Board
of Directors, subject to the limitations in Section 6.5, a pro rata portion of
the distributions that would otherwise be made to the Members pursuant to this
Section 10 may be:
i. distributed to a trust established for the benefit of the
Members for the purposes of liquidating Company assets, collecting
amounts owed to the Company, and paying any contingent or unforeseen
liabilities or obligations of the Company or of the Members arising out
of or in connection with the Company. The assets of any such trust
shall be distributed to the Members, in the same proportions as the
amount distributed to such trust by the Company would otherwise have
been distributed to the Members pursuant to this Agreement; or
ii. withheld to provide a reasonable reserve for Company
liabilities (contingent or otherwise) and to reflect the unrealized
portion of any installment obligations owed to the Company, provided
that such withhold amounts shall be distributed to the Members as soon
as practicable.
10.4. Rights of Members. Except as otherwise provided in this
-----------------
Agreement, (a) each Member shall look solely to the assets of the Company for
the return of its Capital Contribution and shall have no right or power to
demand or receive property other than cash from the Company, and (b) no Member
shall have priority over any other Member as to the return of its Capital
Contributions, distributions, or allocations.
10.5. Notice of Dissolution. In the event a Liquidating Event occurs or
---------------------
an event occurs that would, but for provisions of Section 10.1, above, result in
a dissolution of the Company, the President shall, within thirty (30) days
thereafter, provide written notice thereof to each of the Members and to all
other parties with whom the Company regularly conducts business (as determined
in the discretion of the President) and shall publish notice thereof in a
newspaper of general circulation in each place in which the Company regularly
conducts business (as determined in the discretion of the President).
SECTION 11 - CROSS-INDEMNIFICATION BY MEMBERS
11.1. Cross-Indemnification by Members. Each Member (the "Indemnifying
--------------------------------
Party") agrees to hold harmless, indemnify, protect and defend each other Member
(the "Indemnified Party") and its officers, directors, employees, shareholders
and agents, against any and all liabilities, damages, claims, costs, decrees,
judgments, suit, actions, and expenses suffered or incurred by the Indemnified
Party (collectively, the "Liabilities"), including reasonable attorneys' fees
and court costs, arising out of or in connection with (a) the failure by the
Indemnifying Party or its personnel to perform the Indemnifying Party's
obligations, representations or covenants under this Agreement, or (b) any
business conducted or operated by the Indemnifying Party or any Affiliate of
such Indemnifying Party other than the business affairs of the Company.
Notwithstanding the foregoing, neither Pacific nor FUNC shall have any liability
hereunder arising from or in connection with the sale, production, or delivery
of electrical power by FUNC, or the maintenance and operation of its systems and
equipment used therefor.
11.2. Other Provisions. Nothing contained in this Agreement with regard
----------------
to the sharing of the losses and liabilities of the Company shall in any way
limit the Indemnifying Party's liability to the Indemnified Party for
liabilities arising out of (i) the intentional breach by the Indemnifying Party
or its personnel of (x) this Agreement or (y) the obligations assigned to the
Indemnifying Party under this Agreement or (ii) actions taken by the
Indemnifying Party or its personnel in bad faith or constituting willful
misconduct.
SECTION 12 - PRIOR COSTS
Each party shall bear all costs incurred by it prior to October 1, 1997
except for costs specifically permitted in this Agreement to be recovered by a
Member from the Company after October 1, 1997, or as otherwise agreed by the
Board of Directors.
SECTION 13 - TRANSFER OF INTERESTS
13.1. Limitation on Transfers; Pacific. Except to the extent provided
--------------------------------
in 13.3(iv) hereof and except for transfers to Affiliates, no Member shall
transfer, sell, assign, or convey all or any portion of its Membership Interests
(the "Offered Interest") unless such Member (the "Seller") (a) first offers to
sell the Offered Interest pursuant to the terms of this Section 13 and (b)
obtains the prior written consent of the other Members to a transfer of the
Offered Interest. Any purported transfer of Membership Interests that is not
effected pursuant to the terms of this Section 13 shall be null and void and of
no effect whatever.
13.2. Right of First Refusal. No transfer may be made under this
----------------------
Section unless the Seller has received a bona fide written offer (the "Purchase
Offer") from a Person (the "Purchaser") to purchase the Offered Interest for a
purchase price (the "Offer Price") denominated and payable in United States
dollars at closing or according to specified terms, with or without interest,
which offer shall be in writing signed by the Purchaser and shall be irrevocable
for a period ending no sooner than the day following the end of the Offer
Period, as hereinafter defined.
13.3. Offer Notice. Prior to making any transfer that is subject to the
------------
terms of this Section 13, the Seller shall give to the Company and each other
Member written notice (the "Offer Notice") which shall include a copy of the
Purchase Offer and an offer (the "First Offer") to sell the Offered Interest to
the other Members (the "Offerees") for the Offer Price, payable according to the
same terms as (or more favorable terms than) those contained in the Purchase
Offer, provided that the First Offer shall be made without regard to the
requirement of any earnest money or similar deposit required of the Purchaser
prior to closing, and without regard to any security (other than the Offered
Interest) to be provided by the Purchaser for any deferred portion of the Offer
Price.
i. Offer Period. The First Offer shall be irrevocable for a
------------
period (the "Offer Period") ending at 11:59 p.m., local time at the
Company's principal office, on the ninetieth day following the day of
the Offer Notice.
ii. Acceptance of First Offer. At any time during the first 60
-------------------------
days of the Offer Period, any Member may accept the First Offer as to
that portion of the Offered Interest that corresponds to the ratio of
its Membership Interests to the total Membership Interests held by all
Members, by giving written notice of such acceptance to the Seller and
the other Members. In the event that Offerees ("Accepting Offerees"),
in the aggregate, accept the First Offer with respect to all of the
Offered Interest, the First Offer shall be deemed to be accepted. If
Accepting Offerees do not accept the First Offer as to all of the
Offered Interest during the Offer Period, the First Offer shall be
deemed to be rejected in its entirety.
iii. Closing of Purchase Pursuant to First Offer. In the event
-------------------------------------------
that the First Offer is accepted, the closing of the sale of the
Offered Interest shall take place within thirty (30) days after the
First Offer is accepted or, if later, the date of closing set forth in
the Purchase Offer. The Seller and all Accepting Offerees shall execute
such documents and instruments as may be necessary or appropriate to
effect the sale of the Offered Interest pursuant to the terms of the
First Offer and this Section 13.
iv. Sale Pursuant to Purchase Offer If First Offer Rejected.
-------------------------------------------------------
If the First Offer is not accepted in the manner herein above provided,
the Seller may sell the Offered Interest to the Purchaser at any time
within 60 days after the last day of the Offer Period, provided that
such sale shall be made on terms no more favorable to the Purchaser
than the terms contained in the Purchase Offer, and provided that if
the Seller has not received the prior written consent of the other
Members to transfer the Offered Interest as provided in Section 13.1,
only an Economic Interest may be sold to the Purchaser. In the event
that the Offered Interest is not sold in accordance with the terms of
the preceding sentence, the Offered Interest shall again become subject
to all of the conditions and restrictions of this Section 13. The
transferee of any Economic Interest or Membership Interest in the
Company shall take such interest subject to the provisions of this
Agreement, and all restrictions and limitations in this Agreement with
respect to a Members actions or transactions in the Membership
Interests or Economic Interests in the Company shall apply to such
interests as if the transferee were a party hereto.
13.4. Option to Purchase on Certain Events. Upon the occurrence of any
------------------------------------
of the following (each, a "Triggering Event"): (i) the death of any Member or
the owner of an Economic Interest, (ii) any inter vivos gift of an Economic
Interest or a Membership Interest, (iii) any event described in Section 9.1(a)
or 9.1(g) (certain Insolvency Events and changes of control), or (iv) a Member
electing not to make further Capital Contributions under Section 3.5, the other
Members shall have an option to purchase all of the Membership Interest or
Economic Interest owned by such Person or such Person's predecessor in interest
(or, in the case of the debtor in possession, owned by such Person), for a
period of one year after such Triggering Event. If the Company does not receive
a notice of such Triggering Event, the rights of the other Member shall accrue
upon the receipt of actual notice by the Company of the Triggering Event. The
Company shall send the other Member a notice of their rights hereunder within
sixty (60) days after the Company receives actual notice of a Triggering Event.
Except as set forth below, the purchase price for such interest shall be fair
market value, as agreed to by the purchasing Member and the holder of such
Membership Interest or Economic Interest being sold; if they are unable to agree
to such value or to an independent appraiser to determine such value within
thirty (30) days of submission, such value shall be determined in accordance
with the provisions of Section 21 hereof. If the Triggering Event is a Member's
election to cease making Captial Contribution in the manner permitted in Section
under Section 3.5, the purchase price for such Member's Membership Interest
shall be the balance of such Member's Capital Account as of the date of the
Triggering Event. The provisions of Section 13.1 above shall also govern in the
event that the options under this Section 13.4 are not fully exercised. Payment
shall be, at the option of the purchasing Member, in cash or by promissory note.
Any promissory note shall be dated as of the effective date of the purchase,
shall mature in not more than four (4) years, shall be payable in equal
installments of principal and interest that come due monthly, shall bear
interest at the Prime Rate, plus two (2) percentage points per annum. Any such
promissory note shall be due on sale by the purchasing Member or the Company to
any third party of equity interests in the Company representing ownership of, or
the right to acquire, fifty percent (50%) or more of the voting equity interests
in the Company. The selling Member shall retain a security interest in such
interest until pay-off.
13.5. Option to Sell on Certain Events: Upon a vote described in
--------------------------------
Section 6.4(b) (merger, dissolution, etc.) (each, a "Triggering Vote") any
Member disagreeing with the vote and having an Economic Interest of 49% or less,
and any non-Member holder of Economic Interests (either, a "Minority Member")
shall have an option to sell to the other Member, and the other Member shall
have the obligation to buy, all of the Membership Interest or Economic Interest
owned by such Minority Member or such Minority Member's predecessor in interest
(or, in the case of the debtor in possession, owned by such Person), by sending
notice to the other Member within fifteen (15) days after such Triggering Vote.
The purchase price for such Membership Interest or Economic Interest shall be
fair market value, as agreed to by the Members. If they are unable to agree to
such value or to an independent appraiser to determine such value within thirty
(30) days of submission, such value shall be determined in accordance with the
provisions of Section 21 hereof. Closing on such sale shall take place within
sixty (60) days after determination of the price. Payment shall be, at the
option of the purchasing Member, in cash or partly in cash and partly by note,
but in any event not less than one-fourth in cash. Any promissory note shall be
dated as of the effective date of the purchase, shall mature in not more than
three (3) years, shall be payable in equal installments of principal and
interest that come due monthly, shall bear interest at the Prime Rate, plus two
(2) percentage points per annum. The Minority Member shall retain a security
interest in such interest until pay-off.
13.6. Sale of Remaining Membership Rights to the Company. Upon and
--------------------------------------------------
contemporaneously with any sale or other disposition (including a sale or
disposition resulting from a Dissociation) of a Member's Economic Interest in
the Company which does not at the same time transfer the balance of the rights
associated with the Economic Interest transferred by the Member (including,
without limitation, the rights of the Member to participate in the management of
the business and affairs of the Company or to acquire rights transforming the
Economic Interest into a full Membership Interest), the Company shall have an
option, which shall remain effective for the maximum period under applicable
law, to purchase from such Member or the executor or other successor in interest
to such Member, and such Member or the executor or other successor in interest
to such Member shall, upon exercise of such option, sell to the Company for a
purchase price of one hundred dollars ($100.00), all remaining rights and
interests retained by such Member or the executor or other successor in interest
to such Member which immediately prior to such sale or other transfer were
associated with the transferred Economic Interest. No other writing, in addition
to this Agreement, shall be necessary to evidence such option.
SECTION 14 - ADMISSION OF ADDITIONAL PARTIES
The Board of Directors may determine to issue Membership Interests in
the Company in return for cash or in-kind capital contributions, and on such
other terms as the Board of Directors may approve, provided, however, that no
such issuance of Membership Interests shall have the effect of reducing
Pacific's or FUNC's Membership Interests (except to the extent diluted by the
issuance of additional interests; and provided further that no Membership
Interests will be issued to any Member or any Affiliate of such Member who,
directly or indirectly, sells energy on a wholesale or retail basis into the
Selected Market, without the written consent of FUNC or Pacific.
SECTION 15 - CHOICE OF LAW
This Agreement shall be governed by and interpreted in accordance with
the laws of the State of North Carolina.
SECTION 16 - INTEGRATION
This Agreement is the complete and final agreement of the parties and
supersedes any prior agreements or understandings with respect to the subject
matter hereof.
SECTION 17 - OWNERSHIP OF DESIGNS, PLANS
AND SPECIFICATIONS
Notwithstanding any other provision of this Agreement, all Designs that
have been developed by or for a party hereto shall be the property of the
Company, except that if the Company has not paid in full therefor, the Designs
shall remain the property of the party that developed the Designs and shall be
deemed Confidential Information of the party that developed such Designs for
purposes of Section 18, below. At all times during the term of the Company, each
party hereto shall have full and complete right and license, free of charge, to
use the Designs owned by the Company in connection with the construction and
operation of the System. Upon and after the termination of the Company pursuant
to Section 10, above, the Designs owned by the Company shall be an asset of the
Company that shall be sold to the purchaser of the System or distributed to
either or both Members as part of a liquidating distribution.
SECTION 18 - CONFIDENTIALITY AGREEMENT
18.1. Confidential Information. With respect to a party hereto (the
------------------------
"Disclosing Party"), "Confidential Information" shall mean technical, business
and financial information including, where appropriate and without limitation,
any information, business and financial data, software, structures, models,
techniques, processes, compositions, formulas, inventions, schematics, and
apparatus relating to the same disclosed by the Disclosing Party to another
party hereto (the "Receiving Party") or obtained by the Receiving Party through
observation or examination of information, but only to the extent that such
information is maintained as confidential by the Disclosing Party and is marked
or otherwise identified as confidential or proprietary when disclosed to the
Receiving Party or, in the case of information given verbally, is identified as
confidential or proprietary to the Receiving Party at the time of such verbal
disclosure to the Receiving Party. Confidential Information shall not be deemed
to be or include promotional materials prepared and approved by the Board of
Directors.
18.2. Receiving Party. Each of the Members agrees that the Disclosing
---------------
Party is the owner or licensee of the Confidential Information. The Receiving
Party shall not use any of the Confidential Information of the Disclosing Party
at any time except for the purposes of constructing and operating the System and
evaluating the desirability of a mutually beneficial business relationship. The
Receiving Party shall not disclose any of the Confidential Information other
than on a need-to-know basis, as reasonably necessary for such evaluation, to
his or its directors, officers, employees, attorneys, accountants, bankers,
financial advisors or consultants who are bound by written agreements with the
Receiving Party to maintain the Confidential Information in confidence or who
are otherwise under obligations of confidentiality to the Receiving Party. Each
of the Members agrees to hold the Confidential Information disclosed to it by
the Disclosing Party in strict confidence and to take reasonable precautions to
protect such Confidential Information (including, without limitation, all
precautions the Receiving Party employs with respect to its own Confidential
Information).
18.3. Liability. Notwithstanding anything to the contrary in this
---------
Agreement, the Receiving Party shall have no liability to the Disclosing Party
for the use or disclosure of (1) such information as required by applicable law
or regulation, provided that the Receiving Party shall give the Disclosing Party
prompt written notice and sufficient opportunity to object to such use or
disclosure, or to request confidential treatment to the Confidential
Information; or (2) such information as the Receiving Party can establish by
written documentation to:
i. have been publicly known prior to disclosure by the
Disclosing Party of such information to the Receiving Party;
ii. have become publicly known without fault on the part of
the Receiving Party, subsequent to disclosure to the Disclosing Party
of such information to the Receiving Party;
iii. have been received by the Receiving Party at any time
from a source, other than the Disclosing Party, lawfully having
possession of and the right to disclose such information;
iv. have been otherwise known by the Receiving Party without
any obligation of confidentiality directly or indirectly for the
benefit of the Disclosing Party prior to disclosure by the Disclosing
Party to the Receiving Party of such information; or
v. have been independently developed by the Receiving Party
without use of such Confidential Information.
18.4. No Adequate Remedy at Law. Each of the Members acknowledges and
-------------------------
agrees that due to the unique nature of the Disclosing Party's Confidential
Information, there can be no adequate remedy at law for any breach of its
obligations hereunder, that any such breach may allow the Receiving Party or
third parties to unfairly compete with the Disclosing Party, and therefore, that
upon any such breach or any threat thereof, the Disclosing Party shall be
entitled to appropriate equitable relief in addition to whatever remedies it
might have at law. The Receiving Party will notify the Disclosing Party in
writing immediately upon the occurrence of any such unauthorized release or
other breach of which it is aware.
SECTION 19 - NO RECOURSE
Neither party hereto shall have any recourse under this Agreement for
any breach hereof by the other party against any officer, employee, director,
shareholder or agent of such other party or against any party related to or
affiliated with such other party, recourse of each party hereunder for breach of
this Agreement being strictly limited to recourse against the other party that
is a signatory hereto and to any successors or permitted assigns of such party.
SECTION 20 - SURVIVAL; BENEFIT
Notwithstanding the occurrence of a Liquidating Event or dissolution of
the Company, this Agreement shall continue in effect during the winding up of
the Company. Thereafter, the provisions of Sections 5.10(c), 5.14, 5.15, 11, 17,
18, 19 and 21 of this Agreement shall survive any termination hereof. This
Agreement is solely for the benefit of the parties hereto and their successors
and permitted assigns. No third party is granted or shall have any rights
hereunder.
SECTION 21 - DISPUTE RESOLUTION
21.1. Arbitration. Except for matters covered under Section 5.10(c),
-----------
all claims, disputes and other matters in question arising out of or pertaining
to this Agreement or the breach thereof shall be decided by arbitration in
accordance with the Arbitration Rules of the American Arbitration Association,
to be conducted in Los Angeles, California. Arbitration shall be before a single
arbitrator if the parties can agree on such an arbitrator within five (5)
business days of a Member's call for arbitration. If the parties cannot so agree
within such period, then each party shall choose a single arbitrator, and the
two arbitrators thus chosen shall choose the third arbitrator. If the first two
arbitrators cannot agree on the third arbitrator within ten (10) business days
of submission, such arbitrator shall be chosen by the American Arbitration
Association. Should the arbitrator find the non-prevailing party's claim(s) or
defense(s) to be frivolous, the arbitrator may compel as part of the award the
non-prevailing party to pay all fees and costs of arbitration, including but not
limited to the reasonable attorneys' fees of the prevailing party. This
Agreement to arbitrate shall be specifically enforceable. The award rendered by
the arbitrators shall be final, and judgment may be entered upon it in
accordance with applicable law.
21.2. Demand for Arbitration. Written demand for arbitration shall be
----------------------
filed by a party hereto requesting the same with the American Arbitration
Association in Los Angeles, California, with notice to all other parties. The
demand for arbitration must be filed within a reasonable period of time after
the claim, dispute or other matter in question has arisen, and in no event shall
it be made after institution or legal or equitable proceedings based on such a
claim, dispute or other matter in question would be barred by the applicable
statute of limitations.
SECTION 22 - POTENTIAL RESTRUCTURING
22.1 Legislative Monitoring. Pacific agrees to monitor closely the
----------------------
progress of legislation to repeal or amend PUHCA, and to keep FUNC apprised of
material developments from time to time.
22.2. Construction Monitoring. The Company agrees to deliver a report
-----------------------
to Pacific and FUNC at least once per month that will describe the progress of
construction and development of the System (the "Construction Report"). Each
Construction Report shall contain an estimate of the amount of time remaining
before the System commences operations as a utility within the meaning of PUHCA
(the "Completion Date"). If the Company is unable to deliver the Construction
Report to FUNC and Pacific, FUNC shall prepare and deliver the Construction
Report to Pacific.
22.3. Financing Schedule. The Company agrees to deliver a report to
------------------
Pacific and FUNC no less frequently than once a month that will describe the
progress made with respect to obtaining the System Loan (the "Financing
Report"). Each Financing Report shall contain an estimate of the amount of time
remaining before the Completion Date. If the Company is unable to deliver the
Financing Report to FUNC and Pacific, Pacific shall prepare and deliver the
Financing Report to FUNC.
22.4 PUHCA. The Members acknowledge that it may be necessary to
-----
restructure the Company in the future, taking into account all relevant factors
affecting the Company's operations, including, without limitation, PUHCA, the
NCUC, financing for the System, and the mutual interest of the parties in
developing the optimal capital structure for the Company. If PUHCA has not been
repealed as of the date that either Member or the Board of Directors determines
it must seek approval of a restructuring of the Company by the Securities and
Exchange Commission in order to have a reasonable opportunity to obtain SEC
approval of the manner of restructuring prior to the Completion Date, the Board
of Directors shall meet to determine what manner of restructuring to pursue. The
Members have reviewed the restructuring options described as "Structure B",
"Structure C" and "Structure D" set forth below and the Members each acknowledge
that each of such alternatives is generally acceptable to such Member. The
manner of restructuring the Company determined in accordance with Section 22.5
is referred to as the "Restructuring." The Board of Directors shall make such
amendments to this Operating Agreement as are reasonably necessary to implement
the Restructuring.
22.5 Decision as to Which Structure to Pursue. (a) The Board of
----------------------------------------
Directors shall first consider and undertake reasonable good faith efforts to
pursue any mutually acceptable alternative for restructuring the Company that
retains the relative economic benefits and interests of the parties as in effect
prior to such restructuring and provides each reasonable protection of their
investment. The parties business intent being to retain such economic interests
and benefits to the extent possible while structuring control of the Company in
such a manner that neither Member nor any of its Affiliates will be required to
register as a public utility holding company under PUHCA or to obtain SEC
approval for its acquisition of an interest in the Company.
(b) If the Board of Directors is unable to agree on a mutually
acceptable restructuring concept, the Board will then consider and undertake
reasonable good faith efforts to pursue a restructuring in the manner of
Structure B. The Board of Directors may by mutual agreement determine not to
pursue Structure B for, among other reasons, the Board's inability to identify a
prospective Managing Member otherwise meeting the qualifications described below
that is willing and able to make a financial contribution commensurate with the
interest to be acquired by such prospect. In exercising good faith efforts in
order to achieve Structure B, either party may object to such structure on the
grounds that such structure is subject of regulatory or statutory prohibitions
affecting such Member or its Affilates, or that such structure exposes the
Member or its Affiliates to regulatory or statutory burdens that are materially
more burdensome to such party than those applicable if the Member were to have
only a non-controlling investment in the Company yielding substantially the
economic benefits as such Member holds in the Company (either such grounds,
"Regulatory Objections"). In considering Structure B, each Member acknowledges
that it will not object to such structure on the basis that it has inadequate
investment protections or management input so long as it has investment
protections and management input in form and effect reasonably consistent with
those protections and voting rights set forth in Structure B below ("Reasonable
Rights and Protections").
(c) If the Board of Directors is unable to reach agreement on Structure
B, the Board will then adopt a restructuring in the manner of Structure C;
provided that the Board of Directors may by mutual agreement determine not to
pursue Structure C and FUNC may, in its sole discretion, elect not to pursue
Structure C due to Regulatory Objections. Each Member shall be entitled to have
Reasonable Rights and Protections in any Restructuring. The Members acknowledge
that FUNC and its Affiliates may not ultimately desire to become a registered
PUHCA holding company.
(d) If the Board of Directors mutually determines not to pursue
Structure C or FUNC elects not to pursue Structure C, the Board will then adopt
a restructuring in the manner of Structure D.
22.6 Submissions to the SEC. As soon as possible after the
----------------------
Restructuring is determined pursuant to Section 22.5, the Members shall prepare
and submit to the SEC all applications or "no action letters" necessary to own
and operate the System as a utility under PUHCA. Each Member agrees to cooperate
to the fullest extent reasonable to assist the other Member with such
submissions upon request.
22.7 Suspension of Rights to Withdraw or Withhold Capital
----------------------------------------------------
Contributions. So long as both Members are complying with the foregoing
- -------------
provisions of this Section 22 in all material respects, neither Member shall
invoke the provisions of subsections 3.2 (d)(iii) and (d)(iv) hereof.
22.8 No Commencement of Utility Operations Before Receiving All
----------------------------------------------------------
Necessary SEC Approvals. The Company will not commence operations of the System
- -----------------------
as a utility within the meaning of PUHCA unless and until the Board of Directors
determines that any and all SEC approvals have been obtained or no-action
letters have been received to the effect that such approvals will not be
required or the Board has determined that no further such approvals or no-action
letters are required; such commencement is expressly conditioned on necessary
approvals and no-action letters having been obtained.
22.9 Rescission of Restructuring. If PUHCA is repealed, and unless FUNC
---------------------------
and Pacific agree otherwise in writing, any and all steps theretofore taken to
effect the Restructuring shall be rescinded as quickly as is reasonably
possible, and the structure of the Company shall be returned to what it was
before such Restructuring, without affecting any changes made which are not
related to the Restructuring. The Company and the Members shall cooperate to
obtain all required governmental approvals to implement this Section.
22.10 Structure B. The restructuring described in this Section 22.10
-----------
shall be referred to as "Structure B". If PUHCA is not repealed before the
Completion Date, and Structure B is adopted by the Board of Directors pursuant
to Section 22. 5, the Company may be restructured as follows, and the Operating
Agreement amended accordingly:
(a) Admission of New Member. A new Member (the "Managing
-----------------------
Member") reasonably acceptable to FUNC and Pacific, with the experience,
resources and ability to perform the duties and obligations of the Managing
Member set forth herein, shall be admitted as a Member of the Company in
exchange for a Capital Contribution to be determined by the Board of Directors.
In no event shall the Managing Member be an Affiliate of either FUNC or Pacific.
(b) Adjustment of Economic and Membership Interests. Upon
-----------------------------------------------
admission of the Managing Member, the Membership Interests of FUNC, Pacific and
the Managing Member shall be adjusted to 4.9%, 4.9% and 90.2%, respectively. The
Economic Interests of FUNC, Pacific and the Managing Member shall be adjusted in
accordance with the Capital Contribution made by the Managing Member; provided,
however, that in no event shall the Managing Member's Economic Interest in the
Company initially exceed 20%, and provided that such amount shall be the lowest
amount the Members reasonably agree will achieve the intended purpose. Schedule
3.1 of the Agreement shall be amended to reflect the adjustment in Economic and
Membership Interests of the Members.
(c) Voting By Members. All Members who have not Disassociated
-----------------
shall be entitled to vote on any matter submitted to a vote of the Members.
There shall be one hundred (100) voting points, and each Member shall have one
point for each percentage point of Membership Interest held by such Member from
time to time, with changes in voting points effective at the same time as the
corresponding changes in the Membership Interests of the Members. Attendance by
two thirds of the Members shall constitute a quorum at any meeting of Members.
If a quorum is present, the affirmative vote of Members holding at least 51% of
the Membership Interests represented in person or by proxy shall be an act of
the Members, unless the vote of a greater or lesser proportion or number is
otherwise required by the Act, by the Certificate or by this Agreement. In no
event shall the percentage of Membership Interests required to be voted in favor
of an issue be less than the percentage of Director votes that would be required
if the same matter were submitted to the Board of Directors.
(d) Board of Directors. The Board of Directors shall consist
------------------
of three directors appointed by Pacific, three directors appointed by FUNC and
three directors appointed by the Managing Member. The Directors shall vote as
representatives of the Members, in the same proportion as the Members'
Membership Interests and in the manner provided in Section 5.10(b). Attendance
by at least one Director appointed by each Member shall constitute a quorum at
any meeting of the Board of Directors. The affirmative vote of Directors voting
51 points shall be an act of the Board. The Managing Member shall elect the
Chair of the Board of Directors.
(e) Deadlocks. The provisions contained in Sections 5.10(c)
---------
and 10.1(iv) of the Operating Agreement shall be deleted and shall be replaced
with provisions that are comparable and reasonably reflective of the economic
interests of the parties.
(f) Selection of President. The Board of Directors shall
----------------------
select the President.
(g) Selection of CFO and Limitation on Authority of CFO. The
---------------------------------------------------
Board of Directors shall select the CFO. If the CFO determines that any proposed
action of the Company is likely to have a material adverse effect on the
Company, the CFO must obtain the approval of FUNC and Pacific before taking such
action.
(h) Removal of Managing Member for Cause. FUNC and Pacific
------------------------------------
may, by mutual agreement, remove the Managing Member for cause. "Cause" will be
defined in the Operating Agreement to include, but will not be limited to:
(1) Failure to Make Capital Contribution. The failure of the
------------------------------------
Managing Member to make timely a required Capital
Contribution.
(2) Failure to Seek Approval of Major Matters. The failure of
-----------------------------------------
the Managing Member to seek approval of major matters
materially affecting the business of the Company in the
manner provided in subsection (i) below.
(3) Bankruptcy/Insolvency. The commencement of bankruptcy or
---------------------
insolvency proceedings against the Managing Member or its
Affiliates.
(4) Breach of Operating Agreement. The Managing Member's
-----------------------------
breach of any provision of the Operating Agreement which
has or may have a material adverse effect on the
construction, operation or maintenance of the operations
of the System or on the equity investments of FUNC or
Pacific in the Company.
(5) Breach of Fiduciary Duty. The Managing Member's breach of
---------------------------
fiduciary duty to either FUNC or Pacific, which duties
shall not be less than those imposed upon a corporate
director with respect to a corporation's shareholders.
(6) Change in Ownership. A 45% (provided that such percentage
-------------------
shall be reduced if the Members reasonably agree that
such reduction shall not have an adverse regulatory
effect) or greater change in the equity ownership
of the Managing Member.
The Operating Agreement shall also provide that if the Managing
Member is removed for cause, FUNC and Pacific may select
another Person as the successor Managing Member. In no event
shall the successor Managing Member be an Affiliate of FUNC or
Pacific.
(i) Approval of Major Matters. Approval of major matters
-------------------------
materially affecting the business of the Company shall require the affirmative
vote of a majority of the voting points of FUNC and Pacific. Such matters
shall include, but not be limited to, the following:
(1) Merger, Sale of Assets. Authorization of the merger or
----------------------
consolidation of the Company with any Person or any sale,
lease, exchange, mortgage or other disposition of 25% or
more of the fair market value of the assets of the Company
(other than the sale of natural gas in the ordinary course
of business).
(2) Dissolution, Liquidation. Dissolving or liquidating the
------------------------
Company.
(3) Indebtedness. Incurring or prepaying indebtedness (or
------------
providing guaranties of another entity's indebtedness)
other than in the ordinary course of business, or, if in
the ordinary course of business, in an amount in excess
of $1,000,000, provided that such amount shall be
reduced if the Members reasonably agree that such
reduction shall not have an adverse regulatory effect.
(4) Material Agreements.
-------------------
Approval of the terms of a "Material Agreement"
(as defined below),
Any material amendment or modification of any Material
Agreement,
Waiver of compliance with any material provision of a
Material Agreement,
Termination, assignment of any material rights the Company
may have under, or consenting to or permitting the
assignment by any other Person of any material right such
Person may have under a Material Agreement, or
Giving consents or exercising any other material rights
under a Material Agreement.
"Material Agreement" shall mean any agreement for the
construction, installation, operation, maintenance or
provision of other services to the System with a value of over
$250,000, or the purchase of equipment with a value of over $100,000,
or any other material agreement to which the Company is a party.
(5) Liens. Creating or otherwise allowing any Lien to be
-----
imposed on, or otherwise to affect, any of the Company's
Property, except Permitted Liens.
(6) Settlements. Confessing a judgment or entering into any
-----------
settlement of any dispute that would materially
adversely affect the Company or require payment by the
Company of more than $1,000,000, provided that such
amount shall be reduced if the Members reasonably agree
that such reduction shall not have an adverse regulatory
effect.
(7) Form of Organization. Any change to the form of the
--------------------
organization of the Company, including, without
limitation, the admission of any additional Member.
(8) Adoption of Budget. Adopting a budget that causes an
------------------
increase of 15% or more for any category of expenses
over the amount included in the prior year's budget, or
an aggregate increase of 10%.
(9) Modification of Budget. Modifying a budget to result in a
----------------------
material increase for any category or expense, or an
aggregate increase of 10%.
(10) Capital Expenditures. Making any capital expenditure in
--------------------
excess of $500,000, provided that such amount shall be
reduced if the Members reasonably agree that such
reduction shall not have an adverse regulatory effect.
(11) Governmental Action. Amending any material government
-------------------
permit, amending any filing with any governmental body,
or seeking any governmental action other than is
ordinarily required in the ordinary conduct of business.
(12) Insurance Proceeds. Making a determination with respect to
------------------
the disposition of insurance proceeds in excess of
$500,000, provided that such amount shall be reduced if
the Members reasonably agree that such reduction shall
not have an adverse regulatory effect, or the repair or
rebuilding of any material portion of the System in the
event of substantial damage or destruction.
(13) Bankruptcy Filing. (i) Commencing, or causing the Company
-----------------
to commence any case, proceeding or other action (A)
under any existing or future law of any jurisdiction,
domestic or foreign, relating to bankruptcy, to have an
order for relief entered with respect to it, or seeking
to adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief
with respect to it or its debts, or (B) seeking
appointment of a receiver, trustee, custodian or other
similar official for it or for all or any substantial
part of its assets, or making a general assignment for
the benefit of its creditors; or (ii) if there shall be
commenced against the Company any case, proceeding or
other action of a nature referred to in clause (i)
above, taking any action in furtherance of, or
indicating its consent to, approval of, or acquiescence,
therein, or (iii) admitting in writing its inability to
pay its debts as they become due.
(14) Transfer of Membership Interest by Managing Member. A sale,
--------------------------------------------------
assignment, exchange, mortgage or other disposition
of all or any part of the Managing Member's Membership
Interest or Economic Interest in the Company.
(15) Capital Calls. The determination of Additional Capital
-------------
required from the Members pursuant to Section 3.4
hereof.
(16) Distributions. The determination of Distributions pursuant
-------------
to Sections 4.6, 4.7 or 4.8 hereof.
(j) Transactions with the Company. A Member, Director or
-----------------------------
Affiliate of any Member may enter into agreements, contracts, instruments or
other transactions with the Company so long as any agreement, contract,
instrument or other transaction between the Company and the Member, Director or
such Affiliate is at no greater than market rates, on commercially reasonable
terms and conditions such as are no less favorable to the Company than would be
available in a bona fide arm's length transaction with a Person that is not an
Affiliate, and has been approved by the Board of Directors (such approval not to
be unreasonably withheld if it has been determined that the proposed transaction
meets the other conditions set forth herein). A Director appointed by a Member
who has an interest (economic or otherwise) in the outcome of any such
agreement, contract, instrument or other transaction with the Company may not
vote or consent upon any such matter.
(k) Support Services Agreement. Pacific or an Affiliate with
--------------------------
equal or greater experience and expertise in the business of operating a local
gas distribution company and FUNC or an Affiliate with equal or greater
experience and expertise in the business of operating a local gas distribution
company (collectively, the "Service Providers") shall at all times be parties to
a Support Services Agreement with the Company pursuant to which the Service
Providers make available to the Company, at commercially reasonable rates, the
services of their employees on matters involving the day-to-day operations of
the Company. Services provided by the Service Providers shall be provided as
agent for the Board of Directors and shall be subject to the exclusive direction
and control of the Board of Directors and the officers of the Company.
(l) Change in Control. The provisions of Section 9.1(g)
-----------------
shall not apply to transfers of interests in FUNC by ARB.
22.11 Structure C. The restructuring described in this Section 22.11
-----------
shall be referred to as "Structure C". If PUHCA is not repealed before the
Completion Date, and Structure C is adopted by the Board of Directors pursuant
to Section 22. 5, the Company may be restructured as follows, and the Operating
Agreement amended accordingly:
(a) Adjustment of Economic and Membership Interests. The Economic
-----------------------------------------------
and Membership Interests of FUNC and Pacific shall be
adjusted as set forth in "Structure C" on Schedule 3.1 of
this Agreement, and FUNC shall become the Managing Member.
(b) Voting By Members. All Members who have not Disassociated shall
-----------------
be entitled to vote on any matter submitted to a vote of the
Members. There shall be one hundred (100) voting points, and
each Member shall have one point for each percentage point
of Membership Interest held by such Member from time to
time, with changes in voting points effective at the same
time as the corresponding changes in the Membership
Interests of the Members. Attendance by both Members
shall constitute a quorum at any meeting of Members. If
a quorum is present, the affirmative vote of Members holding
at least 51% of the Membership Interests represented in
person or by proxy shall be an act of the Members, unless
the vote of a greater or lesser proportion or number is
otherwise required by the Act, by the Certificate or by
this Agreement. In no event shall the percentage of
Membership Interests required to be voted in favor of an
issue be less than the percentage of Director votes that
would be required if the same matter were submitted to the
Board of Directors.
(c) Board of Directors. The Board of Directors shall consist of three
-------------------
directors appointed by Pacific and three directors appointed
by FUNC. The Directors shall vote as representatives of the
Members, in the same proportion as the Members' Membership
Interests and in the manner provided in Section 5.10(b).
Attendance by at one Director appointed by each Member
shall constitute a quorum at any meeting of the Board of
Directors. The affirmative vote of Directors voting 51
points shall be an act of the Board. FUNC shall elect the
Chair of the Board of Directors.
(d) Deadlocks. The provisions contained in Sections 5.10(c) and
---------
10.1(iv) of the Operating Agreement shall be deleted and
shall be replaced with provisions that are comparable and
reasonably reflective of the economic interests of the
parties.
(e) Selection of President. The Board of Directors shall select the
-----------------------
President.
(f) Selection of CFO and Limitation on Authority of CFO. The Board
---------------------------------------------------
of Directors shall select the CFO. If the CFO determines that
any proposed action of the Company is likely to have a
material adverse effect on the Company, the CFO must obtain
the approval of Pacific before taking such action.
(g) Removal of Managing Member for Cause. Pacific may remove the
-------------------------------------
Managing Member for cause. "Cause" will be defined in the
Operating Agreement to include, but will not be limited to:
(1) Failure to Seek Approval of Major Matters. The
-----------------------------------------
failure of the Managing Member to seek approval of
major matters materially affecting the business of
the Company in the manner provided in subsection (h)
below.
(2) Bankruptcy/Insolvency. The commencement of bankruptcy
---------------------
or insolvency proceedings against the Managing Member
or its Affiliates.
(3) Breach of Operating Agreement. The Managing Member's
-----------------------------
breach of any provision of the Operating Agreement
which has or may have a material adverse effect on
the construction, operation or maintenance of the
operations of the System or on the equity investments
of Pacific in the Company.
(4) Breach of Fiduciary Duty. The Managing Member's
-------------------------
breach of fiduciary duty to Pacific, which duties
shall not be less than those imposed upon a corporate
director with respect to a corporation's
shareholders.
The Operating Agreement shall also provide that if the
Managing Member is removed for cause, FUNC and Pacific shall
agree upon a successor Manager. If FUNC is removed as Managing
Member, FUNC's Economic Interest in the Company shall not be
altered.
(h) Approval of Major Matters. Approval of major matters
-------------------------
materially affecting the business of the Company shall require
the affirmative vote of Directors voting 96 voting points or
of Members holding 96% of all Membership Interests. Such
matters shall include, but not be limited to, the following:
(1) Merger, Sale of Assets. Authorization of the merger or
-----------------------
consolidation of the Company with any Person or
any sale, lease, exchange, mortgage or other
disposition of 25% or more of the fair market
value of the assets of the Company (other
than the sale of natural gas in the ordinary
course of business).
(2) Dissolution, Liquidation. Dissolving or liquidating
------------------------
the Company.
(3) Indebtedness. Incurring or prepaying indebtedness
------------
(or providing guaranties of another entity's
indebtedness) other than in the ordinary course
of business, or, if in the ordinary course of
business, in an amount in excess of $1,000,000,
provided that such amount shall be reduced if the
Members reasonably agree that such reduction
shall not have an adverse regulatory effect.
(4) Material Agreements.
---------------------
Approval of the terms of a "Material Agreement"
(as defined below),
Any material amendment or modification of any
Material Agreement,
Waiver of compliance with any material provision
of a Material Agreement,
Termination, assignment of any material rights
the Company may have under, or consenting
to or permitting the assignment by any other
Person of any material right such Person
may have under a Material Agreement, or
Giving consents or exercising any other material
rights under a Material Agreement.
"Material Agreement" shall mean any
agreement for the construction, installation, operation,
maintenance or provision of other services to the System
with a value of over $250,000, or the purchase of equipment
with a value of over $100,000, or any other material
agreement to which the Company is a party.
(5) Liens. Creating or otherwise allowing any Lien to
-----
be imposed otherwise to affect, any of the Company's
Property, except Permitted Liens.
(6) Settlements. Confessing a judgment or entering into any
-----------
settlement of any dispute that would materially
adversely affect the Company or require payment by
the Company of more than $1,000,000, provided
that such amount shall be reduced if the Members
reasonably agree that such reduction shall not have
an adverse regulatory effect.
(7) Form of Organization. Any change to the form of the
---------------------
organization of the Company, including, without
limitation, the admission of any additional
Member.
(8) Adoption of Budget. Adopting a budget that causes an
------------------
increase of 15% or more for any category of expenses
over the amount included in the prior year's budget,
or an aggregate increase of 10%.
(9) Modification of Budget. Modifying a budget to result in
----------------------
a material increase for any category or expense,
or an aggregate increase of 10%. 6.
(10) Capital Expenditures. Making any capital expenditure
--------------------
in excess of $500,000, provided that such amount
shall be reduced if the Members reasonably agree
that such reduction shall not have an adverse
regulatory effect.
(11) Governmental Action. Amending any material government
-------------------
permit, amending an filing with any governmental body,
or seeking any governmental action other than is
ordinarily required in the ordinary conduct of
business.
(12) Insurance Proceeds. Making a determination with
-------------------
respect to the disposition of insurance proceeds
in excess of $500,000, provided that such amount
shall be reduced if the Members reasonably agree
that such reduction shall not have an adverse
regulatory effect, or the repair or rebuilding of
any material portion of the System in the event of
substantial damage or destruction.
(13) Bankruptcy Filing. (i) Commencing, or causing the
-----------------
Company to commence any case, proceeding or other
action (A) under any existing or future law of
any jurisdiction, domestic or foreign, relating
to bankruptcy, insolvency, reorganization or
relief of debtors, seeking to have an order for
relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking
reorganization, arrangement, adjustment, winding-
up, liquidation, dissolution, composition or other
relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian
or other similar official for it or for all or any
substantial part of its assets, or making a general
assignment for the benefit of its creditors; or
(ii) if there shall be commenced against the Company
any case, proceeding or other action of a nature
referred to in clause (i) above, taking any action
in furtherance of, or indicating its consent to,
approval of, or acquiescence, therein, or (iii)
admitting in writing its inability to pay its debts
as they become due.
(14) Capital Calls. The determination of Additional Capital
-------------
required from the Members pursuant to Section 3.4
hereof.
(15) Distributions. The determination of Distributions
-------------
pursuant to Sections 4.6, 4.7 or 4.8 hereof.
22.12 Structure D. The restructuring described in this Section 22.12
------------
shall be referred to as "Structure D". If PUHCA is not repealed before the
Completion Date, and Structure D is adopted by the Board of Directors pursuant
to Section 22. 5, the Company may be merged into and become a division of
Southern California Gas Company (the "Gas Company"). Such a merger would be
carried out in a manner that would preserve the balance of economic benefits and
burdens and management control set forth in this Operating Agreement. If
Structure D is adopted, the Members shall negotiate in good faith to determine
an economic adjustment that recognizes any tax burden impacting only one Member
and that is directly attributable to the Restructuring. Such tax burden shall
include taxable events impacting only one Member at the time of implementation
of the Restructuring as well as any change in the nature of taxes (i.e ordinary
income vs. capital gain) thereafter imposed on the Member with respect to the
Company (without regard to the Member's specific tax situation). Following such
merger, the provisions of Section 9.1(g) shall not apply to transfers of
interests in FUNC by ARB. Notwithstanding the foregoing, at the sole election of
FUNC, FUNC's influence on the resulting division of the Gas Company may be
limited to reasonable rights and protections that may be as limited as the
Reasonable Rights and Protections.
SECTION 23 - GENERAL
23.1. Project Finance: Limitation on Obligations of FUNC and Pacific.
--------------------------------------------------------------
With respect to the terms and conditions of the System Loan, or any other debt
of the Company, the Members agree that (a) neither FUNC nor Pacific will provide
any guarantee or other financial accommodation to or in favor of the Company or
to any lender, nor will it provide any pledge, mortgage or other security
interests in its assets, and (b) that parties holding security interests in
FUNC's assets will not be requested to enter into non-disturbance agreements
regarding the use by the Company of any of FUNC's assets. The parties further
covenant with respect to obtaining the System Loan as follows:
(a) Pacific and FUNC, acting jointly, each shall use its good faith
best efforts to cause the Company to obtain the System Loan reflecting a ratio
of seventy-five percent debt financing and twenty-five percent equity financing,
represented by the Capital Contributions provided for herein. Any System Loan
shall be on commercially reasonable terms and conditions, including interest
rate and maturity, for projects of similar size and scope that are not subject
of guaranties by the parents of the members of the Company. The target amount of
System Loan is, therefore, equal to seventy-five percent of the Total Capital
Need.
(b) If the Company is unable to raise at least seventy percent of the
Total Capital Need through the System Loan, Pacific's affiliate, Energy Pacific,
shall provide up to $4,000,000 in incremental financing for the Company in the
form of a Capital Contribution by Pacific (the "Incremental Equity"). The final
amount of the Incremental Equity shall be an amount equal to seventy percent of
the Total Capital Need minus the amount of the System Loan, but in no event
shall be greater than $4,000,000.
(c) The Incremental Equity shall be a part of the capital of the
Company and shall be included in determining the Economic Interests of the
Members in the Company. The Incremental Equity, however, will not be included
for purposes of determining the Membership Interests or voting interests of the
Members in the Company before the fourth anniversary of the funding of the
Incremental Equity. After such date no distinction shall be drawn between
Capital Contributions otherwise provided for in this Operating Agreement and
Incremental Equity.
(d) The Company shall use its best efforts to redeem and repurchase
such Incremental Equity (in whole or in part) from time to time as feasible in
light of its financial position, and as permitted under the covenants in favor
of its lenders and any applicable law prior to and on the fourth anniversary of
the funding of the Incremental Equity. FUNC shall have the right at any time on
or before the fourth anniversary of the funding of the Incremental Equity, upon
written notice to Pacific, to purchase up to one-half of the Incremental Equity
then outstanding. The purchase price to be paid by the Company or FUNC shall be
paid in cash at the amount of the Incremental Equity purchased.
23.2. Further Cooperation. The Parties agree to execute and furnish any
-------------------
and all papers and documents which may reasonably be necessary to carry out the
terms of this Agreement and to further the interests of the Company, including,
without limitation, any financial statements, corporate resolutions, and other
documentation and information as may be required by bonding companies, insurers,
depositories of funds of the Company, construction and permanent lenders and
public agencies involved in the funding of the Project Implementation Plan and
to permit granting authorities relative to permits required for the performance
of the Project Implementation Plan.
23.3. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed to be an original as against any
party whose signature appears thereon, and all of which shall together
constitute one and the same instrument. This Agreement shall become binding when
one or more counterparts hereof, individually or taken together, shall bear the
signatures of all of the parties reflected hereon as the signatories.
23.4. Notices. All notices, request, demands and other communications
-------
required hereunder shall be in writing and shall be deemed to have been duly
given or made if delivered personally, sent by facsimile transmission or telex
confirmed in writing within two (2) business days, or sent by registered or
certified mail, postage prepaid, as follows:
In the event of notice to Pacific:
Frontier Pacific
c/o Energy Pacific
. 633 W. Fifth Street, Suite 5200
Los Angeles, CA 90071-2071
Attention: President
Fax: 213-629-9651
and in the event of a notice to FUNC:
Frontier Utilities of North Carolina
c/o ARB, Inc.
14409 Paramount Boulevard
Paramount, CA 90723
Attention: President
Fax: (562) 601-4604
Any Party may change the address to which such communications are to be sent to
it by giving written notice of change of address to the other party in the
manner provided above for giving notice.
23.5. Attorneys Fees. The prevailing party shall be entitled to
---------------
reasonable attorneys' fees and expenses in the event of any litigation arising
out of or related to this Agreement or the System.
23.6. Authorization; Enforceability. This Agreement has been duly
-----------------------------
authorized by all corporate and other action required by Pacific and FUNC,
respectively, and constitutes the valid, binding and enforceable obligation of
such party.
23.7. Amendments. The provisions of this Agreement may not be amended,
----------
modified or waived except by a written instrument executed by each Member.
23.8. Severability. Any provision of this Agreement which is prohibited
------------
or unenforceable in any jurisdiction shall not invalidate the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
23.9. Counterparts. This Agreement may be signed in any number of
------------
counterparts with the same effect as if the signatures thereto and hereto were
upon the same instrument.
IN WITNESS WHEREOF the parties have entered this Operating
Agreement as of the first date set forth above.
FRONTIER UTILITIES FRONTIER PACIFIC, INC.
OF NORTH CAROLINA
By: /s/ John P. Schauerman By: /s/ Andrew R. Rea
Name: John P. Schauerman Name: Andrew R. Rea
Title: President Title: Vice President
SCHEDULE 3.1
TO OPERATING AGREEMENT OF
FRONTIER UTILITIES OF NORTH CAROLINA LLC
Situation A: As of the date hereof
Name and address of Member Capital Economic Membership
Contribution Interest Interest
Frontier Pacific $3,272,500 50% 50%
Frontier Utilities of
North Carolina $3,272,500 50% 50%
Structure C: If the structure is changed to Structure C as provided in Section
22.5
Name and address of Member Capital Economic Membership
Contribution Interest Interest
Frontier Pacific $3,272,500 50% 4.9%
Frontier Utilities of
North Carolina $3,272,500 50% 95.1%
FURTHER CONTRIBUTIONS
The Members' Further Contributions (as defined in Section 3.3) shall
equal $5,455,000, in the aggregate.
APPENDIX 3.3
OUTLINE AND GENERAL PARAMETERS OF
CONSTRUCTION BUDGET
STATE OF NORTH CAROLINA
UTILITIES COMMISSION
RALEIGH
DOCKET NOS. G-38, SUB 3 and G-40
BEFORE THE NORTH CAROLINA UTILITIES COMMISSION:
In the Matter of )
Application of Frontier Utilities of North ) Application
Carolina, Inc. and Frontier Energy LLC for )
Approval of Final Financing Plan, to )
Transfer Certificates, and for Approval or )
Waiver of Security Bond, )
)
NOW COMES APPLICANTS FRONTIER UTILITIES OF NORTH CAROLINA
("Frontier Utilities") AND FRONTIER ENERGY, LLC ("Frontier
Energy") and hereby respectfully make application to the North
Carolina Utilities Commission ("Commission"), pursuant to
Commission Rules R1-4, R1-5, R1-16 and N.C. Gen. Stat. Sections
62-111, 62-153, 62-161 et seq. (a) for approval of final
financing plan, including the participation of Frontier Pacific,
Inc. as an equity partner and the formation of Frontier Energy,
LLC; (b) for approval of approximately $12,000,000 in equity
investment, including $3,250,000 in cash deposited on January 21,
1997 in Frontier Energy's account with NationsBank in Elkin,
North Carolina, $5,000,000 in transmission pipe that has already
been ordered, and $3,250,000 in capital and in-kind contributions
by Frontier Utilities; (c) for preliminary approval to borrow up
to $40,000,000 principal amount in debt; (d) to transfer
certificates; and (e) for approval or waiver of security bond.
In support thereof, the Applicants show the Commission as
follows:
The names, addresses and telephone numbers of persons to
whom any notices or other communications with respect to this
Application are to be sent are as follows:
Frontier Energy, LLC Donald Liddell, Esq.
1919 North Bridge Street Energy Pacific, LLC.
Elkin, North Carolina 28621 633 West Fifth Street, Suite 56K
tele: 910-526-2690 Los Angeles, CA 90071-2006
tele: 213-895-5166
Mr. John Schauerman Mr. Andrew Rea
ARB, Inc. Energy Pacific, LLC.
2600 Commercenter Driver 633 West Fifth Street, Suite 56K
Los Angeles, CA 92630 Los Angeles, CA 90071-2006
tele: 714-454-7103 tele: 213-895-5734
M. Gray Styers, Jr., Esq. Mr. Robert J. Oxford
James P. Cain, Esq. Frontier Utilities of North
Kilpatrick Stockton LLP Carolina, Inc.
4101 Lake Boone Trail, Suite 400 4501 Wadsworth Blvd.
Raleigh, NC 27607 Wheat Ridge, CO 80033
tele: 919-420-1700 tele: 303-422-3400
II. BACKGROUND INFORMATION
Frontier Utilities is. a corporation duly organized and
existing under the taws of the State of North Carolina for the
purpose of providing natural gas service in certain areas of
North Carolina pursuant to Certificates of Public Convenience and
Necessity heretofore issued by the Commission. Frontier
Utilities is a public utility under the laws of this State, and
its efforts to commence public utility operations in North
Carolina are subject to the jurisdiction of this Commission.
Frontier Utilities received a Certificate of Public
Convenience and Necessity to construct a natural gas transmission
and local distribution systems in Surrey, Wilkes, Watauga, and
Yadkin Counties in consolidated Docket Nos. G-38 and G-9, Sub
357, on January 30, 1996. The order granting this Certificate
was affirmed by the North Carolina Supreme Court on July 24,
1997. The time in which a petition for writ of certiorari to the
United States Supreme Court could have been filed to challenge
this decision expired on November 11, 1997. Ashe and Allegheny
Counties were added to Frontier Utilities' certificated
territory, pursuant to N.C. Gen. Stat. Section 62-36A(b1), by
Order of the Commission in Docket No. G-100, Sub 69, issued on
August 16, 1996. Frontier Utilities received a Certificate of
Public Convenience and Necessity to construct and operate a
natural gas transmission and distribution system in Warren County
in Docket G-38, Sub 1, on March 27, 1997. Collectively, the
transmission and distribution system to be built in the
Four-County area and in Warren County, financed as explained in
greater detail below, is hereinafter referred to as "the
System."(1)
Both the Certificates in consolidated Docket Nos. G-38 and
G-9, Sub 357, and in Docket No. G-38, Sub 1, require Frontier
Utilities to file for approval of its final financing plan within
nine months of the date that the Order in Docket Nos. G-38 and
G-9, Sub 357 becomes final by the expiration of any period during
which that Order may be appealed (i.e. November 11, 1997). A
purpose of this current application is to request approval of
this financing plan for the System, pursuant to these
Certificates and the requirements of N.C. Gen. Stat. Sections
62-161 et seq.
Since the issuance of the Supreme Court decision, Frontier
Utilities has been actively talking and meeting with potential
investors and partners who had previously expressed their
interest in the project. These potential investors and partners
-----------------------
1 Although Frontier Energy plans to serve both Ashe and Allegheny
Counties as soon as possible and feasible, the financing plan set
forth herein does not include the system to be fuilt in those
counties. To the extent that Commission approval will be reuqied
fore additional financing for the extension of the System into
those two counties, that financing plan will be tghe subject of a
future docket.
have been performing their own studies of the natural gas markets
in Frontier's certificated territories and the transmission and
distribution systems that will be needed to serve those markets.
After considerable investigation and deliberation, Frontier
Utilities has chosen a partner that brings significant natural
gas distribution and energy related experience and skills and
substantial resources to serve the industries, businesses, and
residents in its territories.
III. FINANCING PLAN: EQUITY PARTNER - FRONTIER PACIFIC, INC.
FORMATION OF FRONTIER ENERGY, LLC
Frontier Utilities' proposed equity partner is Frontier
Pacific, Inc. ("Frontier Pacific"), a wholly-owned subsidiary of
Energy Pacific, LLC, a joint venture of subsidiaries of pacific
Enterprises and Enova Corporation. Frontier Utilities and
Frontier Pacific will each be fifty-percent (50%) members of a
newly formed entity, Frontier Energy, LLC ("Frontier Energy").
Frontier Energy is a limited liability company organized under
the laws of the State of North Carolina. The Articles of
Organization of Frontier Energy are attached hereto behind Tab A.
If approved in this docket, Frontier Energy will be a public
utility under the laws of this State, and its public utility
operations in North Carolina will be subject to the jurisdiction
of this Commission. The formation of Frontier Energy provides an
organizational structure for all parties to contribute the
necessary capital for construction and operations, to share in
the management responsibility and ownership, to allocate
appropriately the inherent risks and potential rewards, and to
minimize administrative, tax, and other burdens that might
otherwise be present with alternative structures.
As a partner in this venture, Frontier Pacific, through its
affiliated companies, brings not only financial resources, but
also a proven track record and extensive technical expertise and
experience. Moreover, this project is consistent with the
objectives of Energy Pacific (Frontier Pacific's parent) to
invest and participate in energy business opportunities in
unserved or underserved areas and that arise from changes in
energy markets. Exhibit B shown below and attached hereto behind
Tab B contains a chart indicating the relationship of Frontier
Utilities, Frontier Pacific, Frontier Energy, and some of their
affiliated companies.
Exhibit B
Organization Chart
----------- ------------ -------- -------------- ----------
Enova Pacific ARB, Industrial Gas Pipeline
Corporation Enterprises Inc. Services Solutions
----------- ------------ -------- -------------- ----------
. . . . . .
. . . . . .
. . . . . .
. .
- -------------- ------- ----------- ------------------
Southern
San Diego Energy California Frontier Utilities
Gas & Electric Pacific Gas Company
- -------------- ------- ------------ ------------------
-------- ------------------
Frontier Frontier Utilities
Pacific of North Carolina
-------- ------------------
. .
. .
. .
--------------------
Frontier Energy, LLC
--------------------
As shown on Exhibit B, Pacific Enterprises and Enova
Corporation, who are currently merging with one another, are the
parent companies of Southern California Gas Company and San Diego
Gas & Electric, respectively. Together, they serve over six
million energy customers and are the nation's largest natural gas
distributor. The most recent annual reports for Pacific
Enterprises and Enova Corporation are attached as behind Tabs C
and D, respectively
Specifically, Frontier Energy will have access to the
engineering, legal, financial, and administrative resources of
Pacific Enterprises and Enova Corporation. Frontier Energy's
officers involved in the building and initial operations of the
Frontier system include the following persons: John Schauerman,
President; Andrew Rea, Senior Vice President; Robert Oxford, Vice
President of Public Affairs; Rodger Schwecke, Vice President of
Marketing; Kenneth Teague, Vice President of Operations; Robert
Salvaria, Treasurer; and Donald Liddell, Secretary. Other key
personnel include Steve Shute; Larry Rich; David Schiller; and
Antonio Prietto. Biographical profiles for all of these persons
are attached behind Tab E.
IV. EQUITY CAPITALIZATION
The capitalization of Frontier Energy will total
approximately $12,000,000 in equity, including a cash
contribution of approximately $3,250,000 by Frontier Pacific,
which has already been deposited with NationsBank in Elkin, North
Carolina, almost $5,000,000 in pipe that has been ordered for
delivery on or about March 1, 1998, and $3,250,000 in cash and
in-kind contributions (start-up efforts, investigations and
studies, and certificates, etc.) contributed by Frontier
Utilities. Upon information and belief, this represents the
largest equity capitalization of a new public utility ever in
North Carolina. The amount of this investment also demonstrates
the resources and the commitment of Frontier Energy and its
members to ensure high quality, safe, and reliable natural gas
service to its customers.
Frontier Energy will borrow additional funds for the
construction of the system, as described in more detail below,
not to exceed 75% of the total financing. Contributions by
Frontier Pacific, as equity, will constitute the balance of the
unfinanced portion, if necessary. Both Frontier Pacific and
Frontier Utilities intend to retain their respective 50%
membership interest in Frontier Energy, at least through and
until the system construction, as proposed and projected, is
completed.
V. DEBT FINANCING
Frontier Utilities and Frontier Energy have determined that,
under present market conditions, an agreement for the borrowing
of funds to be received at the times needed to meet the cash
needs of the ongoing construction of the System will provide
Frontier Energy with the maximum flexibility for debt financing
on reasonable and favorable terms.
Frontier Energy intends to enter into an agreement for the
debt containing the following terms and subject to the following
limitations:
Maximum Debt: $40 million
Minimum Maturity: 3 years
Maximum Maturity: 10 years
Interest Rates: Not to exceed LIBOR (London inter-bank
offered rate) + 3.50% or 9.50% at
today's rates.
Fees: Not to exceed 2.5% of total debt
Collateral: To be negotiated, but may include the
pledge of the company's assets and/or
the members' equity interest
Covenants and Other Limitations: To be negotiated with
banks but will include
financial covenants, such
as:
- total debt-total
capital not to
exceed 75%
- restrictions on
dividends/distributions
Frontier Energy has talked with a number of lenders
regarding the arrangement of a debt facility consistent with
these terms. At present, the negotiations have progressed the
farthest with NationsBank and Societe Generale, although other
banks that are considering the project include Bank of America,
ABN AMRO, and Union Bank of California. Letters of interest by
NationsBank and Societe Generale are attached hereto behind Tabs
F and G respectively.
In order to. facilitate and expedite the debt financing,
Frontier Utilities and Frontier Energy requests approval of this
financing in two stages. First would be preliminary, general
approval of borrowing of up to $40,000,000, as part of the final
financing plan, consistent with the terms outlined above. Second
would be final approval of the definite terms of the financing
with the specific lending institution(s) from whom Frontier
Energy decides to borrow these funds, as set forth in a firm
Commitment Letter and Term Sheet with the institution(s).
Frontier Energy anticipates filing the Commitment Letter and
Term Sheet before, or very shortly after, the initial approval of
this proposed financing plan, as requested herein, and that this
second approval may occur in a subsequent Order in this docket,
following that filing. Because of the exigencies of the process
of closing financing of this type and the need for funds to
continue construction, which will already have begun, Frontier
Energy would respectfully request that this final approval occur
as soon as practical following the filing of the Commitment
Letter and Term Sheet of the financing.
In addition, as noted above, it may be necessary for the
debt to be secured by the system assets of Frontier Energy or its
members' equity interest. Therefore, pursuant to the
requirements of N.C. Gen. Stat. Section 62-160, Frontier
Utilities and Frontier Energy also requests permission to pledge
the assets of the company if necessary to obtain financing, to be
approved at the time of the final approval of the terms of the
financing as set forth in the commitment letter and term sheet.
As soon as possible after the Commission's final approval of
the financing, Frontier Energy will proceed with the closing of
the debt financing. As soon as the financing documentation is
executed, Frontier Energy will file all of this documentation
with the Commission, so that its compliance with the terms of the
Commitment Letter and Term Sheet can be confirmed
In summary, Frontier Utilities and Frontier Energy request
authorization and permission to receive equity investments and
preliminary approval to borrow debt and pledge assets as outlined
above for the construction and initial operations of a natural
gas transmission and distribution system in Surrey, Watauga,
Wilkes, Yadkin, and Warren Counties, consistent with the evidence
that was presented in Docket Nos. G-38 and G-9, Sub 357 and
Docket No. G-38, Sub 1. These transactions are necessary and
essential for Frontier Utilities/Frontier Energy to construct the
System and provide service in these counties as authorized by
certificates issued by the Commission in those dockets, and
Frontier's ability to provide that utility service in a timely
manner will be impaired in the absence of permission and
authorization to undertake the transactions contemplated and to
borrow debt as described above.
VI. TRANSFER OF CERTIFICATES
Because of the organizational structure of this financing
plan, Frontier Utilities also needs to transfer its Certificates
of Public Convenience and Necessity for the Four-County area
(Surrey, Watauga, Wilkes, and Yadkin Counties), for Ashe and
Allegheny Counties, and for Warren County to Frontier Energy and
for Frontier Energy to own and operate the System in these areas.
The System will be designed, constructed, and operated in
substantial conformity with the evidence presented by Frontier
Utilities in consolidated Docket Nos. G-38 and G-9, Sub 357 and
Docket No. G-38, Sub 1. During the first five years of
construction, Frontier Energy projects installing 146 miles of
steel transmission pipe and distribution pipe to serve 13,250
residential, 1,054 small commercial, 300 poultry, and 55 large
commercial and industrial customers by the end of the fifth year.
Additional distribution pipe will be installed after Year-5
as needed and feasible to serve more customers. The exhibit
attached behind Tab H contains a more detailed breakdown of
Frontier Energy's projections of the volumes of gas it plans to
provide and the number of customers it hopes to serve over next
five years
As a successor to Frontier Utilities, Frontier Energy agrees
to accept all of the obligations and commitments of Frontier
Utilities, pursuant to the terms of the certificates and the
rules and regulations of the North Carolina Utilities Commission.
In addition to the transmission and local distribution systems to
be built in northwestern North Carolina, it intends to construct
a system in Warren County. At the present time, Frontier Energy
has already ordered 55 miles of 10-inch, 76 miles of 6-inch, and
15-miles of 4 inch steel transmission pipe at a cost of almost
$5,000,000 and intends to begin construction in the Four-County
area by the second quarter of 1998 if the necessary approvals are
granted. Assuming no unanticipated delays, gas should be
delivered to Frontier's first key industrial customers in the
summer of this year. Construction of the system in Warren County
will not begin as soon as in northwestern North Carolina, because
Frontier Pacific had not completed its final investigation and
verification of the economics of the system in Warren County at
the time of its commitment to invest as an equity partner.
Frontier Energy, however, plans to build the Warren County system
from the equity invested by its members and does not anticipate
the need for any additional financing beyond what is outlined
above. Frontier Energy will file for approval of its plans to
build the Warren County system, along with its agreement for
interstate pipeline capacity for this system, on or before August
11, 1998.
VII. APPROVAL OR WAIVER OF SECURITY
In addition to approval of the final financing plan, the
certificate issued by the Commission in Docket Nos. G-38 and G-9,
Sub 357 required Frontier to file for approval of security in the
form of a bond in the amount of $4 million payable if (1)
Frontier abandons the system so that the Commission has to
appoint an emergency operator and (2) the funds are needed for
the emergency operator to reliably operate the system. Likewise,
in Docket No. G-38, Sub 1, the Commission's final Order required
approval of security in the amount of $500,000 for the Warren
County project for the same purpose. The need for such security
was discussed in the context of concerns raised because Frontier
Utilities was a new utility company. The Orders in both dockets
stated, "The Order need not be executed at th[e] time [of
approval], but must be ready to be executed." Accordingly,
attached hereto as Exhibit I is such security, ready to be
executed.
Although Frontier Energy stands ready, willing, and able to
fulfill these requirements, it believes that the track record,
reputation, experience, and financial strength of Energy Pacific
and its corporate parents obviate the need for such security.
For example, the $12,000,000 equity contribution demonstrates
that a separate security of $4,500,000 is totally unnecessary The
Certificate in Docket Nos. G-38 and G-9, Sub 357 expressly
stated, "It is the Commission's intention that the required
security should eventually be eliminated," and requested that the
Public Staff annually "evaluate the current and prospective risks
of the project and recommend to the Commission whether. . the
bond should continue to be required." Under the present
circumstance, the "current and prospective risks of the project"
render a bond a bond unnecessary, and therefore one should not be
required.(2) There is no practical, realistic scenario in which
such a bond would be needed to ensure the continued operation of
the System. Therefore, Frontier Utilities and Frontier Energy
respectfully request that this requirement be waived.
----------------------
2 Even without a performance bond, the construction and operation
of the System will be assured in other ways (e.g. construction
bond of the Contractor, business and liability insurance,
compliance inspections by the Commission's pipeline safety staff,
etc.) as the Commission observed in its Order granting the
certificate to Frontier (Order of January 30, 1996, in Docket
Nos. G-38 and G-9, Sub 357, pp. 29-30).
VIII. EXHIBITS
The following exhibits are filed along with this Application
behind the corresponding lettered tabs and are incorporated
herein by reference . :
Exhibit A - Articles of Organization of Frontier Energy
Exhibit B - Organization Chart of Frontier Energy and
some of their affiliated companies
Exhibit C - Annual Report of Pacific Enterprises
Exhibit D - Annual Report of Enova Corporation
Exhibit E - Biographical Profiles of Officers, Directors,
and Key Personnel
Exhibit F - Letter of Interest from NationsBank
Exhibit G - Letters of Interest from Societe Generale
Exhibit H- Projections - Numbers of Customers and
Volumes
Exhibit I - Bond letter and unexecuted Bond
IX. CONCLUSION
Frontier Utilities and Frontier Energy represent that the
formation of the limited liability corporation, the investment of
equity and borrowing of debt, and the transfer of certificates
are for a lawful object within their corporate purposes,
compatible with the public interest, necessary and appropriate
for and consistent with the proper performance by them of their
service to the public, and that these measures will not impair
their ability to perform that service and are reasonably
necessary and appropriate for such purposes.
WHEREFORE, Frontier Utilities and Frontier Energy
respectfully request that the Commission enter an order (a)
approving the final financing plan, including the formation of
Frontier Energy, LLC, its investment of equity, and the plan for
borrowing debt, as discussed above; (b) granting preliminary
approval of the terms of the debt financing within the parameters
set forth above and the pledging of assets of the company to
secure such debt, and empowering and permitting Frontier Energy
to negotiate the appropriate agreements with underwriters or
agents for the borrowing of debt consistent with these terms, (c)
bifurcating this proceeding so that final approval of the debt
financing shall occur in a subsequent Order of the Commission
following the filing of the Commitment Letter and Term Sheet with
specific lending institution(s); (d) transferring to Frontier
Energy the certificates of public convenience and necessity
currently issued to Frontier Utilities, and (e) concluding that a
security, as contemplated by orders in Docket Nos. G38 and G-9,
Sub 357 and Docket No. G-38, Sub 1, is no longer needed, and that
such requirements are hereby waived.
Respectfully submitted, this the 23rd day of January, 1998.
----
KILPATRICK STOCKTON LLP
By: /s/ M. Gray Styers, Jr.
--------------------------
M. Gray Styers, Jr.
James P. Cain
4101 Lake Boone Trail, Suite 400
Raleigh, North Carolina 27607
Telephone: 919/420-1700
Attorneys for Frontier Utilities of
North Carolina, Inc. and Frontier
Energy, LLC
STATE OF Colorado )
--------------------
) VERIFICATION
COUNTY OF Jefferson )
--------------------
Robert J. Oxford, as President of Frontier Utilities of
North Carolina, being first duly sworn, deposes and says:
That he has read the foregoing Application and knows the
contents thereof; that the same is true of this own knowledge,
except as to those matters therein alleged upon information and
belief, and as to those matters, he believes them to be true.
/s/ Robert J. Oxford
--------------------------
Robert J. Oxford
SWORN TO AND SUBSCRIBED
before me this 22nd day of
----
January , 1998
-----------
/s/ Peggy C. Oxford
-----------------------------
Notary Public
My Commission Expires:
10-31-98
-----------------------------
STATE OF California )
-------------------
) VERIFICATION
COUNTY OF Los Angeles )
-----------------
Andrew Rea, on behalf of Frontier Energy, LLC, being duly
sworn, deposes and says that he is the Senior Vice President of
Frontier Energy, LLC; that as such he has read the foregoing
Application and knows the contents thereof; that the same are
true of his own knowledge except as to those matters stated on
information and belief and as to those matters he believes them
to be true.
/s/ Andrew Rea
---------------------------------
Andrew Rea, Senior Vice President
Frontier Energy, LLC
SWORN TO AND SUBSCRIBED
before me this 22nd day of
----
January , 1998
-----------
/s/ Louise Trammel
-----------------------------
Notary Public
My Commission Expires:
3-17-2000
-----------------------------
CERTIFICATE OF SERVICE
----------------------
I, M. Gray Styers, Jr., hereby certify that on this date I
served the foregoing APPLICATION OF FRONTIER UTILITIES OF NORTH
CAROLINA, INC. AND FRONTIER ENERGY, LLC upon counsel of record by
depositing a copy thereof in the United States mail, postage
prepaid and addressed as follows:
Mr. Robert P. Gruber
Executive Director, Public Staff
North Carolina Utilities Commission
Post Office Box 29520
Raleigh. North Carolina 27626-0520
Mark Payne, Esq.
Attorney General's Office
Department of Justice
P.O. Box 629
Raleigh, NC 27602
This the 23rd day of January, 1998.
-----
/s/ M. Gray Styers
----------------------------
M. Gray Styers,
KILPATRICK STOCKTON LLP
4101 Lake Boone Trail, Suite 400
Raleigh, North Carolina 27607
Telephone: (919) 420-1700
STATE OF NORTH CAROLINA
UTILITIES COMMISSION
RALEIGH
DOCKET NO. G-38, SUB 3
DOCKET NO. G-40
BEFORE THE NORTH CAROLINA UTILITIES COMMISSION
In the Matter of
Application of Frontier Utilities of North ) ORDER APPROVING FINAL
Carolina, Inc., and Frontier Energy, ) FINANCING PLAN, TRANSFER
LLC, for Approval of Final Financing ) OF CERTIFICATES, AND
Plan, to Transfer Certificates, and for ) SECURITY BOND AND
Approval or Waiver of Security Bond ) PRELIMINARILY APPROVING
) DEBT FINANCING
BY THE COMMISSION: Frontier Utilities of North Carolina,
Inc. (Frontier Utilities), was granted a certificate of public
convenience and necessity by this Commission to serve the
Four-County area of Surry, Watauga, Wilkes, and Yadkin Counties
by Order dated January 30, 1996, in Docket Nos. G-38 and G-9,
Sub 357. The North Carolina Supreme Court affirmed this Order by
opinion filed July 24, 1997, which became final on November 11,
1997, by the expiration of the deadline to file for review by the
United States Supreme Court. Ashe and Allegheny Counties were
added to Frontier Utilities' territory pursuant to G.S.
62-36A(b1) by Order dated August 16, 1996, in Docket No. G-100,
Sub 69. The certificate to serve Warren County was awarded to
Frontier Utilities by Order dated March 27, 1997. The Orders
awarding the Four-County area and Warren County to Frontier
Utilities required it to file its final financing plan within
nine months of the date the Four-County Order became final.
On January 23, 1998, Frontier Utilities and Frontier Energy,
LLC (Frontier Energy), filed an application (a) for approval of
their final financing plan, including the participation of
Frontier Pacific, Inc., as an equity partner and the formation of
Frontier Energy; (b) for approval of approximately $12 million in
equity investment, including $3.25 million in cash deposited on
January 21, 1997, in Frontier Energy's account with NationsBank
in Elkin, North Carolina, $5 million in transmission pipe that
has already been ordered, and $3.25 million in capital and
in-kind contributions by Frontier Utilities; (c) for preliminary
approval to borrow up to $40 million principal in debt; (d) to
transfer the certificates of public convenience and necessity
awarded to Frontier Utilities to serve Surry, Watauga, Wilkes,
and Yadkin Counties (the Four-County area), Ashe and Allegheny
Counties, and Warren County to Frontier Energy; and (e) for
approval or waiver of a security bond.
Under the proposed financing plan as filed, Frontier
Utilities and Frontier Pacific, Inc., will be fifty-percent (50%)
members of a newly formed entity, Frontier Energy, LLC. Frontier
Pacific, Inc., is a wholly-owned subsidiary of Energy Pacific,
LLC, which is a joint venture of two companies that have
extensive experience in natural gas distribution.
By Order dated February 3, 1998, the Commission established
a deadline of February 24, 1998, for petitions to intervene and
the filing of written comments. The Public Staff and the
Attorney General filed comments. One letter dated February 20,
1998, was filed on behalf of the Warren County Economic
Development Commission, and it raised concerns about the timing
of service to Warren County.
The Public Staff's comments indicated that its investigation
of Frontier Energy's market studies revealed that the Four-County
project as proposed by Frontier Energy is comparable in scope and
size to the project as originally proposed in 1994. Frontier
Energy has already ordered transmission pipe and begun the
process of right-of-way selection and acquisition. Construction
will begin as soon as financing is closed.
In response to a Public Staff data request about its plans
with respect to Warren County, Frontier Energy indicated that it
had focused its resources on the Four-County area initially and
that because of the substantial lead time involved in due
diligence and the planning process, its plans for Warren County
could not be implemented as soon as its plans in the Four-County
area. Frontier Energy further indicated that it expects to file
plans to build the Warren County system no later than August 11,
1998. In addition, it indicated that it had received a formal
proposal for interstate pipeline capacity from Public Service
Company of North Carolina, Inc., on February 20, 1998. Finally,
it indicated that it intends to build the system substantially in
conformance with Frontier Utilities' proposal as filed in 1996,
and that based on (1) the assumption that a reasonable agreement
for interstate pipeline capacity can be finalized and (2) weather
conditions and other variables beyond its control, it expects to
begin construction during the latter part of 1998, with
completion during the first half of 1999.
With respect to Ashe and Alleghany Counties, Frontier Energy
has indicated that it intends to serve Ashe County soon after it
completes its Warren County project. Alleghany County will
receive service as soon thereafter as possible.
With respect to the financing issues, the Public Staff's
comments indicated that it is reasonable to grant approval of the
debt financing in two stages as proposed by Frontier Energy,
subject to certain specific requirements for information being
imposed on the second stage of the approval process. In
addition, the comments indicated that, with the Public Staff's
recommended wording change, the equity financing should be
approved.
Frontier Energy filed an executable security bond as
required by the Commission in its Orders granting the
certificates to Frontier Utilities for the Four-County area and
for Warren County, but requested that the security requirement be
waived. The purpose of the bond, as explained in those orders,
is to provide funds if an emergency operator is appointed by the
Commission and the funds are needed for the emergency operator to
reliably run the system. Frontier Energy requested that the bond
requirement be waived because the reputation, experience,
financial strength, and other resources of Energy Pacific and its
corporate parents obviate the need for such security. In its
comments, the Public Staff did not make a recommendation as to
the security requirement and stated that it would not object to
the Commission waiving the security requirement
Finally, the only outstanding issue at the time the Public
Staff filed its comments was whether Frontier Energy could be
considered to be part of a registered holding company under the
Public Utility Holding Company Act of 1935 (PUHCA). The Attorney
General's comments also stated concerns about the potential PUHCA
issue and about the books and records of Frontier Energy and its
affiliates being subject to full disclosure. A stipulation
between the Public Staff and Frontier Energy, Frontier Pacific,
its ultimate parent companies, and Frontier Utilities on both of
these issues was filed on Monday, March 9, 1998.
The Public Staff presented this matter to the Commission at
its Staff Conference on Monday, March 9, 1998. Allen Kimball of
the Warren County Economic Development Commission made a
statement along the lines of his February 20, 1998 letter.
Based on Frontier Energy's agreement to the changes and
conditions recommended by the Public Staff and the stipulation,
the Public Staff recommended that the Commission (a) approve
Frontier Utilities' and Frontier Energy's final financing plan,
including the participation of Frontier Pacific, Inc., as an
equity partner and the formation of Frontier Energy; (b) approve
$11.5 million in equity investment; (c) preliminarily approve up
to $40 million in debt financing that is consistent with the
terms outlined in its application; and (d) approve the transfer
of the certificates of public convenience and necessity awarded
to Frontier Utilities to serve Surry, Watauga, Wilkes, and Yadkin
Counties (the Four-County area), Ashe and Allegheny Counties, and
Warren County to Frontier Energy. The Public Staff further
recommended that if the Commission grants preliminary approval of
the debt financing as proposed, it should be subject to Frontier
Energy (1) filing the Commitment Letter(s) and Term Sheet(s) of
the final debt financing and (2) providing all requested
additional information with respect thereto. Finally, the Public
Staff recommended that, if the Commission decided to continue the
requirement for the security bond, a security bond of a
short-term nature should be all that is required. The Public
Staff therefore recommended that, if the Commission requires a
security bond, it be set up so that it expires (i.e., has a
sunset provision) two years from the date the first customer is
served unless the Commission takes affirmative action to require
that it be renewed.
Based on the foregoing, the Commission concludes that the
January 23, 1998, application should be approved as recommended
by the Public Staff and as discussed herein. With respect to the
security requirement, the Commission concludes that the
requirement of a security bond should not be waived. However,
given the experience and financial strength of Energy Pacific and
its parents, the security bond required in this case should be of
a short-term nature. Frontier Energy should file an executable
bond within 30 days of this Order that is set up so that it
expires (i.e., has a sunset provision) two years from the date
the first customer is served unless the Commission takes
affirmative action to require that it be renewed. Frontier
Energy is required to execute the bond by the date on which its
first natural gas utility customer is served and to file copies
of such executed security within ten (10) days of such execution.
IT IS THEREFORE ORDERED as follows:
1. That Frontier Utilities' and Frontier Energy's final
financing plan, including the participation of Frontier Pacific,
Inc., as an equity partner and the formation of Frontier Energy,
and the stipulation between the Public Staff and Frontier Energy
with respect to PUHCA and access to utility-related books and
records are approved;
2. That the capitalization of Frontier Energy with an equity
investment of $11.5 million is approved;
3. That $40 million in debt financing that is consistent with
the terms outlined in the January 23, 1998, application is
preliminarily approved;
4. That the transfer of the certificates of public convenience
and necessity awarded to Frontier Utilities to serve Surry,
Watauga, Wilkes, and Yadkin Counties (the Four-County area), Ashe
and Allegheny Counties, and Warren County to Frontier Energy is
approved;
5. That the debt financing as approved herein is subject to
Frontier Energy (1) filing the Commitment Letter(s) and Term
Sheet(s) of the final debt financing and (2) providing all
requested additional information with respect thereto within 60
days of the date of this Order;
6. That the financing is required to be closed as soon as
possible after the Commission grants approval of Frontier
Energy's final debt financing, but no later than 60 days
following the date such approval becomes final; and
7. That Frontier Energy shall file an executable bond within 30
days of this Order that is set up so that it expires (i.e., has a
sunset provision) two years from the date the first customer is
served unless the Commission takes affirmative action to require
that it be renewed. Frontier Energy is required to execute the
bond by the date on which its first natural gas utility customer
is served and to file copies of such executed security within ten
(10) days of its execution.
This the 9th day of March, 1998.
---
NORTH CAROLINA UTILITIES COMMISSION
/s/ Geneva S. Thigpen
Geneva S. Thigpen, Chief Clerk
Exhibit H
Federal Register Notice
Pacific Enterprises, 555 West Fifth Street, Suite 2900, Los
Angeles, California 90013-1001 ("Pacific") and Enova Corporation,
101 Ash Street, San Diego, California 92101 ("Enova"), both of
which are exempt holding companies pursuant to Section 3(a)(1) of
the Public Utility Holding Company Act of 1935, as amended (the
"Act"),(1) have filed a joint Application or Declaration pursuant
to Sections 9(a)(2) and 10 of the Act in which they request
authority to acquire, indirectly, up to 90.1% of the membership
interests of Frontier Energy LLC ("Frontier"), a North Carolina
limited liability company.(2) Frontier has been formed to
construct and operate a small gas distribution system in North
Carolina.
Pacific's predominant subsidiary, Southern California Gas
Company ("SoCalGas"), purchases, transports and distributes
natural gas in southern California. At December 31, 1997,
Pacific reported consolidated total assets of $4.977 billion, of
which approximately $3.154 billion consisted of net gas plant.
For the year ended December 31, 1997, Pacific reported $2.738
billion in operating revenues (including revenues from
transportation-only customers) and $184 million in net income.
-----------------------
1/ In a separate proceeding (File No. 70-9033), Pacific and
Enova are seeking authority for a business combination pursuant
to which they would become subsidiaries of a new holding company
to be called Sempra Energy.
2/ The remaining membership interests in Frontier would be
acquired by Frontier Utilities of North Carolina, Inc., a North
Carolina corporation and an indirect, majority-owned subsidiary
of ARB, Inc., a closely-held California corporation.
Enova's predominant subsidiary, San Diego Gas & Electric
Company ("SDG&E"), provides electric and natural gas service in
San Diego and surrounding areas. At December 31, 1997, Enova
reported consolidated total assets of $5.2 billion, of which
approximately $2.49 billion consists of net electric plant and
$449 million consists of net gas plant. For the year ended
December 31, 1997, Enova reported operating revenues of $2.2
billion (81.6% from electricity sales and 18.4% from gas sales)
(including revenues from transportation only customers), and $252
million in net income.
Pacific and Enova derive substantially all of their gas
requirements from sources outside of California. Approximately
58% of their combined system gas requirements are met from
production in the Permian Basin, which is located in west Texas,
and the San Juan Basin, which is located primarily in New Mexico
and Colorado in the "Four Corners" area. Most of the gas
produced in these gas producing basins is delivered to California
by El Paso Natural Gas Company and Transwestern Pipeline Company
under long-term transportation agreements.
Frontier (as assignee of Frontier Utilities of North
Carolina, Inc.) has been granted certificates of public
convenience and necessity by the North Carolina Utilities
Commission ("NCUC") to construct, test, market, own and operate a
new natural gas distribution system in a four-county area in
northwestern North Carolina comprised of Surrey, Watauga, Wilkes
and Yadkin Counties (the "Four-County Area"), and in Warren
County, which is to the east of the Four-County Area. Frontier
commenced construction in the Four-County Area during the second
quarter of 1998. Construction in Warren County will commence at
a later date, subject to receipt of further NCUC approvals. When
complete, the Four-County Area system will consist of
approximately 140 miles of transmission mains, including a 40-
mile lateral tap off the interstate pipeline facilities of
Transcontinental Gas Pipe Line Corp. ("Transco"), and at least
320 miles of distribution mains. Frontier will purchase at least
50% of its gas requirements from production in the San Juan and
Permian Basins. Gas will be delivered to Frontier by Transco
under a long-term transportation contract. Frontier is
projecting that, by the end of the fifth year following
commencement of construction, it will serve 13,250 residential,
1,054 small commercial, 300 poultry farm, and 55 large commercial
and industrial customers. As a public utility under North
Carolina law, Frontier will be subject to regulation by the NCUC
as to rates, service, securities issuances and other matters.
It is currently contemplated that Pacific and Enova together
and Frontier Utilities will each acquire, directly or indirectly,
50% of the membership interests of Frontier, and that the
economic interests of the members will equal their membership
interests. The NCUC has authorized the equity investments by the
members of Frontier, including cash and in-kind contributions of
pipeline and other property, totaling approximately $12 million.
In addition, the NCUC has given its preliminary approval for $40
million in debt financing by Frontier.
Under Frontier's Operating Agreement, the economic interest
of a member is defined as that member's interest in the profits
and losses of Frontier and right to receive distributions from
Frontier. The membership interest of a member means that
member's economic interest, plus the right to participate in
management of Frontier, including the right to vote. The
Operating Agreement specifically contemplates that the members
may adjust or change their respective economic and membership
interests whenever necessary in order, for example, to limit the
percentage of overall voting rights held by a member. Pacific
and Enova are seeking approval in this proceeding to acquire,
indirectly through Frontier Pacific, Inc., up to 90.1% of the
membership interests of Frontier, representing 90.1% of the
voting interests in Frontier. This will enable Frontier
Utilities, should it choose to do so, to maintain its percentage
interest in Frontier's voting securities at below 10%.
It is stated that the day-to-day operations of Frontier will
be under the control of its General Manager, who will be located
at Frontier's corporate headquarters in Elkin, North Carolina.
The General Manager will report to the President, who will be
located in San Diego, California. It is also anticipated that
Frontier will be staffed by a combination of current employees of
the members of Frontier and their respective subsidiaries and new
hires from the local community in North Carolina. The applicants
state that the operations of Frontier in North Carolina and those
of Pacific and Enova in California systems will be coordinated
administratively in order to enable Frontier to enter the natural
gas business with an experienced management team in place. In
addition, Pacific and Enova state that they will be able to
provide Frontier with greater financial, operational and
technical resources.
The applicants state that their acquisition of Frontier's
voting securities will satisfy all of the requirements of Section
10, including Section 10(c)(2), which provides that the
Commission shall not approve "the acquisition of securities or
utility assets of a public-utility or holding company unless the
Commission finds that such acquisition will serve the public
interest by tending towards the economical and the efficient
development of an integrated public-utility system."
Specifically, the applicants state that the gas distribution
areas of Pacific and Enova and Frontier together will constitute
an "integrated" gas-utility system, as defined in Section
2(a)(29)(B), in that the companies will share a "common source of
supply" (the San Juan and Permian Basins) and will be operated as
a "single coordinated system." Such coordinated operation will
enable Frontier to achieve "substantial economies" in gas supply
through the increased buying power that it will attain by being
part of the larger Pacific and Enova systems, and by gaining
access to Pacific's and Enova's expertise in such areas as
procurement/materials management, finance and accounting, and gas
system engineering and construction management.
Furthermore, the applicants assert that their indirect
investment in Frontier, as well as their ongoing involvement with
Frontier's operations, will be instrumental to the development of
a gas utility system in an area in which natural gas service is
not now available and that the development of this gas system
enjoys strong support from the NCUC.
Finally, the applicants state that, taking into account the
current "state of the art" in the natural gas industry, the area
or region served by Pacific and Enova's subsidiaries in
California and by Frontier in North Carolina will not be "so
large as to impair . . . the advantages of localized management,
efficient operation, and the effectiveness of regulation." On
the contrary, the applicants note that the day-to-day operations
of Frontier will be under the direction of its General Manager,
who will be locally based, and that Frontier will be subject to
effective local regulation by the NCUC.
Pacific and Enova state that they will continue to qualify
for exemption under Section 3(a)(1) as "intrastate" holding
companies even after acquiring Frontier's voting securities
because they will derive no material part of their income from
Frontier. In this regard, the applicants estimate that Frontier
will account for far less than 1% of the consolidated income of
Pacific and Enova on a pro forma basis.
EXHIBIT I - Description of Economies and Efficiencies and Estimated
Dollar Savings
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INTEGRATION & START-UP ANNUAL OPERATING
SYNERGY EXAMPLES COST SAVINGS COST SAVINGS
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COMMON SOURCE OF SUPPLY: NA Frontier will be
Approximately 58% of SoCalGas' able to procure
and SDG&E's combined gas supplies the best supply
originate from the SanJuan and prices available
Permian basins located in the in the market from
Southwestern United States reputable
(approximately 272,000 MMMBTU's suppliers because
were purchased from these basins of its affiliation
in the 1996 -1997 timeframe). with SoCalGas and
At least 50% of Frontier Energy's SDG&E, the
gas purchases will consist of gas collectively
supplies originating from the largest public
same two basins (ranging from 600 utilityin the
MMMBTU's in 1998 to 1,800 MMMBTU's United States.
in 2000).
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PROJECT FINANCING COSTS: Because Estimated
of its association with PE/ENOVA, financing cost
Frontier will be able to secure savings for a
better terms on its approximate $40,000,000
$40 million in financing than it revolver over a
would have been able to secure 5-year period are
otherwise. These terms include approximately
interest rate spread, up-front $1,030,000.
fees, commitment fee, and
required equity. Frontier will
also secure more flexible terms
and less restrictive covenants
than it would have obtained
otherwise.
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PROCUREMENT/MATERIALS MANAGEMENT These staffs are being Frontier will
AND QUALITY ASSURANCE: Frontier used to procure the continue to
has and will continue to realize majority of construction benefit from the
significant efficiencies and materials for the use of corporate
savings by utilizing PE/ENOVA's Frontier project, procurement and
corporate "Procurement/Materials including 146 miles of quality assurance
Management" staff. Procuring natural gas pipe. A staff expertise,
service enables SoCalGas, SDG&E total ofapproximately precluding it from
materials though this corporate $533,000 was saved on contracting for
and Frontier to attain increased the cost of the pipe. outside resources
buyer power and volume discounts at costs that
on items ranging from natural would likely be at
gas pipe to computer software least double
and hardware and other office (due to higher
equipment. By being affiliated hourly rates and
with PE/ENOVA, Frontier is able slower
to secure prices and payment turnaround).
terms on construction materials
that are more competitive than it
would have obtained otherwise.
In addition, the expertise
available from these staffs
enables Frontier to negotiate/
bid very favorable supply
arrangements.
Frontier will also benefit from
the Quality Assurance services
these staffs provide. For example,
rather than having to hire
outside consulting services to
monitor and QA the manufacture
of the natural gas pipe to be
used in the Frontier project,
resources from these staffs
were utilized. Frontier also
benefits from the years of
expertise and R&D these staffs
have accumulated regarding
materials specifications.
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REGULATORY AND GOVERNMENTAL An estimated $37,500 By utilizing
AFFAIRS: Frontier will continue will be saved on initial corporate
to utilize support from start-up costs by using regulatory and
PE/ENOVA's regulatory and corporate resources and governmental
governmental affairs corporat expertise vs. hiring affairs support,
staffs on federal, national, outside consultants. Frontier can
state and local regulatory and forego hiring and/
public policy issues and or contracting
proceedings. In addition, for outside
Frontier will be able to utilize expertise at costs
corporate communication staffs that would likely
to assist in its public be at least
communication and outreach efforts. double. Estimated
annual savings are
$42,500/ year.
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FINANCE AND ACCOUNTING: Frontier An estimated $150,000 in Frontier will save
will be able to utilize up front costs will be an estimated
corporate financial and saved by utilizing $68,500/year due
accounting staff services. These existing corporate to its ability
services include areas such as accounting and financial to utilize
finance, budgeting and reporting computer corporate finance
planning, financial reporting, software systems. & accounting staff
regulatory compliance, cost instead of hiring
accounting, accounts payable, on-site staff.
treasury, cash management,
financial risk management,
insurance/claims, payroll
accounting, internal auditing,
taxes, accounting systems, and
pension management. Frontier
will be able to avoid hiring its
own staffs to perform these
functions, as well as being able
to use corporate accounting and
finance information systems
rather than purchasing and
setting up completely new systems.
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HUMAN RESOURCES: Frontier will By utilizing
be able to utilize PE/ENOVA's corporate human
corporate human resources resources staff,
staff services, including Frontier can
compensation and benefits, forego hiring
employee communications, labor an on-site human
relations, personnel resources manager.
administration, employee Estimated
development, and human resources savings are
systems. $22,500 per year.
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INFORMATION & TECHNOLOGY An estimated $50,000 By utilizing
SERVICES: Frontier will be in up frontcosts will be corporate IT
able to utilize PE/ENOVA's saved by utilizing services,
corporate Information & portions of existing Frontier can
Technology services and systems, corporate planning, forego hiring
such as telecommunications, customer information two on-site IT
computer operations, computer and human resources support staff.
infrastructure support, data software systems. Estimated savings
security, and user support. are $76,138 per
year.
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ENGINEERING, TECHNICAL & DESIGN By utilizing SoCalGas By utilizing
SERVICES: Frontier will continue engineering services SoCalGas/SDG&E
to realize efficiencies from and expertise on initial engineering
utilizing SoCalGas/SDG&E engineering and design, services and
engineering, technical & design Frontier saved expertise,
services. These services approximately $67,500. Frontier will save
include pipeline system component an estimated
design, pipeline construction, $22,500/year.
mapping/GIS technology,
measurement, instrumentation and
controls design, laboratory
services, and cathodic
protection system design.
SoCalGas and SDG&E possess state
of the art systems to support
these services, as well as the
expertise that comes from being
industry leaders.
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CORPORATE AND SUPPORT SERVICES: By utilizing
Frontier will be able to utilize PE/ENOVA
various corporate services, corporate
such as the services of Building services,
and Real Estate, Transportation Frontier will be
Fleet Management, Facilities able to forego
Maintenance, Security, and hiring outside
Claims & Administration, agencies to
rather than procuring services perform these
from outside agencies. It will functions and
also realize increased leverage will save an
in the negotiation of insurance estimated $31,200
rates, terms, and conditions. per year.
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LEGAL: Frontier will be able to By utilizing
utilize corporate legal staffs PE/ENOVA
to support its legal and corporate legal
regulatory processes, rather services, Frontier
than its own counsel. It can can forego hiring
also combine forces with full-time staff to
SoCalGas & SDG&E on certain supervise and
proceedings, such as FERC and perform legal
other Federal proceedings, functions and will
thus lowering overall costs save an estimated
for the three utilities. $24,209 per year.
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TRAINING: Frontier will be Frontier benefits
able to use PE/ENOVA in-house from the use of
training expertise to train existing corporate
its general management, expertise,
marketing and service personnel. precluding it from
contracting for
outside resources
at costs that
would likely be at
least double.
Estimated savings
are $12,000 per
year.
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