Question
December 13, 2005
VIAEMAIL and REGULAR MAIL
Mr. B. MichaelVerne
Federal TradeCommission
PremergerNotification Office
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: OrdinaryCourse Of Business Exemption
Dear Mike:
Thisletter follows up on our voice mail exchanges and our brief telephoneconference in late November relating to a proposed acquisition of a portfolioof power contracts. Based on the hypothetical fact pattern that I described toyou, you concluded that the acquisition described below would be exempt underthe ordinary course of business exemption. Based on our discussion noted aboveand the analysis set forth below, the parties intend to complete the transactionwithout making an HSR filing. I note in advance that the factpattern below contains some more detail than we discussed in November, but I donot believe that additional information changes the HSR filing analysis. Please advise me as soon as possible if you haveany questions regarding the analysis set forth below, or if you believe afiling is required under the facts described in this letter.
Facts
Acquirorexpects to purchase a portfolio of power forward and financially-settled power andgas derivatives contracts from Seller. Among other business activities,Acquiror (and a few related companies) is a marketer and dealer of wholesalepower and power and gas derivatives contracts. It engages in a variety ofwholesale power transactions, including long term purchases and sales, fullsupply requirements contracts and other similar transactions. Acquiror has astaff of employees dedicated to the marketing, trading and the operationalaspects of wholesale power transactions. Most frequently, Acquiror enters intonew power contracts, but sometimes it acquires existing contracts, such ascontemplated in this transaction. Acquiror also offers and sells power and gasderivatives contracts which counterparties enter into primarily for price riskmanagement purposes.
Selleris an integrated power and gas company that has contracts to sell power and gasto utilities or other power and gas purchasers. Seller has a power tradingbusiness ("Power Business") that is a marketer and dealer ofwholesale power and financially-settled power derivatives contracts. Seller'sPower Business is focused on merchant trading of energy contracts, including avariety of wholesale power transactions, such as entering supply contracts andlong term purchases and sales arrangements, and power derivatives contractssimilar to Acquiror's business described above. Seller also has a natural gastrading business ("Gas Business") that is focused on merchant tradingof physical and financially settled gas contracts. The Gas Business is notsignificantly impacted by the proposed acquisition, and Seller expects tocontinue operating as a merchant trader of gas contracts following thistransaction.
Acquirorand Seller anticipate that Seller will sell to Acquiror roughly 95% of its portfolioof power contracts. Seller will retain a small number of power contracts, whichit would either perform until their termination, sell to another buyer orterminate with the consent of its counterparties. Acquiror will neither hirethe Seller's Power Business employees nor acquire assets other than thedesignated contracts (which will need to be novated or assigned to theAcquiror) and related books and records. Seller expects to continue commoditytrading and wholesale delivery of natural gas through its Gas Business.However, Seller does not intend to engage in the merchant trading of powercontracts as a core business, and expects to substantially wind up theremaining operations of its Power Business.
HSR Analysis
Aswe discussed last month, under the facts described above you concurred thatAcquiror's acquisition of contracts constituting approximately 95% of Seller'spower forward contracts and a limited number of financially-settled power andgas derivatives contracts would be exempt as a transaction in the ordinarycourse of business. See 15 U.S.C. I8a(c)(1) (exempting from filing"acquisitions of goods or realty transferred in the ordinary course ofbusiness"). Acquiror's business involves trading wholesale power and powerand gas derivatives contracts, so from its perspective this is a fairly routinetrading activity for Buyer, which commonly engages in acquisitions of suchcontracts. Acquiror will be acquiring only Seller's contracts, and it will notbe acquiring employees or other business operations of the Power Business.
Youconcluded that this transaction would be exempt in the ordinary course ofbusiness because Seller will continue to remain in the energy-related commoditytrading business following this transaction. Seller will continue its businessof the wholesale delivery of natural gas, including buying, selling and tradingphysical and financially-settled natural gas contracts, through the GasBusiness. This transaction involves a Seller that has commodity tradingbusinesses with two different types of portfolios: 1) electricity trading; 2)natural gas trading. You believed that a sale of the substantial majority ofone of those portfolios could be completed consistent with the ordinary courseof business exemption similar to the situation exempted in Interpretation 8 inthe ABA Premerger Notification Practice Manual. In Interpretation 8, a bankthat has two different loan portfolios (consumer loans and commercial loans)can sell all of its assets related to the consumer loan business to anotherbank and qualify for the ordinary course of business exemption so long as theselling bank retains its commercial loan operations and portfolio. Theacquisition would not be exempt if the selling bank were entirely exiting theloan business as a result of the acquisition. By analogy to Interpretation 8,here the Seller is exiting one of its trading portfolios (the Power Business)but will retain another (the Gas Business). Based on the foregoing, youconcluded that the ordinary course of business exemption could apply to thistransaction.