Question
From:(redacted)
Sent:Tuesday, November 28, 2006 10:11 AM
To:Johnson, Janice C.
Cc:(redacted)
Subject:HSR Exemption
Ms.Johnson - This e-mail sets forth the information that we discussed yesterday aboutthe applicability of exemptions under 16 C.F.R. sections 802.3 (carbon-basedmineral reserves) and 802.4 (acquisitions of entities holding exempt assets) to the proposed transaction described below. Aswe discussed, we believe that the majority of the assets of the acquiredcompany are exempt under section 802.3 andthat the remaining non-exempt assets are valued at $30 million, which iswell below the $56.7 million reporting threshold under section 802.4. As wediscussed, the proposed transaction is as follows:
CompanyA, an LLC, would acquire 100% of the membership interests in Company B, also an LLC. The acquisition pricewould be approximately $110 million. Company B has liabilities ofapproximately $5.5 million (including about$3 million in current liabilities), which indirectly will becomeliabilities of the buyer as a result of the transaction.
CompanyB is engaged in the business of producing landfill gas ("LFG"), by obtainingcontract rights to the LFG, producing the gas and ultimately selling the gasproduced from landfill gas reserves. Landfill gas is methane gas that iscreated as a result of the decomposition of landfill material. Company B obtains rights to extract LFG by contracts withowners of landfills. Wells are drilled on the landfill sites at whichCompany B has such contract rights to the gas reserves, in order to extract thegas from the landfill material. The extracted gas is collected from the wellsat each site at a central collection point (where the "blower," or"compressor," which provides the force to extract the gas from thewells, is located). From that collection point, the gas is moved to aprocessing plant at the site, where impurities are removed, after which the gasis transported for ultimate delivery to the purchaser of the gas. Company B haseight "active" LFG sites, at which LFG is being produced, and about13 "passive" sites, at landfills where Company B has contractualrights to the LFG reserves but where no LFG currently is being produced. Inaddition to the contract rights to LFG reserves at the active and passivesites, Company B's other principal categories of assets include the
above-describedproduction and processing equipment, accounts receivable, '
andgoodwill, know-how, and other intangibles associated with its LFG
operations.
As we discussed, based upon the regulations (sections802.3 and 802.4) and publishedInterpretations 211 and 212 in the ABA Premerger Notification Practice Manual(3d ed. 2003), we believe that Company B's contract rights to LFG reserves atthe active and passive landfill sites are exempt rights to reserves undersection 802.3(a), and that the physical assets used to produce and collect thegas at each active site (up to and including the blower/compressor collectionpoints), the accounts receivable, and the goodwill are closely related to theexempt business operations and thus are exempt as associated exploration orproduction assets, under section 802.3 (c), and as described in Interpretation212. The only category of assets that appears to include non-exempt assetsunder section 802.3(c) would be the processing facilities and transportpipelines after the collection points at each site. If those physical assetswere to be recreated, the aggregate replacement cost (for all of the activesites) would be approximately $60 million, based upon the construction coststhat currently are being incurred at one of Company B's sites. However, many ofthose assets have been in place for many (as much as 20 or more) years. We arenot aware of any active resale market for assets of this kind. If a purchaserof a group of these assets currently located at one of Company B's active siteswere interested in buying them for use at another LFG site, the purchaser wouldneed to spend substantial sums (as much as several million dollars) to remove,transport and reinstall the used equipment at another LFG site. Many of theseassets most likely only could be sold for scrap value, which would be far lessthan the replacement cost for comparable new equipment. The reasonableaggregate fair market value of these non-exempt assets is at 50% of the currentreplacement cost of the assets, or not more than $30 million. This amount is wellbelow $56.7 million, the reporting threshold as provided in section 802.4(a).
Thus,as noted during our telephone conversation, we believe that this analysisconfirms that the transaction is not reportable because the exemptions insections 802.3 and 802.4 apply. I understand that you will advise us whetheryou concur in this analysis and conclusion. Of course, please also feel free tocontact me (redacted) and (redacted) if you have any questions in this regard.Thank you again very much for your time and guidance.