Question
October 28, 2009
CONFIDENTIALVIA EMAIL
Mr. B. MichaelVerne
Premerger Notification Office
600 Pennsylvania Avenue, N.W.
Washington, D.C. 20580
Re: Sizeof-Transaction Test and Ordinary Course Of Business Exemption
Dear Mike:
Thisletter follows our telephone conference Monday relating to a proposed assetacquisition consisting primarily of a portfolio of wholesale natural gaspurchase/sales contracts and natural gas park and loan agreements, natural gasinventory and related records. Based on the hypothetical fact pattern that Idescribed to you, you agreed that 1) the parties' methodology for determiningHSR Size of Transaction was reasonable; and 2) the acquisition would be exemptunder the ordinary course of business exemption.
Basedon our discussion noted above and the analysis set forth below, the parties intendto complete the transaction without making an HSR filing. I note in advancethat the fact pattern below may contain some additional detail than wediscussed by telephone, but I do not believe that additional informationchanges the HSR filing analysis. Please advise me as soon as possible if youhave any questions regarding the analysis set forth below, or if you believe afiling is required under the facts described in this letter.
Facts
Buyeris a natural gas supply company which, among other things, purchases and sellsnatural gas, natural gas contracts, and gas swaps and derivatives to hedge itsgas positions.
Selleris an integrated wholesale and retail power company and retail gas companywhich, among other things, buys contracts for commodity natural gas and naturalgas contract hedges, and sells wholesale and retail power and retail gas tocustomers.
Selleralso has a natural gas trading business, which holds a portfolio of wholesalenatural gas purchase/sales contracts and natural gas park and loan agreements.Seller intends to sell in this transaction 12 "trading books" of suchwholesale natural gas purchase/sales contracts and natural gas park and loanagreements, while retaining 8 trading books of such contracts and agreements,although Buyer will have an option to purchase some of these remaining tradingbooks, and those trading books not sold to this Buyer will likely be soldelsewhere or otherwise liquidated by 2011 under current plans. Other assetsbeing transferred include a storage inventory of natural gas, gas storagecontracts and the assignment to Buyer of trading account "deposits"on account with various commodity exchanges, which deposits permit Buyer toexecute contract trades and can be recovered from these exchanges by closingout open trading positions.
Foraccounting purposes, Seller carries the contracts and agreements in thesetrading books as assets and liabilities for monthly balance sheet purposes. Theaccounting valuations for these contracts, and the hedges associated with theagreements, fluctuate with the current market prices for gas. As a result, a"buy" contract obligating Seller to purchase a certain amount of gasat a fixed price on a fixed date in 2010 could be carried as a liability on acurrent monthly balance sheet if the current price of natural gas is below thepurchase price under the contract, while that same contract could be a balancesheet asset in a future month depending on the then current market price fornatural gas. A "gas loan" agreement, pursuant to which Seller has"borrowed" a quantity of gas, subject to an obligation to replacethat quantity of gas at some future date and to pay a fee determined in part bythe gas price change over a negotiated period, will typically be matched by ahedge agreement that will also fluctuate in value for accounting purposes basedon the fluctuating price of gas.
Theestimated cash proceeds from the transfer of these trading books and relatedassets -what Buyer is paying Seller to step into the shoes of Seller to acquirethese assets and take on post closing the benefits and obligations under thecontracts and agreements --will be well below $65.2 million (based on currentgas prices).
HSR AnalysisAswe discussed, under these facts you concurred that in this context theacquisition price can reasonably be viewed as the premium being paid by Buyerto step into Seller's shoes as to the overall portfolio of contracts,agreements and related assets being conveyed. You confirmed that none of thecontracts and agreements discussed to be assigned to Buyer would be regarded asassumed liabilities for HSR valuation purposes, regardless of the fact thatsome of these contracts and agreements are treated as liabilities on Seller'sbalance sheet for accounting purposes. You further concurred that theassignment to Buyer of trading account "deposits" on account withvarious commodity exchanges can be treated as the transfer of "cashequivalents." See 16 CFR 801.21; 15 U.S.C. 18a(c)(2) (securitiesand cash not considered assets when acquired).
Youalso concurred that the acquisition of a significant portion, but not all, ofSeller's portfolio of wholesale natural gas purchase/sales contracts andnatural gas park and loan agreements would be exempt as a transaction in the ordinarycourse of business. See 16 CFR 802.1; 15 U.S.C. 18a(c)(1)(exempting from filing "acquisitions of goods or realty transferred in theordinary course of business"). You concluded that this transaction wouldbe exempt in the ordinary course of business because, among other things, Buyeris a natural gas supply company which regularly purchases and sells naturalgas, natural gas contracts, and gas swaps and derivatives to hedge its gaspositions, and Seller will retain (at least through 2011 as currently planned)a portion of the contract books. Moreover, Seller (by itself for through asubsidiary) will continue its business of tile retail delivery of natural gas(including buying, selling and trading physical and financially-settled naturalgas contracts for that retail business) following this transaction.