[Federal Register Volume 62, Number 36 (Monday, February 24, 1997)]
[Notices]
[Pages 8279-8283]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-4442]
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SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-22515; International Series Release No. 1053; File No.
812-10150]
Enron Corp., et al.; Notice of Application
February 14, 1997.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of Application for Exemption under the Investment
Company Act of 1940 (the ``Act'').
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APPLICANTS: Enron Corp. (``Enron''), Enron Oregon Corp. (``Enron
Oregon''), Enron Oil & Gas Company (``EOG''), Enron Global Power &
Pipelines L.L.C. (``EPP''), and Enron International Inc. (``EII'').
RELEVANT ACT SECTIONS: Order requested under section 6(c) of the Act
for an exemption from all provisions of the Act.
SUMMARY OF APPLICATION: Applicants request an order that would permit
applicants and certain of their controlled companies to engage,
directly or through subsidiaries, in certain foreign infrastructure
projects without being subject to the provisions of the Act.
FILING DATE: The application was filed on May 15, 1996, and amended on
October 22, 1996 and February 12, 1997. Applicants have agreed to file
an amendment, the substance of which is incorporated herein, during the
notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's
[[Page 8280]]
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the SEC by 5:30 p.m.
on March 12, 1997 by proof of service on applicants, in the form of an
affidavit or, for lawyers, a certificate of service. Hearing requests
should state the nature of the writer's interest, the reason for the
request, and the issues contested. Persons who wish to be notified of a
hearing may request notification by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549. Applicants, 1400 Smith, Suite 5011, Houston, Texas 77002.
FOR FURTHER INFORMATION CONTACT: David W. Grim, Staff Attorney, at
(202) 942-0571, or Elizabeth G. Osterman, Assistant Director, at (202)
942-0564 (Division of Investment Management, Office of Investment
Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch.
Applicants' Representations
1. Enron, a Delaware corporation organized in 1930, is an
integrated natural gas company with headquarters in Houston, Texas.
Essentially all of Enron's operations are conducted through its
subsidiaries and affiliates, which are principally engaged in the
transportation and wholesale marketing of natural gas to markets
throughout the United States and internationally through approximately
44,000 miles of natural gas pipelines; the exploration for and
production of natural gas and crude oil in the United States and
internationally; the production, purchase, transportation, and
worldwide marketing of natural gas liquids and refined petroleum
products; the independent (i.e., non-utility) development, promotion,
construction, and operation of natural gas-fired and non-gas-fired
power plants in the United States and internationally; and the non-
price regulated purchasing and marketing of long-term energy related
commitments.
2. Enron Oregon is an Oregon corporation that was organized
recently for the purpose of effecting the merger (the ``PGC Merger'')
of Enron with Portland General Corporation (``PGC''), an electric
utility company organized as an Oregon corporation. Pursuant to the
merger agreement among Enron, PGC, and Enron Oregon, subject to
satisfaction or waiver of the conditions to the obligations of the
parties to effect the PGC Merger, (a) both Enron and PGC will merge
with and into Enron Oregon, (b) Enron Oregon will succeed to all of the
assets and liabilities of both Enron and PGC, and (c) Enron Oregon will
change its name to Enron Corp.\1\
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\1\ After the PGC Merger, Enron Corp. will be the seventh
largest seller of electricity in the United States. Benjamin A.
Holden, Enron Corp. has Accord to Buy Portland General, Wall St. J.,
July 23, 1996, at A3.
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3. EOG, a Delaware corporation, is engaged in the exploration for,
and the development, production, and marketing of, natural gas and
crude oil primarily in major producing basins in the United States, as
well as in Canada, Trinidad, and India, and, to a lesser extent,
selected other international areas. Enron currently owns approximately
54% of the outstanding common stock of EOG.
4. EPP is a Delaware limited liability company formed by Enron to
acquire, own, and manage operating power plants and natural gas
pipelines around the world. EPP's assets consist of interests in two
power plants in the Philippines, power plants in both Guatemala and the
Dominican Republic, and natural gas pipeline systems in Argentina and
Colombia. EPP's strategy is to generate long-term growth in dividends,
cash flow, and earnings per share through the selective acquisition and
efficient management of operating power plants and natural gas
pipelines around the world. Enron owns approximately 54% of the
outstanding common shares of EPP.
5. EII is a Delaware corporation that is a wholly-owned subsidiary
of Enron. In December 1996, Enron announced that it was reorganizing
its business units and that as part of the reorganization Enron
International would be Enron's business unit that would develop and own
integrated energy projects, commercial power generation, and pipeline
activities outside of North America and Europe. This newly organized
business unit will pursue all or substantially all of Enron's foreign
infrastructure projects outside of North America and Europe, will offer
merchant, finance, and risk management products to third parties in
emerging markets, and will be responsible for Enron's interest in EPP.
As the reorganization was announced only recently, Enron must make a
number of decisions and take a number of actions regarding transfers of
subsidiaries or properties to this new business unit and other matters
in order to complete the organization of the Enron International
business unit. Based on preliminary planning, when the organization is
completed, EII will be the parent company of the corporate family of
companies that comprises Enron International. It is possible, however,
that EII will be a wholly-owned subsidiary of the parent company within
the Enron International business unit. This could occur if, for
example, Enron decides that another form of entity (such as a limited
liability company) or an entity incorporated in another jurisdiction
(such as a foreign jurisdiction) should be the parent company within
the Enron International business unit.
6. Enron, Enron Oregon, EOG, EPP, and EII request relief to permit
each applicant and each entity now or in the future controlled by, or
under common control with, any of them (Enron, Enron Oregon, EOG, EPP,
EII, and each controlled entity, the ``Covered Entities'') to engage,
directly or through subsidiaries, in certain foreign infrastructure
projects without being subject to the provisions of the Act.
7. Enron is the largest interstate natural gas pipeline company in
the United States, and its subsidiaries have participated in the
development or ownership and management of gas transmission pipelines,
crude oil and refined petroleum products pipelines, natural gas liquids
pipelines, oil and gas gathering facilities, gas processing facilities,
and chemical manufacturing facilities. Enron and its affiliates also
have developed and own and operate a number of domestic facilities for
the generation of electricity and steam.
8. As a result of relatively recent changes in the international
political and business climate, applicants and their subsidiaries have
begun to develop and acquire and operate infrastructure projects
throughout the world. Foreign infrastructure projects that applicants
have or may become involved in are roads, bridges, communication
facilities, mass transit systems or facilities, rail transportation
facilities, airports, ports, waterways, water supply facilities,
desalinization facilities, recycling or waste water treatment
facilities, solid waste disposal facilities, oil, gas, or other mineral
exploration, development, or production facilities, housing, schools,
hospitals, prisons, electricity generation facilities, electricity
transmission or distribution facilities, stream generation facilities,
natural gas transmission or distribution pipelines of facilities,
petroleum storage facilities, petroleum liquids pipelines, natural gas
liquids separating, processing, or distribution facilities, facilities
for the liquefication of natural gas or the transportation,
distribution, or regasification of liquefied natural gas, refineries,
chemical or other
[[Page 8281]]
manufacturing or processing facilities, or any similar facilities or
operations. Applicants and their subsidiaries currently are working on
approximately 25 foreign infrastructure projects in various stages of
development, involving estimated total capital expenditures of
approximately $20 billion. These include projects in Guam, India,
Indonesia, Israel, Italy, Jordan, Mozambique, Puerto Rico, Qatar, and
Turkey. Although it is unlikely that all of the projects ultimately
will be completed, the dollar amounts involved are quite significant
relative to the size of Enron, EOG, and EPP, whose total assets at year
end 1995 were $13.2 billion, $2.1 billion and $188 million,
respectively.
9. There are numerous steps that must be pursued by a developer/
owner of a foreign infrastructure project. Project development
involves, among other things, engineering or architectural design
services, site selection, governmental relations, construction
services, and the arrangement of financing. The management of operating
projects involves responsibilities such as employee and customer
relations, contract administration, continuing compliance with
environmental and other legal requirements, community and governmental
relations, financial and accounting issues, etc.
10. The physical assets comprising a foreign infrastructure project
are or will be owned by an entity (a ``Foreign Infrastructure Project
Company'') in which a Covered Entity has or will have a direct or
indirect beneficial interest. In most cases, the Foreign Infrastructure
Project Company is or will be a special purpose entity set up for the
sole purpose of owning and operating the assets attributable to a
single foreign infrastructure project, although in some cases, Foreign
Infrastructure Project Companies own or will own interests in assets
comprising multiple foreign infrastructure projects.
11. In some cases, entities are organized for the purpose of
providing development, construction, operational, or maintenance
services to one or more Foreign Infrastructure Project Companies
(``Foreign Infrastructure Service Companies''). Such entities are
distinguishable from Foreign Infrastructure Project Companies in that
the former do not own assets directly, but rather engage in the
business of providing services.
12. For purposes of the application, applicants represent that
Foreign Infrastructure Project Companies and Foreign Infrastructure
Service Companies are included within the term ``Foreign Infrastructure
Company,'' which is any company (a) substantially all of whose
operations are conducted outside of the United States; and (b) whose
business primarily relates to or whose operations consist primarily of
the development, construction, ownership, or operation of, or the
provision of management, operational, or maintenance services relating
to, foreign infrastructure projects. Applicants and other Covered
Entities own and will own their interests in a Foreign Infrastructure
Company through direct or indirect interests in companies known as
``Foreign Infrastructure Finance Companies.''
13. For purposes of the application, applicants represent that a
``Foreign Infrastructure Finance Company'' is any company (a) that is a
majority-owned subsidiary of a Covered Entity; (b) that has not made,
is not making, and does not presently propose to make a public offering
of its securities; and (c) that is primarily engaged in the business of
owning or holding 10% or more of the economic or voting interests in
Foreign Infrastructure companies with respect to which the Covered
Entity, the Foreign Infrastructure Finance Company, or a majority-owned
subsidiary of either of them, provides ``active developmental
assistance.''
14. For purposes of the application, applicants represent that
``active developmental assistance'' means the provision of material
assistance in the development, construction, or operation of, or the
provision of management, operational or maintenance services relating
to, a foreign infrastructure project. An entity will be deemed to
furnish such assistance if it is or has been materially involved in
providing such assistance. Thus, if an entity was materially involved
in the development of a Foreign Infrastructure Company, such entity
will be deemed to be providing active developmental assistance to such
Foreign Infrastructure Company even after the Foreign Infrastructure
Company has moved past the development stage. In addition, the
expiration of a long-term contract relating to the operation of a
foreign infrastructure project will not cause a company to cease to
qualify as a Foreign Infrastructure Finance Company. The requirement of
material involvement will not be satisfied, however, by arrangements
that are immaterial to the overall development of an infrastructure
project or overall success of the Foreign Infrastructure Company's
operations, such as a short-term contract or a non-substantive contract
(e.g., a consulting arrangement that is sometimes entered into as part
of an executive employee's severance arrangement, pursuant to which the
ex-employee is paid but does little in the way of actual consulting). A
contract that is renewable automatically on a periodic basis unless
canceled at the option of one or more contracting parties would not, by
virtue of the cancellation provisions, be deemed to be a short-term or
non-substantive contract.
15. Because regulations in many countries limit the percentage
interest in host country companies that can be owned by foreign
companies, the Covered Entities have been and will continue to be
permitted to own only minority interests in many Foreign Infrastructure
Companies. As a result, it has become increasingly difficult for the
Covered Entities to structure their interests so that they may operate
without technically falling within the definition of ``investment
company'' under the Act. The Covered Entities believe they are not the
type of entities that should be regulated under the Act and thus seek
relief from all provisions of the Act.
Applicants' Legal Analysis
1. Section 3(a)(3) of the Act defines an ``investment company'' as
including any issuer that is engaged in the business of investing,
reinvesting, owning, holding, or trading in securities, and owns
investment securities having a value exceeding 40% of the value of such
issuer's total assets (exclusive of Government securities and cash
items). Section 3(a) defines ``investment securities'' to include all
securities except, in pertinent part, securities issued by majority-
owned subsidiaries of the owner which are not investment companies.
Section 2(a)(24) defines a ``majority-owned subsidiary'' of a person as
a company 50% or more of the outstanding voting securities of which are
owned by such person, or by a company which, within the meaning of
section 2(a)(24), is a majority-owned subsidiary of such person.
2. Applicants represent that the proposed ownership structure for
foreign infrastructure projects is the result of legitimate and
compelling tax, limited liability, governance, and other reasons. The
proposed ownership structure protects applicants against liability to
creditors of the Foreign Infrastructure Companies. In addition, some
foreign governments remain committed to retaining control over
infrastructure projects. Moreover, under the laws of many host
countries, there are limitations on the percentage equity interest in
host country entities that can be owned by companies such as the
Covered Entities that are organized in jurisdictions other than the
host
[[Page 8282]]
country. As a result, a company desiring to participate in a foreign
infrastructure project will often have to choose between becoming a
minority project participant with other companies or not participating
at all. Because sections 3(a) and 2(a)(24), taken together, impose
limits on the percentage of assets of the Covered Entities that may be
attributable to securities representing minority interests in other
companies, the Act may, in the absence of the requested relief, prevent
these entities from participating in foreign infrastructure projects on
desirable terms.
3. In certain cases, a Covered Entity may rely on section 3(c)(1)
or section 3(c)(9) of the Act or rule 3a-1 thereunder. These
provisions, however, are inadequate to permit these entities to
participate in foreign infrastructure projects on desirable terms.
4. Section 3(c)(1) of the Act excepts from the definition of
investment company private investment companies (``3(c)(1) Entities'')
that have 100 or fewer shareholders. Under section 3(c)(1)(A), a
company is counted as one shareholder of a 3(c)(1) Entity unless that
company owns 10% or more of the shares of the 3(c)(1) Entity and more
than 10% of that company's assets are shares of 3(c)(1) Entities. If a
company meets these tests, the beneficial ownership of the 3(c)(1)
Entity is deemed to be that of the holders of such company's
outstanding securities. As a result of this provision, applicants are
forced by the Act to limit their investments in 3(c)(1) Entities even
where compelling business reasons favor making those investments and
where, applicants believe that, none of the Act's purposes would be
served by preventing them from making the investments.
5. The National Securities Markets Improvement Act of 1996 (the
``1996 Act'') amended section 3(c)(1)(A) of the Act. When the relevant
provisions of the 1996 Act become effective (on the earlier of April 9,
1997 or the date on which the related rulemaking is completed), the
amended section 3(c)(1)(A) will no longer apply to a shareholder of a
3(c)(1) Entity that is an operating company (i.e., a company that is
not an investment company or a 3(c)(1) Entity). Accordingly, the
exception provided by amended section 3(c)(1) may be available to
Foreign Infrastructure Finance Companies. However, the 1996 Act also
amends the definition of ``investment securities'' under section 3(a)
of the Act to provide that securities of majority-owned 3(c)(1)
Entities are investment securities. The amended section 3(a) will limit
the amount that the Covered Entities can invest in majority-owned
3(c)(1) Entities, such as Foreign Infrastructure Finance Companies. As
a result, applicants cannot rely on the current or amended version of
section 3(c)(1) to participate in foreign infrastructure projects on
desirable terms.
6. Section 3(c)(9) of the Act excepts from the definition of
investment company any company substantially all of whose business
consists of owning or holding oil, gas, or other mineral royalties or
leases. Although the section 3(c)(9) exception may be available to EOG
in a number of cases, it does not cover Enron or EPP because of the
nature of their businesses. Many foreign infrastructure projects do not
involve oil and gas exploration or production properties. Moreover,
some projects that do involve such properties involve additional assets
not qualifying under section 3(c)(9). As a result, the section 3(c)(9)
exception is inadequate to permit the Covered Entities from
participating in foreign infrastructure projects on desirable terms.
7. Rule 3a-1 under the Act deems certain issuers that meet the
statutory definition of investment company in section 3(a)(3) of the
Act not to be investment companies, provided such issuers meet certain
criteria. An issuer can qualify for this exemption only if no more than
45% of its assets consist of, and no more than 45% of its net income is
derived from, securities other than, among others, securities of
certain companies controlled primarily by the issuer. Although the
exemption may be relied upon by the Covered Entities from time to time,
a company relying on the exemption as a result of a control
relationship must have a degree of control greater than that of any
other person.\2\ Because a foreign government often will primarily
control a Foreign Infrastructure Company, rule 3a-1 is inadequate to
permit the Covered Entities to participate in foreign infrastructure
projects on desirable terms.
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\2\ Health Communications Services, Inc. (pub. avail. Apr. 26,
1985).
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8. Section 6(c) provides that the SEC may exempt any person,
security, or transaction from any provision of the Act or any rule or
regulation thereunder, if and to the extent that such exemption is
necessary or appropriate in the public interest and consistent with the
protection of investors and the purposes fairly intended by the policy
and provisions of the Act. Applicants request an order under section
6(c) to permit the Covered Entities to engage, directly or through
subsidiaries, in foreign infrastructure projects without being subject
to the provisions of the Act.
9. Applicants believe that the requested relief is necessary and
appropriate in the public interest. Applicants state that in many
foreign infrastructure projects, foreign regulations force applicants
to structure their interests in the project such that they may
technically fall within the definition of investment company under the
Act. In addition, applicants state that the fact that they conduct
their foreign infrastructure activities through subsidiaries is not by
any means an attempt to circumvent the limitations imposed in
connection with the exception in section 3(c)(1) of the Act. Applicants
assert that those limitations were not aimed at situations, such as
those described herein, where an active business is conducted through
subsidiaries that are set up for legitimate and compelling tax, limited
liability, governance, and other reasons that prevent companies
actively conducting such business from acquiring direct ownership
interests. Applicants argue that section 3(c)(1) reflects a
congressional determination that no significant public interest exists
in regulating 3(c)(1) Entities under the Act. The beneficial ownership
attribution rules in section 3(c)(1)(A) are, in effect, intended to
prevent companies from circumventing the requirements of the Act by
setting up one or more majority-owned subsidiaries that would be
regulated as investment companies but for the fact that no single one
of them had more than 100 security holders. Further, the amendments to
the beneficial ownership rules in section 3(c)(1)(A) reflect an intent
by Congress to simplify the application and limit the scope of the
rules rather than a change in the underlying purpose of the section. As
a result, applicants assert that the foreign infrastructure activities
described herein, which require active developmental assistance,
clearly are not the type intended to be covered by the current or
amended section 3(c)(1).
10. Applicants believe that the relief requested is consistent with
the protection of investors and the purposes fairly intended by the
policies and provisions of the Act. Applicants state that the Act was
not intended to regulate the kind of industrial activity in which the
Covered Entities engage. Applicants historically have developed as
operating industrial companies rather than investment pools, engaging
principally in the natural gas and other energy-related business. In
addition, their proposed participation in foreign infrastructure
projects through the
[[Page 8283]]
provision of active developmental assistance to a Foreign
Infrastructure Company is consistent with the type of activities
typically associated with an operating industrial company. Finally, the
Covered Entities do not hold themselves out as being engaged in the
business of investing, reinvesting, or trading in securities or
otherwise as investment pools of the type intended to be regulated by
the Act.
Applicants' Conditions
Applicants agree that the order granting the required relief shall
be subject to the following conditions:
1. No Covered Entity that proposes to rely on the requested relief
will hold itself out as being engaged in the business of investing,
reinvesting, or trading in securities.
2. The Covered Entities will rely on the order granting the
requested relief only to the extent that the manner in which they are
involved in foreign infrastructure projects does not differ materially
from that described in the application.
For the Commission, by the Division of Investment Management,
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-4442 Filed 2-21-97; 8:45 am]
BILLING CODE 8010-01-M
