[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

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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

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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