Exhibit C-1
COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
Joint Petition of Dominion Resources, Inc., )
Consolidated Natural Gas Company and )
AGL Resources Inc., for Approval of a ) Case No. PUA00__________
Stock Purchase Agreement under Chapter 5 )
of Title 56 of the Code of Virginia )
JOINT PETITION
Edward L. Flippen
Stephen H. Watts, II
Kodwo Ghartey-Tagoe
David K. Dewey
McGuire, Woods, Battle & Boothe LLP
One James Center
901 E. Cary Street
Richmond, Virginia 23219
James F. Stutts
Vice President and General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, Virginia 23219
J. Alan Crittenden
Deputy General Counsel
Dominion Resources, Inc.
625 Liberty Avenue, CNG Tower
Pittsburgh, Pennsylvania 15222-3199
Donald A. Fickenscher
Chief Counsel and Corporate Secretary
Virginia Natural Gas, Inc.
5100 East Virginia Beach Boulevard
Norfolk, Virginia 23502
Paul R. Shlanta
Senior Vice President and General Counsel
AGL Resources Inc.
817 West Peachtree Street, N.E., Suite 1000
Atlanta, Georgia 30308 June 22, 2000
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COMMONWEALTH OF VIRGINIA
STATE CORPORATION COMMISSION
Joint Petition of Dominion Resources, Inc., )
Consolidated Natural Gas Company and )
AGL Resources Inc., for Approval of a ) Case No. PUA00__________
Stock Purchase Agreement under Chapter 5 )
of Title 56 of the Code of Virginia )
JOINT PETITION
Dominion Resources, Inc., ("DRI"), Consolidated Natural Gas Company ("CNG")
and AGL Resources Inc. ("AGLR") (collectively, the "Petitioners" or "Parties")
hereby request approval under Chapter 5 of Title 56 of the Code of Virginia (ss.
56-88 et seq.) for a transaction under which AGLR will acquire control of
Virginia Natural Gas, Inc., ("VNG") directly from CNG and indirectly from DRI. A
completed Transaction Summary in support of this Joint Petition is contained in
Exhibit 1. In support of this Joint Petition, DRI, CNG and AGLR respectfully
state as follows:
INTRODUCTION
1. Subject to certain regulatory approvals and other conditions, AGLR and
CNG have entered into a Stock Purchase Agreement ("Agreement") pursuant to which
AGLR will purchase all of the issued and outstanding shares of capital stock of
VNG, a Virginia public utility, and VNG will become a wholly-owned subsidiary of
AGLR (the "Transaction"). A copy of the Agreement is contained in Exhibit 2. The
Transaction will result in a change of control of VNG requiring the approval of
the Commission under Chapter 5 of Title 56 of the Code of Virginia. The
Transaction will neither jeopardize nor impair VNG's provision of adequate
service to the public at just and reasonable rates. To the contrary, VNG will
become a valued
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member of the AGLR corporate family, which has a demonstrated record of
providing safe, efficient and reliable natural gas service and which has the
corporate and financial resources, operational experience and commitment needed
for the continued successful operation of VNG. VNG will continue to provide
natural gas service to existing customers, and to add new customers throughout
its Virginia service area, consistent with its obligation to serve.
THE PARTIES
2. DRI is a Virginia corporation and a registered "holding company" subject
to regulation as such by the Securities and Exchange Commission ("SEC") under
the Public Utility Holding Company Act of 1935 ("1935 Act"). The corporate
address of DRI is:
Dominion Resources, Inc.
120 Tredegar Street
Richmond, Virginia 23219
(804) 819-2000 (phone)
Copies of DRI's 1999 Annual Report to Shareholders and subsequent SEC Form 10-Q
are contained in Exhibit 3.
3. CNG, a Delaware corporation, is a wholly-owned subsidiary of DRI and is
also a registered "holding company" as defined in the 1935 Act. CNG's corporate
address is:
Consolidated Natural Gas Company
625 Liberty Avenue
Pittsburgh, PA 15224
(412) 690-1000 (phone)
Copies of CNG's 1999 SEC Form 10-K and all subsequent SEC Form 10-Q are
contained in Exhibit 4.
4. VNG is a Virginia public service corporation that provides natural gas
service to approximately 230,000 customers in the cities of Norfolk, Virginia
Beach, Chesapeake, Suffolk, Newport News, Hampton, Williamsburg, and Poquoson,
and the counties of James City,
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Hanover, and York. It is also certified by the Commission to provide natural gas
service in the counties of Charles City, New Kent, Gloucester, King William,
King and Queen, Essex, Middlesex and Mathews. VNG is a wholly-owned subsidiary
of CNG. VNG's corporate address is:
Virginia Natural Gas, Inc.
5100 East Virginia Beach Boulevard
Norfolk, Virginia 23502
(757) 466-5502 (phone)
Financial statements for VNG for the past five years are contained in Exhibit 5.
VNG joins in this Joint Petition for the purpose of expressing its approval and
support of the Transaction and its intention to cooperate fully in these
proceedings toward the end that the Transaction be approved.
5. AGLR is a Georgia corporation operating as the holding company for
Atlanta Gas Light Company ("AGLC") and its wholly-owned subsidiary, Chattanooga
Gas Company ("Chattanooga"), and for interests in several non-utility
subsidiaries and joint ventures. For the year ended September 30, 1999 AGLR had
total assets of $1,969 million, net utility plant of $1,517 million, total
operating revenues of $1,069 million, operating margin of $523.9 million and net
income of $74.4 million. AGLR's current credit ratings are Baa1 by Moody's
Investors Service, A- by Fitch Investors Service, Inc. and BBB+ by Standard &
Poor's Corporation./1/
6. At September 30, 1999, AGLC and Chattanooga had between them
approximately 1,484,405 customers, 28,803 miles of distribution mains, 27,337
miles of service lines and 7,030,000 Mcf of liquefied natural gas storage. As of
the same date, the consolidated
--------
1 To evaluate the effect of the acquisition, the rating agencies have issued a
credit watch for AGLR, as is customary for similar transactions.
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AGLR system had some 2,892 full-time employees. AGLR is a "holding company"
exempt from all provisions of the 1935 Act, except ss. 9(a)(2). AGLR's corporate
address is:
AGL Resources Inc.
817 West Peachtree Street, N.E.
Suite 1000
Atlanta, Georgia 30308
(404) 584-3430 (phone)
A copy of AGLR's 1999 Annual Report to Shareholders and subsequent SEC Form
10-Qs are attached to this Joint Petition as Exhibit 6. Counsel of record for
DRI, CNG, VNG and AGLR in this proceeding are:
Counsel for all Petitioners:
Edward L. Flippen
Stephen H. Watts, II
Kodwo Ghartey-Tagoe
David K. Dewey
McGuire, Woods, Battle & Boothe LLP
One James Center, 901 E. Cary Street
Richmond, Virginia 23219
(804) 775-1000 (phone)
Counsel for DRI and CNG:
James F. Stutts
Vice President and General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, Virginia 23219
(804) 819-2000 (phone)
J. Alan Crittenden
Deputy General Counsel
Dominion Resources, Inc.
625 Liberty Avenue, CNG Tower
Pittsburgh, Pennsylvania 15222-3199
(412) 690-1240 (phone)
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Counsel for VNG:
Donald A. Fickenscher
Chief Counsel and Corporate Secretary
Virginia Natural Gas, Inc.
5100 East Virginia Beach Boulevard
Norfolk, Virginia 23502
(757) 466-5502 (phone)
Counsel for AGLR:
Paul R. Shlanta
Senior Vice President and General Counsel
AGL Resources Inc.
817 West Peachtree Street, N.E.
Suite 1000
Atlanta, Georgia 30308
(404) 584-3430 (phone)
THE TRANSACTION
7. In its September 17, 1999 order approving the merger of DRI and CNG in
Case No. PUA990020, the Commission adopted as a condition of approving such
merger that DRI, CNG or both sell and dispose of VNG and all of its assets,
including the intrastate pipeline that connects VNG's service territory to the
interstate pipeline facilities of CNG, to a purchaser that is not affiliated
with DRI, CNG, Virginia Electric and Power Company ("Virginia Power") or VNG.
DRI's divestiture of VNG was also required by the Federal Trade Commission
("FTC") in a Decision and Order issued November 4, 1999 ("Consent Order") in
connection with its investigation of the DRI/CNG merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HRS Act"). The
DRI/CNG merger was consummated on January 28, 2000. Subsequently, DRI began the
process for disposition of VNG, which included an open auction, in which AGLR
was the successful bidder. AGLR is not affiliated with DRI, CNG, Virginia Power
or VNG. Accordingly, the Agreement has been entered into to satisfy the
requirements of the Commission's order in Case No. PUA990020 and the FTC's
Consent Order. Proof of the
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approval of the Agreement by the boards of directors of the parties is contained
in Exhibit 7. The Agreement contemplates that the Transaction will be
consummated by December 31, 2000, but the parties intend to close by September
30, 2000, which is the end of AGLR's current fiscal year.
8. Under the terms of the Agreement, CNG will sell, convey, transfer,
assign, and deliver to AGLR all of the issued and outstanding shares of capital
stock of VNG for $550 million, payable in cash at the closing. The purchase
price is subject to adjustment to the extent that, at the closing, VNG's working
capital deviates from a specified level. Further, CNG must refund $50 million of
the purchase price if Dominion does not join AGLR in making an election under
Section 338(h)(10) of the Internal Revenue Code with respect to the purchase. As
a result of the Transaction, the common stock of VNG will not be changed, but it
will be owned directly or indirectly by AGLR. AGLR will continue to be located
in Atlanta, Georgia, while VNG's operating headquarters will continue to be
located in Norfolk, Virginia. Current and post-Transaction organizational charts
of AGLR are contained in Exhibit 8. Pro-forma financial statements for AGLR and
VNG are contained in Exhibit 9.
9. The Transaction, together with its financing activities and intrasystem
service arrangements, is required to be approved by the SEC under the 1935 Act,
and upon consummation of the Transaction AGLR will register with the SEC as a
holding company under ss. 5 of the 1935 Act. The Transaction is not required to
be cleared under the HSR Act, but prior approval of the Transaction must be
obtained from the FTC under the Consent Order. The Transaction is not required
to be approved by the Federal Energy Regulatory Commission. This Commission is
the only state regulatory authority required to approve the Transaction. As soon
as possible, AGLR will file in a separate proceeding for such Commission
approvals as are
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required under Virginia law for issuance of securities by VNG and for affiliate
relationships between VNG and members of the AGLR corporate family associated
with the Transaction.
10. The Transaction will not impair or jeopardize adequate service at just
and reasonable rates to VNG's customers. VNG will continue to abide by its
approved tariffs and contracts, and it will fully honor its obligations to
customers and to all regulatory authorities.
11. The Transaction will not impair or in any way diminish the financial,
technical or managerial fitness of VNG to continue to provide continuous and
adequate natural gas service to its Virginia customers. To the contrary, VNG
will become a valued member of the AGLR corporate family, which has a
demonstrated record of providing safe, efficient and reliable natural gas
service and which has the financial resources, operational experience and
commitment needed for VNG to continue to provide adequate service at just and
reasonable rates. VNG will also benefit from AGLR's extensive experience with
its retail customer choice program in Georgia. As a result of Georgia's
Deregulation Act, AGLC continues to provide intrastate delivery service through
its existing pipeline system to end-use customers in Georgia, but AGLC has
exited the natural gas sales function. AGLC now bills marketers for the services
that it provides to them, and on their behalf. As of October 1, 1999, AGLC was
delivering natural gas to approximately 1.4 million residential and small
business end-use customers in Georgia on behalf of approximately 15 marketers
and to approximately 700 large commercial and industrial customers on behalf of
approximately 40 poolers. AGLC serves approximately 240 communities throughout
Georgia including Atlanta, Athens, Augusta, Brunswick, Macon, Rome, Savannah and
Valdosta. To show the impact of the Transaction on VNG, a report has been
prepared by AGLR to reflect Transaction-related benefits to VNG. A copy of that
report is contained in Exhibit 10.
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12. AGLR and VNG will work to minimize workforce reductions through a
combination of growth, reduced hiring and attrition. All collective bargaining
agreements will be honored.
WHEREFORE, DRI, CNG and AGLR respectfully request this Commission to (A)
issue an Order approving their Joint Petition and granting all approvals that
are required under Chapter 5 of Title 56 of the Code of Virginia and regulations
thereunder for the Transaction and (B) issue a letter certifying to the SEC that
the Commission (1) has the resources to, and does currently exercise, regulatory
jurisdiction over the rates, services and operations of VNG and (2) that it will
continue to exercise that jurisdiction following completion of the Transaction.
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Respectfully submitted,
DOMINION RESOURCES, INC.
By /s/ James L. Stutts
-----------------------------
Its VP and General Counsel
DOMINION RESOURCES, INC.
By /s/ Patricia A. Wilkerson
-----------------------------
Its VP & Corp Secy
CONSOLIDATED NATURAL GAS COMPANY
By /s/ James L. Stutts
-----------------------------
Its VP & General Counsel
CONSOLIDATED NATURAL GAS COMPANY
By /s/ Patricia A. Wilkerson
-----------------------------
Its VP & Corp Secy
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AGL RESOURCES INC.
By /s/ Walter M. Higgins
-----------------------------
Its Chairman, President and CEO
AGL RESOURCES INC.
By /s/ Paul R. Shlanta
-----------------------------
Its Assistant Corporate Secretary
VIRGINIA NATURAL GAS, INC.
By /s/ William A. Fox
-----------------------------
Its Senior Vice President and Chief
Executive Officer
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VERIFICATION
I, James L. Stutts, V.P. and General Counsel of Dominion Resources, Inc.,
do solemnly swear that the facts stated in the foregoing petition and all
appendices incorporated by reference, insofar as they relate to Dominion
Resources, Inc., and its subsidiaries, are to the best of my knowledge and
belief, true and correct and that said statements of fact constitute a complete
statement of the matters to which they relate.
/s/ James L. Stutts
Subscribed and sworn to before me this 21st day of June 2000.
/s/ Cynthia L. Hutchenson
Notary Public
My commission expires: August 31, 2002
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VERIFICATION
I, Patricia A. Wilkerson, V.P. & Corp. Secretary of Dominion Resources,
Inc., do solemnly swear that the facts stated in the foregoing petition and all
appendices incorporated by reference, insofar as they relate to Dominion
Resources, Inc., and its subsidiaries, are to the best of my knowledge and
belief, true and correct and that said statements of fact constitute a complete
statement of the matters to which they relate.
/s/ Patricia A. Wilkerson
Subscribed and sworn to before me this 21st day of June 2000.
/s/ Cynthia L. Hutchenson
Notary Public
My commission expires: August 31, 2002
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VERIFICATION
I, James F. Stutts, Vice Pres. & Gen. Cnsel of Consolidated Natural Gas
Company, do solemnly swear that the facts stated in the foregoing petition and
all appendices incorporated by reference, insofar as they relate to Consolidated
Natural Gas Company, and its subsidiaries, are to the best of my knowledge and
belief, true and correct and that said statements of fact constitute a complete
statement of the matters to which they relate.
/s/ James F. Stutts
Subscribed and sworn to before me this 21st day of June 2000.
/s/ Cynthia L. Hutchenson
Notary Public
My commission expires: August 31, 2002
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VERIFICATION
I, Patricia A. Wilkerson, V.P. & Corp. Secretary of Consolidated Natural
Gas Company, do solemnly swear that the facts stated in the foregoing petition
and all appendices incorporated by reference, insofar as they relate to
Consolidated Natural Gas Company, and its subsidiaries, are to the best of my
knowledge and belief, true and correct and that said statements of fact
constitute a complete statement of the matters to which they relate.
/s/ Patricia A. Wilkerson
Subscribed and sworn to before me this 21st day of June 2000.
/s/ Cynthia L. Hutchenson
Notary Public
My commission expires: August 31, 2002
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VERIFICATION
I, Walter M. Higgins, Chairman, President and CEO of AGL Resources Inc. do
solemnly swear that the facts stated in the foregoing petition and all
appendices incorporated by reference, insofar as they relate to AGL Resources
Inc., and its subsidiaries, are to the best of my knowledge and belief, true and
correct and that said statements of fact constitute a complete statement of the
matters to which they relate.
/s/ Walter M. Higgins
Subscribed and sworn to before me this 21 day of June 2000.
/s/ Helen R. Bowen
Notary Public
My commission expires: [seal]
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VERIFICATION
I, Paul R. Shlanta, Assistant Corporate Secretary of AGL Resources Inc., do
solemnly swear that the facts stated in the foregoing petition and all
appendices incorporated by reference, insofar as they relate to AGL Resources
Inc., and its subsidiaries, are to the best of my knowledge and belief, true and
correct and that said statements of fact constitute a complete statement of the
matters to which they relate.
/s/ Paul R. Shlanta
Subscribed and sworn to before me this 21 day of June 2000.
/s/ Connie C. Harris
Notary Public
My commission expires: Notary Public, Rockdale County, Georgia, My
Commission expires March 17, 2002
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INDEX OF EXHIBITS
Tab
1. Transaction Summary
2. Stock Purchase Agreement, dated as of May 8, 2000 by and between AGL
Resources Inc., as Buyer, and Consolidated Natural Gas Company, as Seller,
Virginia Natural Gas, Inc. and Dominion Resources, Inc.
3. Dominion Resources, Inc. 1999 Annual Report to Shareholders and subsequent
SEC Form 10-Q
4. Consolidated Natural Gas Company 1999 SEC Form 10-K and subsequent SEC Form
10-Q
5. Virginia Natural Gas, Inc. Financial Statements for the years 1995 through
1999
6. AGL Resources Inc. 1999 Annual Report to Shareholders and subsequent SEC
Form 10-Qs
7. Board resolutions for Consolidated Natural Gas Company and AGL Resources
Inc. approving the Stock Purchase Agreement
8. AGL Resources Inc. Current and Post-Transaction Organizational Charts
9. AGL Resources Inc. and Virginia Natural Gas, Inc. Pro-Forma Financial
Statements
10. AGL Resources Inc. Report on Transaction Effects
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[Note:
Tab 1, the Transaction Summary, is included infra.
Tab 2, the Stock Purchase Agreement, is incorporated by reference to Exhibit B-1
to SEC File No. 70-9707, filed by AGL Resources Inc. on June 22, 2000.
Tab 3 includes two parts. Part 1, the 1999 Annual Report of Dominion Resources,
Inc. is provided under cover of Form SE in accordance with a continuing hardship
exemption under Rule 202 of Regulation S-T. Part 2, Dominion Resources, Inc.
Form 10-Q for the quarterly period ended March 31, 2000 is incorporated by
reference to SEC File No. 1-8489, filed on May 15, 2000.
Tab 4, the Consolidated Natural Gas Company Form 10-K for the year ended
December 31, 1999 is incorporated by reference to SEC File No. 1-3196, filed on
March 7, 2000.
Tab 5, the financial statements of Virginia Natural Gas, Inc. is provided under
cover of Form SE in accordance with a continuing hardship exemption under Rule
202 of Regulation S-T.
Tab 6 included two parts. Part 1, the 1999 Annual Report of AGL Resources Inc.
is provided under cover of Form SE in accordance with a continuing hardship
exemption under Rule 202 of Regulation S-T. Part 2, AGL Resources Inc. Form 10-Q
for the quarter ended December 31, 2000, is incorporated by reference to SEC
File No. 1-14174, filed on February 14, 2000.
Tab 7, the Dominion Resources, Inc. Transcript from Minutes of Board of
Directors Meeting for May 30, 2000, is included infra.
Tab 8, AGL Resources' Organizational Structure Chart is provided under cover of
Form SE in accordance with a continuing hardship exemption under Rule 202 of
Regulation S-T.
Tab 9, the Pro Form Financial Statements for AGL Resources Inc. and Virginia
Natural Gas, Inc. are incorporated by reference to Exhibits FS-1 to FS-4 to SEC
File No. 70-9707, filed by AGL Resources Inc. on June 22, 2000.
Tab 10, a Summary of the Preliminary Identification of Opportunities for
Efficiency Gains and Cost Savings, is included, infra.]
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Exhibit 1
TRANSACTION SUMMARY - CHAPTER 5
1) Provide a copy of the agreement signed by the president or any vice
president and the secretary or any assistant secretary of the parties.
See Exhibit 2.
2) Provide a clear summarization of the asset(s) in question.
The assets in question are all of the issued and outstanding shares of
the capital stock of Virginia Natural Gas, Inc. ("VNG").
3) Describe the proposed procedure and the terms and conditions of the
transaction to include:
a) Historical and current use of property;
VNG is a Virginia public service corporation that provides natural gas
service to approximately 230,000 customers in the cities of Norfolk,
Virginia Beach, Chesapeake, Suffolk, Newport News, Hampton, Williamsburg,
and Poquoson, and the counties of James City, Hanover, and York. It is also
certified by the Commission to provide natural gas service in the counties
of Charles City, New Kent, Gloucester, King William, King and Queen, Essex,
Middlesex and Mathews.
b) Proposed use of property;
The proposed use will be the same as the current use.
c) Original cost of property;
See Exhibit 5.
d) Proposed sales price of property and method of determining the price;
and
CNG will sell, convey, transfer, assign, and deliver to AGLR all of
the issued and outstanding shares of capital stock of VNG for $550 million,
payable in cash at the closing. The purchase price is subject to adjustment
to the extent that, at the closing, VNG's working capital deviates from a
specified level. CNG must refund $50 million of the purchase price if
Dominion does not join AGLR in making an election under Section 338(h)(10)
of the Internal Revenue Code with respect to the purchase.
e) Proposed accounting treatment of the transaction as well as current
recording on company's books of record.
AGLR will account for its acquisition of VNG as a purchase in
accordance with the provisions of Accounting Principles Board Opinion No.
16, "Business Combinations." AGLR will allocate its purchase price to the
fair value of VNG's identifiable assets acquired and liabilities assumed
with the excess, if any, allocated to goodwill. Ratemaking treatment, if
any, of such allocations will be addressed in future rate proceedings. AGLR
has not completed its purchase price allocation as of the current date.
4) Provide assurances that adequate service to the public at just and
reasonable rates will not be impaired or jeopardized by the proposed
transfer.
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The Transaction will not impair or jeopardize adequate service at just
and reasonable rates to VNG's customers. VNG will continue to abide by its
approved tariffs, and it will fully honor its obligations to customers and
to all regulatory authorities. The Transaction will not impair or in any
way diminish the financial, technical or managerial fitness of VNG to
continue to provide continuous and adequate natural gas service to its
Virginia customers. To the contrary, VNG will become a valued member of the
AGLR corporate family, which has a demonstrated record of providing safe,
efficient and reliable natural gas service and which has the financial
resources, operational experience and commitment needed for VNG to continue
to provide adequate service at just and reasonable rates. VNG will also
benefit from AGLR's extensive experience with its retail customer choice
program in Georgia. As a result of Georgia's Deregulation Act, AGLC
continues to provide intrastate delivery service through its existing
pipeline system to end-use customers in Georgia, but AGLC has exited the
natural gas sales function. AGLC now bills marketers for the services that
it provides to them, and on their behalf. As of October 1, 1999, AGLC was
delivering natural gas to approximately 1.4 million residential and small
business end-use customers in Georgia on behalf of approximately 15
marketers and to approximately 700 large commercial and industrial
customers on behalf of approximately 40 poolers. AGLC serves approximately
240 communities throughout Georgia including Atlanta, Athens, Augusta,
Brunswick, Macon, Rome, Savannah and Valdosta.
5) Show that the sales price was arms-length and that the purchase will result
in a direct benefit to customers.
In its September 17, 1999 order approving the merger of DRI and CNG in
Case No. PUA990020, the SCC adopted as a condition of approving such merger
that DRI, CNG or both sell and dispose of VNG and all of its assets,
including the intrastate pipeline that connects VNG's service territory to
the interstate pipeline facilities of CNG, to a purchaser that is not
affiliated with DRI, CNG, Virginia Electric and Power Company ("Virginia
Power") or VNG. DRI's divestiture of VNG was also required by the Federal
Trade Commission ("FTC") in a Decision and Order issued November 4, 1999
("Consent Order") in connection with its investigation of the DRI/CNG
merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the
"HRS Act"). The DRI/CNG merger was consummated on January 28, 2000.
Subsequently, DRI began the process for disposition of VNG, which included
an open auction, in which AGLR was the successful bidder. AGLR is not
affiliated with DRI, CNG, Virginia Power or VNG. Accordingly, the Agreement
has been entered into to satisfy the requirements of the SCC's order in
Case No. PUA990020 and the FTC's Consent Order. The Agreement contemplates
that the Transaction will be consummated by December 31, 2000, but the
parties do intend to close by September 30, 2000, which is the end of
AGLR's current fiscal year.
6) Provide schedule of plant, book depreciation, and contributed property
related to assets to be acquired up to current date (or date of purchase,
if acquisition has taken place).
Not applicable. The proposed Transaction is for the sale and purchase
of all of the outstanding shares of capital stock of Virginia Natural Gas,
Inc.
7) Provide complete financial statements of AGL and VNG, to include Balance
Sheet, Income Statement, and Cash Flow Statement, for the latest
twelve-month period and for the last five years.
See Exhibits 5, 8 and 9.
8) Are invoices available to verify plant figures? If not, why not?
Not applicable - The proposed Transaction is for the sale and purchase
of all of the outstanding shares of capital stock of Virginia Natural Gas,
Inc.
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9) In addition to the items described above, for applications requesting
approval of the acquisition/disposition of control, address the anticipated
impact of such action on the regulated company's rates and service, capital
structure, and access to capital and financial markets. Discuss favorable
and unfavorable economic impacts on the State of Virginia to include
employee levels, facilities, and services provided. Will an additional
investment be required to improve service quality? Provide specific details
on improvements needed. Provide the anticipated impact on rates of such
improvements currently and for the next ten years.
Impact on Regulated Company's Rates and Service
The Transaction will not impair or jeopardize adequate service at just
and reasonable rates to VNG's customers. VNG will continue to adhere to its
tariffs and to honor fully its obligations to customers, regulatory
authorities and other stakeholders. Additionally, the management style and
strategic vision of AGLR will enhance VNG's stable and reliable corporate
decision-making.
Impact on Capital Structure
The Transaction will have no impact on the capital structure of VNG.
Impact on Access to Capital and Financial Markets
The Transaction will not impair VNG's access to capital and financial
markets. AGLR has been placed on credit watch by Moody's Investors
Services, Fitch Investors Service, Inc and Standard & Poor's. However, such
credit watch is customary in mergers and acquisitions and should have no
significant impact on VNG's access to capital and financial markets. Also,
AGLR fully expects to retain its investment grade credit rating following
the completion of the Acquisition.
Favorable and Unfavorable Economic Impacts on Virginia
It is not anticipated that the Transaction will have unfavorable
economic impacts on the Commonwealth of Virginia. Service levels will
likely be enhanced as a combination of best practices and technology is
deployed at VNG to serve the community. It is likely that the Transaction
will have a favorable economic impact on Virginia. In the long run, it is
anticipated that the Transaction will generate new job opportunities in the
Commonwealth due to the expansion of the gas distribution system,
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continued growth in customers, and new business opportunities that will
result from increased competition for energy services. Further, the
Transaction will enhance VNG's presence in the Commonwealth through the
placement of a President and CEO of VNG in Virginia who will manage the
day-to-day operations and become actively involved in the affairs of the
community. Although the transition and integration plans are not complete,
the Parties will work to minimize any work force reductions through a
combination of growth, reduced hiring, and attrition to minimize the need
for employee separations. All collective bargaining agreements will be
honored by VNG. To the extent that the transition and integration plans
result in the consolidation of facilities to improve efficiency and work
processes, those consolidations will be minimal and service levels will not
be compromised.
Additional Investment to Improve Service Quality
No additional investment has been identified to improve service
quality as a result of the Transaction. VNG will continue to invest in its
distribution system to meet the needs of its growing service territory. VNG
will continue to provide quality service to its Virginia customers, and
there is no anticipated impact on rates resulting from the Transaction.
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Tab 7
DOMINION RESOURCES, INC.
TRANSCRIPT FROM MINUTES OF BOARD OF DIRECTORS MEETING
MAY 30, 2000
************************************************************************
SALE OF VIRGINIA NATURAL GAS
WHEREAS, certain officers of the Company have signed a Stock Purchase
Agreement dated as of May 8, 2000, by and between AGL Resources, Inc.,
Consolidated Natural Gas Company, Virginia Natural Gas, Inc. and Dominion
Resources, Inc. (the "Agreement"),
NOW AND THEREFORE, BE IT RESOLVED, that the actions taken by any such
officers of the Company in connection with the negotiation and execution and
delivery of the foregoing Agreement is hereby in all respects ratified,
confirmed and approved; and further
RESOLVED, that the President, any Executive Vice President, any Senior Vice
President or any Vice President of the Company are hereby authorized to
negotiate, execute and deliver any agreements, documents, certificates or other
documents and to take such other actions as necessary or desirable, in such
officer's sole discretion, to carry out the intent of the foregoing resolutions.
************************************************************************
I, the undersigned, hereby certify that I am Vice President and Corporate
Secretary of Dominion Resources, Inc., a Virginia corporation; that the
foregoing is a true and correct transcript from the records of the meeting of
the Board of Directors of said Company held on May 30, 2000, said meeting having
been duly held and a quorum being present and acting throughout.
I further certify that said resolutions have not been amended or revoked
and that the same are now in full force and effect.
IN WITNESS WHEREOF, I have hereunto set my hand and have affixed the
corporate seal of said Company this 21st day of June 2000.
/s/ Patricia A. Wilkerson
----------------------------------------
Vice President and Corporate Secretary
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CERTIFICATE OF CORPORATE SECRETARY
I, Melanie M. Platt, hereby certify that I am duly appointed and qualified
Vice President and Corporate Secretary of AGL Resources, Inc., a corporation
chartered and existing under the laws of the State of Georgia (the "Company"),
that I am familiar with the corporate records of the Company, and further
certify individually and on behalf of the Company as follows:
(i) Attached hereto as Exhibit A is a true and correct excerpt from
minutes of meeting of the Board of Directors of the Company held on
April 25, 2000, at which meeting a quorum was present and acting
throughout; and such excerpt has not been amended, modified, or
rescinded and remains in full force and effect.
WITNESS my signature and the seal of said Company at Atlanta, Georgia, as
of this 20th day of June 2000.
/s/ Melanie M. Platt
---------------------
Melanie M. Platt
Vice President and Corporate Secretary
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EXHIBIT A
Excerpt:
Meeting of the Board of Directors of AGL Resources Inc. held April 25, 2000
WHEREAS, the Company desires to submit a proposal, including a proposed
Stock Purchase Agreement, (collectively, the "Proposal") for the purchase of all
of the issued and outstanding shares of Virginia Natural Gas, Inc. ("VNG") from
Consolidated Natural Gas Company for a total consideration of approximately $550
million in cash, if treated as a stock sale for tax purposes and approximately
$550 million in cash, if treated as an asset sale for tax purposes;
WHEREAS, the Board deems it advisable and in the best interests of the
Company to submit the Proposal;
WHEREAS, the Board desires to ratify, confirm, approve and adopt all
actions heretofore or hereafter taken by the Company and its officers, employees
and agents in connection with the Proposal;
WHEREAS, the Board desires to further authorize the officer, employees and
agents of the Company to take all acts necessary to consummate all transactions
contemplated by the Proposal, including without limitation the negotiation,
execution, delivery and performance of a definitive Stock Purchase Agreement
(the "Stock Purchase Agreement") by and among the Company, Consolidated Natural
Gas Company, a Delaware corporation, VNG, a Virginia corporation, and Dominion
Resources, Inc., a Virginia corporation, pursuant to which the Company would
purchase all of the issued and outstanding shares of VNG from Consolidated
Natural Gas Company as well as all agreements to be referenced therein or
contemplated thereby (collectively, with the Stock Purchase Agreement, the
"Transaction Documents" and each individually, a "Transaction Document"), with
the terms of such Transaction Documents to be negotiated on behalf of the
Company by the President or any Senior Vice-President of the Company (each an
"Authorized Officer" and collectively, the "Authorized Officers");
WHEREAS, the Board desires to ratify, confirm, approve and adopt all
actions heretofore or hereafter taken by the Company and its officers, employees
and agents in connection with the Stock Purchase Agreement, including the
negotiation, execution and delivery of the Transaction Documents;
WHEREAS, the Board desires to further authorize the officers, employees and
agents of the Company to take all acts necessary to consummate all transactions
contemplated by the Stock Purchase Agreement, including without limitation the
execution, delivery and performance of any Transaction Documents, and the
payment of all amounts now or hereafter due and payable by the Company under the
Transaction Documents;
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NOW, THEREFORE, BE IT RESOLVED that all actions taken by the Company and
its officers, employees and agents in connection with the negotiation, execution
and delivery of the Proposal are hereby ratified, confirmed, approved and
adopted;
FURTHER RESOLVED, that the Company is authorized to submit the Proposal,
with such changes, modifications, substitutions, and additions as any Authorized
Officer shall in his or her sole discretion approve, and to undertake all
transactions contemplated thereby;
FURTHER RESOLVED, that if the Proposal is accepted, any Authorized Officer
is hereby authorized to negotiate, execute and deliver the Transaction
Documents;
FURTHER RESOLVED, that all actions taken by the Company and its officers,
employees and agents in connection with the negotiation, execution and delivery
of the Transaction Documents are hereby ratified, confirmed, approved and
adopted;
FURTHER RESOLVED, that any Authorized Officer is authorized and empowered
to make, execute and deliver for and in the name of the Company each Transaction
Document at such time and in such form as may be approved by such Authorized
Officer, with the authority of the Authorized Officer to make, execute and
deliver each Transaction Document being conclusively evidenced by the signature
of the Authorized Officer on each Transaction Document, and the Authorized
Officers are further authorized and directed to take all such further action and
execute and deliver for and in the name of the Company all such documents,
certificate and documents referenced in any Transaction Document or as may be
necessary, appropriate, desirable and/or required in order to carry out the
intent and purposes of the terms of the Transaction Documents;
FURTHER RESOLVED, that the Corporate Secretary of the Company is authorized
and directed to attest to the signature of any signatory officer to call
instruments, certificates and documents as may be executed in connection with
the Transaction Documents, and to affix the Company's seal thereto (provided
that no attestation or seal shall be required to make such documents effective,
valid, binding and enforceable); and
FURTHER RESOLVED, that any actions or deeds done by any officer or agent of
the Company in accordance with these resolutions or to facilitate the actions
contemplated by these resolutions are hereby approved, ratified, confirmed and
adopted; and that the officers and agents of the Company are authorized to take
and do such further acts and deeds, and to execute and deliver, for and in the
name of the Company, such other documents, papers, and instruments as they deem
necessary, appropriate, advisable or required in order to effectuate the purpose
and intent of these resolutions, and the taking of any such acts and deeds, and
the execution and delivery of any such documents, papers and instruments are
hereby approved, ratified, confirmed and adopted.
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Exhibit 10
PRELIMINARY IDENTIFICATION OF OPPORTUNITIES
FOR EFFICIENCY GAINS AND COST SAVINGS
SUMMARY
AGL Resources (AGLR) is proposing to acquire Virginia Natural Gas, Inc. (VNG).
In recent years VNG has been operated as a wholly-owned natural gas distribution
subsidiary of Consolidated Natural Gas Company (CNG). As a condition to the
approval of the merger of CNG and Dominion Resources, Inc. (DRI), the Virginia
State Corporation Commission and the Federal Trade Commission have required the
divestiture of VNG. The divestiture of VNG was deemed necessary to ensure and
promote a competitive environment for utility energy services in Virginia. As
part of the acquisition process, the management of AGLR conducted a preliminary
review of the types of potential efficiency gains and cost savings estimates
that may result from the acquisition of VNG. The actual transition analysis and
planning are underway currently, and are expected to continue past closing of
this transaction. The results of the initial review are described in the
attached document.
The potential acquisition-related efficiency gains and estimated cost savings
described in this report were developed by AGLR's management, with the
assistance of Deloitte Consulting, as part of AGLR's acquisition due diligence.
The process utilized by AGLR's management identified sources of savings
typically available in an acquisition of this type. Additional savings
quantification, based on more complete information, is anticipated as part of
the implementation process after the transaction closes.
Estimates of costs savings are inherently speculative. Indeed, the potential
exists that various economies already realized within the CNG organization may
be difficult to replicate by an organization of lesser scale. Thus, the achieved
cost savings may be partially or substantially offset by changes driven by both
scale of operation and the length of time required for full implementation of
new process and procedures.
The estimated cost savings generally reflect the potential to capture
cost-reduction or cost-avoidance opportunities by consolidating separate,
stand-alone corporate and operations support functions into a single service
company. This consolidation and integration thus may enable duplicative
functions and positions to be eliminated; similar corporate activities to be
combined, avoided or reduced in scope; external purchases of commodities and
services to be aggregated, and; certain capital expenditures to be avoided.
A goal of the current transition analysis and planning initiative is to identify
opportunities for efficiency gains and cost savings, if any exist, and to
quantify the potential opportunities that have been identified to date. Emphasis
is being placed on eliminating duplicative labor positions, reducing overlapping
non-labor corporate programs (e.g. - information technology, administrative &
general overhead, etc.), capturing non-fuel purchasing economies and reducing
predecessor holding company costs. At the same time, the transition team has
been charged with ensuring that there is no deterioration in service quality.
Likewise, no actions will be taken that would compromise the safety standards of
AGLR and VNG. Indeed, it is likely that knowledge sharing and best practice
transfers among operating units will be enabled by this transaction and will
lead to service enhancements for all end-use customers served by AGLR companies.
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OVERVIEW
The proposed acquisition of VNG by AGLR has multiple goals. One of those goals
is the capture of operational and management efficiencies that will provide
benefits to the customers, employees, and shareholders of the companies and to
the communities in which the companies operate. The proposed acquisition affords
the individual companies the opportunity to optimize the use of existing
resources and expertise to meet successfully the challenges of the evolving
business environment. The benefits accruing to all stakeholders will include
continued improvements in service quality, increased responsiveness to
stakeholder needs, and potentially lower cost.
Based on the information made available during the due diligence phase of the
acquisition process, a review was done of potential efficiencies that could
result from integrating management and operational support areas of the
companies. This review focused on current cost structures and potential impacts
on these cost structures post-integration under the assumption that the body of
work performed and the environment in which this work is performed remain
essentially constant. Of course, given the current evolution of the environment
in which energy companies are operating, e.g. unbundling and restructuring
energy delivery services in Virginia, it is unlikely that these variables will
remain constant. However, for purposes of this review, it was inappropriate to
make assumptions about what the specific obligations and opportunities of the
combined company would be under a new, as yet unformulated, environment.
The following is a description of the efficiency gains and estimated benefits
that may be reasonably attainable under the proposed integration of AGLR and
VNG. These benefits are identified by the nature and area of occurrence and are
described with respect to the method of calculation.
NATURE OF POTENTIAL BENEFITS
As previously described, the integration of relevant AGLR and VNG functions
potentially creates opportunities for all of the various stakeholders or
constituencies to benefit directly from integration. These benefits are viewed
as a natural by-product of the acquisition and are believed to be recurring in
nature.
o The combination of AGLR and VNG will provide an opportunity to realize
potential benefits in the form of economies, efficiencies and
operating effectiveness. These synergies relate to a variety of
operational functions and potentially create benefits that will accrue
directly to customers.
The key benefits of close operational integration, complementary business scope,
heightened management attention, and service territory diversity accrue to the
general value of all of the stakeholder groups, but directly impact each group
to different degrees as discussed below:
- Customers - The customers of AGLR's existing operating units and VNG
are the most direct beneficiaries of the combination as they will
realize the benefits of future cost savings from operational
efficiencies in the form of potentially lower cost-of-service than
would otherwise exist. This group also benefits from the enhanced
coordination of key planning processes and the increased focus this
brings to these processes. Customers as a group also benefit through
the increased financial strength and flexibility of the combined
companies, which assures that a high quality of service delivery can
be maintained.
- Employees - The combination of AGLR and VNG will provide career
opportunities to the employee group, as a whole, from both the
expansion of job responsibility and an increase in general
opportunities. As the two companies combine, they will have a need to
broaden the skills and experience of existing employees to complement
the position requirements of the combined companies. The combination
will also result
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in the creation of new positions and will increase the number of
opportunities available for career development to employees through
new job opportunities in the growing regulated business. The combined
companies will be committed to retaining talented employees to
successfully meet the challenges of the evolving business environment.
- Shareholders - The increased financial strength that potentially will
result from the combination of AGLR and VNG may provide future growth
opportunities for the shareholders of AGLR. The presence of a larger
and more diverse asset base and the increased cash flow that will be
generated from operations can enhance the opportunity for increased
price appreciation and total return in the future. Further, the AGLR
shareholders may benefit from the improved strategic position of the
combined companies, which may provide for additional growth
opportunities and increased market recognition of the significance of
the combined companies.
DEVELOPMENT OF POTENTIAL COST SAVINGS
Areas where potential cost savings could result from the transaction were
identified at the outset of the effort. This effort was generally conducted
based on internal information from the Companies. The areas where
integration-related impacts were expected to occur were evaluated and potential
savings were estimated, where possible. Estimates were based on a number of
factors, including avoiding duplication, comparing per unit costs among the
operating units, comparing similar transactions, and management insight based on
past experience.
The potential savings identified to date reflect those areas where the total
level of costs can be affected by actions of management that are the direct
result of the acquisition of VNG by AGLR. These savings areas are principally
derived from the operational efficiencies that are created upon integration of
two corporate and operations support organizations. These savings areas would
typically incorporate both cost reduction and cost avoidance. As a result of the
proposed acquisition of VNG by AGLR, both cost reduction and cost avoidance
opportunities have been preliminarily identified based on the information
obtainable and on the current business environments of both companies. Where
particular functions can be performed in one or more locations, decisions have
not yet been made as to the location at which the costs would be avoided. Such
decisions, together with the more refined estimates of the potential savings,
will be made in the transition analysis, planning and implementation phases.
Likewise, the costs to achieve such savings will be further quantified.
DISCUSSION OF POTENTIAL COST SAVINGS
The integration of AGLR and VNG will create a number of opportunities to realize
potential cost savings. From the review completed to date, the breadth of
potential cost savings opportunities includes the corporate administration and
operations support areas. These areas are summarized by category below:
- Corporate and Operations Support Staffing
- Corporate and Administrative Programs
- Purchasing Economies (Nonfuel)
- Reduced Holding Company Charges
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The Process for Identifying and Quantifying Potential Cost Savings
AGLR management, in cooperation with VNG, has developed a broad framework for
planning and executing the transition and integration of VNG. Identifying and
quantifying potential efficiency gains and cost savings opportunities are
integral to the transition and integration framework. Four distinct, detailed
transition phases of work embody that framework.
The first and current phase of work involves Transition Analysis. This phase of
work requires the development and chartering of inter-company management teams
to develop and document an understanding of current organization structures,
processes and policies; identifying differences in organizational performance
and related cost drivers; understanding organizational similarities and
differences between the two companies from a best practices standpoint; and
quantifying legal and operational business requirements for Day 1 operations.
In conjunction with this initial phase of work, a core team of AGLR and VNG
subject matter experts has begun compiling facts and issues to provide a
baseline for future integration actions. Broad areas of focus include Operations
and Engineering, Customer Service, Finance and Accounting, Human Resources,
Information Technology, Legal/Regulatory and Communications. The Transition
Analysis phase of activity is ongoing as of the date of this report.
The second phase of work is Transition Planning. The planning phase links to the
baseline costs developed in the Analysis Phase to help quantify the business
case. In addition, all customer requirements developed during the Analysis Phase
are refined and used to drive the development of processes to be employed in the
combined entity.
Implementation Planning is the third distinct phase of work. The business cases
developed during the Planning Phase constitute the starting point for
Implementation Planning. During this phase of work, a complete and integrated
set of analyses from all previous phases is provided to the selected business
function managers. Also, planned performance enhancements are continually
measured against the Analysis Phase baseline.
The fourth and final phase is Transition Implementation, marking the integration
of processes and organization following the official closing of the transaction.
Each of the four areas of potential cost savings identified above will be
examined in this four-phase process, as further described below.
Corporate and Operations Support Labor
The integration of certain relevant functions of AGLR and VNG will provide an
opportunity to integrate existing corporate administrative and operations
support functions. Savings in this area arise through the elimination of
redundant functions within both headquarters and operations support in areas
such as:
- Executive Management - Legal
- Finance, Accounting and Planning
- Human Resources
- Information Services
- - Administrative and Support
- Customer Service
- Distribution
An integration of related corporate and operating support functions between the
companies provides an opportunity to combine functions, eliminate duplicative
activities and take advantage of productivity efficiencies. Because a
significant portion of payroll costs are relatively fixed and, in general, do
not vary directly with an increase or decrease in the number of customers
served, certain labor efficiencies may be achieved with no impact on customers.
For example, the integration of two accounting departments would typically
create savings. Potential redundancy identification would begin with the
alignment of the functional departments within each company to ensure
comparability across different organizational structures. Each individual
function within the accounting department, including budget and forecasting,
general accounting and tax accounting, among others, may contain
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duplicative personnel performing similar tasks. Such duplicative positions could
be reduced and economies of scale could be captured.
These functions represent the broad categories of headquarters or operations
support that are performed by both AGLR and VNG. The consolidation will provide
an opportunity to combine these functions or departments and eliminate duplicate
activities in the dual locations. The need to perform these activities
separately will no longer exist once integration is achieved, as the combined
company will only require that these functions be performed once on behalf of
the total corporation. Thus, the ability to reduce the stand-alone total costs
of these functions is directly attributable to the acquisition and would not be
attainable in its absence.
Operations support labor savings are created by the nature of the various
operations support functions. The combination will also enable integration of
duplicative technical and engineering support functions. Both companies maintain
support staff, e.g. design engineering, to perform customer or system-related
functions and to meet the service quality needs of customers. Other specific
functions are performed in field locations and generally relate to the areas of
meter reading, customer service and service operations, such as construction and
maintenance. Because the two companies do not have contiguous territories,
savings opportunities are limited to work activities that are not site-specific
such as engineering support. Field activities directly impacting the customer
will not be significantly affected by the consolidation and therefore
reliability and service quality will not be adversely impacted. In fact, other
operations support and field operations programs will be focused on improving
operating efficiency.
Corporate and Administrative Programs
Both AGLR and VNG incur many costs for items that relate to the operation of
each operating unit, but which are not directly attributable to customers. Such
costs include items such as benefits, professional services, and information
systems. These costs are of a corporate nature and are incurred to support the
corporate staffing infrastructure, obtain needed services or protect
investments. Several such areas have been identified and evaluated by management
to determine the quantifiable cost savings potential.
- Administrative and general overhead
- Benefits administration
- Information services
- Professional services
- Other outside services
- Facilities
Each of these savings areas is outlined below.
- Administrative and general overhead - Many costs associated with
corporate administrative and general personnel are captured as
overhead costs in FERC Account No. 921. These costs include employee
business expenses, office supplies, employee memberships,
transportation expenses, and miscellaneous other expenses and are
directly variable with employee levels. To the extent that positions
are determined to be duplicative and are thus eliminated, there will
be related administrative and general overhead savings.
- Benefits administration - Potential cost savings may occur as a result
of the increased purchasing power in negotiating the administrative
fees associated with the procurement of similar employee benefits for
the combined company and from eliminating duplicate
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fees. Areas where savings could occur include pension trust fees,
actuarial fees, recordkeeping fees, thrift trustee fees, and group
plan administration fees. Potential reductions in administrative fees
from the consolidation of these various plans were identified. A
further reduction of total combined net benefit expense, after
combination of the respective benefits plan into a single,
comprehensive plan, may also be possible. This potential saving does
not contemplate changes in plan design.
- Information systems - The effective management of operations
requires the design, development and installation of support systems
to provide information or processing capability to support the service
delivery functions and provide information for management and decision
making. Both AGLR and VNG maintain information systems (IS)
departments to facilitate the systems development effort and support
the information processing needs of each company. Five areas of IS are
being reviewed for potential cost savings opportunities, including:
data center consolidation, distributed network operations,
applications consolidation, application development projects and
telecommunications. In the short-term a transition contract with CNG
will be maintained to obtain IT services until systems are fully
converted to AGLR's systems.
- Professional services - Potential cost savings have been identified in
expenses associated with professional services, e.g., consulting,
legal, financial, accounting, etc. Each of the companies utilize a
variety of consultants and professional advisors for assignments where
either specialized skill or knowledge is required or external
requirements exist which require the retention of professional
services. With a broader resource and capabilities mix available to
the combined company, it is likely that less reliance on external
advisors will be necessary.
- Facilities Consolidation - Cost savings in this area may be possible
because of anticipated consolidation of functions that are currently performed
in both Virginia and Georgia. To the extent that the going-forward work force is
streamlined, there would be a related opportunity to reduce total facilities
space into fewer locations or consolidated in a single location if the function
is centralized. Subsequently, unused space can be subleased or sold, reducing
the cost of corporate facilities.
Purchasing Economies (Nonfuel)
Currently, AGLR and VNG independently maintain separate purchasing departments
responsible for maintaining materials and supplies used by employees at various
storeroom locations. While AGLR's purchasing department is responsible for the
acquisition of all non-fuel materials and supplies, VNG relies on CNG for a
portion of its
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procurement activity. As a result of the combination, savings can be realized in
the procurement of both materials and supplies.
In addition to the professional services category discussed above, both AGLR and
VNG procure certain services from third party vendors. These services are
typically more closely related to operations support and capital projects, e.g.
engineering design and construction. Integration of the companies will allow
them to contract jointly with certain related third party vendors for common
services and obtain purchasing leverage.
Reduced Holding Company Charges
As a subsidiary of CNG, VNG incurs costs associated with this ownership
relationship. These costs are associated with services provided directly to VNG
related to general management and oversight provided by the parent. These
charges are received by VNG either as direct billings or through corporate
allocations.
VNG has historically incurred charges from CNG for assistance directly related
to such matters as benefits administration, insurance administration, risk
management, intellectual capital, and organizational development and training.
When VNG separates from CNG and becomes a subsidiary of AGLR, some of these
services may be provided by AGLR, some may be outsourced to third parties and
some may be discontinued altogether, depending on the nature of the service and
future requirements of the company. Elimination, reduction or replacement of the
services currently provided directly to VNG by CNG will provide the opportunity
for cost evaluations.
As VNG's parent, CNG also allocates a portion of the general corporate overhead
to VNG. Since these costs are incurred by CNG for the benefit of all of their
subsidiaries but cannot be identified as directly benefiting one more than
another, they are allocated to each subsidiary based on a generally accepted,
standardized formula. The types of costs allocated through such a formula
include such items as executive compensation, facilities, investor relations and
community affairs. These costs are generally incurred by all companies on behalf
of their subsidiaries and are allocated to each subsidiary in a manner similar
to that used by CNG. When VNG is separated from CNG and becomes a subsidiary of
AGLR, the allocated company costs of CNG will be eliminated. Necessary services
for VNG will be replaced by services from AGLR, together with certain
allocations from AGLR to reflect increased costs from absorbing increased work
volumes. The level of such services and the corresponding charges to VNG from
AGLR are not yet known. It is known, however, that the current charges from CNG
to VNG significantly exceed the amount that was included in VNG's revenue
requirements in its last rate case. Cost increases from CNG since 1996 were
driven in large measure by an effort to centralize support functions within the
service company to realize benefits from economies of scale. If the level of
corporate charges and allocations to VNG by AGLR can be reduced to the levels
included in the last rate case revenue requirements determination, then the cost
savings would be approximately $5 million annually. In order for AGLR to achieve
the target savings identified above, AGLR must improve efficiencies across the
spectrum of services offered at present by CNG.
COSTS TO ACHIEVE
Several of the potential cost savings that have been identified cannot be
achieved without the expenditure of direct costs. For example, streamlining
duplicative positions potentially will require out-of-pocket expenditures to
support their realization. To the extent that attrition, controlled hiring,
retraining, and better management programs do not fully achieve the position
elimination that may be appropriate, other separation packages may be made
available to employees.
Certain areas, such as information systems integration and facilities
consolidation, will also require expenditures to achieve the savings due to
costs of integration implementation. Most of these costs are expected to be
incurred in the first year of the consolidation (or before) with the exception
of information systems, which is likely to be incurred over multiple years.
Potential costs to achieve consolidation savings include: severance costs,
relocation costs, information systems integration costs, facilities integration
costs, communications costs, and transition costs.
As in most transactions of this nature, it is reasonable to expect costs to
exceed savings initially. Nonetheless, the cost/benefit analysis that will be
employed by the transition team will ensure that the savings are achievable, or
the actions will not be undertaken.
ANTICIPATED EFFICIENCY GAINS AND COST SAVINGS
An examination of other mergers and acquisitions reveals long-run, sustainable
savings ranging from approximately 2% to approximately 16% of non-fuel O&M
expenses, with the average being just below 9%. The preliminary, high-level
review of the areas discussed above, including the costs to achieve, are
estimated to produce potential net cost savings from the post-acquisition
consolidation consistent with the range of the industry experience to date.
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Nonetheless, the actual savings achieved by the consolidation will reflect the
structure of the new company after all functions are integrated. As discussed
above, the process for Transition Analysis, Transition Planning, Implementation
Planning, and Transition Implementation in underway. Additionally, the cost
structure of the consolidated company may reflect changes in the business
environment in addition to those associated with the consolidation.
Notwithstanding the foregoing statement concerning the preliminary estimate of
savings and the range of savings in the industry, a note of caution is required.
DRI, CNG and VNG are all efficiently operated entities. Additionally, DRI and
CNG are significantly larger than AGLR, and therefore have already realized many
economies of scale. As such, there may be services that AGLR will not be able to
reproduce at CNG's costs for similar shared services. AGLR is comfortable,
though, that the total potential net cost savings will offset any increased
cost.
