File No.
United States Securities and Exchange Commission
Washington, D.C. 20549
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
AGL Resources Inc. Virginia Natural Gas, Inc.
Atlanta Gas Light Company 5100 East Virginia Beach Blvd
Chattanooga Gas Company Norfolk, Virginia 23502
817 West Peachtree Street, N.W.
Atlanta, Georgia 30308
(Names of companies filing this statement
and addresses of principal executive offices)
AGL Resources Inc.
(Name of top registered holding company)
Donald P. Weinstein Donald A. Fickenscher
Senior Vice President and Chief Chief Counsel and Corporate Secretary
Financial Officer Virginia Natural Gas, Inc.
AGL Resources Inc. 5100 East Virginia Beach Blvd
817 West Peachtree Street, N.W. Norfolk, Virginia 23502
Atlanta, Georgia 30308 Telephone: (757) 466-5502
Telephone: (404) 584-3410 Facsimile: (757) 466-5562
Facsimile: (404) 584-3419
(Names and addresses of agents for service)
<PAGE>
The Commission is also requested to send copies
of any communication in connection with this matter to:
Joanne C. Rutkowski
Markian M. W. Melnyk
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Ave., N.W.
Washington, D.C. 20009-5728
Telephone: (202) 986-8000
Facsimile: (202) 986-8102
<PAGE>
Defined Terms
--------------------------------------------------------------------------------
Term Definition
--------------------------------------------------------------------------------
AGL Resources AGL Resources Inc.
--------------------------------------------------------------------------------
Utility Atlanta Gas Light Company ("AGLC"), Chattanooga Gas Company
Subsidiaries ("Chattanooga Gas") and Virginia Natural Gas, Inc. ("VNG").
--------------------------------------------------------------------------------
Nonutility AGL Energy Services, Inc. ("AGLE"), Georgia Gas Company
Subsidiaries ("Georgia Gas"), SouthStar Energy Services LLC
("SouthStar"), AGL Investments, Inc. ("AGLI"), AGL Propane,
Inc. ("AGL Propane"), Trustees Investments, Inc. ("Trustees
Investments"), Utilipro, Inc. ("Utilipro"), AGL Consumer
Services, Inc. ("AGL Consumer Services"), and AGL Peaking
Services, Inc. ("AGL Peaking"). The term Nonutility
Subsidiaries also includes other direct or indirect
subsidiaries of AGL Resources, like AGL Services, Inc. ("AGL
Services"), that are formed or acquired in accordance with
an order of the Commission or applicable exemption
subsequent to the issuance of an order by the Commission in
this file.
--------------------------------------------------------------------------------
Subsidiaries The Utility Subsidiaries and the Nonutility Subsidiaries,
collectively.
--------------------------------------------------------------------------------
AGL System AGL Resources and the Subsidiaries.
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Description of the Proposed Transaction...............................1
A. Introduction......................................................1
1. General Request...............................................1
2. Overview of the Acquisition...................................3
B. Description of the Parties........................................4
1. AGL Resources.................................................4
a. AGLC......................................................4
b. Non-Utility Businesses....................................6
2. VNG...........................................................8
C. Description of the Acquisition....................................9
1. Financing the Acquisition....................................10
D. Management and Operations of VNG Following the Acquisition.......10
E. Financing the AGL System Following the Acquisition...............11
1. Summary of Authorization Requested...........................11
2. Parameters for Financing Authorization.......................12
3. Use of Proceeds..............................................14
4. Description of Proposed Financing Program....................15
a. AGL Resources External Financing.........................15
b. Common Stock.............................................15
c. Preferred Stock..........................................16
d. Long-Term Debt...........................................17
e. Short-Term Debt..........................................17
f. Hedges and Interest Rate Risk Management.................18
g. Guarantees...............................................20
h. Money Pool...............................................20
i. Changes in Capital Stock of Wholly-Owned Subsidiaries....22
j. Payment of Dividends Out of Capital or Unearned
Surplus(1)...............................................22
k. Financing Entities.......................................25
l. Tax Allocation Agreement.................................25
m. Direct Stock Purchase and Dividend Reinvestment Plan,
Incentive Compensation Plans and Other Employee Benefit
Plans....................................................26
n. Subsidiary Financings....................................26
F. Intra-System Service Transactions................................27
1. AGL Service..................................................27
2. Other Services...............................................31
G. Nonutility Reorganizations.......................................32
H. Certificates of Notification.....................................35
Item 2. Fees, Commissions and Expenses.......................................36
<PAGE>
Item 3. Applicable Statutory Provisions......................................36
A. Applicable Provisions............................................36
B. Legal Analysis...................................................36
1. Section 10(b)................................................37
a. Section 10(b)(1).........................................37
i. Interlocking Relations...............................37
ii. Concentration of Control.............................38
b. Section 10(b)(2).........................................40
i. Fairness of Consideration............................40
ii. Reasonableness of Fees...............................41
c. Section 10(b)(3).........................................41
2. Section 10(c)................................................44
i. Section 10(c)(1).....................................44
(a). Section 11, Integrated Utility System..........44
(b). Non-Utility Subsidiaries.......................47
ii. Section 10(c)(2)50
3. Section 10(f)................................................52
4. Section 3(a)(2)..............................................52
Item 4. Regulatory Approvals.................................................52
1. State Regulation.............................................52
2. Federal Regulation...........................................53
Item 5. Procedure............................................................53
Item 6. Exhibits and Financial Statements....................................53
Item 7. Information as to Environmental Effects..............................55
<PAGE>
Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks approvals relating to
the proposed acquisition of Virginia Natural Gas, Inc. ("VNG"), a Virginia
public service corporation, by AGL Resources Inc. ("AGL Resources"), a Georgia
corporation, pursuant to which VNG will become a wholly-owned subsidiary company
of AGL Resources ("Acquisition"). Following consummation of the Acquisition, AGL
Resources will register with the Securities and Exchange Commission (the "SEC"
or the "Commission") as a holding company under Section 5 of the Public Utility
Holding Company Act of 1935 (the "Act"). AGL Resources is currently a holding
company exempt from all provisions of the Act, except Section 9(a)(2), under
Section 3(a)(1) and Rule 2. The Application also seeks authorization for
financing, intrasystem services and other transactions that the AGL System will
engage in after the Acquisition in connection with its operation as a registered
holding company system.
AGL Resources currently has one public utility subsidiary, Atlanta Gas
Light Company ("AGLC") a gas utility company that in turn owns all of the
outstanding shares of Chattanooga Gas Company ("Chattanooga Gas"), another gas
utility company. AGLC is currently exempt under Section 3(a)(2) and Rule 2 from
all provisions of the Act, except Section 9(a)(2).
1. General Request
Under Sections 9(a)(2) and 10 of the Act, AGL Resources requests the
Commission's authorization to acquire all the issued and outstanding common
stock of VNG, a gas public-utility company, and thereby acquire VNG. AGL
Resources and AGLC request that the Commission issue an order finding AGLC
exempt under Section 3(a)(2) from all provisions of the Act, except Section
9(a)(2). In addition, AGL Resources is evaluating whether to restructure its
utility holdings by acquiring Chattanooga Gas from AGLC and retaining it as a
direct subsidiary. AGL Resources requests that the Commission authorize this
contemplated restructuring. AGL Resources also requests that the Commission
allow it to retain its non-utility businesses and investments. To permit the
operation of the AGL System post-registration, Applicants request authorization
for financing, intrasystem service transactions and other transactions.
<PAGE>
2. Overview of the Acquisition
Pursuant to a Stock Purchase Agreement dated as of May 8, 2000 among AGL
Resources, Consolidated Natural Gas Company ("CNG"), VNG and Dominion Resources,
Inc. ("Dominion"), AGL Resources will purchase all of the issued and outstanding
capital stock of VNG for $550 million, payable in cash at the closing. Pursuant
to the Stock Purchase Agreement, the purchase price is subject to adjustment to
the extent that at the closing, VNG's working capital is greater or less than a
specified working capital level. CNG must refund $50 million of the purchase
price if Dominion does not join AGL Resources in making an election under
Section 338(h)(10) of the Internal Revenue Code in respect of the purchase. AGL
Resources intends to finance the Acquisition through a combination of credit
facilities with various banks. After the Acquisition, AGL Resources expects to
refinance the debt incurred with more permanent equity capital or debt.
As discussed in Item 1.C. below, the boards of directors and managements of
AGL Resources and VNG believe that the Acquisition will provide the larger scale
important to remain competitive in the utilities industry. Gaining a larger
customer and financial base will allow AGL Resources to operate more cost
effectively, invest in technologies that enhance service and develop additional
product offerings for customers. A more competitive and cost-effective operation
will also benefit AGL Resources shareholders and employees.
The AGL Resources and Dominion boards of directors have approved the
proposed Acquisition. No shareholder approval is required. The Virginia State
Corporation Commission ("Virginia Commission") is the only state regulatory
authority that must approve the Acquisition. AGL Resources, Dominion and CNG
filed a joint petition with the Virginia Commission for authority to undertake
the Acquisition on June 22, 2000. The application to the Virginia Commission is
attached as Exhibit C-1.
Last year, the Virginia Commission and the Federal Trade Commission ("FTC")
issued orders requiring Dominion to divest VNG as part of Dominion's planned
merger with CNG. In addition to the approvals noted above, the sale of VNG must
be approved by both the Virginia Commission and the FTC under their respective
orders of divestiture./1/ The FTC must
----------
/1/ See Order Approving Merger, Virginia State Corporation Commission Case No.
PUA990020, Joint Petition of Dominion Resources, Inc. and Consolidated
Natural Gas Company for Approval of Agreement and Plan of Merger Under
Chapter 5 of Title 56 of the Code of Virginia, (Sept. 17, 1999)
("Dominion/CNG Merger Order"); and FTC Order, FTC File No. 991-0244, FTC
Docket No. C-3901 (Nov. 4, 1999).
----------
2
<PAGE>
also approve the acquisition of VNG by AGL Resources. Lastly, the sale of VNG
must be approved by this Commission under the Act. AGL Resources understands
that Dominion will file a separate application with the Commission with respect
to the disposition of VNG.
The Acquisition is not required to be approved by the Federal Energy
Regulatory Commission ("FERC").
B. Description of the Parties
1. AGL Resources
AGL Resources was incorporated on November 27, 1995 and is currently a
holding company exempt from the requirements of the Act, except Section 9(a),
under Section 3(a)(1) and Rule 2. AGL Resources' common stock has a five dollar
($5.00) par value and is listed and traded on the New York Stock Exchange under
the symbol ATG. As of March 31, 2000, there were 54,285,667 outstanding shares
of AGL Resources' common stock.
For the year ended September 30, 1999, AGL Resources had total assets of
$1,969 million, net utility plant assets of $1,517 million, total operating
revenues of $1,069 million, operating margin/2/ of $524 million and net income
of $74 million. As of September 30, 1999, AGL Resources employed, in conjunction
with its subsidiaries, a total of 2,892 full-time employees.
AGL Resources currently holds all of the outstanding voting securities of
two public utility companies within the meaning of the Act, AGLC, and its
wholly-owned subsidiary Chattanooga Gas. AGL Resources also owns or has an
ownership interest in several non-utility subsidiary companies.
a. AGLC
AGLC is a regulated public utility company engaged in the distribution of
natural gas in Georgia for marketers approved and certificated by the Georgia
Public Service Commission ("Marketers"). Under Georgia's 1997 Natural Gas
Competition and Deregulation Act ("Deregulation Act"), AGLC unbundled various
components of its service to end-use customers. The Deregulation Act enabled
AGLC to unbundle its delivery service and other related services
----------
/2/ Operating margin represents operating revenues less the cost of purchased
gas.
----------
3
<PAGE>
from the sale of natural gas for all customers, thus allowing firm residential
and small commercial customers to purchase natural gas and other services from
suppliers other than AGLC./3/
As a result of the 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 the
Marketers for the services that it provides to, and on behalf of, such
Marketers. 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.
The Georgia Public Service Commission ("Georgia Commission") regulates
AGLC's overall operations. AGLC comprises substantially all of AGL Resources'
assets, revenues and earnings. As of and for the year ended September 30, 1999,
AGLC had total assets of $1,677 million, total operating revenues of $466
million, and net income of $62 million.
At September 30, 1999, the AGLC gas distribution system included
approximately 27,381 miles of distribution mains and 26,078 miles of service
lines. AGLC also had approximately 1,428,812 meters in service. AGLC maintains
approximately 5.950 Bcf (billion cubic feet) of liquefied natural gas ("LNG")
storage capacity in three LNG plants to supplement the gas supply in very cold
weather or emergencies. Under the Deregulation Act, AGLC continues to contract
for interstate gas transmission and storage capacity and to assign the capacity
to Marketers according to the requirements of the firm end-use customers served
by each Marketer. However, because AGLC is no longer in the commodity merchant
business, it does not maintain gas supply contracts or gas inventories other
than minimal amounts necessary to maintain operational integrity. For this
reason, Applicants cannot state the exact production source of the gas delivered
to AGLC, but expect that it continues to come from the areas of traditional
supply, primarily the Gulf of Mexico, Texas and Louisiana.
AGLC maintains arrangements with the following companies for gas
----------
3 Large interruptible commercial and industrial customers historically had
the option of purchasing gas from suppliers other than AGLC and
transporting such natural gas through AGLC's distribution system for
delivery.
----------
4
<PAGE>
transportation and storage capacity:
o Dominion Transmission, Inc. ("Dominion Transmission");
o East Tennessee Natural Gas Company ("East Tenn");
o Southern Natural Gas Company ("Southern Natural");
o Tennessee Gas Pipeline Company ("Tennessee Gas");
o Transcontinental Gas Pipe Line Corporation ("Transco");
o ANR Pipeline Company ("ANR"), and;
o Cove Point LNG ("Cove Point").
AGLC owns all of the outstanding stock of Chattanooga Gas, a small natural
gas retailer and distributor that services the areas surrounding Chattanooga and
Cleveland, Tennessee. The Tennessee Regulatory Authority ("Tennessee Authority")
regulates Chattanooga Gas's rates and overall operations. As of and for the year
ended September 30, 1999, Chattanooga Gas had total assets of $121 million,
total operating revenues of $67 million, and net income of $4 million.
At September 30, 1999, the Chattanooga Gas distribution system included
approximately 1,422 miles of distribution mains and 1,259 miles of service
lines. Chattanooga Gas also had approximately 55,593 meters in service and 1.080
Bcf of LNG storage capacity in its LNG plant. Chattanooga Gas maintains
arrangements with many of the same companies used by AGLC for gas transportation
and storage capacity, including:
o Dominion Transmission;
o East Tenn;
o Southern Natural;
o Tennessee Gas, and;
o Transco.
b. Non-Utility Businesses
AGL Resources has an ownership interest in several active non-utility
businesses. These businesses are:
(a) SouthStar Energy Services LLC ("SouthStar") is a joint venture among a
subsidiary of AGL Resources Inc. and subsidiaries of Dynegy Holdings Inc.
and Piedmont Natural Gas Company. SouthStar markets natural gas and related
services to residential and small
5
<PAGE>
commercial customers in Georgia and to industrial customers in the
Southeast. SouthStar began marketing natural gas to customers in Georgia
during the first quarter of fiscal 1999 under the trade name "Georgia
Natural Gas Services."
(b) AGL Investments, Inc. is an intermediate holding company for
investments in the following non-utility businesses:
(i) AGL Propane, Inc. ("Propane"), engages in the sale of propane and
related products and services in Georgia, Alabama, Tennessee and North
Carolina./4/
(ii) Trustees Investments, Inc., owns Trustees Gardens, a residential
and retail development located in Savannah, Georgia.
(iii) Utilipro, Inc. ("Utilipro"), in which AGL Resources has an 85%
ownership interest, engages in the sale of integrated customer care
solutions and billing services to energy marketers in the United
States and Canada.
(iv) AGL Consumer Services, Inc., markets energy-related consumer
services, including appliance warranty contracts and energy management
systems, to residential and commercial customers.
(c) AGL Energy Services, Inc. ("AGLE"), is a gas supply services company,
that buys and sells natural gas primarily for Chattanooga Gas.
(d) Georgia Gas Company, a wholly-owned subsidiary of AGLE, owns minor
interests in natural gas production activities.
(e) AGL Peaking Services, Inc. owns a 50% interest in Etowah LNG Company
LLC ("Etowah"), a joint venture with Southern Natural Gas Company. Etowah
was formed for the purpose of constructing, owning, and operating a
liquified natural gas peaking facility.
(f) AGL Interstate Pipeline Company is 50% owner of a joint venture with
Transco known as Cumberland Pipeline Company. Cumberland Pipeline Company
was formed to construct, own and operate a new interstate pipeline to serve
customers in Georgia and
----------
/4/ AGL Resources has entered into a definitive agreement to combine its
propane operations, presently operated through Propane, with the propane
operations of Atmos Energy Corporation, Piedmont Natural Gas Company, Inc.,
and TECO Energy. The joint venture, which will be called US Propane, will
combine with Heritage Propane Partners, L.P. to create the fourth largest
retail propane distributor in the U.S. Upon closing the transaction,
expected later this summer, US Propane will own all of Heritage Holdings,
Inc., the general partner, and approximately 34% of the limited partnership
interests in Heritage Propane Partners, L.P.
----------
6
<PAGE>
Tennessee. Management has decided not to proceed with the Cumberland
pipeline project.
2. VNG
VNG is a Virginia public utility company providing retail natural gas
service to approximately 230,000 customers in the cities of Norfolk, Newport
News, Virginia Beach, Chesapeake, Hampton, Suffolk, Poquoson and Williamsburg,
and the counties of James City, Hanover and York. It is also certificated by the
Virginia Commission to provide natural gas service in the counties of Charles
City, New Kent, Gloucester, King William, King and Queen, Essex, Middlesex and
Mathews. As of and for the year ended December 31, 1999, VNG had operating
revenues of $203 million, net income of $7 million and assets totaling $456
million.
VNG owns and operates one of the most modern natural gas distribution
systems in the United States with nearly half of the pipeline and service
network installed since 1980. VNG has approximately 4,110 miles of distribution
main pipeline along with approximately 231,000 service lines and meter sets.
VNG also owns and operates 155 miles of intrastate transmission pipeline
consisting of 80 miles of 24-inch steel pipe ("Joint-Use Pipeline") and 75 miles
of 16-inch steel pipe ("VNG Lateral Pipeline"). VNG's distribution and
transmission system is served by city gate stations connected to Columbia Gas
Transmission Corporation and Dominion Transmission, which is currently an
affiliate of VNG. VNG maintains arrangements with many of the same gas
transmission and storage service providers that serve the areas in which AGLC
and Chattanooga Gas operate, including:
o Dominion Transmission;
o Columbia Gulf Transmission Corporation;
o Columbia Gas Transmission Corporation;
o Texas Eastern Transmission Corporation;
o Tennessee Gas;
o Transco, and;
o Cove Point.
7
<PAGE>
VNG also contractually operates and maintains a Virginia Electric and Power
Company ("Virginia Power") 16-mile, 18-inch diameter intrastate pipeline that
connects its Chesterfield and Darbytown Power Stations with VNG's Joint-Use
Pipeline at Mechanicsville, Virginia.
VNG owns and operates two propane air peak shaving plants located in
Chesapeake and James City County with a combined maximum production capacity of
approximately 52,000 dekatherms per day. The Chesapeake facility has a maximum
storage capability of approximately 3.4 million gallons of propane. The James
City County facility stores a total of 2.3 million gallons of propane.
The Virginia Commission regulates VNG's rates and overall operations. VNG
does not have any subsidiaries.
C. Description of the Acquisition
On April 25, 2000, AGL Resources' board of directors approved the
Acquisition subject to management negotiation of an acceptable definitive
agreement. On May 30, 2000, the board of directors of Dominion ratified the
actions of CNG's officers with regard to the sale of VNG.
The Acquisition is driven by AGL Resources' recognition of the importance
of gaining scale to remain competitive in the utilities industry. Gaining a
larger customer and financial base will allow AGL Resources to operate more cost
effectively, invest in technologies that enhance service and develop additional
product offerings for customers.
AGL Resources is among the first utility systems in the United States to
transition to a new business and regulatory structure that allows customers to
choose their energy providers. Since the Commonwealth of Virginia is pursuing a
plan for consumer choice, AGL Resources' management believes it is well prepared
to participate in Virginia's restructuring./5/
The Acquisition also is pro-competitive in Virginia with respect to the
market for electricity and so is in the public interest and the interest of
consumers. As noted earlier, the Virginia Commission and FTC required Dominion
to divest VNG as part of Dominion's merger with CNG. The Virginia Commission
ordered the divestiture because it found that the merger of
----------
/5/ As noted above, under deregulation AGLC provides gas distribution services
to retail gas marketing companies who in turn service retail customers.
Chattanooga Gas and VNG currently continue to directly serve retail gas
consumers.
----------
8
<PAGE>
Dominion and CNG could result in market power in the region served by Virginia
Power, a Dominion electric utility subsidiary company. The Virginia Commission
clearly described the importance of access to gas supply for reasonably priced,
clean electricity in its divestiture order:
VNG owns and operates gas pipeline facilities that
traverse the service territory of Virginia Power. The
combination of VNG's control over natural gas pipeline
facilities and Virginia Power's control over generating
facilities in the same area would create a condition
conducive to the existence of market power.
It is through such pipelines, indeed through this
pipeline, that one of the essential ingredients for electric
generation competition will arrive, i.e., the fuel necessary
for the generation of reasonably priced electricity that can
be produced in an environmentally responsible manner. The
importance of the ability of competitive suppliers to access
fuel through this facility in order to supply generation
capacity within Virginia Power's territory cannot be
overstated.
We believe, based on the record herein, that
realization of meaningful electric competition in the
Commonwealth could have been frustrated for a necessarily
unknown, but probably considerable period, absent the
agreement by the Petitioners to divest themselves of VNG./6/
[emphasis in original]
1. Financing the Acquisition
AGL Resources will purchase VNG with cash. The purchase price will be
funded from cash on hand and from short term acquisition "bridge" financing.
Applicants expect that the "bridge" financing will be financed with longer-term
debt or preferred securities in the future. AGL Resources expects that funding
the Acquisition in this manner will allow it to retain its investment grade
status without an equity offering.
The Acquisition will be accounted for under the purchase method. The excess
of the purchase price and assumed liabilities over the value of VNG's assets
will be recorded on the books of VNG as goodwill./7/
D. Management and Operations of VNG Following the Acquisition
Following the Acquisition, VNG will be operated as a subsidiary of AGL
Resources. Although AGL Resources has not yet determined the leadership of VNG
and the
----------
/6/ Dominion/CNG Merger Order at 10-11.
/7/ All VNG intercompany debt will be extinguished at or before the closing of
the Acquisition.
----------
9
<PAGE>
composition of VNG's board of directors, it is expected that the President and
CEO of VNG will be a resident of Virginia and a member of VNG's board. In
addition, VNG will retain an office in Virginia for VNG management and local
facilities for customer service, maintenance and field work operations.
AGL Resources is currently evaluating a reorganization of its corporate
structure whereby it would acquire all of AGLC's holdings in Chattanooga Gas.
Under the revised structure, after giving effect to the Acquisition, AGLC, VNG
and Chattanooga Gas would all be direct subsidiaries of AGL Resources. AGL
Resources and AGLC accordingly request authority for AGLC to transfer in the
form of a dividend to AGL Resources the Chattanooga Gas securities it holds and
for AGL Resources to acquire such securities. The transfer of the Chattanooga
Gas stock from AGLC to AGL Resources does not require the approval of the
Tennessee Authority or the Georgia Commission.
E. Financing the AGL System Following the Acquisition
Applicants seek Commission authorization of the financing activities of the
AGL System for the period beginning with the effective date of an order issued
pursuant to this filing and continuing for a period of three years from the date
of such order ("Authorization Period").
1. Summary of Authorization Requested
Applicants seek the following Commission authorizations:
a) AGL Resources requests authorization to issue and sell through the
Authorization Period up to $5 billion of securities at any time outstanding
and to issue guarantees and other forms of credit support in an aggregate
amount of $500 million at any time outstanding;
b) AGL Resources requests authority to enter into hedging transactions,
including anticipatory hedges, with respect to its indebtedness in order to
manage and minimize interest rate costs and to lock-in current interest
rates;
c) AGL Resources and the Subsidiaries request authorization to establish a
money pool for the purpose of financing the short-term capital requirements
of the Subsidiaries;
10
<PAGE>
d) AGL Resources, on behalf of the Subsidiaries, requests authorization to
change the terms of any wholly-owned Subsidiary's authorized capital stock
capitalization;
e) AGL Resources requests authorization for the payment of dividends out of
capital or unearned surplus by VNG, and authorization for AGL Resources and
the Subsidiaries to acquire, retire, or redeem the securities that they
have issued to any associate company, any affiliate, or any affiliate of an
associate company;
f) AGL Resources requests authorization to acquire the equity securities of
one or more special purpose subsidiaries ("Financing Subsidiaries")
organized solely to facilitate a financing transaction and to guarantee the
securities issued by Financing Subsidiaries.
g) AGL Resources requests that the Commission approve the form of agreement
for the allocation of consolidated tax among AGL Resources and the
Subsidiaries;
h) AGL Resources requests that the Commission approve the issuance of up to 22
million shares of common stock under dividend reinvestment and stock-based
management incentive and employee benefit plans;
i) AGLC and Chattanooga Gas request authorization to issue and sell short-term
debt;
2. Parameters for Financing Authorization
As of March 31, 2000, AGL Resources had the following capital
structure:/8/
----------
/8/ Currently, all equity and short-term debt issuances in public or private
transactions are conducted by AGL Resources. AGL Resources presently
finances its Subsidiaries through intercompany accounts. After registration
under the Act, AGL Resources expects to finance the Subsidiaries
principally by acquiring their equity and debt securities, in transactions
that are exempt under Rule 52. AGL Resources will also issue guarantees to
third parties to support the operations of its Subsidiaries.
----------
11
<PAGE>
--------------------------------------------------------------------------------
AGL Resources Capital Structure
--------------------------------------------------------------------------------
($ millions) % of Total Capitalization
--------------------------------------------------------------------------------
Common stockholders' equity, less 623.4 44.0
shares held in treasury/9/
--------------------------------------------------------------------------------
Subsidiary mandatorily redeemable 74.3 5.2
preferred securities/10/
--------------------------------------------------------------------------------
Long-term debt (including current 610.0 43.0
portion)/11/
--------------------------------------------------------------------------------
Short-term debt 111.0 7.8
--------------------------------------------------------------------------------
Total capitalization $1,418.7 100%
--------------------------------------------------------------------------------
After the Acquisition AGL Resources will also have a sound capital structure. On
a pro forma basis (assuming the Acquisition was consummated on March 31, 2000),
common stockholders' equity would make up 31.5% of AGL Resources' total
capitalization at that date. To assure the continued sound financial structure
of the AGL System and because the specific terms and conditions of the financing
authorizations requested in this Application are not established at this time,
Applicants propose that the following general terms and conditions would apply,
where appropriate, to the requested financing authorizations:
a) Investment Grade Credit Rating - AGL Resources commits that all long-term
debt issued to unaffiliated parties under the authority requested in this
Application will be rated investment
----------
/9/ As of March 31, 2000, AGL Resources had 54,285,667 shares of common stock
outstanding, $5 par value. On October 5, 1999, AGL Resources' board
authorized a plan to purchase up to 3,600,000 shares of AGL Resources
common stock over a period ending no later than September 30, 2001. Open
market purchases of the shares may be made from time to time, subject to
availability, and the repurchased shares will be held in treasury. As of
March 31, 2000, AGL Resources held 3.9 million shares in treasury,
including approximately 900,000 shares held for the AGL Resources Leveraged
Employee Stock Ownership Plan.
/10/ The subsidiary mandatorily redeemable preferred securities were issued in
1997 by a financing subsidiary of AGL Resources, AGL Capital Trust I. In
addition to these preferred securities, the Trust also issued common voting
securities to AGL Resources. The proceeds of the sale of the mandatorily
redeemable preferred securities were used to purchase 8.17% Junior
Subordinated Deferrable Interest Debentures, due June 1, 2037, from AGL
Resources.
/11/ The long-term debt was issued in medium term notes Series A, Series B, and
Series C under an Indenture dated December 1, 1989. These medium term notes
($725 million principal amount) were issued by AGLC. At the time these
notes were registered with the Securities and Exchange Commission, AGLC was
not a subsidiary of AGL Resources. AGL Resources assumed its holding
company status with respect to AGLC on March 6, 1996. Additional long-term
debt securities and/or equity capital is expected to be issued by AGL
Resources in connection with refinancing the short term acquisition
"bridge" financing.
----------
12
<PAGE>
grade, or will meet the qualifications for being rated investment grade, by
a nationally recognized statistical rating organization as that term is
used in Rule 15c3-1(c)2(vi)(F) under the Securities Exchange Act of 1934.
b) Minimum Capitalization Ratio - AGL Resources, on a consolidated basis, and
the Utility Subsidiaries, individually, will maintain common stock equity
as a percentage of total capitalization of at least 30%.
c) Effective Cost of Money on Borrowings - The cost of money on debt
financings under the authorizations requested in this Application will not
exceed 300 basis points over the comparable term U.S. Treasury securities
or, for short-term debt borrowings, 300 basis points over the comparable
term London Interbank Offered Rate ("LIBOR").
d) Maturity of Debt - The maturity of debt will not exceed 50 years.
e) Effective Cost of Preferred Stock - The dividend rate on preferred stock or
other types of preferred or equity-linked securities will not exceed at the
time of issuance 500 basis points over the yield to maturity of a U.S.
Treasury security having a remaining term equal to the term of such
securities.
f) Issuance Expenses - The underwriting fees, commissions and other similar
remuneration paid in connection with the non-competitive issue, sale or
distribution of a security pursuant to this Application will not exceed an
amount or percentage of the principal or total amount of the security being
issued that would be charged to or paid by other companies with a similar
credit rating and credit profile in a comparable arm's-length credit or
financing transaction with an unaffiliated person.
g) EWG and FUCO Investments - AGL Resources "aggregate investment" in exempt
wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as
defined in Rule 53 under the Act, will not exceed 50% of the consolidated
retained earnings of the AGL System.
3. Use of Proceeds
13
<PAGE>
The proceeds from the financings authorized by the Commission under this
Application will be used for general corporate purposes, including (i)
refinancing the Acquisition-related debt, (ii) financing, in part, investments
by and capital expenditures of AGL Resources and its Subsidiaries, (iii) funding
future investments in EWGs, FUCOs and Rule 58 Subsidiaries, (iv) repaying,
redeeming, refunding or purchasing any securities issued by AGL Resources or any
Subsidiary, and (v) financing the working capital requirements of AGL Resources
and its Subsidiaries.
Applicants represent that no financing proceeds will be used to acquire the
equity securities of any company unless such acquisition has been approved by
the Commission in this proceeding or in a separate proceeding or in accordance
with an available exemption under the Act or rules thereunder, including
Sections 32 and 33 and Rule 58. The proceeds of financing and guarantees used to
fund investments in Rule 58 Subsidiaries will be subject to the limitations of
that rule.
4. Description of Proposed Financing Program
a. AGL Resources External Financing
AGL Resources proposes to issue long-term equity and debt securities
aggregating not more than $5 billion at any one time outstanding during the
Authorization Period./12/ Such securities could include, but would not
necessarily be limited to, common stock, preferred stock, options, warrants,
long- and short-term debt (including commercial paper), convertible securities,
subordinated debt, bank borrowings and securities with call or put options. AGL
Resources may also issue guarantees and enter into interest rate swaps and
hedges as described below.
b. Common Stock
AGL Resources may issue and sell common stock or, if pursuant to employee
benefit plans, issue options exercisable for common stock and common stock upon
the exercise of options. AGL Resources may also buy back shares of such stock or
such options during the Authorization Period.
AGL Resources may perform common stock financings pursuant to underwriting
agreements of a type generally standard in the industry. Public distributions
may be made by
----------
/12/ The overall limit of $5 billion includes the Acquisition-related financing.
----------
14
<PAGE>
private negotiation with underwriters, dealers or agents as discussed below or
through competitive bidding among underwriters. In addition, sales may be made
through private placements or other non-public offerings to one or more persons.
All such common stock sales will be at rates or prices and under conditions
negotiated or based upon, or otherwise determined by, competitive capital
markets.
AGL Resources may seek to acquire securities of companies engaged in
energy-related businesses as described in Rule 58, exempt telecommunications
companies ("ETCs"), EWGs and FUCOs. These acquisitions may involve the exchange
of AGL Resources stock for securities of the company being acquired in order to
provide the seller with certain tax advantages. These transactions would be
individually negotiated. The AGL Resources' common stock to be exchanged may be
purchased on the open market under Rule 42, or may be original issue. Original
issue stock may be registered under the Securities Act of 1933, as amended (the
"1933 Act"), but at present it is expected that the common stock would not be
registered and the common stock acquired by the third parties would be subject
to the resale restrictions of Rule 144 under the 1933 Act. AGL Resources does
not intend to engage in any transaction where original issue stock is not
registered while a public offering is being made, other than a public offering
pursuant to a compensation, dividend or stock purchase plan, a public offering
of debt or a public offering in connection with a similar acquisition of an
energy-related business as described in Rule 58, ETCs, EWGs and FUCOs.
The ability to offer stock as consideration may make a transaction more
economical for AGL Resources as well as for the seller of the business. For
purposes of calculating compliance with the $5 billion external financing limit,
AGL Resources' common stock would be valued at market value based upon the
closing price on the day before closing of the sale or based upon average high
and low prices for a period prior to the closing of the sale.
c. Preferred Stock
AGL Resources may issue preferred stock from time to time during the
Authorization Period. Preferred stock or other types of preferred or
equity-linked securities may be issued in one or more series with such rights,
preferences, and priorities as may be designated
15
<PAGE>
in the instrument creating each such series, as determined by AGL Resources'
board of directors. All such securities will be redeemed no later than 50 years
after the issuance thereof. The dividend rate on any series of preferred stock
or other preferred securities will not exceed at the time of issuance 500 basis
points over the yield to maturity of a U.S. Treasury security having a remaining
term equal to the term of such securities. Dividends or distributions on
preferred stock or other preferred securities will be made periodically and to
the extent funds are legally available for such purpose, but may be made subject
to terms that allow the issuer to defer dividend payments for specified
periods. Preferred stock or other preferred securities may be convertible or
exchangeable into shares of common stock.
d. Long-Term Debt
AGL Resources proposes to issue long-term debt in accordance with the
conditions described in Item 1.E.2 above. Any long-term debt security would have
the maturity, interest rate(s) or methods of determining the same, terms of
payment of interest, redemption provisions, sinking fund terms and other terms
and conditions as AGL Resources may determine at the time of issuance. The
request for authorization for AGL Resources to issue long-term debt securities
is consistent with authorization that the Commission has granted to other gas
registered holding companies. See Columbia Energy Group, Holding Co. Act Release
No. 27035 (June 8, 1999).
e. Short-Term Debt
AGL Resources requests authorization to issue short-term debt including,
but not limited to, institutional borrowings, commercial paper and bid notes.
Issuance of short-term debt will be in accordance with the conditions described
in Item 1.E.2 above. Proceeds of any short-term debt issuance may be used to
refund pre-Acquisition short-term debt and Acquisition-related debt, and to
provide financing for general corporate purposes, working capital requirements
and Subsidiary capital expenditures until long-term financing can be obtained.
AGL Resources currently has the following short-term debt facilities in
place, which may remain in place following the Acquisition: (1) AGL Resources
maintains uncommitted bank lines of credit in the current amount of $50 million;
(2) AGL Resources also maintains committed lines of bank credit for $125 million
with various banks, and; (3) AGL Resources is
16
<PAGE>
currently negotiating additional bank commitments of approximately $115 million.
These amounts are included within the overall authorization amount requested
above.
AGL Resources may sell commercial paper, from time to time, in established
domestic or European commercial paper markets. Such commercial paper would be
sold to dealers at the discount rate or the coupon rate per annum prevailing at
the date of issuance for commercial paper of comparable quality and maturities
sold to commercial paper dealers generally. It is expected that the dealers
acquiring commercial paper from AGL Resources will reoffer such paper at a
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. Institutional investors are expected to include
commercial banks, insurance companies, pension funds, investment trusts,
foundations, colleges and universities and finance companies.
AGL Resources also proposes to establish bank lines of credit, directly or
indirectly through one or more financing subsidiaries. Loans under these lines
will have maturities of less than one year from the date of each borrowing. AGL
Resources may engage in other types of short-term financing generally available
to borrowers with comparable credit ratings as it may deem appropriate in light
of its needs and market conditions at the time of issuance.
f. Hedges and Interest Rate Risk Management
AGL Resources requests authority to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of interest rates,
including but not limited to interest rate swaps, caps, floors, collars and
forward agreements or any other similar agreements. AGL Resources would employ
interest rate swaps as a means of prudently managing the risk associated with
any of its outstanding debt issued under the authority requested in this
application or an applicable exemption by, in effect, synthetically (i)
converting variable rate debt to fixed rate debt, (ii) converting fixed rate
debt to variable rate debt, (iii) limiting the impact of changes in interest
rates resulting from variable rate debt and (iv) providing an option to enter
into interest rate swap transactions in future periods for planned issuances of
debt securities. In no case will the notional principal amount of any interest
rate swap exceed that of the underlying debt instrument and related interest
rate exposure. Thus, AGL Resources will not engage in "leveraged" or
"speculative" transactions. The underlying interest rate indices of such
interest rate
17
<PAGE>
swaps will closely correspond to the underlying interest rate indices of AGL
Resources' debt to which such interest rate swap relates. AGL Resources will
only enter into interest rate swap agreements with counterparties whose senior
debt ratings are investment grade as determined by Standard & Poor's, Moody's
Investors Service, Inc. or Fitch IBCA, Inc. ("Approved Counterparties").
In addition, AGL Resources requests authorization to enter into interest
rate hedging transactions with respect to anticipated debt offerings
("Anticipatory Hedges"), subject to certain limitations and restrictions.
Anticipatory Hedges would only be entered into with Approved Counterparties, and
would be used to fix and/or limit the interest rate risk associated with any new
issuance through (i) a forward sale of exchange-traded U.S. Treasury futures
contracts, U.S. Treasury obligations and/or a forward swap (each a "Forward
Sale"), (ii) the purchase of put options on U.S. Treasury obligations (a "Put
Options Purchase"), (iii) a Put Options Purchase in combination with the sale of
call options on U.S. Treasury obligations (a "Zero Cost Collar"), (iv)
transactions involving the purchase or sale, including short sales, of U.S.
Treasury obligations, or (v) some combination of a Forward Sale, Put Options
Purchase, Zero Cost Collar and/or other derivative or cash transactions,
including, but not limited to structured notes, caps and collars, appropriate
for the Anticipatory Hedges.
Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with
brokers through the opening of futures and/or options positions traded on the
Chicago Board of Trade, the opening of over-the-counter positions with one or
more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange
Trades and Off-Exchange Trades. AGL Resources will determine the optimal
structure of each Anticipatory Hedge transaction at the time of execution.
AGL Resources will comply with SFAS 80 ("Accounting for Futures Contracts")
and SFAS 133 ("Accounting for Derivatives Instruments and Hedging Activities")
when it is implemented or such other standards relating to accounting for
derivative transactions as are adopted and implemented by the Financial
Accounting Standards Board ("FASB"). In addition, these financial instruments
will qualify for hedge accounting treatment under FASB rules.
18
<PAGE>
To the extent such securities are not exempt under Rule 52(a), the Utility
Subsidiaries request authorization to enter into the transactions described in
this Item 1.E.4.f on the same terms applicable to AGL Resources.
g. Guarantees
AGL Resources requests authorization to enter into guarantees, obtain
letters of credit, enter into expense agreements or otherwise provide credit
support ("Guarantees") with respect to the obligations of its Subsidiaries as
may be appropriate or necessary to enable such Subsidiaries to carry on in the
ordinary course of their respective businesses in an aggregate principal amount
not to exceed $500 million outstanding at any one time (not taking into account
obligations exempt under Rule 45). Included in this amount are Guarantees
entered into by AGL Resources that were previously issued in favor of its
Subsidiaries. The limit on Guarantees is separate from the limit on AGL
Resources' external financing. Currently, AGL Resources guarantees AGLC with
respect to the obligations of Southstar, AGL Resources' affiliated Marketer.
This intra-system Guarantee is expected to remain in place following the
Acquisition.
h. Money Pool
AGL Resources and the Subsidiaries request authorization to establish the
AGL System money pool ("Money Pool"). AGLC and Chattanooga Gas also request
authorization to make unsecured short-term borrowings from the Money Pool, to
contribute surplus funds to the Money Pool, and to lend and extend credit to
(and acquire promissory notes from) one another through the Money Pool. AGL
Resources requests authorization to contribute surplus funds and to lend and
extend credit to the Money Pool.
Applicants believe that the cost of the proposed borrowings through the
Money Pool will generally be more favorable to the Subsidiaries than the
comparable cost of external short-term borrowings, and the yield to the
Subsidiaries contributing available funds to the Money Pool will generally be
higher than the typical yield on short-term investments.
Applicants propose that the Money Pool would make short-term funds
available for short-term loans to the Subsidiaries from time to time from the
following sources: (1) surplus funds in the treasuries of the Subsidiaries, (2)
surplus funds in the treasury of AGL Resources, and (3) proceeds from bank
borrowings by Money Pool participants or the sale of commercial
19
<PAGE>
paper by AGL Resources or the Subsidiaries for loan to the Money Pool. Funds
would be made available from such sources in such order as AGL Services, as
administrator of the Money Pool, may determine would result in a lower cost of
borrowing, consistent with the individual borrowing needs and financial standing
of the companies providing funds to the pool.
Money Pool loans and borrowings would require authorization by the
borrower's chief financial officer or treasurer, or by a designee thereof. No
party would be required to effect a borrowing through the Money Pool if it is
determined that it could (and had authority to) effect a borrowing at lower cost
directly from banks or through the sale of its own commercial paper. No loans
through the Money Pool would be made to, and no borrowings through the Utility
Money Pool would be made by, AGL Resources. No Subsidiary that is an EWG, FUCO
or ETC will borrow from the Money Pool. Applicants request that he Commission
reserve jurisdiction over the participation in the Money Pool of any Subsidiary
formed or acquired after the issuance of an order in this file until such time
as Applicants have completed the record with respect to such company.
Operation of the Money Pool, including record keeping and coordination of
loans, will be handled by AGL Services under the authority of the appropriate
officers of the participating companies. AGL Services will administer the Money
Pool on an "at cost" basis. See Exhibit L-1 for a copy of the Form of Money Pool
Agreement.
20
<PAGE>
i. Changes in Capital Stock of Wholly-Owned Subsidiaries
The portion of an individual Subsidiary's aggregate financing to be
effected through the sale of stock to AGL Resources or other immediate parent
company during the Authorization Period pursuant to Rule 52 and/or an order
issued in this file is unknown at this time. The proposed sale of capital
securities (i.e., common stock or preferred stock) may in some cases exceed the
then authorized capital stock of such Subsidiary. In addition, the Subsidiary
may choose to use capital stock with no par value. As needed to accommodate such
proposed transactions and to provide for future issues, Applicants request
authority to change the terms of any wholly-owned Subsidiary's authorized
capital stock capitalization by an amount deemed appropriate by AGL Resources or
other intermediate parent company.
The requested authorization is limited to AGL Resources' wholly-owned
Subsidiaries and will not affect the aggregate limits or other conditions
contained herein. A Subsidiary would be able to change the par value, or change
between par value and no-par stock, without additional Commission approval. Any
such action by a Utility Subsidiary would be subject to and would only be taken
upon the receipt of any necessary approvals by the state commission in the state
or states where the Utility Subsidiary is incorporated and doing business. In
addition, each of the Utility Subsidiaries will maintain, during the
Authorization Period, a common equity capitalization of at least 30%. See New
Century Energies, Inc., Holding Co. Act Release No. 26750 (Aug. 1, 1997);
Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26, 1998); Dominion
Resources, Inc., Holding Co. Act Release No. 27112 (Dec. 15, 1999).
j. Payment of Dividends Out of Capital or Unearned Surplus
As a result of the application of the purchase method of accounting to the
Acquisition, the current retained earnings of VNG will be eliminated. In
addition, the Acquisition will give rise to a substantial level of goodwill, the
difference between the aggregate values allocated to all identifiable tangible
and intangible (non-goodwill) assets on the one hand, and the total
consideration to be paid for VNG and the fair value of the liabilities assumed,
on the other. In accordance with the Commission's Staff Accounting Bulletin No.
54, Topic 5J, the goodwill will be "pushed down" to VNG and reflected as
additional paid-in-capital in its financial statements. The effect of these
accounting practices would be to leave VNG without retained
21
<PAGE>
earnings, the traditional source of dividend payment, but, nevertheless, a
strong balance sheet showing a significant equity level. To allow VNG to pay
dividends after the Acquisition, VNG requests authorization to pay dividends out
of additional paid-in-capital up to the amount of its retained earnings
immediately prior to the Acquisition and out of earnings before the amortization
of goodwill thereafter.
The application of "push down" accounting represents a change in the manner
of accounting. For FERC and state commission reporting purposes, goodwill will
be recorded in VNG's books, however, the original historical basis of VNG's
books will not be disturbed.
Immediately following this accounting treatment, the only components with a
recorded value would be:
o Common stock - which would continue to reflect the current value on the
books of the common stock.
o Paid-in-capital - which would reflect a value consistent with total common
shareholders' equity minus the par value recorded in the common stock line.
In other words, the resulting common shareholders' equity will equal the total
consideration paid for the entity.
The push down of the net assets at fair market value also has an impact on
the net income of VNG. The net assets include an acquisition adjustment that
will be amortized over 40 years. VNG's net income will be reduced by the amount
of the amortization. For example if the Acquisition had occurred on January 1,
1999, net income of $6.8 million for the year ended December 31, 1999 would have
been reduced by a goodwill amortization of $4.0 million. The resulting net
income after amortization would be $4.5 million.
In determining whether to permit a registered holding company or subsidiary
to pay dividends out of capital surplus, the Commission considers various
factors, including: (i) the asset value of the company in relation to its
capitalization, (ii) the company's prior earnings, (iii) the company's current
earnings in relation to the proposed dividend, and (iv) the company's projected
cash position after payment of a dividend. See Eastern Utilities Associates,
Holding Co. Act Release No. 25330 (June 13, 1991) ("EUA"), and The National Grid
Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000). Further, the
payment of the dividend must be "appropriate in the public interest." Id.,
citing Commonwealth & Southern Corporation, 13 S.E.C. 489, 492 (1943).
22
<PAGE>
In support of its request, VNG asserts that each of the standards of
Section 12(c) of the 1935 Act enunciated in the EUA case are satisfied:
(i) After the Acquisition, and giving effect to the push down of goodwill,
VNG's common equity as a percentage of total capitalization will be at or
above 30%; consistent with industry norms.
(ii) VNG has a favorable history of prior earnings and it has a long record
of consistent dividend payments.
(iii) Applicants anticipate that VNG's cash flow from operations after the
Acquisition will remain stable. In the years following the Acquisition,
cash flow is expected to improve and earnings before the amortization of
goodwill ("Gross Earnings") should be adequate to support the requested
dividend authorization. Dividends paid out of future earnings should not
exceed 100% of VNG's Gross Earnings, based on a rolling 5-year average.
This percentage is lower than VNG's historical dividend payout ratio.
(iv) The projected cash position of VNG after the Acquisition will be
adequate to meet its operating needs. As of March 31, 2000, VNG had cash
balances of $1.5 million. The amortization of goodwill is a non-cash
expense that will not affect the cash flow of VNG. VNG is forecast to have
sufficient cash to pay dividends in the amounts contemplated.
(v) The proposed dividend payments are in the public interest. VNG is in
sound financial condition. In addition, the dividend payments are
consistent with investor interests because they allow the capital structure
of VNG to be adjusted to more appropriate levels of debt and equity.
Lastly, it is important to note that in no case would dividends be paid if
VNG's common stock equity as a percentage of its total capitalization was below
30%. This restriction protects the interests of investors, consumers and the
general public in soundly capitalized public utility companies.
23
<PAGE>
k. Financing Entities
AGL Resources and the Subsidiaries seek authorization to organize new
corporations, trusts, partnerships or other entities that will facilitate
financings by issuing income preferred securities or other securities to third
parties. To the extent not exempt under Rule 52, the financing entities also
request authorization to issue such securities to third parties. In connection
with this method of financing, AGL Resources and the Subsidiaries may: (i) issue
debentures or other evidences of indebtedness to a financing entity in return
for the proceeds of the financing; (ii) acquire voting interests or equity
securities issued by the financing entity to establish ownership of the
financing entity (the equity portion of the entity generally being created
through a capital contribution or the purchase of equity securities, ranging
from one to three percent of the capitalization of the financing entity), and;
(iii) guarantee a financing entity's obligations in connection with a financing
transaction. AGL Resources and the Subsidiaries also request authorization to
enter into expense agreements with financing entities to pay the expenses of any
such entity. Any amounts issued by a financing entity to a third party under
this authorization will be included in the overall external financing limitation
authorized herein for the immediate parent of such financing entity. However,
the underlying intra-system mirror debt and parent guarantee shall not be so
included. The authorization sought herein with respect to financing entities is
substantially the same as that granted in New Century Energies, Inc., Holding
Co. Act Release No. 26750 (Aug. 1, 1997); Conectiv, Holding Co. Act Release No.
26833 (Feb. 26, 1998) and Dominion Resources, Inc., Holding Co. Act Release No.
27112 (Dec. 15, 1999).
l. Tax Allocation Agreement
Applicants ask the Commission to approve the agreement among the AGL System
companies to file a consolidated tax return ("Tax Allocation Agreement").
Approval is necessary because the Tax Allocation Agreement provides for the
retention by AGL Resources of certain payments for tax losses that it has
incurred, rather than the allocation of such losses to the Subsidiaries without
payment as would otherwise be required by Rule 45(c)(5).
In this matter, AGL Resources is seeking to retain the benefit of tax
losses that have been generated by it in connection with Acquisition-related
debt only. As a result of the Acquisition, AGL Resources will be creating tax
benefits from the interest expense on Acquisition-related debt that is
non-
24
<PAGE>
recourse to the Subsidiaries and unrelated to the financing of subsidiary
operations. Because the debt incurred is necessary to finance AGL Resources'
investment in VNG, AGL Resources should properly retain the related tax
benefits. In addition, the Tax Allocation Agreement will not give rise to the
types of problems (e.g., upstream loans) that the Act was intended to address.
Compare Section 12(a) of the Act.
The Commission has approved a substantially similar tax allocation
agreement in The National Grid Group plc, Holding Co. Act Release No. 27154
(Mar. 15, 2000). Accordingly, the Applicants request that the Commission approve
the Tax Allocation Agreement. Applicants have attached the form of the proposed
Tax Allocation Agreement among AGL Resources and the Subsidiaries as Exhibit
M-1.
m. Direct Stock Purchase and Dividend Reinvestment Plan, Incentive
Compensation Plans and other Employee Benefit Plans
AGL Resources proposes, from time to time during the Authorization Period
to issue and/or acquire in open market transactions or by some other method that
complies with applicable law and Commission interpretations then in effect up to
22 million shares of AGL Resources common stock under AGL Resources' dividend
reinvestment plan, certain incentive compensation plans and certain other
employee benefit plans. For example, AGL Resources currently maintains the
following stock-based benefit plans for employees: The AGL Resources Inc.
Long-Term Stock Incentive Plan of 1990, the AGL Resources Inc. Long-Term
Incentive Plan (1999), the AGL Resources Inc. Nonqualified Savings Plan, the AGL
Resources Inc. Retirement Savings Plus Plan, the AGL Resources Inc. 1996
Non-Employee Directors Equity Compensation Plan, and the AGL Resources Inc. 1998
Common Stock Equivalent Plan for Non-Employee Directors. These plans will remain
in effect following consummation of the Acquisition. The plans are described in
greater detail in Exhibit J-1 to the Application.
n. Subsidiary Financings
The Georgia Commission and the Tennessee Authority must approve all
issuances of securities by AGLC and Chattanooga Gas, respectively, with the
exception of debt securities with maturities of less than one year. The Virginia
Commission exercises jurisdiction over all issuances of securities by VNG.
Consequently, AGLC and Chattanooga request authorization to issue short-term
debt securities with maturities of less than one year.
25
<PAGE>
Under Virginia law, all issuances of securities by VNG must be approved by
the Virginia Commission. VNG currently has no public securities outstanding and
all debts to companies in the Dominion system will be repaid prior to or upon
the Acquisition. VNG will rely on financings under Rule 52(a) after the
Acquisition.
The Nonutility Subsidiaries will finance their capital needs through the
issuance of securities under Rule 52(b).
F. Intra-System Service Transactions
1. AGL Services
AGL Resources requests authorization to form a service company, AGL
Services, to provide a variety of services to the companies in the AGL System.
As a general rule, the individual system companies will maintain services that
can benefit from individualized application at the company level. In contrast,
AGL Services will offer system-wide coordination and strategy services,
oversight services and other services where economies can be captured by
centralization of services. AGL Services will also ensure adequate oversight and
realize economies of scale by consolidating certain administrative and service
functions for the AGL System.
In particular, Applicants anticipate that the following services would be
offered by AGL Services to system companies:
a. Corporate Compliance.
AGL Services would oversee compliance with all laws, regulations and
policies applicable to all of AGL Resources' businesses and direct
compliance training.
b. Internal Auditing.
AGL Services would conduct periodic audits of administration and accounting
processes. Audits would include examinations of service agreements,
accounting systems, source documents, allocation methods and billings to
assure proper authorization and accounting for services.
c. Strategic Planning.
AGL Services would advise and assist system companies with the preparation
of strategic business plans and corporate strategies.
d. Public Affairs.
26
<PAGE>
AGL Services would maintain relationships with government policy makers,
conduct lobbying activities and provide community relations support.
e. Gas Supply and Capacity Management (Regulated Subsidiaries).
AGL Services would assist VNG and Chattanooga Gas in coordinating the
management of their gas supply and assist the Utility Subsidiaries in
coordinating gas transmission and storage services to ensure the most
efficient use of services and to capture economies of scale as a larger
purchaser in the market. Individual Utility Subsidiaries may, however,
remain as the contract party under any agreement. Non-regulated marketing
subsidiaries such as AGLE may also use AGL Services for certain
transportation and storage capacity management services.
f. Legal Services.
AGL Services would provide various legal services and general legal
oversight, as well as handle claims.
g. Marketing and Sales.
AGL Services would assist system companies to develop marketing strategies
for product and brand name promotion. Individual system companies may
maintain independent marketing personnel to handle the day-to-day details
of marketing campaigns.
h. Financial Services.
AGL Services would provide various services including corporate tax,
treasury, corporate accounting and reporting, hedging policy and oversight,
financial planning and rates (for Utility Subsidiaries and other
Subsidiaries that interact with regulators or regulated companies). Each
Subsidiary may also maintain its own corporate and accounting group and
engage AGL Services to provide advice and assistance on accounting matters,
including the development of accounting practices, procedures and controls,
the preparation and analysis of financial reports and the filing of
financial reports with regulatory bodies, on a system-wide basis.
i. Information System Services.
AGL Services would provide the AGL System companies with electronic data
processing services.
j. Executive.
27
<PAGE>
Using AGL Resources executive staff working through AGL Services, AGL
Services would assist the AGL System companies in formulating and executing
general plans and policies, including operations, issuances of securities,
appointment of executive personnel, budgets and financing plans, expansion
of services, acquisitions and dispositions of property, public
relationships and other related matters.
k. Investor Relations.
AGL Services would maintain relationships with the financial community,
provide shareholder services, and perform corporate secretarial functions
for the benefit of system companies.
l. Customer Services.
AGL Services would provide billing, mailing, remittance processing, call
center and customer communication services for customers.
m. Purchasing.
AGL Services would provide procurement services.
n. Risk Management.
AGL Services would provide insurance, claims, security, environmental and
safety services.
o. Telecommunications.
AGL Services would provide telecommunications services, in particular,
telephone equipment.
p. Employee Services.
AGL Services would offer to assist system companies to develop employee
relations policies and programs and to train personnel in a coordinated
manner across the AGL System. Each AGL System company may maintain a human
resources group to handle the individualized application of policies and
programs. AGL Services would also provide payroll services, employee
communications, mail services, facilities management for offices owned by
AGL System companies and aviation services for efficient transportation of
company personnel.
q. Other Services.
28
<PAGE>
AGL Services would provide any other services, such as engineering and
technical services, as identified in the services agreement or requested by
the Subsidiaries.
In accordance with the services agreement, services provided by AGL
Services will be directly assigned if possible or allocated as necessary by
activity, project, program, work order or other appropriate basis. To accomplish
this, employees of AGL Services will record transactions using data capture and
accounting systems currently in place at AGL Resources. Costs of AGL Services
will be accumulated in accounts and directly assigned if possible or allocated
as necessary to the appropriate system company in accordance with the guidelines
set forth in the services agreement (included as Exhibit K-1 to the
Application). It is anticipated that AGL Services will be staffed primarily by
transferring personnel from AGL Resources. AGL Services' accounting and cost
allocation methods and procedures are structured to comply with the Commission's
standards for service companies in registered holding company systems. AGL
Services' billing system will use the "Uniform System of Accounts for Mutual
Service Companies" established by the Commission for holding-company systems, as
may be adjusted to use the FERC uniform system of accounts. Exhibit K-2
discusses the systems and procedures to be implemented by AGL Services.
As compensation for services, the services agreement will provide for
client companies to "pay to AGL Services the cost of such services, computed in
accordance with the applicable rules and regulations (including, but not limited
to Rules 90 and 91) under the Act and appropriate accounting standards." Where
more than one company is involved in or has received benefits from a service
performed, the services agreement will provide that client companies will pay
their fairly allocated pro rata share in accordance with the methods set out in
a schedule to the services agreement. Thus, charges for all services provided by
AGL Services to affiliated utility companies, non-utility companies and the
holding company will be on an "at cost" basis as determined under Rules 90 and
91 of the Act.
No change in the organization of AGL Services, the type and character of
the companies to be serviced, the methods of allocating cost to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until AGL Services shall first have given the Commission written
notice of the proposed change not less than 60 days prior to the proposed
29
<PAGE>
effectiveness of any such change. If, upon the receipt of any such notice, the
Commission shall notify AGL Services within the 60-day period that a question
exists as to whether the proposed change is consistent with the provisions of
Section 13 of the Act, or of any rule, regulation or order thereunder, then the
proposed change shall not become effective unless and until AGL Services shall
have filed with the Commission an appropriate declaration regarding such
proposed change and the Commission shall have permitted such declaration to
become effective.
AGL Resources will structure the services agreement so as to comply with
Section 13 of the Act and the Commission's rules and regulations thereunder.
Rule 88 (b) provides that "(a) finding by the commission that a subsidiary
company of a registered holding company . . . is so organized and conducted, or
is to be so conducted, as to meet the requirements of Section 13(b) of the Act
with respect to reasonable assurance of efficient and economical performance of
services or construction or sale of goods for the benefit of associate
companies, at cost fairly and equitably allocated among them (or as permitted by
Rule 90), will be made only pursuant to a declaration filed with the Commission
on Form U-13-1, as specified in the instructions for that form, by such company
or the persons proposing to organize it." Notwithstanding the foregoing
language, the Commission has on at least two recent occasions made findings
under Section 13(b) based on information set forth in an application on Form
U-1, without requiring the formal filing on a Form U-13-1. See Unitil Corp., 51
SEC Docket 562 (Apr. 24, 1992); CINergy Corp., 57 SEC Docket 2353 (Oct. 21,
1994). In this Application, AGL Resources has submitted substantially the same
application information as would have been submitted in a Form U-13-1.
Accordingly, it is appropriate for the Commission to find that AGL Services
will be so organized and shall be so conducted as to meet the requirements of
Section 13(b), and that the filing of a Form U-13-1 is unnecessary, or,
alternatively, that this Application should be deemed to constitute a filing on
Form U-13-1 for purposes of Rule 88.
2. Other Services
The Utility Subsidiaries and other associate companies of AGL Resources
may, from time to time, enter into leases of office or other space with other
associate companies. Any such lease will comply with the requirements of Rules
87, 90 and 91. See Central Power & Light Company, Holding Co. Act Release No.
26408 (Nov. 13, 1995).
30
<PAGE>
The Utility Subsidiaries will retain ownership of software they have
developed or that involve some form of license agreement with third parties and
other system companies may enter into license agreements to use this software.
These license agreements will be structured in accordance with the requirements
of Rules 87, 90 and 91. In addition, the Utility Subsidiaries may provide
services to affiliated and unaffiliated gas marketing companies and charge fees
under approved tariffs that may not be "at cost."/13/
G. Nonutility Reorganizations
Applicants propose to restructure AGL Resources' nonutility holdings from
time to time as may be necessary or appropriate in the furtherance of the AGL
System's authorized nonutility activities. To that end, AGL Resources requests
authorization to acquire, directly or indirectly, the equity securities of one
or more intermediate subsidiaries ("Intermediate Subsidiaries") organized
exclusively for the purpose of acquiring, financing, and holding the securities
of one or more existing or future Nonutility Subsidiaries. Intermediate
Subsidiaries may also provide management, administrative, project development,
and operating services to such entities.
Restructuring could involve the acquisition of one or more new
special-purpose subsidiaries to acquire and hold direct or indirect interests in
any or all of the AGL System's existing or future authorized nonutility
businesses. Restructuring could also involve the transfer of existing
subsidiaries, or portions of existing businesses, among the AGL Resources
associates and/or the reincorporation of existing subsidiaries in a different
state. This would enable the AGL System to consolidate similar businesses and to
participate effectively in authorized nonutility activities, without the need to
apply for or receive additional Commission approval.
These direct or indirect subsidiaries might be corporations, partnerships,
limited liability companies or other entities in which AGL Resources, directly
or indirectly, might have a 100% interest, a majority equity or debt position,
or a minority debt or equity position. These subsidiaries would engage only in
businesses to the extent the AGL System is authorized, whether by statute, rule,
regulation or order, to engage in those businesses. AGL Resources does not seek
----------
/13/ For example, AGLC currently provides various services to SouthStar, an
affiliated Marketer, and other unaffiliated Marketers on a
non-discriminatory basis. The services provided by AGLC in this regard are
either priced under AGLC's tariff, and thus exempt under Rule 81, or priced
as a pass-through of AGLC's cost of service.
----------
31
<PAGE>
authorization to acquire an interest in any nonassociate company as part of the
authority requested in this application and states that the reorganization will
not result in the entry by the AGL System into a new, unauthorized line of
business.
The Intermediate Subsidiaries would be organized for the purpose of
acquiring, holding and/or financing the acquisition of the securities of or
other interest in one or more EWGs, FUCOs, Rule 58 Subsidiaries, ETCs or other
non-exempt nonutility subsidiaries. Intermediate Subsidiaries may also engage in
development activities ("Development Activities") and administrative activities
("Administrative Activities") relating to such the permitted businesses of the
nonutility subsidiaries. To the extent such transactions are not exempt from the
Act or otherwise authorized or permitted by rule, regulation or order of the
Commission issued thereunder, AGL Resources requests authority for Intermediate
Subsidiaries to provide management, administrative, project development and
operating services to such entities.
Development Activities will be limited to due diligence and design review;
market studies; preliminary engineering; site inspection; preparation of bid
proposals, including, in connection therewith, posting of bid bonds; application
for required permits and/or regulatory approvals; acquisition of site options
and options on other necessary rights; negotiation and execution of contractual
commitments with owners of existing facilities, equipment vendors, construction
firms, power purchasers, thermal "hosts," fuel suppliers and other project
contractors; negotiation of financing commitments with lenders and other
third-party investors; and such other preliminary activities as may be required
in connection with the purchase, acquisition, financing or construction of
facilities or the acquisition of securities of or interests in new businesses.
Intermediate Subsidiaries request authority to expend up to $300 million during
the Authorization Period on all such Development Activities. Administrative
Activities will include ongoing personnel, accounting, engineering, legal,
financial, and other support activities necessary to manage AGL Resources'
investments in Nonutility Subsidiaries.
An Intermediate Subsidiary may be organized, among other things, (1) in
order to facilitate the making of bids or proposals to develop or acquire an
interest in any EWG, FUCO, Rule 58 Subsidiary, ETC or other non-exempt
nonutility subsidiary; (2) after the award of such a bid proposal, in order to
facilitate closing on the purchase or financing of such acquired company; (3) at
any time subsequent to the consummation of an acquisition of an interest in any
such
32
<PAGE>
company in order, among other things, to effect an adjustment in the respective
ownership interests in such business held by AGL Resources and non-affiliated
investors; (4) to facilitate the sale of ownership interests in one or more
acquired nonutility companies; (5) to comply with applicable laws of foreign
jurisdictions limiting or otherwise relating to the ownership of domestic
companies by foreign nationals; (6) as a part of tax planning in order to limit
AGL Resources' exposure to U.S. and foreign taxes; (7) to further insulate AGL
Resources and the Utility Subsidiaries from operational or other business risks
that may be associated with investments in non-utility companies; or (8) for
other lawful business purposes.
Investments in Intermediate Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guarantees issued,
provided or arranged in respect of the securities or other obligations of any
Intermediate Subsidiaries. Funds for any direct or indirect investment in any
Intermediate Subsidiary will be derived from (1) financings authorized in this
proceeding; (2) any appropriate future debt or equity securities issuance
authorization obtained by AGL Resources from the Commission; and (3) other
available cash resources, including proceeds of securities sales by a Nonutility
Subsidiary pursuant to Rule 52. To the extent that AGL Resources provides funds
or guarantees directly or indirectly to an Intermediate Subsidiary that are used
for the purpose of making an investment in any EWG or FUCO or a Rule 58
Subsidiary, the amount of such funds or guarantees will be included in AGL
Resources' "aggregate investment" in such entities, as calculated in accordance
with Rule 53 or Rule 58, as applicable.
33
<PAGE>
H. Certificates of Notification
To reduce expenses for both the Commission and AGL Resources and to
eliminate duplicative filings with the Commission covering essentially the same
subject matter, AGL Resources proposes to integrate its reporting under the
Securities Exchange Act of 1934, as amended (the "1934 Act") and the Securities
Act of 1933, as amended (the "1933 Act") with the reporting required under the
Act. To that end, the portion of the 1933 Act and 1934 Act reports containing or
reflecting disclosures of transactions occurring pursuant to the authorizations
granted in this proceeding would be incorporated by reference into the Rule 24
certificates of notification filed with the Commission in this matter. The
certificates would also contain all other information required by Rule 24,
including the certification that each transaction being reported on had been
carried out in accordance with the terms and conditions of and for the purposes
represented in this Application. Such certificates of notification would be
filed within 60 days after the end of the last calendar quarter, in which
transactions occur.
The Rule 24 certificates will contain the following information:
a. If sales of common stock by AGL Resources are reported, the purchase
price per share and the market price per share at the date of the agreement
of sale;
b. The total number of shares of AGL Resources' common stock issued or
issuable pursuant to options granted during the quarter under employee
benefit plans and dividend reinvestment plans including any employee
benefit plans or dividend reinvestment plans hereafter adopted;
c. If AGL Resources' common stock has been transferred to a seller of
securities of a company being acquired, the number of shares so issued, the
value per share and whether the shares are restricted in the hands of the
acquiror;
d. If a guarantee is issued during the quarter, the name of the guarantor,
the name of the beneficiary of the guarantee and the amount, terms and
purpose of the guarantee;
e. The amount and terms of any financings consummated by any Utility
Subsidiary that are not exempt under Rule 52;
f. A list of U-6B-2 forms filed with the Commission during the quarter,
including the name of the filing entity and the date of filing;
34
<PAGE>
g. Consolidated balance sheets as of the end of the quarter and separate
balance sheets as of the end of the quarter for each company, including AGL
Resources, that has engaged in jurisdictional financing transactions during
the quarter; and
h. Future registration statements filed under the 1933 Act with respect to
securities that are subject of the Application will be filed or
incorporated by reference as exhibits to the next certificate filed
pursuant to Rule 24.
Item 2. Fees, Commissions and Expenses
AGL Resources expects to pay or incur approximately $8.75 million in
aggregate fees, commissions and expenses, directly or indirectly, in connection
with the proposed Acquisition.
Item 3. Applicable Statutory Provisions
A. Applicable Provisions
The proposed Acquisition is subject to Sections 9 and 10 of the Act.
Sections 6(a), 7, 9(a), 10, 12 and 13 of the Act and Rules 42, 43, 45, 52, 53
and 88 are considered applicable to the proposed financing and intrasystem
service transactions.
To the extent that the proposed transactions are considered by the
Commission to require authorization, exemption or approval under any section of
the Act or the rules and regulations other than those set forth above, request
for such authorization, exemption or approval is hereby made.
B. Legal Analysis
Section 9(a)(2) of the Act makes it unlawful, without approval of the
Commission under Section 10, "for any person . . . to acquire, directly or
indirectly, any security of any public utility company, if such person is an
affiliate . . . of such company and of any other public utility or holding
company, or will by virtue of such acquisition become such an affiliate." Under
the definition set forth in Section 2(a)(11)(A) of the Act, an "affiliate" of a
specified company means "any person that directly or indirectly owns, controls,
or holds with power to vote, 5 per centum or more of the outstanding voting
securities of such specified company."
AGL Resources is currently the beneficial owner of 100% of the voting stock
of two public utility companies, AGLC and Chattanooga Gas. VNG is also a public
utility company
35
<PAGE>
as defined in Section 2(a)(5) of the Act. Because AGL Resources will, as a
result of the Acquisition, own more than five percent of the outstanding voting
securities of a third public utility company, VNG, AGL Resources must obtain the
approval of the Commission for the Acquisition under Sections 9(a)(2) and 10 of
the Act. The statutory standards to be considered by the Commission in
determining whether to approve the proposed Acquisition are set forth in
Sections 10(b), 10(c) and 10(f) of the Act.
As described below, the Acquisition complies with all of the applicable
provisions of Section 10 of the Act.
1. Section 10(b)
Section 10(b) provides that if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)(2)
unless the Commission finds that:
such acquisition will tend towards interlocking relations or the
concentration of control of public utility companies, of a kind or to
an extent detrimental to the public interest or the interests of
investors or consumers;
in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly,
in connection with such acquisition is not reasonable or does not bear
a fair relation to the sums invested in or the earning capacity of the
utility assets to be acquired or the utility assets underlying the
securities to be acquired; or
such acquisition will unduly complicate the capital structure of the
holding company system of the applicant or will be detrimental to the
public interest or the interests of investors or consumers or the
proper functioning of such holding company system.
a. Section 10(b)(1)
i. Interlocking Relations
Under Section 10(b)(1), the Commission shall approve an acquisition unless
the Commission finds that "such acquisition will tend towards interlocking
relations. . . ." By its nature, any merger of previously unrelated companies
results in new links and relations between the companies. Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act
Release No. 25273 (March 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972
F.2d 358 (D.C. Cir. 1992) ("interlocking relationships are necessary to
integrate [the
36
<PAGE>
two merging entities]"). These links, however, are not the types of interlocking
relations targeted by Section 10(b)(1), which was primarily aimed at preventing
business combinations unrelated to operating efficiencies./14/ AGL Resources'
purchase of VNG is motivated by operating efficiencies and does not create the
type of interlocking relations prohibited by Section 10(b)(1). Although it has
not been determined how many members of VNG's board of directors will be
officers or directors of AGL Resources and how many of AGL Resources' officers
and directors will be officers or directors of VNG, it is clear that some
overlap will be necessary to integrate VNG fully into AGL Resources' system and
to promote group-wide policies and practices for the efficient operation of the
combined system. Such overlap will therefore be in the public interest.
ii. Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex and irrational systems", and to avoid "an excess of
concentration and bigness" while preserving opportunities for the "economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and the generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., Holding Co. Act Release No. 20633 (July 21, 1978).
In applying Section 10(b)(1) to utility acquisitions, the Commission must
determine whether the acquisition will create "the type of structures and
combinations which the Act was specifically directed [to prohibit]." Vermont
Yankee Nuclear Corp., Holding Co. Act Release No. 15958 (Feb. 6, 1968). AGL
Resources' acquisition of VNG will not result in a "huge system" and will avoid
the "excess of concentration and bigness" which Section 10(b)(1) seeks to
prevent. AGL Resources' system after the Acquisition The AGL Resources system
will be smaller than many other systems that have been approved by the
Commission. On a pro forma basis, assuming the Acquisition was consummated on
October 1, 1998, the beginning of AGL Resources' prior fiscal year, AGL
Resources and VNG would have combined assets of $2,600 million, total revenues
of $1,271 million, operating margin of $627 million, and net income of $57
million for the twelve months ended September 30, 1999, and approximately 1.8
million delivery service customers.
The Commission has approved acquisitions involving registered holding
companies with much larger public utility systems. See American Electric Power
Company, Inc. and Central and South West Corporation, Holding Co. Act Release
No. 27186 (June 14, 2000) (approving a
----------
/14/ See Section 1(b)(4) of the Act (finding that the public interests of
consumers are adversely affected "when the growth and extension of holding
companies bears no relation to economy of management and operation or the
integration and coordination of related operating properties. . . .").
----------
37
<PAGE>
merger resulting in a system with combined assets of $35.7 billion and 4.8
million customers); Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17,
1993) (approving the acquisition of Gulf State Utilities, with combined assets
at the time of acquisition in excess of $21 billion); The Southern Company,
Holding Co. Act Release No. 24579 (Feb. 12, 1988) (approving the acquisition of
Savannah Electric and Power Company to create a system with assets of $20
billion and 3.25 million customers). After the Acquisition, AGL Resources will
be smaller than other registered holding companies with gas utilities. The chart
below compares AGL Resources and VNG combined on a pro forma basis to Columbia
Energy Group and National Fuel Gas Company, two large registered holding
companies with gas utility subsidiary companies.
--------------------------------------------------------------------------------
Pro Forma Combined Columbia Energy National Fuel Gas
AGL Resources and Group Company
VNG ($ millions)/16/ ($ millions)/17/
($ millions)/15/
--------------------------------------------------------------------------------
Gross Revenues $1,271 $3,222 $3,074
--------------------------------------------------------------------------------
Operating Margin $627 $1,995 $1,883
--------------------------------------------------------------------------------
Net Income $57 $249 $137
--------------------------------------------------------------------------------
Total Assets $2,600 $7,095 $6,535
--------------------------------------------------------------------------------
Overall, AGL Resources' acquisition of VNG will not create a "complex and
irrational system," but will create a company focused on competitive prices and
high quality reliable customer service. AGL Resources' acquisition of VNG will
also not have a negative effect on competition, indeed, as the Virginia
Commission observed in its divestiture order, it is beneficial for competition
in the electric utility market that VNG operate under different ownership. AGL
Resources does not own electric generation facilities and, consequently, its
ownership of VNG could not create the market power concerns identified by the
Virginia Commission.
In the market for gas distribution services, as monopoly service providers
in their respective service territories, AGLC, Chattanooga Gas and VNG have no
overlapping retail delivery customers. There is, therefore, no increase in
market concentration as a result of the
----------
/15/ As of and for the year ended September 30, 1999.
/16/ As of and for the year ended December 31, 1999.
/17/ As of and for the year ended December 31, 1999.
----------
38
<PAGE>
Acquisition. In the market for retail gas supply, AGLC has voluntarily unbundled
its gas services and exited the retail supply market under the Deregulation Act,
creating a competitive market in Georgia for retail gas supply in which
approximately 15 Marketers currently participate. To the extent the Applicants
engage in similar unbundling in Virginia, competition in that retail gas supply
market also should improve.
The nonutility businesses conducted by the AGL Resources system after the
Acquisition also should not adversely affect competition or the public interest.
For example, market power will not increase in gas transmission services since
VNG is the only company in the AGL Resources system that currently owns
intrastate gas pipeline assets. Although the Acquisition is not a jurisdictional
transaction under the Federal Power Act or the Natural Gas Act and therefore
does not require the approval of the FERC,/18/ its impact on competition and the
public interest will be subject to review on both the federal and state level.
The FTC and the Virginia Commission must approve the Acquisition. Since the FTC
and the Virginia Commission sought to safeguard competition by ordering CNG to
divest VNG as a condition of merging with Dominion, AGL Resources' purchase and
operation of VNG will complete the plan of the Virginia Commission and the FTC
and, therefore, further the public interest in the maintenance of competition.
b. Section 10(b)(2)
i. Fairness of Consideration
Section 10(b)(2) requires the Commission to determine whether the
consideration paid by AGL Resources for VNG is reasonable and whether it bears a
fair relation to the investment in, and the earning capacity of, the utility
assets being acquired. AGL Resources relied in part on Morgan Stanley Dean
Witter's analysis and conclusion in a fairness opinion that the consideration to
be paid for VNG was fair to AGL Resources from a financial point of view. More
importantly the negotiation between Dominion and AGL Resources was at
arm's-length and the consideration agreed to by the parties was the product of a
competitive process. To facilitate the sale of VNG, Dominion engaged Merrill
Lynch to solicit offers -- a process in which multiple bidders participated. AGL
Resources emerged as the successful bidder
----------
/18/ In TUC Holding Company, Holding Co. Act Release No. 26749 (Aug. 1, 1997),
the Commission approved a transaction that similarly did not require
approval by the Federal Energy Regulatory Commission.
----------
39
<PAGE>
in the solicitation and subsequent negotiations with Dominion refined the terms
of the Acquisition, including the consideration to be paid.
ii. Reasonableness of Fees
AGL Resources believes that the estimated overall fees, commissions and
expenses incurred and to be incurred in connection with the Acquisition are
reasonable and fair in light of the size and complexity of the transaction
relative to other transactions and the anticipated benefits of the acquisition
to the public, investors and consumers; that they are consistent with recent
precedent; and that they meet the standards of Section 10(b)(2).
The fees and expenses that AGL Resources expects to incur in connection
with the Acquisition total approximately $8.75 million. This amount represents
approximately 1.6% (based on a purchase price of $550 million) of the value of
the consideration to be paid by AGL Resources to Dominion. This percentage is
consistent with percentages previously approved by the Commission. See, e.g.,
Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and
expenses represented approximately 1.7% of the value of the consideration paid
to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co.
Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the
assets to be acquired).
c. Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Acquisition will unduly complicate AGL Resources' capital structure or be
detrimental to the public interest, the interest of investors or consumers or
the proper functioning of AGL Resources.
The proposed Acquisition will not unduly complicate the capital structure
of AGL Resources or its subsidiaries. The proposed Acquisition does not involve
the creation of any minority interests and the financing of the Acquisition will
not affect the priorities, preferences, voting power, or other rights of the
holders of the outstanding securities of AGL Resources or its subsidiaries.
After the Acquisition, AGL Resources and each of its utility subsidiaries will
continue to fall within the seventy-to-thirty percent debt-to-common equity
ratio generally prescribed by the Commission. See, e.g., The National Grid Group
plc, Holding Co. Act Release No. 27154 (March 15, 2000). On a pro forma basis,
as the following chart shows, assuming the Acquisition was consummated on March
31, 2000, common stockholders' equity would make up 31.5% of AGL Resources'
total capitalization at that date.
40
<PAGE>
--------------------------------------------------------------------------------
Pro Forma Capital Structure
--------------------------------------------------------------------------------
($ millions) % of Total Capitalization
--------------------------------------------------------------------------------
Common stockholders' equity/19/ 623.4 31.5
--------------------------------------------------------------------------------
Subsidiary mandatorily redeemable 74.3 3.7
preferred securities/20/
--------------------------------------------------------------------------------
Long-term debt (including current 1,168.8 58.9
portion)/21/
--------------------------------------------------------------------------------
Short-term debt/22/ 116.6 5.9
--------------------------------------------------------------------------------
Total capitalization $1,983.1 100%
--------------------------------------------------------------------------------
Section 10(b)(3) also requires that a proposed acquisition not be
detrimental to the public interest, the interest of the investors or consumers
or the proper functioning of the resulting holding company system. As set forth
more fully in the discussion of the standards of Section 10(c)(2), below, and
elsewhere in this Application, AGL Resources' proposed acquisition of VNG will
benefit shareholders and consumers.
As noted by the Commission in Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993), "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and the
securities markets themselves." In this regard, following completion of the
Acquisition, AGL Resources will continue to be a reporting company subject to
the disclosure requirements of the Securities Exchange Act of 1934 (the
"Exchange Act") that will provide investors with readily available information
concerning AGL Resources and its subsidiary companies. Furthermore, the
Acquisition is subject to various other federal and state regulatory approvals
as discussed in Item 4.
----------
/19/ Equity is maintained at the holding company level by AGL Resources.
/20/ The subsidiary mandatorily redeemable preferred securities were issued in
1997 by a financing subsidiary of AGL Resources, AGL Capital Trust I. In
addition to these preferred securities, the Trust also issued common voting
securities to AGL Resources. The proceeds of the sale of the mandatorily
redeemable preferred securities were used to purchase 8.17% Junior
Subordinated Deferrable Interest Debentures, due June 1, 2037, from AGL
Resources.
/21/ The long-term debt was issued in medium term notes Series A, Series B, and
Series C under an Indenture dated December 1, 1989. These medium term notes
($725 million principal amount) were issued by the Atlanta Gas Light
Company utility subsidiary of AGL Resources. At the time these notes were
registered with the Securities and Exchange Commission, Atlanta Gas Light
Company was not a subsidiary of AGL Resources. AGL Resources assumed its
holding company status with respect to AGLC on March 6, 1996.
/22/ Short-term debt is maintained at the holding company level by AGL
Resources.
----------
41
<PAGE>
Nonetheless, AGL Resources' current credit ratings are Baa1 by Moody's
Investors Service, A- by Fitch Investors Service, and BBB+ by Standard & Poor's
Corporation, Inc. To evaluate the effect of the Acquisition, the rating agencies
have issued a credit watch for AGL Resources, as is customary with similar
transactions.
After the Acquisition and AGL Resources' registration under the Act, the
resulting registered holding company system will have long-term debt outstanding
at the subsidiary level, at AGLC, and at the holding company level. Registered
gas utility holding company systems have generally not issued long-term debt at
the utility subsidiary level, preferring to satisfy the system's long-term
capital needs through external holding company-level financings./23/ The
Commission has recently provided more flexibility to registered holding company
systems to finance operations where the resulting capital structure would not
impose an unreasonable financial burden and would be reasonably adapted to the
earnings power of the issuer. In addition, proposed financings that vary from
the traditional standards should be for necessary and urgent corporate
purposes./24/
As shown above, the pro forma capital structure is reasonably adapted to
the earning power of the combined AGL Resources and VNG system. AGL Resources'
use of long-term debt under the Facility to finance the Acquisition is the
preferred manner of financing, in part because it results in an efficient
capital structure for the resulting holding company system. The Commission has
found that in circumstances such as these, limiting a registered holding
company's financing options may impose an unreasonable financial burden and that
greater flexibility, including the flexibility to issue long-term debt at both
levels, is appropriate./25/
----------
/23/ See e.g., Columbia Energy Group, Holding Co. Act Release No. 27035 (June 8,
1999).
/24/ See The National Grid Group, plc, Holding Co. Act Release No. 27154 (March
15, 2000) and The Southern Company, Holding Co. Act Release No. 27134 (Feb.
9, 2000).
/25/ The Southern Company, Holding Co. Act Release No. 27134 (Feb. 9, 2000).
----------
42
<PAGE>
2. Section 10(c).
i. Section 10(c)(1)
Section 10(c)(1) prohibits the Commission from approving an acquisition for
which Commission approval is required under Section 9(a) if such acquisition is
unlawful under the provisions of Section 8 or is detrimental to carrying out the
provisions of Section 11. AGL Resources will not own electric and gas utilities
servicing the same area and therefore does not fall under Section 8.
(a). Section 11, Integrated Utility System
Section 11 (b)(1) directs the Commission, to require each registered
holding company system to limit its utility operations to "a single integrated
public utility system" and "such other businesses as are reasonably incidental,
or economically necessary or appropriate to the operations of such integrated
public utility system." Section 2(a)(29)(B) defines an integrated public utility
system with respect to gas utility companies as:
a system comprised of one or more gas utility companies
which are so located and related that substantial economies
may be effectuated by being operated as a single coordinated
system confined in its operations to a single area or
region, in one or more states, not so large as to impair
(considering the state of the art and area or region
affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation; provided
that gas utility companies deriving natural gas from a
common source of supply may be deemed to be included in a
single area or region.
(i) Substantial Economies May Be Effected by Being Operated
as a Single Coordinated System
In prior orders, the Commission has found that a holding company's use of
administrative coordination mechanisms to purchase gas, coordinate gas supply
among utilities, manage transportation and storage arrangements and provide
other administrative, technical and operating services is a satisfactory means
of coordinating previously separate utilities and achieving economies of scale.
See NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999)
("NIPSCO"); Sempra Energy, Holding Co. Act Release No. 26791 (Feb. 1,
43
<PAGE>
1999). Access to industry recognized market and supply-area hubs can also
contribute to effective coordination and savings. See NIPSCO.
As part of the acquisition process, the management of AGL Resources
conducted a preliminary review of the types of potential efficiency gains and
cost savings that may result from the acquisition of VNG. A transition analysis
is currently underway and is expected to continue past the closing of the
transaction. For example, a team of various subject matter experts from AGL
Resources and VNG is collecting information for use in planning future
integration in areas such as operations and engineering, customer service,
finance and accounting, human resources, and information technology.
Opportunities for knowledge sharing and best practice transfers are being
identified. The report of AGL Resources' management describing the process of
identifying opportunities for efficiency gains and cost savings is included in
Exhibit N-1 to the Application. The measures described above and in the report
will integrate AGLC, VNG and Chattanooga Gas into a single coordinated system
and will produce savings through greater economies of scale.
(ii) Single area or Region
Section 2(a)(29)(B) expressly provides that companies that derive natural
gas from a common source of supply may be deemed to be included in a single area
or region. The Commission interprets "common source of supply" flexibly based on
its understanding of the contemporary gas industry and may find that companies
purchasing gas from a common producer or basin are in a "single area or region"
when doing so does not undercut the Act's policies, particularly, the growth and
extension of holding companies that bears no relation to economy of management
and operation or the integration and coordination of related operating
properties. See NIPSCO.
Applicants are not required, however, to show that they share a common
source of supply to establish that they form an integrated gas public-utility
system in a single area or region. The Act merely requires that the operations
that the Applicants seek to integrate be in a single area or region, in one or
more states, not so large that the combination impairs the advantages of
localized management, efficient operation and the effectiveness of regulation.
The three utilities that AGL Resources will own after consummation of the
Acquisition are located in close proximity to one another in the Southeastern
United States in the three contiguous states of
44
<PAGE>
Georgia, Tennessee and Virginia. Many electric and gas registered holding
companies operate in more states. For example, American Electric Power Company
operates in seven states and Columbia Energy Group operates in six states./26/
It is clear from the commonality among the gas transportation and storage
companies serving AGLC, Chattanooga Gas and VNG that the combined AGL Resources
system will operate in the same region and, in all likelihood, gas that is
supplied over the individual utilities' systems will be produced in basins in
the Gulf of Mexico, Texas and Louisiana. The unbundling of the retail gas
marketing function from the distribution function, however, has made the source
of supply less important in this case than in prior cases the Commission has
considered,/27/ and the Commission need not make this finding to determine that
the AGL Resources system operates in a single area or region.
A showing that utilities in a gas system share common facilities is
sufficient to establish that they operate in a common area or region. Indeed,
the applicants noted in Sempra that the concept of a common source of supply is
susceptible of a different understanding today than in 1935, when the term
"single area or region" was generally defined in terms of the pipeline delivery
points (i.e., the city gate), where system LDCs purchased their gas./28/
Fundamentally, the single area or region standard reflects the policy of the Act
against "scatteration" - the ownership of widely dispersed utility properties
that do not lend themselves to efficient operation./29/ In this matter, all
three utilities in the AGL Resources system are currently using Dominion
Transmission, Tennessee Gas, and Transco for interstate transmission and/or
storage services -- third-party providers that, in an era of unbundled gas
supply and delivery services, form today's city gate. These common elements put
the combined AGL Resources system in the same area or region for purposes of the
definition of an integrated gas utility system under the Act.
(iii) Prohibited Impairments
The Commission also evaluates the size of the proposed holding company
system, in light of its impact on "the advantages of local management, efficient
operation and the effectiveness of regulation". After consummation of the
Acquisition, VNG will retain sufficient
----------
/26/ Securities and Exchange Commission, Financial and Corporate Report, Holding
Companies Registered Under the Public Utility Holding Company Act of 1935
as of July 1, 1999.
/27/ See e.g., Sempra Energy, Holding Co. Act Release No. 26971 (Feb. 1, 1999)
(finding commonality in supply basins between California and North Carolina
utilities) ("Sempra").
/28/ Sempra at 5.
/29/ Id.
----------
45
<PAGE>
local management to insure that VNG is sensitive to the needs of its customers
and changes in the local economy, but procurement and other administrative
functions may be centralized to achieve purchasing and management efficiencies.
Accordingly, AGL Resources will retain local management as necessary to assure
the safe and efficient operation of the VNG system and high levels of customer
service.
VNG will be operated as a subsidiary of AGL Resources. Although AGL
Resources has not yet determined the leadership of VNG and the composition of
VNG's board of directors, it is expected that the President and CEO of VNG will
be a resident of Virginia and a member of VNG's board. In addition, VNG will
retain an office in Virginia for VNG management and local facilities for
customer service, maintenance and field work operations.
The Acquisition will not undermine the effectiveness of regulation. Rather,
the Acquisition is connected with decisions of the Virginia Commission and FTC
requiring Dominion to divest VNG. The divestiture was ordered to maintain
competition after Dominion's merger with CNG. AGL Resources has submitted an
application requesting the Virginia Commission's approval of the Acquisition,
attached as Exhibit C-1, and expects that it will be approved. Because the
Acquisition will not proceed without the authorization of the Virginia
Commission, this Commission may find it appropriate to give deference to the
determination of the Virginia Commission on these issues.
(b). Non-Utility Subsidiaries
The acquisition of VNG does not introduce any new non-utility subsidiaries
into the AGL Resources system, and all of AGL Resources' non-utility businesses
are gas-related and retainable under the Commission's rules and precedent.
Section 11(b)(1) limits the non-utility interests of a registered holding
company to those that are "reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system," on a
finding by the Commission that such interests are "necessary or appropriate in
the public interest or for the protection of investors or consumers and not
detrimental to the proper functioning" of the integrated system. The Commission
has interpreted these provisions to require; (i) the existence of an operating
or functional relationship between the utility operations of the registered
holding company and the non-utility activities sought to be retained, see
generally, Michigan Consolidated Gas Co., Holding Co. Act Release
46
<PAGE>
No. 16763 (June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971), and (ii) that
the retention is in the public interest, see, e.g., id. quoting General Public
Utilities Corp., Holding Co. Act Release No. 10982 (Dec. 28, 1951); United Light
and Railways Co., Holding Co. Act Release No. 12317 (Jan. 22, 1954). A
non-utility business may also be retained if it evolved out of the system's
utility business, the investment is not significant in relation to the system's
total financial resources and the investment has the potential to produce
benefits for investors and/or consumers. CSW Credit, Inc., Holding Co., - Act
Release No. 25995 (1994); Jersey Central Power and Light Co., Holding Co. Act
Release No. 24348 (March 18, 1987).
Rule 58 under the Act expands the types of permissible non-utility
activities retainable by registered systems by exempting from Section 9(a) of
the Act acquisitions by registered holding companies of the securities of
energy-related companies or gas-related companies. With respect to
energy-related companies, a holding company's aggregate investment in such
energy-related companies may not exceed the greater of $50 million or 15% of the
consolidated capitalization of the registered holding company. Rule
58(a)(1)(i)-(ii). Rule 58 defines "energy-related company" as a company that,
directly or indirectly, derives substantially all of its revenues from certain
enumerated activities such as rendering energy management services, the sale of
electric and gas appliances and the development of certain energy-related
technologies.
Rule 58 defines "gas-related company" as a company that directly or
indirectly through one or more affiliates, derives or will derive substantially
all of its revenues from activities permitted under the Gas-Related Activities
Act of 1990 and conducted within the United States. Such activities may include
transportation and storage of natural gas and activities related to the supply
of natural gas, including exploration, development, production, marketing,
manufacture and other similar activities./30/
As set forth below, all of AGL Resources' active non-utility businesses are
retainable./31/
----------
/30/ The Act also allows registered holding companies to acquire and maintain
interests in the following exempt entities: exempt telecommunications
companies (Section 34), foreign utility companies (Section 33) and exempt
wholesale generators (Section 32).
/31/ AGL Resources also holds interests in the following direct or indirect
subsidiary companies that are currently inactive or holding companies for
nonutility businesses: (1) AGL Rome Holdings, Inc., (2) Georgia Engine
Sales and Service Co., (3) Peachtree Pipeline Company, (4) Atlanta Gas
Light Services, Inc., (5) Georgia Natural Gas Company, (6) TES, Inc., (7)
Georgia Natural Gas Services, Inc., (8) AGL Gas Marketing, Inc., (9) AGL
Power Services, Inc., (10) Georgia Energy Company, and (11) AGL Energy Wise
Services, Inc.
----------
47
<PAGE>
(a) SouthStar markets natural gas and related services and is retainable
under Rule 58(b)(2)(ii).
(b) AGL Investments, Inc. currently is an intermediate holding company for
investments in other non-utility businesses. It currently has ownership
interests in:
(i) Propane, which engages in the sale of propane and markets propane
tanks, gas appliances and wholesale propane and is retainable under
Rule 58(b)(2)(ii);/32/
(ii) Trustees Investments, Inc., which owns Trustees Gardens, a
residential and retail development located in Savannah, Georgia on and
adjacent to a former manufactured gas plant site owned by AGLC and
Trustees Investments, Inc. is retainable under UNITIL Corp., Holding
Co. Act Release No. 25524 (April 24, 1992); and
(iii) Utilipro, which sells integrated customer care solutions and
billing services to energy marketers and is retainable under Rule
58(b)(1)(vii).
(iv) AGL Consumer Services, Inc., which markets appliance warranty
contracts, energy management systems and other energy-related consumer
services to residential and commercial customers is retainable as a
gas-related company under Rule 58(b)(2)(ii).
(c) AGLE, a gas supply services company that buys and sells natural gas
primarily for Chattanooga Gas, is retainable as a gas-related company under
Rule 58(b)(2)(ii).
(d) Georgia Gas Company owns minor interests in natural gas production
activities and is retainable as a gas-related company under Rule
58(b)(2)(ii).
(e) AGL Peaking Services, Inc. owns a 50% interest in Etowah LNG Company
LLC ("Etowah"), a joint venture with Southern Natural Gas Company. Etowah
was formed for the purpose of constructing, owning, and operating a
liquified natural gas peaking facility and is retainable under Rule
58(b)(2)(ii).
(f) AGL Interstate Pipeline Company is 50% owner of a joint venture with
Transco known as Cumberland Pipeline Company. Cumberland Pipeline Company
was formed to
----------
/32/ After the formation of US Propane and the acquisition of Heritage Holdings,
Inc., and interests in Heritage Propane Partners, L.P., discussed supra,
note 4, AGL Resources' investment in the propane business will continue to
be retainable under Rule 58(b)(2)(ii).
----------
48
<PAGE>
construct, own and operate a new interstate pipeline to serve customers in
Georgia and Tennessee. Management has decided not to proceed with the
Cumberland pipeline project. Pending the dissolution of the joint venture,
the business is retainable under Rule 58(b)(2)(ii).
AGL Resources requests that the Commission exempt energy-related
investments made prior to issuance of the order authorizing the proposed
Acquisition from the calculation of the maximum amount (15% of consolidated
capitalization) of investment in energy-related subsidiaries allowed under Rule
58. Prior to its acquisition of VNG, AGL Resources was exempt from the Act's
requirements, except Section 9(a)(2), pursuant to Section 3(a)(1) and Rule 2,
and thus this request is consistent with Commission precedent. See New Century
Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997).
Before natural gas was widely available in the Southeast, AGLC manufactured
gas from coal and other fuels. Those manufacturing operations were known as
"manufactured gas plants" or "MGPs" which AGLC ceased operating in the 1950s.
Because of recent environmental concerns, AGLC is investigating possible
environmental impacts associated with those plants and, if necessary, will clean
up any contamination. As part of this process, AGLC may transfer one or more of
its MGP properties to individual wholly-owned single asset subsidiaries of AGLC
for the purpose of holding the real estate in connection with a sale or lease
for a nominal amount to local municipalities or non-profit organizations. The
first of these transfers may occur within the next 60 days. Applicants request
authorization to organize and retain such subsidiaries. In addition, to the
extent required under Rule 44, Applicants request authorization to transfer the
MGP properties to the subsidiaries and to dispose of the properties, as
described above./33/
i. Section 10(c)(2)
Section 10(c)(2) requires the Commission to examine whether a proposed
acquisition will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. The Acquisition
will result in benefits to investors, consumers and the public interest and
represents an opportunity for growth.
The combination of AGL Resources and VNG will benefit shareholders of AGL
----------
/33/ Applicants represent that any required state regulatory or other approvals
will be obtained prior to any transfer.
----------
49
<PAGE>
Resources. Both companies serve high-growth areas in regions that are among the
most economically vibrant in the United States. Both companies have unique
strengths and capabilities that will be shared to improve overall operations and
financial performance. The management of AGL Resources projects that the
acquisition of VNG will be earnings accretive to shareholders no later than 12
months after the close.
The Acquisition will provide important benefits to consumers as well. As
Virginia proceeds toward customer choice, AGL Resources may participate in
shaping the transition and in competitive retail markets. AGL Resources'
voluntary unbundling under gas deregulation in Georgia helped the transition to
retail competition. In addition, AGL Resources' retail energy marketing
experience may help to promote competition in Virginia's electric and gas
markets. AGL Resources' is optimistic that its expertise in these areas promises
benefits to consumers through lower costs and more choices.
Further, there will be savings and efficiencies associated with the
Acquisition itself, both in financial and operational terms, as VNG is
integrated into AGL Resources' system. Among other things, AGL Resources' larger
scale, both in financial and operational terms, will enhance the utilities'
ability to use new developments in technology and information systems, and to
obtain efficiencies in financing, particularly when contrasted to the increased
costs and inefficiencies that VNG might have incurred had it been spun-off on
its own from the Dominion system.
Although some of the anticipated benefits are strategic and will be fully
realizable only in the longer term, they are properly considered in determining
whether the standards of Section 10(c)(2) are met. See The National Grid Group
plc, Holding Co. Act Release No. 27154 (March 15, 2000). The Commission has
recognized that potential benefits are entitled to be considered, regardless of
whether they can be precisely estimated: "[S]pecific dollar forecasts of future
savings are not necessarily required; a demonstrated potential for economies
will suffice even where these are not precisely quantifiable." Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986) (citation omitted).
See also Energy East Corporation, Holding Co. Act Release No. 26976 (Feb. 12,
1999) (authorizing acquisition based on strategic benefits and potential, but
unquantifiable, savings).
50
<PAGE>
3. Section 10(f)
Section 10(f) prohibits the Commission from approving an acquisition unless
the Commission is satisfied that the acquisition will be undertaken in
compliance with applicable state laws. As described in Item 4, AGL Resources'
acquisition of VNG will be consummated in compliance with all applicable state
laws.
4. Section 3(a)(2)
AGLC is a public utility holding company by virtue of its ownership of all
the outstanding common stock of Chattanooga Gas, a gas public utility company.
AGLC qualifies for exempt holding company status under Section 3(a)(2) of the
Act because it is a holding company that is "predominately a public utility
company whose operations as such do not extend beyond the state in which it is
organized and states contiguous thereto." AGLC is predominantly a gas utility
company operating exclusively in the state of Georgia. AGLC's only subsidiary,
Chattanooga Gas, operates exclusively in the contiguous state of Tennessee. For
the year ended September 30, 1999, Chattanooga Gas had total operating revenues
of $67 million, as compared to AGLC's total operating revenues of $466 million
for the same period./34/ Accordingly, AGL Resources and AGLC request that the
Commission issue an order exempting AGLC from all requirements of the Act,
except Section 9(a)(2)./35/
Item 4. Regulatory Approvals
A. State Regulation
As described earlier, the Virginia Commission is the only state regulatory
authority that must approve the Acquisition. AGL Resources petitioned the
Virginia Commission for authority to undertake the Acquisition on June 22, 2000.
AGL Resources' application to the Virginia Commission is attached as Exhibit
C-1. Although the approval of the Tennessee Authority and Georgia Commission are
not required, AGL Resources has advised these bodies of the proposed
Acquisition.
----------
/34/ See Union Electric Co., 40 S.E.C. 1072, 1077 (1962) (discussing previous
cases where Section 3(a)(2) exemptions were granted "where the gross
revenues of the utility subsidiaries were 19.2%, 23.5% 23.7% and 27% of the
respective parents" [citations omitted] and noting that "in all prior cases
where exemptions under Section 3(a)(2) have been denied, the gross utility
revenues of the subsidiaries have exceeded 35% of those of the parent").
/35/ As noted above, AGLC may transfer the Chattanooga Gas securities it holds
to AGL Resources by means of a dividend. At that point, an exemption would
no longer be required.
----------
51
<PAGE>
With respect to financing authorizations, the Georgia Commission and the
Tennessee Authority have jurisdiction over the issuances of securities by AGLC
and Chattanooga Gas, respectively, except the issuance of debt securities with
maturities of less than one year. The Virginia Commission has jurisdiction over
all issuances of securities by VNG.
B. Federal Regulation
The Acquisition is subject to the authorization of the FTC. No other
federal regulatory approvals, other than the approval of this Commission, are
required with respect to the Acquisition.
Item 5. Procedure
AGL Resources respectfully requests that the Commission issue and publish,
not later than July 31, 2000, the requisite notice under Rule 23 with respect to
the filing of this Application-Declaration, such notice to specify a date not
later than August 31, 2000 by which comments may be entered and a date not later
than September 15, 2000 as the date after which an order of the Commission
granting and permitting this Application-Declaration to become effective may be
entered by the Commission.
AGL Resources waives a recommended decision by a hearing or other
responsible officer of the Commission for approval of the Acquisition and
consents to the Division of Investment Management's assistance in the
preparation of the Commission's decision. There should not be a waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
Item 6. Exhibits and Financial Statements
Exhibits
A-1 Articles of Incorporation of VNG incorporated by reference to Exhibit
B-18(a) of Dominion's Form U5B, SEC File No. 001-08489, filed April 27,
2000.
A-2 By-Laws of VNG incorporated by reference to Exhibit B-18(b) of Dominion's
Form U5B, SEC File No. 001-08489, filed April 27, 2000.
A-3 Articles of Incorporation of AGL Resources.
A-4 By-Laws of AGL Resources.
52
<PAGE>
B-1 Stock Purchase Agreement dated as of May 8, 2000 among AGL Resources Inc.,
Consolidated Natural Gas Company, Dominion Resources, Inc. and Virginia
Natural Gas, Inc.
C-1 Application to the Virginia State Corporation Commission (to be filed by
amendment).
C-2 Order of the Virginia State Corporation Commission (to be filed by
amendment).
D-1 Map of AGL Resources' service territory (to be filed on paper on Form SE).
D-2 Map of VNG's service territory (to be filed on paper on Form SE).
E-1 Opinion of Counsel - AGL Resources (to be filed by amendment).
E-2 Opinion of Counsel - VNG (to be filed by amendment).
F-2 Past tense opinion of counsel (to be filed by amendment).
G-1 Application to the Federal Trade Commission (to be filed by amendment).
G-2 Order of the Federal Trade Commission (to be filed by amendment).
H-1 1999 Annual Report on Form 10-K of AGL Resources, incorporated by reference
to AGL Resources' Form 10-K405, SEC File No. 001-14174 (filed December 29,
1999).
I-1 Proposed Form of Notice.
J-1 Summary of AGL Resources Direct Stock Purchase and Dividend Reinvestment
Plan, Incentive Compensation Plans and other Employee Benefit Plans.
K-1 Form of Services Agreement between AGL Services and the Subsidiary
Companies (to be filed by amendment).
K-2 AGL Services Policies and Procedures Manual (to be filed by amendment).
L-1 Form of Money Pool Agreement (to be filed by amendment).
L-2 Form of Money Pool Promissory Note (to be filed by amendment).
M-1 Form of Tax Allocation Agreement (to be filed by amendment).
N-1 Report of AGL Resources' Management on the Process of Identifying
Opportunities for Efficiency Gains and Cost Savings, incorporated by
reference to Exhibit 10 of Exhibit C-1 to this Application (to be filed by
amendment).
53
<PAGE>
Financial Statements
FS-1 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet as of March 31, 2000.
FS-2 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Statement of Consolidated Income for the Twelve Months ended September
30, 1999.
FS-3 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Statement of Consolidated Income for the Six Months ended March 31,
2000.
FS-4 Notes to the Unaudited Pro Forma Combined Condensed Consolidated
Financial Statements.
FS-5 AGL Resources' Consolidated Balance Sheet and Statement of Income for
the year ended September 30, 1999, included in Exhibit H-1 to this
Application.
FS-6 AGL Resources' Unaudited Condensed Consolidated Balance Sheet and
Statement of Income for the quarter ended December 31, 1999,
incorporated by reference to AGL Resources' Form 10-Q, SEC File No.
001-14174 (filed February 14, 2000).
FS-7 AGL Resources' Unaudited Condensed Consolidated Balance Sheet and
Statement of Income for the quarter ended March 31, 2000, incorporated
by reference to AGL Resources' Form 10-Q, SEC File No. 001-14174
(filed May 15, 2000).
FS-7 VNG Balance Sheet and Statement of Income for the year ended and as of
December 31, 1999, incorporated by reference to Exhibit 5 of Exhibit
C-1 to this Application.
Item 7. Information as to Environmental Effects.
The proposed Acquisition involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
54
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, Applicants have duly caused this Application-Declaration to be signed on
their behalf by the undersigned thereunto duly authorized.
Date: June 22, 2000 /s/ Donald P. Weinstein
----------------- ---------------------------
Donald P. Weinstein
Senior Vice President and
Chief Financial Officer
AGL Resources Inc.
Atlanta Gas Light Company
/s/ Charles C. Moore
--------------------------
Charles C. Moore
Vice President and Treasurer
Chattanooga Gas Company
/s/ Donald A. Fickenscher
--------------------------
Donald A. Fickenscher
Chief Counsel and Corporate
Secretary
Virginia Natural Gas, Inc.
55
<PAGE>
Exhibit Index
A-3 Articles of Incorporation of AGL Resources.
A-4 By-Laws of AGL Resources.
B-1 Stock Purchase Agreement dated as of May 8, 2000 among AGL Resources Inc.,
Consolidated Natural Gas Company, Dominion Resources, Inc. and Virginia
Natural Gas, Inc.
I-1 Proposed Form of Notice.
J-1 Summary of AGL Resources Direct Stock Purchase and Dividend Reinvestment
Plan, Incentive Compensation Plans and other Employee Benefit Plans.
FS-1 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Consolidated Balance Sheet as of March 31, 2000.
FS-2 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Statement of Consolidated Income for the Twelve Months ended September 30,
1999.
FS-3 AGL Resources' and Subsidiaries Unaudited Pro Forma Combined Condensed
Statement of Consolidated Income for the Six Months ended March 31, 2000.
FS-4 Notes to the Unaudited Pro Forma Combined Condensed Consolidated Financial
Statements.
56
