<PAGE> 1
File Number 70-8107
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
FORM U-1
DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
By
CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
Names and addresses of agents for service:
S. E. Williams, Senior Vice President L. D. JOHNSON, Vice Chairman
and General Counsel of the Board and Chief Financial
Consolidated Natural Gas Company Officer
CNG Tower Consolidated Natural Gas Company
625 Liberty Avenue CNG Tower
Pittsburgh, Pennsylvania 15222-3199 625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
N. F. CHANDLER, General Attorney
Consolidated Natural Gas Service Company, Inc.
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
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File Number 70-8107
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
FORM U-1
DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
Consolidated Natural Gas Company restates its
application-declaration (except financial statements) under the above file
number in the entirety as follows:
Item 1. Description of Proposed Transaction
___________________________________
(a) Furnish a reasonably detailed and precise description of the
proposed transaction, including a statement of the reasons why it is desired
to consummate the transaction and the anticipated effect thereof. If the
transaction is part of a general program, describe the program and its
relation to the proposed transaction.
I. REQUEST FOR AUTHORIZATION TO USE NEW INDENTURE
Consolidated Natural Gas Company ("Consolidated" or the
"Company"), a registered public utility holding company, desires
to be able to issue and sell debt securities ("Debt Securities")
under a new indenture ("New Indenture"), which would be between
Consolidated and a major bank yet to be designated.
By order dated April 21, 1993 ("First Order"), Release No.
35-25800, File No. 70-8167, the Securities and Exchange
Commission ("Commission") authorized Consolidated to issue and
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sell on or before June 30, 1995 up to $400,000,000 principal
amount of debentures maturing in not more than thirty years. On
August 24, 1993, Consolidated issued and sold $150,000,000
principal amount of 5-3/4% Debentures Due August 1, 2003
pursuant to the First Order. On December 8, 1993, Consolidated
issued and sold $150,000,000 principal amount of 6-5/8%
Debentures Due December 1, 2013 under the First Order. Both
series of these debenture were issued pursuant to an indenture
dated as of May 1, 1971 ("1971 Indenture") between Consolidated
and Chemical Bank. The expiration date of the First Order was
extended from June 30, 1995 to June 30, 1996 by Commission
supplemental order dated November 21, 1994 ("First Supplemental
Order"), Release No. 35-26165.
By order dated April 14, 1994 (Second Order"), Release No
35-26026, File No. 70-8365, the Commission authorized
Consolidated to issue and sell on or before June 30, 1996 up to
an additional $400,000,000 principal amount of debentures
maturing in not more than thirty years. No debentures have been
issued under the Second Order. The $100,000,000 principal
amount of securities remaining available for issue under the
First Order and the $400,000,000 principal amount of securities
available for issue under the Second Order are hereinafter
referred to as the "Debt Securities."
By the First Supplemental Order in File No. 70-8167 and by
Commission supplemental order dated November 21, 1994 ("Second
Supplemental Order"), Release No. 35-26166, in File No. 70-8365,
Consolidated was authorized to amend the 1971 Indenture
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to reserve the right, without consent of the holders of future
debentures, to change covenants requiring certain income
coverage and debt to equity ratio tests before additional funded
debt (as defined in the 1971 Indenture) could be incurred. Any
need to use such covenant changing authorizations would be
obviated if Consolidated were authorized to use the New
Indenture. The First Order, First Supplemental Order, Second
Order, and Second Supplemental Order are collectively referred
to herein as the "Orders."
In this proceeding, Consolidated is seeking authorization to
use the New Indenture in lieu of the 1971 Indenture with respect
to the remaining unissued aggregate balance of the $500,000,000
debt security authorization granted under the Orders.
Consolidated desires to be able to select whether to use the
1971 Indenture or the New Indenture for an interim period of
time. It would, therefore, retain the right to issue debentures
under the Orders or issue Debt Securities under the New
Indenture until June 30, 1996, provided that the aggregate so
issued would not exceed $500,000,000 in principal amount.
The price, negotiated sales and use of proceeds provisions
in the Orders as applicable to the offer and sale of Debentures
under the 1971 Indenture would also apply to the offer and sale
of Debt Securities under the New Indenture. Accordingly, the
Debt Securities would be sold on or before June 30, 1996, and
would mature in not more than thirty years from date of issue.
The Debt Securities will be sold in one more series at a price,
exclusive of accrued interest, which will be not less than 98%
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nor more than 101% of the principal amount and at an interest
rate which will be a multiple of 1/8, 1/10, or 1/20 of 1%.
Consolidated proposes to issue and sell the Debt Securities
either by competitive bidding or through negotiated public or
private offerings without any additional prior Commission
approval. The interest rate on Debt Securities sold through a
negotiated public or private offering will not exceed 300 basis
point over United States Treasury securities of comparable
maturity.
The proceeds from the sale of the Debt Securities will be
added to Consolidated's treasury fund and subsequently used to
(i) finance, in part, capital expenditures of Consolidated and
its subsidiaries, (ii) finance the purchase of Consolidated's
common stock in the open market, and/or (iii) acquire, retire,
or redeem securities of which Consolidated is an issuer without
the need for prior Commission approval pursuant to Rule 42 under
the Act. The proceeds from the sale of the Debt Securities will
not be used to acquire any interest in an exempt wholesale
generator as defined in Section 32(a)(1) of the Act or any
interest in a foreign utility company as defined in Section
33(a)(3) of the Act.
Consolidated provides funds to its subsidiaries through (i)
open account advances for general corporate purposes, including
gas storage inventories, other working capital requirements and
temporarily for construction until long-term financing is
obtained and/or cash is generated internally, and (ii) long-term
loans and the purchase of subsidiary capital stock to
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finance capital expenditures. Consolidated presently applies
for Commission approval of the financing of the Consolidated
subsidiaries' capital needs on an annual basis, the most recent
authorization being by Commission order dated June 27, 1994,
HCAR No. 26072, File No. 70-8415, which expires on June 30,
1995. It is expected by Consolidated that the order authorizing
such system financing for 1994-1995 would itself be succeeded by
subsequent orders authorizing, on an annual or multi-annual
basis, future Consolidated intra-system financing programs. No
Debt Securities will be issued or sold for the purpose of
financing subsidiary capital needs except as permitted by the
Act or authorized by Commission order under the Act.
Consolidated's purchase of up to 4 million shares of its
common stock through December 31, 1995, is authorized in the
Commission's order dated May 18, 1992, HCAR No. 35-25538, File
No. 70-7948.
II. NEW INDENTURE
A. General Description
The Debt Securities will be issued in one or more series,
under the New Indenture. A draft of the Indenture is filed as
Exhibit A.
Many provisions of the New Indenture, such as redemption
procedures, defaults and remedies, and rights and duties of the
trustee, do not materially vary from similar provisions in the
1971 Indenture. However, the New Indenture
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is more flexible and adaptable to market conditions than the
1971 Indenture.
Even if the Company adopts the New Indenture at this time,
the following restrictive covenants in the 1971 Indenture would
still apply to the Company, unless modified with the approval of
debenture holders, until it retires the last issue outstanding
under the 1971 Indenture.(1) The longest maturity outstanding
under the 1971 Indenture is that of the 8-3/4% Debentures due
October 1, 2019.
Subject Provision
_______ _________
Liens Generally no liens allowed on assets of the
Company unless Debentures equally and
ratably secured; does not apply to purchase
and acquisition liens, assessment and tax
pledges and pledges to stay legal
proceedings (Section 6.04)
Limitation on Debt- The Company and its subsidiaries ("Subs")
CNG and Subsidiaries cannot incur Funded Debt(2) unless during 12
consecutive months out of the last 15 months
consolidated income is equal to 2.5 times
annual interest charges plus Sub preferred
stock dividend requirements, and
consolidated debt and preferred stock will
not exceed 60% of consolidated net tangible
assets ("CNTA"). (Section 6.06)
_______________
(1) Modification of the covenants contained in the 1971 Indenture would
require approval of 66 2/3% in aggregate principal amount of the
outstanding debentures and 66 2/3% in aggregate principal amount of
the debentures of each affected series. Such modification would also
require the approval of the Commission under the Act. The Company
believes that obtaining such consents from debenture holders would be
difficult and expensive, and might prove to be impossible.
(2) Funded Debt is defined in the 1971 Indenture as any indebtedness
maturing by its terms more than one year from the date of its
creation, including indebtedness renewable or extendible at the
Company's option to a date later than one year after its creation.
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Subject Provision
_______ _________
Limitation on Debt- Sub cannot incur Funded Debt to third
Subsidiaries party unless funded debt and preferred stock
of Sub will not exceed 60% of capitalization
of the Sub and funded debt and preferred
stock of all Subs will not exceed 15% of
CNTA. (Section 6.07)
Issue and Sale of Cannot issue or sell voting stock of a
Stock of Subsidiaries restricted Sub(3) unless all such shares
sold, or all of common and 75% of other
voting shares of Sub retained by the Company
and other restricted Subs, or total amount
of securities (other than of restricted
Subs) does not exceed 25% of CNTA. (Section
6.05)
Limitations on The Company cannot pay dividends on capital
Dividends stock if amount paid together with
cumulative past payments from a prior date
(usually around issue date) as to each
series of debentures would exceed amount of
cumulative net income available for
dividends from such date plus an amount
calculated to be free for dividends as of
such date. (Section 6.08)
B. Comparative Analysis of New Indenture with 1971 Indenture
The New Indenture's provisions reflect the modernization of
indenture provisions generally over the past twenty years and
will simplify the Company's corporate housekeeping. For
example, the New Indenture incorporates by reference provisions
of the Trust Indenture Act of 1939, as amended, is expected to
result in substantial savings in printing and trustee
administration costs, simplifies the procedure for
_______________
(3) "Restricted Subsidiary" under the 1971 Indenture means any
corporation all of the common share of which and at least 75% of the
voting shares of which are at the time owned by the Company and/or
another restricted subsidiary.
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authorization and issuance of Debt Securities and provides for
covenant defeasance of Debt Securities.
Setting of Terms
________________
The terms of a specific issue of Debt Securities can be set
under the New Indenture through either a resolution of the Board
of Directors of the Company ("Securities Resolution"), or by a
supplemental indenture. The New Indenture enumerates 25
variable terms, such as the principal amount, interest rate,
redemption terms, denominations, events of default and the like,
which may be included as part of the terms of a new issue, and
permits other terms to be included or excluded in the
resolutions or supplemental indenture authorizing a particular
series of securities.
The 1971 indenture allows only a limited number of terms to
vary by series, including the interest rate, principal amount,
maturity and interest dates, and redemption and sinking fund
provisions.
Types of Securities
___________________
The New Indenture permits the Company to issue a wide
variety of unsecured debt securities. Securities issuable can
include, in addition to notes and debentures with terms similar
to those the Company has issued in the past, medium-term notes,
securities having a low or zero coupon (which may be
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issued with original issue discount), securities as to which
payments of interest or principal are based on a formula or
index, and securities on which payment of interest or principal
are denominated in a foreign currency or currencies. In theory,
any combination of the above provisions could be included in a
single series of securities which, under current practice, would
be called various names such as "notes", "debentures" or
"medium-term notes". The New Indenture also permits any series
of securities to be issued in certificated form, in "global"
form (i.e., transferable only by book-entry on the records of a
securities depository such as The Depository Trust Company),
uncertificated securities, and bearer securities (if such
securities are sold outside the United States).
The 1971 Indenture permits the issuance of only traditional
type registered debentures.
Lien Restrictions
_________________
The New Indenture, unless the Securities Resolution provides
otherwise, generally prohibits liens on property of the Company,
and of any of its wholly-owned subsidiaries having substantially
all of its assets in the United States ("Restricted
Subsidiary"), which property ("Principal Property") is used in
the transmission, distribution,
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exploration or production of natural gas in the United States,
the net depreciated book value of which exceeds 3% of the
Company's consolidated net tangible assets ("CNTA"). However,
property certified by the Company as not of material importance
to the total business of the Company will not be Principal
Property. The New Indenture enumerates 15 categories of
permissible liens ("Permitted Liens") generally of a type
normally arising in the ordinary course of business. Liens in
addition to Permitted Liens are allowed under the New Indenture
if the lien equally and ratably secures the Debt Securities
issued under the New Indenture and all debt for borrowed money
not subordinated to the Debt Securities, or if the lien arises
in connection with acquisition or improvement of property, a
merger or consolidation, pre-existing or substituted liens,
intra-affiliate transactions, production payments and other
transactions typically exempt from an indenture no-pledge
clause. Additionally, aggregate liens are allowed on Principal
Property to the extent debt secured does not exceed 10% of CNTA.
The New Indenture contains restrictions on liens because the
Company has been advised, and has learned from its survey of
debt instruments of issuers who compete for the same investors
as the Company, that such investors require a lien restriction
covenant of this sort in the debt instruments in which they
invest. The lien restriction covenant is drafted
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with a view to striking a balance between investors' desire to
have some covenant of this type in an investment grade debt
indenture and the Company's need for flexibility to impose liens
on its property if doing so is reasonable from a business point
of view, or if liens arise by operation of law in circumstances
over which the Company has no control.
The 1971 Indenture has a somewhat similar lien provision,
namely Section 6.04, although as such Section is drafted it
reflects a less sophisticated understanding of the business
operations issues created by liens than investors now have.
Like Section 4.04 in the New Indenture, Section 6.04 prohibits
the Company from imposing liens on its property without equally
or ratably securing Debentures issued under the 1971 Indenture.
A list of exceptions from this requirement is set forth in
Section 6.04 which generally includes purchase money mortgages,
liens on property acquired and certain other liens which arise
in the course of the Company's business. The New Indenture
similarly contains a list of exceptions from the general
restriction it imposes. The length of the list in the New
Indenture reflects an attempt to clarify ambiguities and
interpretive issues that arise under a more broadly drafted
provision such as that found in the 1971 Indenture.
Working together, the two aspects of the lien covenant in
the New Indenture are intended to protect investors by requiring
the Company to equally and ratably secure debt issued under the
New Indenture in the same manner as other secured
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debt that the Company might issue, while allowing such
exceptions to this general rule as are necesssary to permit the
Company operational flexibility under the covenant.
Sale and Leaseback Restrictions
_______________________________
Under the New Indenture, unless the Securities Resolution
provides otherwise, the Company and any Restricted Subsidiary
cannot enter into a sale-leaseback transaction with respect to
any Principal Property acquired or placed into service more than
180 days before inception of the lease unless (i) the term is
three years or less, (ii) the lease is between the Company and a
Restricted Subsidiary, (iii) a lien could be created at least
equal to discounted present value of net rent for the remaining
term of the lease ("Attributable Debt") or (iv) long-term debt
at least equal to the Attributable Debt is retired. This
covenant works together with the covenant restricting liens. It
treats transactions in which the Company sells and leases back a
principal property, which it has owned for 180 days or longer,
as the functional equivalent of a secured financing. The
objective of the covenant is to provide some measure of
assurance to holders of unsecured debt that the Company will not
pledge significant assets for financing purposes through the use
of the sale and lease-back technique in a manner not otherwise
contemplated by the covenant which restricts the imposition of
liens on Company assets.
Neither Consolidated nor its subsidiaries have engaged in
sale and leaseback transactions.
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The 1971 Indenture has no provision dealing with sale and
leaseback.
Additional Debt Incurrence Limitations
______________________________________
The New Indenture has no restrictions on incurrence of
unsecured debt, and secured debt could be incurred so long as
the lien restrictions in the New Indenture allowed the security
interest with respect to such debt or the Debt Securities under
the New Indenture were equally and ratably secured.
The 1971 Indenture provides that Funded Debt cannot be
incurred and subsidiary preferred stock cannot be issued unless
(i) the consolidated income available for interest and
subsidiary preferred stock dividends of the Company and its
subsidiaries for any 12 consecutive months within 15 months
immediately preceding the date additional funded debt is
incurred is not less than 2-1/2 times the sum of (a) total
annual interest charges and (b) total subsidiary preferred stock
dividends, assuming the incurrence of such additional Funded
Debt or issuance of such preferred stock, as the case may be,
and (ii) after giving effect to the incurrence of the additional
funded Debt and issuance of preferred stock, the sum of the (a)
outstanding consolidated debt of the Company and its
subsidiaries and (b) amount of outstanding subsidiary preferred
stock shall not be more than 60% of the CNTA of the Company and
its subsidiaries. The 1971 Indenture further provides that a
subsidiary of the Company cannot incur Funded Debt or issue
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preferred stock to a third party unless Funded Debt and
preferred stock of the subsidiary will not exceed 60%
of the total capitalization of the subsidiary, and the principal
amount of Funded Debt and amount of preferred stock of all
subsidiaries of the Company shall not exceed 15% of CNTA.
Issue and Sale of Stock of Subsidiaries
_______________________________________
The New Indenture has no restriction on the issuance and
sale of voting stock of any subsidiary.
The 1971 Indenture defines a restricted subsidiary ("1971
Restricted Subsidiary") as a subsidiary all of the common stock
of which and at least 75% of the voting shares of which are
owned by the Company and/or other 1971 Restricted Subsidiaries.
The 1971 Indenture prohibits the issuance and sale of voting
shares of a 1971 Restricted Subsidiary unless (i) all of such
shares are sold, (ii) the subsidiary remains a 1971 Restricted
Subsidiary, or (iii) after giving effect to such issuance and
sale, the total amount of securities, other than securities of
1971 Restricted Subsidiaries, shall not exceed 25% of CNTA as
defined in the 1971 Indenture.
Limitations on Dividends
________________________
There are no limitations on the payment of dividends in the
New Indenture.
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The 1971 Indenture limits the cumulative payment of
dividends or other distribution upon the Company's capital
stock, or the acquisition of its capital stock, to an amount
which cannot exceed, in the case of each series of debentures,
the consolidated net income available for dividends after
debenture issue date plus an amount of consolidated retained
earnings calculated to be free for dividends as of such issuance
date.
Defeasance
__________
The New Indenture permits the Company to, at any time,
terminate its covenant and payment obligations with respect to a
series of Debt Securities ("legal defeasance") or to terminate
its obligations only with respect to covenants applicable to the
series ("covenant defeasance"), in each case, upon deposit of
U.S. government obligations in trust for the payment of such
series of Debt Securities and satisfaction of certain other
conditions. The covenant defeasance option may, under
applicable tax laws, permit the Company to defease Debt
Securities in a broader range of circumstances.
The 1971 Indenture permits legal defeasance only and permits
defeasance only within six months of maturity or redemption of
an issue of debentures.
C. Business Reasons for New Indenture
Having considered the terms of the 1971 Indenture, in light
of a number of factors mentioned below, Consolidated has
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concluded that the restrictions contained in the 1971 Indenture
burden the Company without producing any apparent benefit to it
or investors or consumers or any effect on the public interest.
The present net earnings test, net tangible assets test,
capitalization test, dividend restriction and other terms of the
1971 Indenture are archaic from the point of view of what the
financial markets require for securities similar to the
Company's. Investors do not require the inclusion of financial
covenants in the indentures that govern new issues of investment
grade rated debt, such as the Company's. This is evidenced by
what other issuers in the natural gas industry presently
include, or do not include, in their debt instruments. A survey
of 19 major natural gas companies including Consolidated
indicates that all but Consolidated and another company (which
is experiencing financial distress) have eliminated any debt to
capitalization, fixed charge and dividend covenants. The other
18 companies in the survey are either exempt holding companies
under the Act or nonjurisdictional under the Act due to the
absence of ownership of any utility company subsidiaries.
Consolidated has, in the 1971 Indenture, the most onerous
indenture of all 19 companies. Although Consolidated is in full
compliance with the provisions in its current indenture and has
repeatedly expressed commitment to maintaining strong financial
integrity, continued adherence to its present indenture places
Consolidated at a competitive disadvantage to its peer group.
This is particularly inappropriate at this time given the
changing dynamics of the natural gas industry, the opportunities
that
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exist in business, and the evolving and volatile nature of the
financing markets. In the event that investor requirements
change in the future, however, covenant protection can be
inserted on an issue by issue basis at such time. Moreover, if
Consolidated's credit standing were to deteriorate notably,
investors could be expected to insist upon provisions giving
what the market considers appropriate protection.
The Company's credit and ability to raise debt financing
would not be adversely affected if the provisions in the 1971
Indenture were excluded from the New Indenture. Descriptions of
the New Indenture have been given to four credit rating agencies
that rate the Company's debt securities; they have indicated
that the omission of such covenants would not itself adversely
affect the ratings of the Company's securities.
Further, the New Indenture would result in a reduction of
costs associated with the sale and issuance of Debt Securities.
If the New Indenture were adopted by Consolidated, it is
estimated that there could be a cost savings of as much as
$40,000 with respect to each issuance of Debt Securities, and a
savings of approximately $9,000 per year in annual charges for
each series of Debt Securities issued. The Company as of
December 31, 1994 has 8 issues of debentures outstanding which
require the preparation of annual compliance materials. These
cost savings are expected to result from elimination of the need
to prepare a supplemental indenture and covenant compliance
certificate for each issue of debentures and, when book-entry
only issuances are made, elimination of engraved
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debenture certificates and costs associated with the
registration of transfers of certificates.
D. Section 7(d) Standards
Section 7(d) of the Act provides, in relevant part, that the
Commission shall permit a declaration to become effective unless
it finds that:
(1) the security is not reasonably adapted to the
security structure of the declarant and other companies in
the same holding company system;
(2) the security is not reasonably adapted to the
earning power of the declarant;
(3) financing by the issue and sale of the particular
security is not necessary or appropriate to the economical
and efficient operation of a business in which the applicant
lawfully is engaged or has an interest;
. . . .
(6) the terms and conditions of the issue or sale of the
security are detrimental to the public interest or the
interest of investors or consumers.
The Company proposes to issue Debt Securities under the New
Indenture. As discussed above, the New Indenture has been
prepared to take advantage of modern procedures for securities
issuance. As also indicated above, the New Indenture will not
<PAGE> 20
contain the following substantive covenants contained in the
1971 Indenture(4):
* limitation on incurrence of funded debt by the
Company to 60% of consolidated tangible net assets
and subject to a 2.5:1 net earnings test
* limitation of subsidiary debt to 60% of the total
capitalization of such subsidiary and of subsidiary
preferred stock to 15% of consolidated net tangible
assets of such subsidiary
* limitation on dividends and other distributions to
stockholders of the Company
* limitation on ownership by the Company and its
subsidiaries of less than wholly owned subsidiaries
to not more than 25% of the consolidated tangible
net assets of the Company(5)
In the Company's view, the absence of these provisions from
the New Indentures do not warrant a finding by the Commission
under Section 7(d) that the Company not be permitted to issue
securities thereunder. That is, none of the omitted provisions
are, in the view of the Company, necessary to meet the standards
of Section 7(d) of the Act. As discussed above, the
_______________
(4) The New Indenture will permit the inclusion of any of these
covenants, or any other covenant, with respect to a specific series
of securities merely by including the applicable covenant in the
authorization of the series of securities.
(5) As noted above, these covenants will continue to restrict the
Company, unless the 1971 Indenture is amended with the consent of
debenture holders, until all debentures issued under the 1971
Indenture are retired. The longest maturity outstanding are the
8-3/4% Debentures due October 1, 2019.
<PAGE> 21
Company believes, and its rating agencies have confirmed, that
the omission of such covenants will not, of itself, affect the
Company's credit ratings. The Company also believes, based on
the advice of investment bankers, that omission of such
covenants will not of itself increase its cost of borrowing.
The limitations on debt and restrictions on dividends
contained in the 1971 Indenture parallel the provisions that, in
the past, the Commission has required to be included in mortgage
bonds issued by utility companies that are subsidiary companies
of a registered holding company pursuant to its Statement of
Policy on First Mortgage Bonds, HCAR NO. 13105 (February 16,
1956) (the "SOP"). Among other things, the SOP requires that
additional bonds be issuable in an amount not in excess of 60%
of property additions and makes issuance of bonds subject to a
2:1 net earnings test. The Company concurs with
the Commission's belief (as stated in HCAR No. 25573 (July 7,
1992)) that the broad dissemination of information concerning
issuers such as the Company and their proposed securities
issuances as mandated by the disclosure obligations under its
Securities Act of 1933 and the Securities Exchange Act of 1934,
together with the sophisticated markets which prescribe the
nature and extent of the covenants and restrictions needed to
successfully sell debt securities and preference stock, have
eliminated this need for regulations (such as the SOP) created
to protect investors and the public from conditions that existed
when the Act was adopted.
Over time, the Commission has authorized a number of
departures from the SOP and a parallel Statement of Policy on
<PAGE> 22
Preferred Stock, HCAR No. 13106 (February 16, 1956) ("Preferred
Stock SOP") without making an adverse finding under Section
7(d). See e.g., Columbus Southern Power Company, HCAR No. 25060
(March 20, 1990) (substantially all provisions in the Preferred
Stock SOP waived); National Fuel Gas Company, HCAR No. 25116
(July 24, 1990). The Commission and the Staff have recognized
that the SOP is "anachronistic" and its provisions unnecessary
to the protection of investors.(6) For example,
the Commission no longer requires compliance with the SOPs as a
condition to the exemption from Section 6(a) of the Act for the
issuances of securities by public utility subsidiaries of
registered holding companies under Rule 52 (7), and has proposed
to eliminate any requirement to comply with the SOP or Preferred
Stock SOP in connection with financing by non-utility
subsidiaries of registered holding companies. See HCAR No.
25574 (July 7, 1992).
The imposition of rigid indenture covenants has in certain
circumstances the potential of working against the interests of
_______________
(6) "The SOPs, published by the Commission's Staff nearly 25 years ago,
are anachronistic in today's financial markets. . . . On many
occasions, the Commission has granted deviations from the five-year
limitation to permit an offer of first mortgage bonds to be marketed
successfully (footnote omitted). Other provisions of the SOPs that
appear no longer useful or that may present a hindrance to the
raising of capital by the registered holding-company system focus on
the dividend limitations, allowable funded debt as a percentage of
bonded debt, and short-term debt limitations." HCAR No. 25059 (March
19, 1990).
(7) The requirement to comply with the SOPs together with five other
requirements were deleted as conditions to the use of Rule 52 in HCAR
No. 25573 (July 7, 1992). While Rule 52 does not apply to the
Company, the Company believes that the position taken by the
Commission with respect to amending the rule is illustrative of, and
analogous to, the Company's point that the provisions of its 1971
Indenture which parallel certain provisions in the SOPs should no
longer be imposed on the Company.
<PAGE> 23
the Company, its investors and consumers. This can occur when
the Company reaches the limits of what it is able to do under
the 1971 Indenture and yet finds itself with financing needs
which must be met in some way. For example, the Company might
be in a position where it could not issue additional debt under
the 1971 Indenture but could issue preferred stock. A preferred
stock issuance would meet the financing requirement the Company
faced, but at a much greater cost. The greater cost would arise
from a dividend rate higher than what the interest rate would
have been on debt, and also because the dividends on preferred
stock are not deductible for tax purposes while the interest on
debt would have been so deductible. The Company believes it to
be unreasonable, from a business point of view, to be forced
into higher cost financing by virtue of inflexible Indenture
provisions.
The Company notes that even absent the foregoing
restrictions in the New Indenture, the Commission and the Staff
of the Office of Public Utility Regulation ("Staff") have
statutory authority and ample opportunity to maintain
surveillance of the Company's financial condition and the
suitability of its outstanding securities in light of the
requirements of Section 7(d). The Company files with the
Commission many periodic reports (Forms 10-K, 10-Q and U5S)
which include financial statements. The Company and its
subsidiaries will also continue to file Forms U-1 in connection
with almost all of their financing activities, and are now
filing 14 certificates of notification on a quarterly basis to
<PAGE> 24
keep the Staff apprised of developments under currently
outstanding authorizations granted under the Act.
The Commission's orders authorizing the Company to issue
debentures have traditionally been effective for a period of two
years. The Consolidated system companies have been filing a
Form U-1 annually for authorization of intra-system financings.
Other financings would generally be the subject of a specific
Form U-1 filing and Commission order. The Commission thus has
an on-going ability to pass upon securities issuances by the
Company and its subsidiaries and the compliance of such
issuances with the standards of Section 7 of the Act. In
connection with such procedures, the Commission will have the
statutory authority to impose such conditions on the Company's
issuances of securities in the future as it then deems
appropriate under the circumstances.(8) The Company believes,
therefore, that the inclusion of issuance and other restrictions
of the type set forth in its 1971 Indenture is not required in
order for the New Indenture to meet the standards of Section
7(d).
An analysis of each of the relevant subsections of Section
7(d) follows.
Section 7(d)(1)
_______________
Section 7(d)(1) permits the Commission to deny effectiveness
of an application made under Section 6(a) if it
_______________
(8) The Company believes that no such conditions should be imposed by the
Commissions in connection with the authorization requested in this
application.
<PAGE> 25
relates to a security that "is not reasonably adapted to the
security structure of the declarant and other companies in the
same holding company system." The retention of restrictive
covenants that are in the 1971 Indenture but not in the New
Indenture is not necessary to assure that the Debt Securities
are reasonably adapted to the security structure of Consolidated
and the other companies in the Consolidated System. The
Company's 1971 Indenture limits funded debt to 60% of total
capitalization. The SOP limits issuance of additional mortgage
bonds, except refundings, to 60% of unbonded property. The
Company's covenant is more onerous since it, and the
corresponding limitation on subsidiary debt, limit all debt of
the Company. The SOP provision limits only issuance of bonds
under that mortgage.
The Commission in numerous financing orders has recognized
that the maximum 65% debt and minimum 30% equity standards for
capitalization of holding companies and their subsidiary
companies is a guideline that may be departed from in
appropriate circumstances. See e.g., Eastern Utilities
Associates, Inc., HCAR 24879 (May 5, 1989) (capital structure
consisting of 80% debt, 15% preferred stock and 5% common stock
approved for generating subsidiary; temporary drop of
consolidated equity of regulated holding company system to 28%
approved); Columbia Gas System, Inc., HCAR No. 23971
(December 30, 1985) (Commission approved issuance and sale of
first mortgage bonds by transmission company and guaranty
thereof by parent). Although the Company has no present
<PAGE> 26
intention to incur debt beyond the 60% of total capitalization
limit contained in the 1971 Indenture, it believes that it
should not be precluded from doing so, in appropriate
circumstances, by indenture covenants which are not required by
the marketplace nor productive of savings in the Company's cost
of money.(9) The Company believes that debt to equity ratios
remain a significant factor in the ratings given its debt
securities by rating agencies. The Company therefore seeks to
maintain sufficient equity to continue its investment grade debt
ratings.
However, fixing debt to equity ratios in a form of indenture
creates an inflexible set of ground rules which do not allow for
even temporary variations when business reasons warrant them.
In the event legitimate business needs would require the Company
temporarily to incur debt in excess of the 60% ratio, it could
not do so even if it could soon restore its debt to equity ratio
below the 60% level in a manner which would not jeopardize its
investment grade rating. The Company does not believe such an
incurrence of temporary debt would be inconsistent with its
overall intention to maintain a conservative debt to equity
ratio which would permit it to keep an investment grade debt
rating. Rather in the Company's view, it should have
flexibility to so vary its debt to equity ratio if it believes
doing so is in its best business interests without running afoul
of rigid Indenture provisions. In addition, as noted above,
Commission approval will continue
_______________
(9) After giving effect to the incurrence of the $500 million of Debt
Securities requested to be authorized in this application, the
Company's Funded Debt would represent approximately 43% of total
capitalization.
<PAGE> 27
to be required to issue debt securities in the future. The
Commission will, of course, have the right to examine the
Company's capital structure in the context of any financing
declaration.
For much the same reasons, the limitation on subsidiary debt
contained in the 1971 Indenture is not necessary to insure an
appropriate capital structure for the Company system.
Incurrence of long-term debt by each of the Company's public
utility subsidiaries except Hope Gas, Inc. is subject to state
utility commission approval.(10) The suitability of utility
company capital structure is also considered by the state
utility commissions in rate proceedings. Issuances of
securities and other debt financings by the Company's
non-utility subsidiaries may be subject to Section 6(a) of the
Act and require, except as exempted by Rule 45 or Rule 52 (11),
that such subsidiary file a declaration with the Commission and
receive its approval before incurring such debt.
_______________
(10) Ohio Rev. Code Section 4905.40 (1991); 66 Pa. C.S.A. Section 1901 -
1905 (purdons); Va. Code Ann. Section 56-56. Hope Gas, Inc.'s
financings are reviewed by the Public Service Commission of West
Virginia in connection with rate proceedings.
(11) As noted above for illustrative purposes, the Commission has proposed
amendments to Rule 52 that would exempt many financings by
subsidiaries not subject to state utility commission jurisdiction.
HCAR No. 25574 (July 14, 1992). In proposing the amendments, the
Commission concluded that the exemption was justified "because of the
extensive reporting requirements imposed by the Act and other federal
securities laws, and the far greater scrutiny of reporting companies
generally since the passage of the Act fifty-seven years ago." Id.
Until such amendments are adopted the Commission will continue to
require applications to be filed with respect to all non-utility
subsidiary financings.
<PAGE> 28
Section 7(d)(2)
_______________
Section 7(d)(2) requires that the Commission consider
whether the securities to be issued are "not reasonably adapted
to the earning power of the (issuer)". The New Indenture would
not in any way cause the Debt Securities to be not reasonably
adapted to Consolidated's earning power. In the past, the
Commission has looked primarily at fixed charge coverage ratios
to determine whether a security meets this earning power test.
This test has, however, been applied flexibly by the Commission
in appropriate circumstances. For example, in Eastern Utilities
Associates, HCAR 24641 (May 12, 1988) the Commission approved
the issuance of mortgage bonds by EUA Power, which had no
current cash flow except payments under a tax sharing agreement,
on the basis of expected revenues once the Seabrook plant became
operational.
The Company's ratio of earnings to fixed charges is
disclosed in its periodic filings under the Securities Exchange
Act of 1934, as amended, and in filings under the Securities Act
of 1933 in connection with each offering of debentures. In
addition, earnings coverage of fixed charges plays a substantial
part in determining the rating afforded the Company's debentures
by the various rating agencies. All information material to an
investor's assessment of whether the Company can adequately
cover its fixed charge obligations is available to investors in
the Company's public filings with the Commission, which
information the Company believes is
<PAGE> 29
sufficient for an investor to make its own decision as to the
Company's credit-worthiness. The Commission, of course, will
have authority to impose restrictions on the issuance of
securities as to any specific financing applied for if it
believes circumstances at the time warrant restrictions.
Since the rates paid by consumers are based on the cost of
providing service to them, the impact of new issuances of debt
securities on the earning power of the Company should not affect
consumers. For a discussion of the interest of consumers in the
cost of the Company's debt financing see the text under the
heading "Section 7(d)(6)", below.
Section 7(d)(3)
_______________
Section 7(d)(3) permits the Commission to deny effectiveness
of a declaration if the issue of the Security is not necessary
or appropriate to the economical and efficient operation of the
(issuer's) business. There is no basis for such a finding here
with respect to the New Indenture. The Company has historically
financed the operations of the system companies through the
issuance of unsecured debentures by the holding company. After
consultation with professional advisers and rating agencies, the
Company believes that the issuance of Debt Securities under the
New Indenture will not, in itself, result in any increase in the
Company's cost of money in debt financings. Moreover, the
Company expects to realize administrative cost savings by using
the New Indenture, including reduced trustee's and accountant's
fees, which over
<PAGE> 30
time are expected to be substantial. As already indicated
above, the Company's preliminary estimates indicate that it
should be able to save approximately $40,000 per issue of
initial issuance costs and approximately $9,000 per issue of
annual administrative costs.
Section 7(d)(4)
_______________
Section 7(d)(4) permits the Commission to deny effectiveness
of a declaration if the fees, commissions, or other remuneration
paid, directly or indirectly, in connection with the sale, or
distribution of the Securities are not reasonable. The Company
believes that, to the extent such amounts can be estimated at
present, use of the New Indenture should not provide a basis for
such finding. As noted below in this application, the Company
estimates that use of the New Indenture is expected to reduce
issuance costs by up to $40,000 per issue, assuming the use of
global securities and no supplemental indenture. See, "Item 2,
Fees, Commissions and Expenses." The amount of commissions
which may be incurred with issuances under the New Indenture is
not presently determinable. However, the Company expects that
such commissions will be at the rates customarily charged.
Section 7(d)(6)
_______________
Section 7(d)(6) permits the Commission to deny effectiveness
of an application made under Section 6(a) if "the
<PAGE> 31
terms and conditions of the issue and sale of the security are
detrimental to the public interest or the interest of investors
or consumers." The Company does not believe that either the
inclusion or exclusion of the type of restrictions presently in
its 1971 Indenture protects investors or consumers, and
exclusion of such provisions is in no way detrimental to the
public interest. Investors and consumers are best protected by
the Company's interest in maintaining its access to capital
markets at the lowest cost practicable, and its related interest
in obtaining a credit rating for its securities which assists in
achieving such access. By adhering to the demands of the market
place, the Company consistently takes those steps which are
necessary so as to be able to attract investors willing to
provide it with relatively low-cost financing. This in turn
requires the Company to be protective of investors since to
obtain attractive financing the Company must, among other
things, refrain from becoming over-leveraged both at the holding
Company and the subsidiary levels. Furthermore, the Company
believes that today's sophisticated marketplace is able to
demand inclusion of covenants in securities, whether debt or
preferred stock, at the time such securities are marketed.
Failure to include covenants required by the market at the time
of issuance may result in increased financing costs or limited
access to the market. The ultimate beneficiaries of the
Company's concerns in this regard are the Company's system
company consumers whose utilities are able to obtain low-cost
financing from the Company. Rates paid by consumers are set, in
part, based on the cost of providing services. Costs
<PAGE> 32
includable for such purposes include, among other things, the
cost of capital including debt. Since the Company is an
important source of capital for its subsidiaries, subsidiary
borrowings from the Company bear an interest cost which is
directly related to the Company's cost of raising funds. The
subsidiaries' borrowing cost is in turn passed on to their
customers in rates. Thus, the lower the Company's borrowing
costs, the lower the subsidiaries' borrowings cost will be to
the extent they borrow from the Company. Lower borrowing cost
at the Company level, therefore, is reflected in lower costs
borne by consumers through rates.
The Company, therefore, believes that issuing Debt
Securities without including in the New Indenture limitations on
incurrence of additional unsecured debt or a dividend covenant
is not detrimental to the Company system companies' consumers or
to investors in those Debt Securities. If in the future the
market place requires certain restrictions be agreed to by the
Company to obtain financing at favorable rates, such
restrictions may be included on an issue-by-issue basis.
In addition, system consumers will be protected by state
utility regulators' jurisdiction over the financing of the
system public utility companies, the use of proceeds of
financings, and over the rates charged to consumers. Effective
regulation of utility companies at the state level today largely
eliminates the risk of the types of abuses which prevailed prior
to passage of the Act and which Section 7 was, in part, intended
to eliminate. In adopting Rule 52 and exempting from the
requirements of Section 6(a) and 7 issuances
<PAGE> 33
of securities by public utility companies if such issuance has
been approved by a state public utility commission, the
Commission recognized that state public utility commissions have
the adequate ability to regulate securities issuances for the
protection of consumers.
III. RULE 53 SATISFIED
Rule 54 promulgated under the Act states that in determining whether to
approve the issue or sale of a security by a registered holding company for
purposes other than the acquisition of an electric wholesale generator ("EWG")
or a foreign utility company ("FUCO"), or other transactions by such registered
holding company or its subsidiaries other than with respect to EWGs or FUCOs,
the Commission shall not consider the effect of the capitalization or earnings
of any subsidiary which is an EWG or a FUCO upon the registered holding company
system if Rules 53(a), (b) or (c) are satisfied. Currently Consolidated owns
indirectly a 1% general partnership and a 34% limited partnership interest in
Lakewood Cogeneration, L.P. ("Lakewood"), an EWG. On November 30, 1994, the 1%
general partnership interest in Lakewood was
acquired by CNG Power Services Corporation, an EWG and a newly-formed
wholly-owned subsidiary of Consolidated, from CNG Energy Company, another
wholly-owned subsidiary of Consolidated, in a transaction exempt under Rule
43(b)(2).
Consolidated does not own any interests in a FUCO. Consolidated believes that
Rule 53(a), (b) and (c) are satisfied in its case as follows.
Fifty percent of Consolidated's retained earnings as of September 30, 1994
was $702,436,000; Consolidated's aggregate investment (as defined in Rule
53(a)(l)(i)) in Lakewood on such date and in both its EWGs as of the date of
<PAGE> 34
filing of this Application-Declaration is estimated to be approximately
$18,000,000, thereby satisfying Rule 53(a)(l). Consolidated and its
subsidiaries maintain books and records to identify the investments in and
earnings from its EWGs in which they directly or indirectly hold an interest,
thereby satisfying Rule 53(a)(2). Employees of Consolidated's domestic
public-utility companies do not render services, directly or indirectly, to the
EWGs in the Consolidated System, thereby satisfying Rule 53(a)(3). No
application for EWG financing has been filed with the Commission since adoption
of Rule 53; Rule 53(a)(4) is correspondingly inapplicable at this time.
None of the conditions described in Rule 53(b) exist with respect to
Consolidated, thereby satisfying Rule 53(b) and making Rule 53(c) inapplicable.
(b) Describe briefly, and where practicable state the approximate
amount of, any material interest in the proposed transaction, direct or
indirect, of any associate company or affiliate of the applicant or declarant
or any affiliate of any such associate company.
None, except as set forth in Item 1(a) above.
(c) If the proposed transaction involves the acquisition of
securities not issued by a registered holding company or a subsidiary thereof,
describe briefly the business and property, present or proposed, of the issuer
of such securities.
Inapplicable.
(d) If the proposed transaction involves the acquisition or
disposition of assets, describe briefly such assets, setting forth original
cost, vendor's book cost (including the basis of determination) and applicable
valuation and qualifying reserves.
Inapplicable.
<PAGE> 35
Item 2. Fees, Commissions and Expenses
______________________________
(a) State (1) the fees, commissions and expenses paid or incurred,
or to be paid or incurred, directly or indirectly, in connection with the
proposed transaction by the applicant or declarant or any associate company
thereof, and (2) if the proposed transaction involves the sale of securities
at competitive bidding, the fees and expenses to be paid to counsel selected
by applicant or declarant to act for the successful bidder.
The following is an itemized statement of the estimated
amounts of all expenses in connection with the issuance of a
$200,000,000 segment of Debt Securities in a single transaction.
The first column shows the estimated costs if the 1971 Indenture
were used; the second column shows estimated costs under the New
Indenture assuming the use of global securities and no
supplemental indenture. The estimated aggregate fees and
expenses for offerings of Debt Securities would accordingly be
two and one half the $296,973 total shown in the table, or a
total of $742,433.
1971 New
Indenture Indenture
_________ _________
Filing Fees, Securities and Exchange
Commission $ 69,473 (12) $ 69,473 (12)
Printing of Registration Statement,
Prospectus, Supplemental Indenture
(if any), Definitive Debt Certificates
(if any), and Other Miscellaneous Papers 60,000 30,000
______________________
(12) The $69,473 consists of a two-fifths allocation of the sum of (i)
one-fourth of the total $125,000 filing fee paid in connection with
the Form S-3 filing (Registration Statement No. 33-49469); (ii) the
$137,932 filing fee paid in connection with the Form S-3 filing
(Registration Statement NO. 33-52585); (iii) one-fourth of the
$2,000 filing fee paid in connection with File No. 70-8167; (iv) the
total $2,000 filing fee paid in connection with File No. 70-8365;
(v) the total $2,000 filing fee paid in connection with this
Form U-1.
<PAGE> 36
1971 New
Indenture Indenture
_________ _________
Trustees Acceptance and Other Charges 7,000 3,000
Legal Fees of Counsel for the Trustee 3,500 1,000
Independent Accountants' Fees and Expenses 40,000 40,000
Rating Fees (Moody's Investors Service, Inc.,
Standard & Poor's Corporation, Duff and
Phelps, Inc.) 130,500 130,500
Blue Sky Fees 8,000 8,000
Service Charges, Consolidated Natural Gas
Service Company, Inc. 15,000 13,000
Other Miscellaneous Expenses 3,500 2,000
________ ________
Total Expenses $336,973 $296,973
======== ========
(b) If any person to whom fees or commissions have been or are to be
paid in connection with the proposed transaction is an associate company or an
affiliate of the applicant or declarant, or is an affiliate of an associate
company, set forth the facts with respect thereto.
The charges of Consolidated Natural Gas Service Company,
Inc., a subsidiary service company, for services on a cost basis
(including regularly employed counsel) rendered in connection
with the preparation of this Declaration to the Commission on
Form U-1, the Registration Statements filed or to be filed under
the Securities Act of 1933, the New Indenture, any supplemental
indenture(s) and other related documents and papers, are
disclosed above.
<PAGE> 37
Item 3. Applicable Statutory Provisions
_______________________________
(a) State the sections of the Act and the rules thereunder believed
to be applicable to the proposed transaction. If any section or rule would be
applicable in the absence of a specific exemption, state the basis of
exemption.
Sections 6(a) and 7 of the Act are considered applicable to
the issuance and sale of the Debt Securities by Consolidated.
(b) If an applicant is not a registered holding company or a
subsidiary thereof, state the name of each public utility company of which it
is an affiliate or of which it will become an affiliate as a result of the
proposed transaction, and the reasons why it is or will become such an
affiliate.
Inapplicable.
Item 4. Regulatory Approval
___________________
(a) State the nature and extent of the jurisdiction of any State
commission or any Federal commission (other than the Securities and Exchange
Commission) over the proposed transaction.
None.
(b) Describe the action taken or proposed to be taken before any
commission named in answer to paragraph (a) of this item in connection with
the proposed transaction.
None.
<PAGE> 38
Item 5. Procedure
_________
(a) State the date when Commission action is requested. If the date
is less than 40 days from the date of the original filing, set forth the
reasons for acceleration.
It is requested that the Commission permit this Declaration
to become effective by order issued by February 28, 1995 or at
the earliest possible date, so that Consolidated may obtain the
benefits of using the New Indenture as soon as possible. It is
further requested that the expiration date of any order issued
be June 30, 1996.
(b) State (i) whether there should be a recommended decision by a
hearing officer, (ii) whether there should be a recommended decision by any
other responsible officer of the Commission, (iii) whether the Division of
Corporate Regulation may assist in the preparation of the Commission's
decision, and (iv) whether there should be a 30-day waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed with
respect to the proposed transaction. The Office of Public
Utility Regulation may assist in the preparation of the
Commission's decision. There should be no 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
_________________________________
The following exhibits and financial statements are made a part of
this statement.
<PAGE> 39
(a) Exhibits
________
A - Form of Indenture.
B - Standard Purchase Agreement Provisions - Debt Securities
including Form of Purchase Agreement.
C - Form S-3 Registration Statement. (Incorporated by
reference to Registration Statement No. 33-49469
filed via EDGAR on April 6, 1993)
D - Form S-3 Registration Statement. (Incorporated by
reference to Registration Statement No. 33-52585
filed via EDGAR on March 9, 1994)
F - Opinion of Counsel.
H - Form of Proposed Notice pursuant to Rule 22(f).
(b) Financial Statements
____________________
(Index included in Financial Statements annexed hereto.)
Item 7. Information as to Environmental Effects
_______________________________________
(a) Describe briefly the environmental effects of the proposed
transactions in terms of the standards set forth in Section 102(2)(C) of the
National Environmental Policy Act (42 U.S.C. 4312(2)(C)). If the response to
this item is a negative statement as to the applicability of Section 102(2)(C)
in connection with the proposed transaction, also briefly state the reasons
for that response.
As more fully described in Item 1, the proposed transactions
subject to the jurisdiction of this Commission relate solely to
financing proposals and involve no major federal action
significantly affecting the human environment.
(b) State whether any other federal agency has prepared or is
preparing an environmental impact statement ("EIS") with respect to the
proposed transaction. If any other federal agency has prepared or is
preparing an EIS, state which agency or agencies and indicate the status of
that EIS preparation.
None.
<PAGE> 40
SIGNATURE
_________
Pursuant to the requirements of the Public Utility Holding Company
Act of 1935, the undersigned company has duly caused this statement to be
signed on its behalf by the undersigned thereunto duly authorized.
CONSOLIDATED NATURAL GAS COMPANY
By L. D. Johnson, Vice Chairman of
the Board and Chief Financial
Officer
Dated: March 6, 1995
