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File Number 70-8631
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Amendment No. 1
to
Form U-1
APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
By
CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
(a registered holding company and
the parent of the other party)
CNG ENERGY SERVICES CORPORATION
One Park Ridge Center
P.O. Box 15746
Pittsburgh, Pennsylvania 15244-0746
Names and addresses of agents for service:
S. E. WILLIAMS, Senior Vice President
and General Counsel
Consolidated Natural Gas Company
CNG Tower
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
<PAGE> 2 File Number 70-8631
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
to
FORM U-1
APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
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. INTRODUCTION
Consolidated Natural Gas Company ("Consolidated") is a Delaware
corporation and a public utility holding company registered as such under the
Public Utility Holding Company Act of 1935 ("Act"). It is engaged solely in
the business of owning and holding all of the outstanding securities, with the
exception of certain minor long-term debt, of sixteen subsidiaries. These
subsidiary companies are engaged in the energy business, principally in
natural gas exploration, production, purchasing, sales, gathering,
transmission, storage, distribution, by-product operation, research and other
activities related to natural gas.
II. PROPOSED INVESTMENT IN ENERGY ALLIANCE PARTNERSHIP
CNG Energy Services Corporation ("Energy Services"), a Delaware
corporation and a wholly-owned nonutility subsidiary of Consolidated, proposes
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to incorporate CNG Energy Arbitrage Corporation ("CNGEA") under the laws of
the State of Delaware, with an authorized equity capitalization of $10,000,000
consisting of 1,000 shares of common stock, $10,000 par value each. Soon
after approval by the Securities and Exchange Commission ("SEC") of this
Application-Declaration, it is anticipated that CNGEA will sell and issue 300
shares of its common stock at par for $3,000,000 to Energy Services to become
a special purpose, wholly-owned subsidiary of Energy Services. This
$3,000,000 in financing is part of the $10,000,000 aggregate financing
authorization sought herein. Subsequent additional financing of CNGEA by
Energy Services and/or Consolidated may also occur as exempt transactions
pursuant to Rule 52.
CNGEA will acquire a one-third general partnership interest in Energy
Alliance Partnership ("Partnership"), a partnership to be formed under the
laws of the state of Delaware. A draft of the Partnership agreement is filed
as Exhibit B-1. According to the terms of the Partnership agreement, the
Partnership will terminate on December 31, 2020 unless the Partners (as
defined below) agree on another date. The Partnership will be set up to
engage in the principal business of buying and selling natural gas and
electric power, including in connection with arbitrage transactions,
principally in wholesale markets.
Noverco Energy Services (U.S.) Inc., a Delaware corporation ("NOV Sub"),
a wholly-owned subsidiary of Noverco Inc. ("Noverco") which is a Canadian
public-utility holding company, will also acquire a one-third general
partnership interest in the Partnership. Noverco, headquartered in Montreal,
is committed to positioning Quebec's natural gas industry as a strategic link
in America's Northeast markets. Noverco principally pursues its activities
through two subsidiaries: Gaz Metropolitain and Company, Limited Partnership
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("GMLP"), Quebec's natural gas distributor with annual deliveries of 200
billion cubic feet to over 172,000 customers; and Novergaz Inc., which carries
out nonregulated activities such as marketing, independent power production
and gas storage. By SEC Order dated November 23, 1994, Release No. 35-26170,
a wholly-owned subsidiary of Noverco, Gaz Metropolitain Inc. ("GMI"), and a
majority owned subsidiary of GMI, GMLP, were granted an exemption from all
provisions of the Act (except Section 9(a)(2) thereof) in connection with the
acquisition by GMLP of Vermont Gas Systems, Inc., a gas utility company.
Noverco's shareholders are SOQUIP (38%), an energy company owned by the Quebec
government; Caisse de Depot et Placement du Quebec (30%), a C$47 billion
portfolio manager that invests the funds of the Quebec public pension and
insurance plans; Laurentides Investissements S.A. (24%), a subsidiary of Gaz
de France, France's state-owned gas company and a world leader in the natural
gas industry; and Levesque Beaubien Geoffrion Inc. (8%), a major Quebec
brokerage firm.
The remaining one-third general partnership interest will be acquired by
H.Q. Energy Services (U.S.) Inc. a Delaware corporation ("HQ-Sub"), which is
wholly-owned directly or indirectly by wholly-owned subsidiaries of Hydro-
Quebec, a Canadian electric utility company which is a crown corporation of
the Province of Quebec. Hydro-Quebec is one of the top ten electric utilities
in the world with 30,000 MW capacity and assets in excess of C$30 billion. It
is headquartered in Montreal. It has annual sales of more than US$5 billion
and serves 3.3 million domestic Canadian customers. About 10 percent of its
production is sold to neighboring utilities in Canada and the United States.
Hydro-Quebec has a reputation as a reliable supplier to U. S. power pools, and
has extensive experience in spot power sales to U. S. public utilities. It is
an established world leader in high-voltage transmission and management of
large power systems and has been extensively involved in wholesale electricity
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trading for more than 30 years. Its 95 percent hydropower production is
backed by 165 trillion watt hours of water storage capacity. Hydro-Quebec's
price of power is among the lowest in North America. Neither Hydro-Quebec nor
any of its affiliates own any electric or gas transmission facility, nor have
any electric or gas retail customer, in the United States.
CNGEA, NOV Sub and HQ-Sub are referred to individually as a "Partner"
and collectively as the "Partners." Consolidated, Noverco and Hydro-Quebec
are referred to collectively as "the Parent Companies."
Each of the Parent Companies will enter into similar undertaking
agreements with the Partnership which, among other things, will commit them
subject to the terms and conditions of such agreement to provide up to
$3,000,000 to their respective Partner subsidiary as shall be necessary to
permit such subsidiary to fulfill its obligations respecting its capital
contributions under the Partnership agreement. A draft of the Consolidated
undertaking agreement ("Undertaking Agreement") is filed as Exhibit B-2.
III. DESCRIPTION OF THE PARTNERSHIP'S BUSINESS
The business of the Partnership will be to supply, sell, purchase,
market, broker or otherwise trade electricity or fuel, to provide electricity
or fuel management services, and to carry on activities, or perform services,
related to any of the foregoing, including in connection with arbitrage
transactions. The Partnership will initially seek to profit in the evolving
integrated energy market by identifying and capturing the electric and/or fuel
arbitrage profits inherent in the wholesale electric and natural gas business.
It will strive to become a leader in providing major customers with flexible
and competitive packaged electric/fuel services. With the considerable gas
supply from all market sources, including from Consolidated and Noverco, the
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plentiful supply of reliable electric power from all market sources including
Hydro-Quebec, the financial strength of all three Parent Companies and their
affiliates, and the Partnership's fuel management capabilities, the
Partnership is expected to give its customers unprecedented choices in buying,
selling, borrowing and loaning of natural gas, electricity, and other fuels as
well as additional choices in how they manage their operations.
It is expected that the other fuels will include oil and other
hydrocarbons, as well as wood chips, wastes and other combustible substances.
Involvement with such fuels is likely to result in connection with arbitrage
transactions also involving natural gas. It is anticipated that these other
fuels will not comprise a material part (probably less than 5%) of the
business of the Partnership and will be only incidental to the main business
of gas and electric power arbitrage.
The services to be offered by the Partnership will include the
following.
- Providing electric generators with instantaneous supply and sales
options so they can keep generating units operating at optimal
levels.
- Helping electric utilities find the best way to meet Clean Air
requirements through a combination of new gas technologies,
emission credits, cross-fuel management and wholesale electricity
purchases and sales.
- Helping customers manage the price changes in electricity and fuel
relative to time and location.
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- Helping electric utilities and nonutility generators by managing
fuel supply and transportation contracts, banking of electricity
until needed and providing price and delivery flexibility.
The following is an example of the type of transactions in which the
Partnership would engage. An independent power generator ("Generator") with a
gas fueled generating facility might have long-term gas purchase contracts
with gas suppliers. The Partnership, however, could be in a position to sell
to the Generator, over a given term in the future, electric power acquired
from another electric producer, including possibly Hydro-Quebec, at a price
below the cost of the Generator producing its own power using gas as a fuel.
At the same time, the Partnership estimates that the gas prices under these
gas supply contracts are currently below the gas price anticipated to exist at
the time when deliveries would occur. In a transaction in which both the
Generator and the Partnership would profit, the Generator would contract to
buy the less expensive power from the Partnership to meet its obligations to
supply power to its own customers, and would assign or sell its rights to take
delivery under its gas supply contracts to the Partnership. The Partnership
would subsequently dispose of the gas under these contracts into the wholesale
gas markets when and where prices have risen favorably in relation to the
contract prices. The Partnership could also hedge against unfavorable gas
price movements through the use of such instruments as gas futures. The net
result of this arbitrage transaction is that gas and electric power move, as
convertible energy forms, into the most economic market for each respective
commodity while the contracting parties also profit. Further examples of
Transactions are filed as Exhibit B-3 (filed under claim of confidential
treatment pursuant to Rule 104)
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Due to the varied nature of market requirements in doing fuel and power
arbitrage transactions, not all transactions will be completely balanced as
between the fuel component and the power component. That is, a given
arbitrage transaction may require the delivery of a greater amount of power
than would be generated by the fuel component of the transaction. Conversely,
the contract may call for the delivery of a greater proportion of energy in
the form of fuel when compared to the amount of energy being received in the
form of power.
The Partnership intends to engage in transactions involving gas and
power capacity rights, rate swaps and other commodity-based derivative
products that may be developed for use in the markets in which it participates
in the ordinary course of its business. It is felt that the Partnership will
need to use such products in order to remain competitive in such markets.
There are currently many sophisticated market tools to manage gas price risk.
It is expected that similar tools for the management of electricity price risk
will evolve as the electric power markets become more open and competitive in
parallel fashion to the open-access developments of the gas markets under FERC
Order 636. It is anticipated that power derivative markets will first occur
in those parts of the United States, such as the West Coast, that have
relatively balanced power generation costs and an absence of a high degree of
utility stranded costs under open access conditions. Federal and state
regulatory accommodation of open-access in power markets is also essential.
Under such circumstances, derivatives will contribute to a more balanced power
market through the levelizing of prices. The Partnership will not deal in
such derivative products for purposes of speculation, but rather would use
them only to reduce price-risk exposure through hedging. See the detailed
discussion of such market hedging and policy under "MARKET HEDGING TOOLS"
under "VII. NEED FOR GUARANTEE" beginning on page 30 intra.
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The Partnership will initially conduct its activities generally in the
wholesale energy markets in the northeastern and middle-Atlantic United
States. The Partnership may engage in energy transactions with the gas
utility companies in the Consolidated System(1), Energy Services or other
affiliates in the Consolidated System on the same market terms that would be
available to nonaffiliate customers of the Partnership. The Partnership will
sell electric and gas energy to wholesale and retail customers to the extent
permitted without becoming an "electric utility company" or a "gas utility
company" within the meaning of the definitions of such terms in Section
2(a)(3) and 2(a)(4) of the Act, respectively. In this regard, the Partnership
may sell gas at retail. But since it would not own or operate facilities used
for the distribution of gas at retail, such transactions would not cause it to
be a utility company as defined in Section 2(a)(4) of the Act. The
Partnership will not at this time make any electricity sales at retail since
such are not currently permitted to FERC authorized power marketers. It is
expected, however, that the electric industry will evolve to permit retail
electricity transactions by power marketers; in such event the Partnership
would engage in retail power sales in order to remain competitive.
The business affairs of the Partnership are to be managed by a
management committee ("Management Committee"). Each Partner will be entitled
to name one person to serve on the Management Committee for each eleven
percent of its Partnership interest. Each member of the Management Committee
will have one vote at committee meetings. The Management Committee may create
management positions and other committees, and delegate the exercise of
certain powers.
______________
(1) The utility companies in the Consolidated System are The East Ohio Gas
Company, Peoples Natural Gas Company, Virginia Natural Gas, Inc., Hope Gas,
Inc, and West Ohio Gas Company.
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The Partnership may contract for needed services from the Partner or
affiliate that is determined to be best suited to procure or supply them by
virtue of its expertise and experience in the relevant field. The Management
Committee may also have recourse to outside suppliers in the event
availability, quality, price or reliability are better than those that may be
obtained from a Partner. Charges to the Partnership for services from a
Partner are to be made on a direct costing method (salary plus fringe
benefits) for use of personnel, and direct out-of-pocket expenses for other
items.
The net profits of the Partnership are to be divided in accordance with
each Partner's Partnership interest.
A Partner will not be able to transfer, in whole or in part, its
Partnership interest without first allowing the other Partners to match the
offer which the selling Partner is contemplating accepting. This right of
first refusal does not apply to the transfer of interests to a Related Entity
as defined in the Partnership Agreement.
IV. FUNDAMENTAL CHANGES IN THE ENERGY INDUSTRY
The Partnership would inaugurate business in the context of accelerating
and fundamental changes occurring in the energy industry. Essentially, what
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has been traditionally regarded as discrete facets of the industry, primarily
gas and electric, are rapidly being integrated into an energy market trading
on Btu (British thermal unit) values. The following sets forth some of the
details describing this development.
1. Developments in gas industry; Order 636
Due to the issuance of Order 636 by the Federal Energy Regulatory
Commission ("FERC") in 1992, interstate pipelines, such as Consolidated's
subsidiary CNG Transmission Corporation ("Transmission"), ceased to be
merchants or sellers of gas. The pipelines became common carriers under the
open access provisions of Order 636, with their transportation and storage
services becoming unbundled from the sale of natural gas.
As a result of Order 636, a market in released transportation and
storage capacity has developed. Natural gas customers, such as local
distribution companies ("LDCs"), now have significantly increased
responsibility and control over gas supply and transportation capacity. Gas
marketers have entered the business of assisting these customers in managing
their daily supply requirements. The early multitude of gas marketers is now
being replaced through industry consolidation by the emergence of several
mega-marketers. Parallels of these developments are expected to develop in
the electric industry deregulation process.
2. Developments in electric industry; Energy Policy Act of 1992
The Energy Policy Act of 1992 (Pub.L 102-486, October 24, 1992)
("EPA92") has significantly furthered the deregulation of electric power
markets. It has, through the creation of the electric wholesale generator
status in Section 32 of the Act, contributed towards the unbundling of power
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generation and transmission. There is a correspondingly growing pressure for
wholesale and retail wheeling of electric power generated outside the
transporter's system.
The majority of changes in the electric markets are expected to occur in
the 1995-97 timeframe, which would be five years faster than it took the gas
industry to become deregulated. Both FERC and Congress have the benefit of
knowledge of energy market deregulation gained from the gas industry
restructuring. There are also many state initiatives underway, such as open
access proposals for California and Wisconsin. Paralleling earlier events in
the gas industry, energy or power marketers are starting up to assist
wholesale and industrial electric customers with their increased
responsibilities to arrange for energy at the lowest available price in an
increasingly competitive market. Much of the electric market maker
infrastructure is already in place, with experienced gas marketers poised to
enter the marketplace. Exhibit B-4 is a list of major energy companies, many
of which have affiliates deeply involved in the gas industry, who have filed
with FERC for power marketing status.
3. Evolution towards integrated fuel markets; development of
power marketing similar to development of gas marketing
The rising gas demand and deliverability worries appearing amid the
transitional stresses of gas and electricity deregulation have left natural
gas producers, pipeline companies and marketing firms scrambling to adjust.
It is dawning on them that they are in the business of selling Btus of energy
- - not necessarily cubic feet of natural gas. Analysts predict that gas
consumption for electricity power generation could double by the end of the
decade if the restructured gas and electric industries learn to cooperate
better. According to projections from the National Electric Reliability
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Council, more than 60% of the power generation capacity to come on line by
2001 will be gas-fired, or a combination of gas and oil. The figure compares
to 1991, which saw only 20% of new electric-power capacity fired by gas.
Independents are the source of most of the growth in gas use.
Energy markets are becoming more customer focused. Utilities must
consequently provide competitively priced power to retain industrial load and
to make incremental inroads. Tools have also been developed to increase power
trading and to provide related services. Some of these are the production of
real-time data, standardized transmission access and pricing, power pools open
to entry of new members, regional transmission groups, computerized systems
and state ratemaking initiatives. Customer demand is also expected to create
integrated energy marketplaces. All of these changes are indicative of the
control of the commodity assets moving towards the ultimate consumer.
Electric and gas markets must become efficient through the use of
trading systems, demand side management programs, arbitrage and creative
service offerings. Power marketers must take advantage of their strengths;
these are their ability to move fast, unique knowledge, financial capacity to
control strategic assets and an aggressive nature. They should accumulate
low-cost excess generating, supply and transmission capacity to market to
those who do not have the same resources at the same economic cost. The
purpose of the Partnership is for gas and electric industry companies through
their subsidiaries to form a strategic alliance which is needed to remain
competitive with others.
The interchangeability of different forms of energy, particularly gas
and electric, is becoming more commonplace. For example, it was recently
announced that Long Island Lighting Co. ("LILCO") and Con Edison will swap
natural gas for electric energy. LILCO will pay a fee to have gas that it
owns burned at Con Edison's plants with the electricity thereby generated
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delivered to LILCO. This avoids LILCO having to construct new gas-burning
facilities while at the same time reducing its consumption of high-priced oil.
As a further example of the integration of energy markets, UtiliCorp
United Inc. has announced that it wants to become the first electric and
natural gas utility to operate in all 50 states. The Kansas City based
company says it will expand its natural gas network, which already extends
into 45 states, and its eight-state electric operations, to eventually offer
both services to millions of customers nationwide. They will be packaged and
marketed under the brand name EnergyOne.
If the Partnership is not authorized by the Commission to become a
participant in these forthcoming competitive markets, Consolidated will see
other energy marketers take advantage of the Consolidated System
infrastructure and other business assets. Consolidated would thus find itself
a hobbled observer of others grasping the integrated market opportunities
(denied to it) to engage in profitable gas and power transactions.
V. LEGAL BASIS FOR AUTHORIZING ENERGY RELATED ACTIVITIES OF THE PARTNERSHIP
Consolidated is of the opinion that the proposed activities of the
Partnership should be permitted under the Gas Related Activities Act of 1990
(Pub.L 101-572, November 15, 1990) ("GRAA") and Section 11(b) of the Act for
the following reasons.
1. Gas Related Activities Act of 1990
Section 2(a) of the GRAA provides that the requirements of Section
11(b)(1) of the Act are met with respect to the acquisition of an interest in
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a company organized to participate in activities involving the transportation
or storage of natural gas.
Section 2(b) of the GRAA provides that the requirements of Section
11(b)(1) of the Act are met with respect to the acquisition of an interest in
a company organized to participate in activities related to the supply of
natural gas, broadly defined to include exploration, development, production,
marketing and other similar activities, if:
"(1) the Commission determines . . . that such acquisition is in
the interest of consumers of each gas utility company of such
registered company or consumers of any other subsidiary of such
registered company; and
(2) the Commission determines that such acquisition will not be
detrimental to the interest of consumers of any such gas utility
company or other subsidiary or to the proper functioning of the
registered holding company system."
Section 2(c) of the GRAA provides that each determination be made "on a
case-by-case basis, and not based on any preset criteria."
The proposed activities of the Partnership satisfy the requirements of
Section 2(b) of the GRAA and, therefore, of Section 11(b)(1) of the Act. The
GRAA requires the Commission to determine whether the activities of the
Partnership will benefit Consolidated System consumers. As used in the GRAA,
the term "consumers" refers both to the retail utility customers and to
wholesale customers such as pipelines and nonaffiliated utility companies.
Consolidated's consumers, both current and future, wholesale and retail, will
benefit from the Partnership's business.
Energy Services, as a gas marketer, has had several years of experience
in unregulated gas commodity sales. During those years it has developed a
considerable customer base. Its participation in the Partnership with the
United States subsidiaries of two substantial Canadian companies will give
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Energy Services a great deal more credibility as an energy marketer, both gas
and electric. The customers of Energy Services, Transmission, the utility
companies in the Consolidated System, and other Consolidated companies
engaging in the natural gas business would obtain a material advantage through
the Partnership's activities; they would be able to advance, bank, price,
store and interchange energy sources through the facilities of one house.
The Partnership's business could also maintain and increase
Consolidated's system gas throughput to LDCs, both associated and
nonassociated, and their end-users. The creation of an integrated energy
marketer in the market area served by Transmission will encourage
transportation of gas into such system. This will enhance the investments
that customers of Transmission have made in service agreements with
Transmission. Further, the increase in throughput (i.e., volumes of gas
transported through the pipeline of Transmission) attributable to the
Partnership's activities should result in more competitive
transportation rates for the wholesale customers of Transmission, including
the Consolidated System LDCs. The additional transportation fees should
increase Consolidated System revenues and lower intrasystem gas transportation
costs on Transmission's system.
One of the more significant consumer benefits expected to result from
the Partnership's business is an addition to capacity release value of LDC
customers of the Consolidated System. Due to the open-access provisions of
FERC's Order 636, LDC's found it necessary to contract on a twelve-month basis
for gas deliverability capacity, on interstate pipelines such as
Transmissions', in amounts sufficient to provide supply at maximum demand
arising in the winter. This causes a substantial amount of such capacity to
go unneeded during the "off" months when LDC customer demand is low. Such
excess capacity is often sold into capacity release markets at minimal rates
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To the extent the Partnership becomes an active purchaser in such excess
capacity markets for its non-LDC customers, it will contribute towards an
increase in price that the LDCs can obtain for their release capacity rights,
thereby helping to lower the cost of gas to their customers.
Another consumer benefit is that the Partnership would provide a place
for buyers and sellers to execute trades of gas and electric power, which will
be supported by services offered by the Partners in their respective spheres
of activity. This would overall help maintain the liquidity of the integrated
energy market on both its gas and electric sides.
On October 27, 1990, the following was stated in the U.S. Congress by
legislative sponsors (Senator D'Amato in the Senate and Representative Markey
in the House) of the GRAA:
"...Technical advances and expertise may also be developed through
these activities that may benefit customers. Finally, there may exist
assets that are either surplus to the needs of the system or that have
developed in the normal course of system operations. Use of these
assets to maximize their value is recognized as a benefit to customers
only so long as the proposed activity does not create a detriment to
system customers."
These statements indicate that the legislators that passed the GRAA intended
that such legislation be interpreted flexibly. They show that activities that
naturally evolve from the Consolidated System's gas operations and which also
benefit system customers should be permitted under the Act. The proposed
energy related activities of the Partnership fall into such category.
For all of the above reasons, the proposed activities of the Partnership
should be found to be in the interest of consumers of the Consolidated System;
and, accordingly that Section 2(b)(1) of the GRAA is satisfied.
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It is further requested that the SEC find the proposed activities will
not be detrimental to the interests of consumers or to the proper functioning
of the holding company system, and that Section 2(b)(2) of the GRAA is thereby
satisfied. No subsidiary of Consolidated will be obligated to engage in any
transaction with the Partnership. Consolidated's maximum investment of $10
million in CNGEA, anticipated to be in the form of either stock purchases or
short-term open account advances, will be de minimis in relation to the
Consolidated System's consolidated total assets of approximately $5.4 billion.
2. Appropriate under Section 11(b) of the Act
The first sentence of Section 11(b)(1) of the Act limits the operations
of a registered holding company system to a single integrated public utility
system, and to such other businesses as are reasonably incidental, or
economically necessary or appropriate to the operations of such integrated
public utility system. The last sentence of Section 11(b)(1) states that the
Commission may permit as reasonably incidental, or economically necessary or
appropriate to the operations of one or more integrated public utility systems
the retention of an interest in any business which the Commission shall find
necessary or appropriate in the public interest or for the protection of
investors or consumers and not detrimental to the proper functioning of such
system or systems.
In view of the rapidly changing nature of the energy markets in North
America as the twentieth century draws to a close, particularly the increasing
convergence of the gas and electric power markets due to the
interchangeability of energy forms, the type of business in which the
Partnership proposes to engage should be deemed to be incidental and
appropriate to the operations of the Consolidated System. A substantial
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portion of the Partnership's business will consist of gas marketing, and the
portions which do not involve gas directly will be energy-related and will
accordingly involve gas indirectly. Highly competitive energy markets are
making the classification of companies as solely gas or electric obsolete.
Consolidated through its investments in cogeneration facilities already has
part ownership in seven plants capable of producing 438 megawatts of power.
It is for these reasons that the business of the Partnership is incidental and
appropriate to the energy operations of the Consolidated System.
The proposed activities of the Partnership are clearly appropriate in
the public interest as evidenced by the recent history of federal legislation
which has strongly promoted the development of competitive energy markets.
Such legislation consists of the following.
a. Public Utility Regulatory Practices Act of 1978
The Public Utility Regulatory Practices Act of 1978 ("PURPA")
defines a "cogeneration facility" as a facility which produces electric
energy and steam or other forms of useful energy (such as heat) which
are used for industrial, commercial, heating or cooling purposes (16
USCA 796 (18)(A)). PURPA further defines a "qualifying cogeneration
facility" ("Cogen") as a cogeneration facility which meets FERC
requirements respecting minimum size, fuel use, and fuel efficiency (16
USCA 796 (18)(B)). The FERC operating and efficiency standards for
Cogens are set forth in 18 CFR 292.205(a) and (b). PURPA also requires
electric utilities to purchase electric energy from, and sell electric
energy to, Cogens (16 USCA 824a-3). PURPA allowed FERC to exempt
Cogens from being electric utility companies under Section 2(a)(3) of
the Act, which FERC did at 18 CFR 292.602. PURPA can thus be viewed as
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Congress' initial action to provide for greater efficiencies in energy
markets through the liberalization of the restraints placed on electric
generation by the Act.
b. Cogeneration Statutes
Even though Cogens became exempt from the Act by virtue of PURPA
and FERC rulemaking, Consolidated and the other registered gas holding
companies were prevented from investing in Cogens under a strict
interpretation of the functional relationship requirement of Section
11(b) of the Act. This restraint was removed by Public Law 99-186
(December 18, 1985), which stated that notwithstanding Section 11(b)(1)
of the Act, a company in a registered gas holding company system could
acquire and retain, in any geographic area, any interest in a Cogen.
Public Law 86-553 (October 27, 1986) broadened the scope of the
1985 statute by providing that any company in a registered holding
company system (whether gas or electric) could acquire and retain, in
any geographic area, an interest in a Cogen. The 1986 statute thus
allowed electric holding company systems to invest in Cogens without
needing to comply with the operational integration requirements of the
Act.
These two Cogen statutes together are further evidence of
Congressional intent to foster the development of competitive energy
markets. Congress achieved this by removing restraints otherwise
imposed by the Act on registered holding company participation in such
markets.
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c. Gas Related Activities Act of 1990
The provisions of the GRAA are discussed in detail above. The
GRAA is an important step in the evolution of Congressional thinking on
removing Section 11(b) restraints to allow registered gas holding
companies to compete in energy markets with those not restrained by the
Act. The GRAA essentially made inapplicable, as to gas related
activities of a registered gas holding company, the functionally related
requirement of Section 11(b)(1), which requires a showing of benefit to
the utility companies of the system. Substituted in lieu of the
functional relationship test is a standard based on consumer benefit and
absence of detriment to the proper functioning of the system. Congress,
in weighing the matter, clearly came down in favor of removal of the
traditional Section 11(b)(1) restrictions when such would promote energy
industry efficiencies and consumer benefits.
d. Energy Policy Act of 1992
The enactment of EPA92 is the most recent and significant
contribution towards competitiveness in the wholesale energy markets in
the United States. As already noted above under "IV FUNDAMENTAL CHANGES
IN THE ENERGY INDUSTRY", EPA92 added Sections 32 and 33 to the Act,
which created the categories of exempt wholesale generator ("EWG") and
foreign utility company ("FUCO"), respectively. An EWG as defined in
Section 32 means any person determined by FERC to be engaged in the
business of owning or operating an eligible facility. The definition of
"eligible facility" in Section 32 includes a facility which is used for
the generation of electric energy exclusively for sale at wholesale.
Section 32(e) states that EWGs shall not be considered electric utility
<PAGE> 22
companies under the Act. Section 32(g) allows a registered holding
company to acquire interests in EWGs or FUCOs without prior approval of
the SEC.
Two salient features of EPA92 indicating further federal policy of
liberalizing energy markets are (i) the category of EWG under EPA92 is
broader than that of a Cogen under PURPA in that it has no requirement
for an industrial or commercial host using an alternative energy form
(which greatly reduces facility complexity, cost, and siting problems)
and (ii) EWGs, unlike Cogens, are exempt from all provisions of the Act
(which makes for ease of operation of a facility within a registered
holding company system). EPA92 can be regarded as laying the groundwork
for what is generally anticipated to be the next big step in opening
energy markets to greater competition, i.e. open access on utility
transmission lines or the electric industry equivalent of FERC Order
636.
FERC has taken further steps in the direction of opening up
wholesale power markets. On March 29, 1995, it issued a proposal
(Docket No. RM95-8-000) which would require investor-owned electric
utilities to provide "open access" to their interstate transmission
systems. This would allow distant utilities or wholesale customers to
buy and sell power over transmission lines owned by others. Tariffs
would be posted by the utilities for the transmission of power and
allied services, with the same rates applying to their own wholesale
transactions.
<PAGE> 23
e. NAFTA
The Partnership's business would also further the goals of
increased trade between the United States and Canada as expressed in the
North American Free Trade Agreement Implementation Act ("NAFTA") (Pub L.
103-182). There is much cross-border energy business taking place
between the United States and Canada today. In 1993 the U.S. natural gas
industry imported 11% of its total consumption from Canada, whereas
exports to Canada for the same year was 45 billion cubic feet. In 1992
the United States imported 35,181,757 Kwh from Canada and exported
7,865,990 Kwh to Canada. The public policy enunciated in NAFTA
encourages the reduction of barriers to trade and the enhancement of
investment opportunities between the United States and Canada, to the
betterment of consumers in both countries.
The SEC in a supplemental order issued on February 15, 1995, Release No.
35-2632 (File No. 70-7287), acknowledged the importance of the fundamental
legislative trend described above. This order allowed EUA Cogenex, a
subsidiary of Eastern Utility Associates, to engage in demand-side management
without any longer being limited to doing no more than half of its business
for nonaffiliate customers. In the order, the SEC indicates that the energy
management business is closely related to the utility's core business, and
that Congress has stated that there is a strong national interest in promoting
energy conservation and efficiency. This order also states that this policy
would appear to be furthered by the expansion of the services proposed by
Cogenex. Similar to the Cogenex order, the applicants believe that the
proposed business of the Partnership is closely related to the Consolidated
System's core energy business, and that the issuance of an order in this
<PAGE> 24
proceeding will also promote the national interest in seeking energy
efficiency.
The SEC gave further acknowledgment to the suitability of registered
holding companies engaging in energy-related activities, whether gas, electric
or otherwise, in HCAR No. 26313, dated June 20, 1995, in which it proposed the
adoption of Rule 58. New Rule 58 would exempt the acquisition of securities
of an energy-related company (as defined) from prior SEC approval under
Section 9(a)(1) and 10 of the Act on the grounds that such a nonutility
business is closely related to the registered holding company system's core
utility business.
Concluding Argument
The proposed transactions reflect economic realities in competitive
energy markets. The business of the Partnership as an energy marketer dealing
in both gas and power transactions would be a direct development of the
changing nature of the North American energy markets. As already stated
herein, energy forms are becoming readily interchangeable. Customers will
contract for the most economic form of the Btus that they need; it will not
matter that much if it be gas, electricity or some other form of energy such
as oil or coal. The Parent Companies are striving to be participants in such
emerging markets through their investments in the Partners of the Partnership.
VI. OTHER LEGAL ASPECTS OF THE PARTNERSHIP
In addition to the permissibility of the Partnership under the GRAA and
Section 11(b) of the Act, there are other legal aspects of the Partnership's
status that should be discussed. These are as follows.
<PAGE> 25
1. Rule 16 Status for the Partnership
The applicants request that the Partnership and each affiliate thereof
(except for companies within the Consolidated System) be deemed exempt under
Rule 16 from all obligations imposed upon them by the Act, as a subsidiary
company or as an affiliate of a registered holding company or of a subsidiary
company thereof. The basis for such application is as follows.
- The Partnership is not a public utility company as defined
in Section 2(a)(5) of the Act.
- The Partnership is being organized to engage primarily in
activities related to the supply of natural gas.
"Primarily" has been defined to mean "at first, in the first
instance; originally." The term has been defined to
secondarily mean "in the first place; principally." The
activities of the Partnership will all be energy related.
Many of these activities, particularly in the early stages
of the Partnership's business, will directly involve
contracts for the purchase and sale of natural gas. The
types of most transactions envisioned for the Partnership
will be of such a nature that the gas and power aspects will
be inseparably interwoven; consequently all such energy
transactions should be characterized as "gas transactions"
or "gas related" in their entirety.
- No more than one-third of the voting interests in the
Partnership will be owned, directly or indirectly, by a
registered holding company, i.e. Consolidated.
<PAGE> 26
- The acquisition by Energy Services of its interests in the
Partnership is the subject of this Application-Declaration.
2. Partnership under FERC jurisdiction
Since the Partnership will be engaging in the business of power
marketing, it will need to obtain the approval of the FERC for market based
rates. In granting an order, FERC will consider whether there are any likely
opportunities for discriminatory practices favoring any affiliated utility
companies participating in the same markets as competitors who are likely to
be customers of the Partnership. FERC in granting an order may impose
conditions to guard against such subsidization. The interests of consumers
will thus be protected by this FERC oversight.
3. No U.S. utility company directly involved; Partnership not a
utility company
Neither the Partnership nor any parent affiliate of the Partnership will
be a United States utility company. It is the belief of the applicants that
the Commission Staff position taken in the no-action letter, dated January 5,
1994, with respect to Enron Power Marketing, Inc. ("Enron Power") would
substantially apply to the status of the Partnership. In such letter, the
Staff stated that it would not recommend any enforcement action to the
Commission under the Act, including Section 2(a)(3) thereof, against Enron
Power in the event it enters into contracts for the purchase and resale of
electric power and for transmission capacity in connection with power
marketing transactions. In effect, the Staff has taken the position that
Enron Power was not to be deemed an electric utility company under the Act.
<PAGE> 27
VII. SOURCE OF FUNDS
It is proposed for Energy Services to raise funds for the purposes
described herein by (i) selling shares of its common stock, $1,000 par value,
to Consolidated, (ii) open account advances as described below, or (iii) long-
term loans from Consolidated, in any combination thereof. The open account
advances and long-term loans will have the same effective terms and interest
rates as related borrowings of Consolidated in the forms listed below:
(1) Open account advances may be made to Energy Services to provide
working capital and to finance the activities authorized by the
Securities and Exchange Commission ("Commission"). Open account
advances will be made under letter agreement with Energy Services
and will be repaid on or before a date not more than one year from
the date of the first advance with interest at the same effective
rate of interest as Consolidated's weighted average effective rate
for commercial paper and/or revolving credit borrowings. If no
such borrowings are outstanding, the interest rate shall be
predicated on the Federal Funds' effective rate of interest as
quoted daily by the Federal Reserve Bank of New York.
(2) Consolidated may make long-term loans to Energy Services for the
financing of its activities. Loans to Energy Services shall be
evidenced by long-term non-negotiable notes of Energy Services
(documented by book entry only) maturing over a period of time
(not in excess of 30 years) to be determined by the officers of
Consolidated, with the interest predicated on and equal to
Consolidated's cost of funds for comparable borrowings. In the
event Consolidated has not had recent comparable borrowings, the
rates will be tied to the Salomon Brothers indicative rate for
<PAGE> 28
comparable debt issuances published in Salomon Brothers Inc. Bond
Market Roundup or similar publication on the date nearest to the
time of takedown. All loans may be prepaid at any time without
premium or penalty.
Consolidated will obtain the funds required for Energy Services through
internal cash generation, issuance of long-term debt securities, borrowings
under credit agreements or through other authorizations approved by the
Commission subsequent to the effective date of this Application-Declaration.
Consolidated also seeks the authorization to make the commitment to provide up
to $3,000,000 to CNGEA as embodied in the Undertaking Agreement. CNGEA would
engage in general partner investing and financing transactions with respect to
the Partnership in lieu of Energy Services. CNGEA would have mirror image
authorizations and obligations of Energy Services under this filing as such
relate to the acquisition of a one-third general partner interest in the
Partnership, with Energy Services functioning as a "pass-through" with regard
to the indirect Consolidated financing of the Partnership.
VIII. NEED FOR GUARANTEE
By order dated November 16, 1993 ("November 16, 1993 Order"), Release
No. 35-25926, File No. 70-8231, the SEC authorized Consolidated to guarantee,
through December 31, 1998, up to an aggregate principal amount of $750 million
of the obligations of Energy Services, pursuant to certain gas purchase, sales
and transportation contracts. The reason for obtaining such guarantee
authority was the structural change in the gas markets under FERC Order 636,
which necessitated gas marketing companies, such as Energy Services, to be
able to demonstrate financial credibility with customers. Energy marketing
companies, though entering many contracts for high volumes of gas or power,
<PAGE> 29
are not highly capitalized due to the nature of their operations. This
absence of high capitalization has caused some would-be customers to be
apprehensive of the risk of dealing with such marketing companies. However,
often times such marketing companies are subsidiaries of financially strong
parent companies. Consequently, the usual method for establishing the
financial credibility of the marketing company is by the parent (such as
Consolidated) standing behind its subsidiary through guarantees, thus allowing
the subsidiary to compete effectively in increasingly deregulated markets.
This same rationale applies to the proposed business of the Partnership. The
energy marketing business of the Partnership would be an extension of the gas
marketing business of Energy Services. Consolidated, therefore, seeks
authority through December 31, 1998 to guarantee, either directly or
indirectly through CNGEA, the fuel and power transactions of the Partnership,
to the extent required by the Partnership's customers to consummate
transactions. The amount of such guarantees will be limited by placing them
under the same dollar cap as applies to guarantees under the November 16, 1993
Order. That is, Consolidated will not make a guarantee under the authority
granted in this proceeding nor under the November 16, 1993 Order if the effect
of such an additional guarantee would be for the aggregate of all outstanding
guarantees under both authorizations to exceed $750 million. It is noted,
however, that the guarantee authority granted in this proceeding may be
superseded by a new guarantee authority requested in the proceeding in File
No. 70-8667.
The Partnership intends to use many ways which are available to limit
financial risks in today's energy markets, thereby also lessening the risk to
Consolidated under any guarantees it may give. Some of the more common of
these risk-reduction methods are as follows.
<PAGE> 30
MATCHING OF OBLIGATIONS TO MARKET PRICES. Price is now matched much
better between purchase and sales contracts, and also matched more directly to
market prices. Previously as to gas, pipelines negotiated prices with
producers without the benefit of market input. Sales prices were determined
independently by regulation. Now the market establishes the price of gas to
be delivered, with future prices defined in terms of then existing markets or
an index. This limits the potential size of damage claims from customers
since replacement gas should be available at the market price at which Gas
Services would be obligated to perform. The same principle would apply to
power purchase and sales contracts as the wholesale power market further
develops.
MARKET HEDGING TOOLS. Generally, the Partnership would strive to match
its portfolio of its fuel and power sales contracts with a portfolio of fuel
and power purchase contracts with similar terms. For instance, long-term firm
sales contracts with variable or indexed prices would be matched with long-
term supply contracts with variable or indexed prices. Hedging would be
needed only to reduce risk with respect to that small portion of the
Partnerships' total sales contract portfolio which is not matched with
appropriate supply contracts. For example, a one year, fixed price sales
contract might not be matched; protection against price risk in such a short-
term contract could be provided by proper hedging tools.
There are currently many sophisticated market tools to manage price
risk. The market for natural gas risk-management contracts is about $5 billion
and growing fast. Tools such as gas futures contracts and options on gas
futures, are traded on the New York Mercantile Exchange, and gas price swap
agreements which are binding agreements between parties on a private contract
basis, are common and essential tools to manage risk on some types of gas
sales that cannot be matched with a corresponding gas purchase. The New York
<PAGE> 31
Mercantile Exchange's board of directors in early 1995 approved preliminary
terms and conditions for two electricity futures contracts, with trading
likely to begin in the last quarter of 1995.
In its use of hedging tools, the Partnership will not engage in
speculative trading. Consolidated represents that such trading is prohibited
by corporate policy, and that hedging activity will be limited to no more than
the total volume of the Partnership's commodities that are subject to market
price fluctuation.
Consolidated has established a System Energy Price Risk Committee
("SEPRC") comprised of its Controller and other senior level financial and
accounting officers. The SEPRC has the responsibility to review the
effectiveness of subsidiary hedge strategies and ensure that adequate trading
controls are being implemented. The SEPRC further has the responsibility to
approve the establishment of new accounts, establish minimum credit quality
standards of brokers and counter parties, review position limits, and review
subsidiary policies and procedures to ensure they adhere to CNG System policy.
LIMITATION OF DAMAGES. Damages can be specifically limited to the
difference between the cost of fuel or power that should have been provided to
a customer and the cost of replacement fuel or power when the performance
failure occurs. Consequential damages are generally excluded.
SPECIFICATION OF OBLIGATIONS. Contractual obligations can be more
specific than in the past. Before FERC Order 636, most pipeline gas sales
were made under full requirements contracts. Today gas sales contracts have
specific volume obligations, thus limiting the exposure. The same principle
would apply to power sales.
<PAGE> 32
SHORTER TERMS. There is also less risk exposure in today's gas markets
because the terms of gas sales contracts are generally 5 to 10 years compared
to the previous industry standard of 20 years. Also, when an undesirable
contract expires, there is no longer any need to obtain FERC approval of
abandonment before the Partnership could walk away from the customer.
It is believed by Consolidated that through the proper use of price
hedging tools, together with favorable contract terms, the risk to
Consolidated under any guarantees of Partnership obligations will not pose a
material risk to Consolidated or the CNG System. It is further believed that
as the wholesale power market matures, risk reduction devices for power
transactions will become available to the same extent as those available for
gas transactions.
The financial exposure to Consolidated through guarantees of Partnership
obligations will be further limited due to the participation of the other
Parent Companies (both of which are financially substantial entities) through
their United States subsidiaries in making such guarantees. It is anticipated
that each of the Partner's guarantees will for the most part be limited to
those Partnership obligations arising in the area of the respective Partner's
business.
IX. AUTHORIZATIONS REQUESTED
The following authorizations are hereby requested. All funding by a
Consolidated System parent company of its immediate subsidiary would be in the
form of (a) the sale of the subsidiary's common stock to the parent, (b) open
account advances from the parent to the subsidiary, and/or (c) long-term loans
from the parent to the subsidiary. Any providing of funds by Consolidated to
Energy Services can be in any combination of these three forms of financing;
<PAGE> 33
and any financing between Energy Services and CNGEA will be in the same
combination of forms that exists between Consolidated and Energy Services in
the transaction which causes Energy Services to obtain funds to invest in
CNGEA. All the authorizations described below would be for a period ending
December 31, 2020 (the Partnership termination date) with the exception of the
fifth item covering Consolidated guarantees of arbitrage transactions, which
would be for the same period in the November 16, 1993 Order, i.e. ending
December 31, 1998.
(1) For Energy Services to obtain up to $10,000,000 from Consolidated
for the purpose of accomplishing its indirect investment in the
Partnership.
(2) For CNGEA to obtain up to $10,000,000 from Energy Services needed
for CNGEA to complete its acquisition of a one-third general
partnership interest in the Partnership and to possibly make
further equity contributions to the Partnership thereafter.
(3) For CNGEA to invest up to $10,000,000 in the Partnership by
initially purchasing a one-third general partnership interest
therein and by being in a position to make further equity
contributions thereafter.
(4) For Consolidated to enter into the Undertaking Agreement with the
Partnership to commit to providing CNGEA with up to $3,000,000 in
financing.
(5) For Consolidated to make guarantees, either directly or indirectly
through CNGEA, of transactions of the Partnership, provided that
the total amount of such guarantees for the Partnership together
with the total amount of guarantees of transactions of Energy
Services under the November 16, 1993 Order shall not exceed $750
million at any one time.
<PAGE> 34
X. 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 EWG or a 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 December 31,
1994 was $734,939,000; 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
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). In addition, the books and records of each
such entity are kept in conformity with United States generally accepted
accounting principles ("GAAP"), the financial statements are prepared
<PAGE> 35
according to GAAP, and Consolidated undertakes to provide the SEC access to
such books and records and financial statements as it may request. 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.
XI. SERVICE CONTRACTS WITH AFFILIATES
CNGEA, as a special purpose subsidiary, would not have any payroll or
full-time employees. Accordingly, it would enter into a service contract with
Energy Services pursuant to which Energy Services would provide administrative
and other supporting services, such as the keeping of books and records and
the making of corporate filings.
The Partnership may contract for needed services from the Partner,
Parent Company, or other affiliate that is determined to be best suited to
provide them by virtue of its expertise and experience. It is accordingly
anticipated that the Partnership will enter into a contract with CNGEA and/or
Energy Services for the rendering of supporting services relative to United
States gas marketing transactions.
All service contracts between affiliates in the Consolidated System will
provide for services to be rendered on an at-cost basis in compliance with
Rules 87 and 90 under the Act.
<PAGE> 36
XII. RULE 24 CERTIFICATES
It is also requested that Rule 24 Certificates of Notification be filed
within 60 days after the end of each semi-annual calendar period to report to
the Commission with respect to transactions authorized pursuant to this
filing. Such certificates shall contain a CNGEA balance sheet as of the end
of such period, and a statement of income and expense for the period.
Consolidated guarantees of Partnership arbitrage transactions will be reported
in the Rule 24 Certificates of Notification filed under File No. 70-8231.
(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 any
affiliate of any such associate company.
None, except as set forth in Item 1(a).
(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.
None, except as set forth in Item 1(a).
(d) If the proposed transaction involves the acquisition or disposition
of assets, described briefly such assets, setting forth original cost,
vendor's book cost (including the basis of determination) and applicable
valuation and qualifying reserves.
None, except as set forth in Item 1(a).
<PAGE> 37
Item 2. Fees, Commissions and Expenses
______________________________
(a) State (i) 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 (ii) 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.
It is estimated that the fees, commissions and expenses ascertainable at
this time to be incurred by Consolidated and Energy Services in connection
with the herein proposed transaction will not exceed $35,000, consisting of
the $2,000 filing fee under the Act, $17,000 payable to Consolidated Natural
Gas Service Company, Inc. ("Service Company") for services on a cost basis
(including regularly employed counsel) for the preparation of this
application-declaration and other documents, $12,000 payable to non-affiliated
professionals, and $4,000 for miscellaneous other expenses.
(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 Service Company, a subsidiary service company, for
services on a cost basis (including regularly employed counsel) in connection
with the preparation of this application-declaration and other related
documents and papers required to consummate the proposed transactions are as
stated above.
<PAGE> 38
Item 3. Applicable Statutory Provisions
_______________________________
(a) State the section 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 and Rule 43 are deemed applicable to the issuance of
securities by Energy Services and/or CNGEA.
Sections 9(a) and 10 are deemed applicable to the acquisitions (i) by
Consolidated of the capital stock, open account advance debits and notes of
Energy Services, (ii) by Energy Services of the capital stock, open account
advance debits and notes of CNGEA and (iii) by CNGEA of partnership interests
in the Partnership.
Sections 12(b) and Rule 45 are considered applicable to loan
arrangements among Consolidated, Energy Services and CNGEA, the Undertaking
Agreement commitment and to guarantees of fuel and power arbitrage transaction
by the Partnership.
CNGEA's participation in the Partnership is deemed to satisfy the
requirements of Rule 16 under the Act. Consequently, the Partnership and
affiliates not otherwise subject to the jurisdiction of the Act will be exempt
from all obligations, duties or liabilities that would be imposed upon them by
the Act in the absence of Rule 16.
Section 11(b)(1) of the Act and the Gas Related Activities Act of 1990
apply to the energy related transactions proposed by the Partnership. In the
alternative, Section 9(c)(3) of the Act may apply in so far as an exemption
for the proposed investments in the Partnership may be granted.
If the Commission considers the proposed future transactions to require any
authorization, approval or exemption, under any section of the Act for
<PAGE> 39
Rule or Regulation other than those cited hereinabove, such authorization,
approval or exemption is hereby requested.
(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.
Not applicable.
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 transactions.
The financing authorization sought herein is not subject to the
jurisdiction of any State or Federal Commission (other than the Commission).
(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.
Inapplicable.
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 hereby requested that the Commission issue its order with respect
to the transaction proposed herein on or before September 20, 1995.
<PAGE> 40
(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
Investment Management - Office of Public Utility 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 transactions. The office of the Division of Investment Management -
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:
(a) Exhibits
A-1 Certificate of Incorporation of Energy Services.
(Incorporated by reference to File No. 70-8577)
A-2 By-Laws of Energy Services.
(Incorporated by reference to File No. 70-8577)
B-1 Form of General Partnership Agreement to be among
CNGEA, NOV Sub, and HQ-Sub.
B-2 Form of Undertaking Agreement between Consolidated
and the Partnership.
B-3 Examples of energy arbitrage transactions.
(Filed under claim of confidential treatment pursuant
to Rule 104)
<PAGE> 41
B-4 List of companies who have filed with FERC for power
marketing status.
F Opinion of counsel for Consolidated and Energy Services.
O Draft of Notice.
(b) Financial Statements
Financial statements are deemed unnecessary with respect to the
authorizations herein sought due to the nature of the matter proposed.
However, Consolidated will furnish any financial information that the
Commission shall request.
Item 7. Information as to Environmental Effects
_______________________________________
(a) Describe briefly the environmental effects of the proposed
transaction in terms of the standards set forth in Section 102 (2) (C) of the
National Environmental Policy Act 42 U.S.C. 4232 (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 or
that response.
The proposed transactions do not involve major federal action
having a significant effect on the human environment. See Item 1(a).
(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.
No federal agency has prepared or is preparing an environmental
impact statement with respect to the proposed transaction.
<PAGE> 42
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
CNG ENERGY SERVICES CORPORATION
By N. F. Chandler
Its Attorney
Date: September 7, 1995
<PAGE> 1
EXHIBIT F
September 7, 1995
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Consolidated Natural Gas Company, et al.,
SEC File Number 70-8631
Dear Sirs:
The following opinion is rendered in accordance with the requirements of
Exhibit F to Form U-1 of the Securities and Exchange Commission ("SEC") with
respect to the transactions proposed ("Proposed Transactions") by Consolidated
Natural Gas Company ("Consolidated") and Consolidated Energy Services
Corporation ("Energy Services"), (referred collectively as the "Companies"), in
the Application-Declaration at SEC File No. 70-8631, as amended ("Application-
Declaration"). In the Application-Declaration authority is requested for
Energy Services to finance a new, limited purpose subsidiary, CNG Energy
Arbitrage Corporation ("CNGEA"), which will acquire a one-third general
partnership interest in Energy Alliance Partnership ("Partnership"), a
partnership to be set up to engage in the principal business of buying and
selling natural gas and electric power, including in connection with arbitrage
transactions, principally in wholesale markets. Authority is further requested
for Energy Services to obtain for such purposes, through December 31, 2020, up
to $10,000,000 through (i) the sale of shares of its common stock, $1,000 par
value per share hare, to Consolidated, (ii) open account advances from
Consolidated, or (iii) long-term loans from Consolidated, and any combination
thereof. The Application-Declaration also requests authority for Energy
Services to use such funds obtained from Consolidated to acquire in mirror-
image form similar securities of CNGEA to enable it to finance its interest in
the Partnership. The Application-Declaration further requests authority for
Consolidated to enter into an undertaking agreement ("Undertaking Agreement")
with the Partnership to commit to providing CNGEA with up to $3,000,000 in
financing; and to make certain guarantees ("Guarantees"), either directly or
indirectly through CNGEA, of transactions of the Partnership.
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I have examined the certificate of incorporation and bylaws of the
Companies; corporate actions of the Companies relating to the Proposed
Transactions; the Application-Declaration; and such other documents, records,
laws and other matters as I deemed relevant and necessary for the purposes of
this opinion.
Based on such examination and relying thereon, I am of the opinion that
when the SEC shall have permitted the Application-Declaration to become
effective, all requisite action will have been taken by the Companies which are
parties to the Application-Declaration, except the actual carrying out thereof.
In the event the Proposed Transactions are consummated in accordance with
the Application-Declaration, I am of the opinion that:
(a) No state commission has jurisdiction of the proposed transactions;
(b) All state laws applicable to the Proposed Transactions will have
been complied with;
(c) Energy Services is validly and duly existing; the capital stock of
Energy Services will be validly issued, fully paid and
nonassessable, and the holder thereof will be entitled to the
rights and privileges pertaining thereto set forth in the
Certificate of Incorporation of Energy Services; and the open
account advances and long-term loans to Energy Services will be
valid and binding obligations of Energy Services in accordance with
their terms;
(d) Consolidated will legally acquire the capital stock of, and
interests in open account advances and long-term loans to, Energy
Services as described in the said Application-Declaration;
(e) Energy Services will legally acquire the capital stock of, and
interests in open account advances and long-term loans to, CNGEA as
described in the said Application-Declaration; and
(f) The commitment of Consolidated in the Undertaking Agreement, and
the respective Guarantees of the Companies will be valid and
binding obligations of the respective Companies; and
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(g) The consummation of the Proposed Transactions will not violate the
legal rights of the holders of any securities issued by
Consolidated or Energy Services or any associate company thereof.
I hereby consent to the use of this opinion in connection with said
filing.
Very truly yours,
N. F. Chandler
Attorney
