<PAGE> 1
File Number 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
Item 1. Description of 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 seventeen 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. Consolidated and its subsidiaries are referred to
herein as the "CNG System."
CNG Energy Services Corporation ("Energy Services"), a Delaware
corporation, is a wholly-owned nonutility subsidiary of Consolidated. Energy
Services, pursuant to various orders issued by the Securities and Exchange
Commission ("SEC" or "Commission") beginning in 1987 (See order dated February
27, 1987, Release No. 35-24329, File No. 70-7225), engages in the gas marketing
and power generation business.
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II. PROPOSED INVESTMENTS IN ENHANCED ENERGY ACTIVITIES
Consolidated as part of its core strategy to remain competitive in the
emerging integrated energy markets seeks to have Energy Services authorized to
engage in the power marketing business. Since the converging energy markets
have achieved a rapid stage of development, request is made for expeditious
processing of this application-declaration so that the opportunity for Energy
Services to become a significant participant in such markets may not be
irrevocably lost. The applicants seek authority for Energy Services to do the
following:
1. To invest, through December 31, 2001, up to $250 million to expand its
business to include that of power marketing, fuel management and other
energy related activities ("Enhanced Energy Activities") as described
in more detail below. Subsequent investments would be made pursuant to
Rule 52.
2. To participate in retail power programs authorized by state regulatory
authorities (with reservation of jurisdiction over programs other than
New Hampshire and Massachusetts and similar pilot programs put in place
by other states), and to sell power at retail to large industrial
customers obtaining power from the Bonneville Power Agency.
3. To form one or more subsidiaries in order to participate in individual
state retail power programs and as otherwise required or appropriate to
engage in its energy marketing business.
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4. To provide up to $250 million in guarantees or other credit support to
subsidiaries engaged in Enhanced Energy Activities.
III. DESCRIPTION OF ENERGY SERVICE'S PROPOSED ENHANCED BUSINESS
Energy Services seeks the authority to engage in Enhanced Energy
Activities as follows. Energy Services seeks to be an electric power and fuel
marketer in addition to being a gas marketer. Energy Services desires to be
able 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.
With the considerable gas supply from all market sources, including from
Consolidated, the plentiful supply of reliable electric power from all market
sources, the financial strength of Consolidated, and Energy Service's fuel
management capabilities, Energy Services is expected to give its customers
excellent 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, coal, 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 or electric power. It is
anticipated that these other fuels will not initially comprise a material part
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of the business of Energy Services and will be only incidental to the main
business of gas and electric power marketing and arbitrage.
CNG Power Services Corporation ("CNGPS") is a wholly-owned subsidiary of
Consolidated that is an exempt wholesale generator ("EWG") under Section 32 of
the Act and a power marketer. To the extent that the Enhanced Energy
Activities of Energy Services would include that of a power marketer, they
would broadly encompass the same kind of business as that currently being
conducted by CNGPS. It is anticipated that CNGPS, since it is limited as to
its activities as an EWG, will evolve into having a proportionally smaller role
as a power marketer once Energy Services is authorized to be a power marketer.
For example, Energy Services desires to engage in retail sales of electric
power whereas CNGPS as an EWG is barred from such business.
Energy Services currently engages in gas-related derivatives in order to
hedge against commodity price risks inherent in its gas marketing business.
Energy Services intends to engage in transactions involving both gas, power and
other fuel capacity rights, rate swaps and other commodity-based derivative
products that may be developed for use in the energy markets in which it will
participate in the ordinary course of its business as an energy company.
Energy Services 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 under Order 888 of the Federal Energy Regulatory
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Commission ("FERC") in parallel fashion to the open-access developments of the
gas markets under FERC Order 636. Power derivative markets have first occurred
in those parts of the United States, such as the West Coast, that have
relatively balanced power generation costs and more liquidity. 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 leveling of prices.
Energy Services will not deal in such derivative products for purposes of
speculation, but rather would use them only to reduce price-risk exposure
through hedging.
Energy Services will conduct its activities nationally, following the
trend being set by CNGPS which will conduct business through offices recently
opened in Atlanta, Georgia and Portland, Oregon. Energy Services may engage in
Enhanced Energy Activities with the gas utility companies in the Consolidated
System(1) or other affiliates in the Consolidated System on the same market
terms that would be available to nonaffiliate customers of Energy Services.
Energy Services 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.
____________________
(1) The utility companies in the Consolidated System are The East Ohio Gas
Company, The Peoples Natural Gas Company, Virginia Natural Gas, Inc., Hope Gas,
Inc, and West Ohio Gas Company.
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Consolidated undertakes that it will not seek recovery through higher
rates to the CNG System utility customers in order to compensate Consolidated
for any possible losses that it may sustain in Enhanced Energy Activities of
Energy Services or for any inadequate returns on investments in Enhanced Energy
Activities.
IV. SALE OF ELECTRIC POWER AT RETAIL
1. General; Reservation of Jurisdiction
Other than (i) in state pilot programs in states including New Hampshire
and Massachusetts and (ii) with Direct Served Industries ("DSIs"), as described
in more detail herein, Energy Services will not at this time make any
electricity sales at retail since such are not currently permitted by or under
state regulation. It is expected, however, that the electric industry will
continue to evolve and that more states will permit retail electricity
transactions by power marketers; in such event Energy Services would engage in
retail power sales in such additional states in order to remain competitive.
Request is hereby made for the SEC to reserve jurisdiction over retail sales of
electricity other than in pilot programs in New Hampshire, Massachusetts and
where other state pilot programs permit such sales, and in parts of the Pacific
Northwest with respect to DSI transactions, pending further developments with
respect to the permissibility of such transactions. Energy Services requests
that authority to participate in state-wide retail programs be granted without
the need for further time consuming notice in this proceeding. Adequate notice
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of the details of such programs would be provided through official action by
the various state legislatures and public utility commissions involved.
2. Participation in Retail Sales in New Hampshire
On February 1, 1996, the New Hampshire House of Representatives passed a
bill which would require New Hampshire utilities to file plans by June 1996
with the New Hampshire Public Utilities Commission ("NHPUC") to provide
customers with access to alternative suppliers. The bill allows the NHPUC to
impose a plan on utilities if none is approved prior to July 1997.
Previously, the State of New Hampshire enacted legislation in June 1995
that instructed the NHPUC to establish a retail competition pilot program open
to all classes of customers. The NHPUC issued its Order DR 95-250, dated
February 28, 1996 pursuant to such legislation. This order establishes final
guidelines and requires compliance filings with respect to a retail pilot
program (the "NHPilot"). The NHPilot provides that each New Hampshire utility
is to allow customers representing three percent of their peak loads (a state-
wide total of approximately 50 MW) to have access to alternative suppliers of
electricity for two years, starting May 28, 1996. Eligibility will be
allocated proportionately among residential, commercial and industrial
classes, based on the relative loads of those classes for each utility. There
is no deadline for the some 18,000 NHPilot customers to select alternative
suppliers.
The FERC has given approval to six utility companies serving New
Hampshire to wheel wholesale power in order to participate in the NHPilot. The
FERC is requiring such participants to submit tariffs they plan to charge
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others for the use of their power lines. Energy Services would utilize
transmission covered by such tariffs.
Energy Services requests authority to engage directly, or indirectly
through other entities as described further below, in the NHPilot in New
Hampshire.
3. Participation in Retail Sales in Massachusetts
The Massachusetts Department of Public Utilities ("DPU") initiated an
investigation into the restructuring of the electric utility industry in
February 1995. On August 16, 1995, the DPU issued its report and order ("DPU
Order"), noting that long-term cost reductions will be achieved most
efficiently by increasing competition within the generation industry. The DPU
Order also noted the need to allow broad customer choice, which permits market
forces to play the primary role in organizing electricity supply for all
consumers. The DPU Order mandated that three of the largest electric utilities
in the state submit their respective plans for a competitive electricity market
to the DPU on February 16, 1996. This deadline was met by the three companies
and one other which elected to submit a plan.
On May 1, 1996, the DPU issued draft rules for restructuring the electric
industry. The DPU accepted comments through May 24, hearings are to be held in
June and July, with the final rules to be released on September 29. By October
7, all utilities must file unbundling revenue-neutral rates for implementation
during the first quarter of 1997. The DPU will then implement restructuring on
a utility-by-utility basis, beginning in January 1997.
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In April 1996, the DPU approved two retail wheeling pilot programs
("MPilots") proposed by Massachusetts Electric Co. ("MECO"). The first MPilot,
which will begin on July 1, 1996, extends retail choice for up to 200 MW to
members of the Massachusetts High Technology Council who are currently served
under MECO's G-3 rate. The second MPilot, which is to begin on September 1,
1996, offers retail choice to residential, small commercial and industrial
customers in four communities (Lawrence, Lynn, Northhampton and Worcester) for
up to 100 MW per year with 50 MW set aside for residential customers. The
MPilots allow suppliers to aggregate loads, transfer capability
responsibilities and work through the New England Power Pool. The first MPilot
will continue until retail choice is generally available, while the second
MPilot is scheduled to terminate on December 31, 1997, the day before retail
wheeling is to begin for all customers in the state under the DPU's proposed
restructuring rules.
The DPU approved the MPilots saying they will provide valuable experience
to MECO, customers, and other participants in the transition to a competitive
market. The approval was with the understanding that customers that do not
participate will not be harmed. MECO has stated that the MPilots were
essential to test the metering and billing protocols that will be used in
broader retail wheeling programs developed in the ongoing restructuring
proceedings.
Energy Services requests authority to engage directly, or indirectly
through other entities as described further below, in one or both of the
MPilots as permitted by Massachusetts.
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4. Participation in other state approved pilot programs
Energy Services also requests authority to participate in other state
approved pilot programs without the need for any further Commission approval.
Such other pilot programs are anticipated to be similar to those already
adopted by New Hampshire and Massachusetts as described above. These pilots
would be of limited scope and duration, and would be permitted by the relevant
state commissions under safeguards to both participating and nonparticipating
utility customers. The pilot programs are inherently subject to close and
continuing surveillance by FERC and state regulatory authorities. The pilots
by their nature are anticipatory to, and extremely helpful in the development
of, state-wide restructuring of power markets, and function best with a maximum
number of supplier participants. Since the pattern of pilot programs is
already being set and approved, it serves no public purpose for the Commission
to prevent Energy Services from readily participating in pilot programs in
addition to those of New Hampshire and Massachusetts. Immediate entry into any
such programs is essential in order to compete with other potential
participants. Indeed, to require two step approval of retail marketing in each
state would seem wasteful of time and expense for both the Commission and
Energy Services, would place Energy Services at a significant competitive
disadvantage very difficult to overcome, and would deprive the pilot programs
and consumers of the benefits of rapid broad supplier participation.
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5. Sales to Direct Served Industries
The DSIs are 16 industrial facilities located in the Pacific Northwest
who receive most of their power needs directly from the Bonneville Power
Administration ("BPA"). The BPA is a wholesale, federal power marketing agency
whose customers (aside from the DSIs) are retail utilities. Unlike other
industrial facilities, the DSIs are the only northwest industrials who receive
power directly from BPA, instead of through a retail utility.
The DSIs consist of eight aluminum smelters, a copper wire extrusion
facility, two chemical facilities, a pulp and paper plant, a nickel smelter, a
steel mill, a titanium smelter, and a magnesium/ferrosilicon smelter currently
shut down. They account for approximately 30% of BPA's $2 billion annual
revenues and total about 28% of BPA's annual load.
Prior to October 1995, the DSI's were contractually obligated to receive
all of their firm and nonfirm (top quartile) power requirements from BPA
through the year 2001. However, in March of 1995, BPA and the DSIs agreed to
allow the DSIs access to the open market for one-half of their top quartile
power needs starting October 1995. Since then, the BPA and most of the DSIs
have agreed to a five year power sales agreement that allows BPA to retain a
large share of DSI load, but at the same time allows the DSIs access to the
open market for an estimated 1100 MW out of about a 3300 MW total.
The ability of Energy Services to seek to supply this load is important
to its power and gas marketing efforts. Energy Services' success at entering
into power/services contracts with DSIs will enhance Energy Services' marketing
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efforts with other customers nationwide. Energy Services has a power marketer
on staff that has expertise and personal contacts with this customer class;
this distinguishes Energy Services from other marketers and utilities. To the
extent Energy Services can successfully enter into contracts with the DSIs,
Energy Services' credibility as a reliable source of power will be enhanced and
it will help its marketing efforts with public utilities, investor owned
utilities and other marketers. Also, the DSIs are an attractive load in terms
of revenue potential; they are a flat load thus allowing more flexibility in
mixing and matching different shapes and sources of energy in the service of
maximizing margins.
Energy Services requests authority to participate in the business of
providing power to the DSIs.
V. ACQUISITION OF INTERESTS IN OTHER ENTITIES IN ORDER TO ENGAGE IN ENHANCED
ENERGY ACTIVITIES
In order for Energy Services to engage in retail pilot programs, in other
programs allowing retail sale of electric energy as permitted on a state-by-
state basis, and otherwise in its energy marketing business, it may be required
to acquire interests in special purpose subsidiaries, corporations,
partnerships, limited liability companies, joint ventures or other entities
("Special Purpose Entities") in which it may have a 100% interest, or a
majority or a minority equity or debt position with nonaffiliates. For
example, Energy Services seeks to participate in the NHPilot through Green
Mountain Energy Partners L.L.C. ("Green Mountain"), a limited liability
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company in which it, Noverco, Hydro-Quebec and Green Mountain Power
Corporation, a Vermont utility company, will have interests. Energy Services
desires the flexibility to either acquire an interest in Green Mountain Energy
directly, or alternatively indirectly through the acquisition of a direct
interest in Green Mountain by the Energy Alliance Partnership (referred to
further below) to be formed by Noverco, Hydro-Quebec and Energy Services.
Other similar state-specific oriented entities may be used to engage in retail
sales of gas as such is permitted by the other states. Energy Services,
therefore, request authority to acquire interests in Special Purpose Entities
without further Commission approval with respect to retail electric and gas
programs that it is authorized to enter by the Commission.
V. ENHANCED ENERGY ACTIVITIES APPROPRIATE UNDER SECTION 11(b)(1) OF THE ACT
Under Section 10(c)(1) of the Act, the Commission cannot approve an
acquisition that would be detrimental to the carrying out of the provisions of
Section 11. Section 11 directs the Commission to limit the nonutility
interests of a registered holding company to those that are reasonable
incidental, or economically necessary or appropriate to such company's utility
operations, including interests in any other business which the Commission
finds 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.
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The applicants believe that in view of the increasing integration of the
energy markets, the Commission should find that the approval of the proposal
for Energy Services to engage in Enhanced Energy Activities would not be
detrimental to the carrying out of Section 11 and so require an adverse finding
under Section 10(c)(1). Further, the proposed transactions should be regarded
as needed and appropriate in the public interest, furthering the interests of
investors and consumers, and beneficial to the proper functioning of the
Consolidated system. As discussed below, activities similar to the Enhanced
Energy Services have been approved by the Commission in other proceedings under
the Act. Additionally, as referred to below, the Commission through other
actions has indicated its awareness of the need to adopt a different attitude
towards what is appropriate and beneficial to utilities in light of the
fundamental changes now occurring in the integrated energy markets today.
By order dated August 18, 1995, HCAR No. 26359, the Commission in
permitted a service company subsidiary of Northeast Utilities Service Co., a
registered electric holding company, to market electric power, and to
substitute other forms of energy for electricity.
By order dated March 14, 1996, HCAR No. 26493, File No. 70-8769, the
Commission authorized a subsidiary of Eastern Utilities Associate to buy, sell
and broker electric power in wholesale markets, and to furnish fuel marketing
services to electric power producers. The Commission in such order reserved
jurisdiction over such subsidiary's buying, selling and brokering electric
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power and fuel in retail markets and to any party other than an electric power
producer, pending completion of the record.
Enhanced Energy Activities for which Energy Services herein seeks
authorization are similar to those activities authorized for a subsidiary of
Energy Services in Commission order dated April 30, 1996 (the "Energy Alliance
Order"), HCAR No. 26512. In the Energy Alliance Order, the Commission approved
the proposed acquisition by Consolidated of an interest in the Energy Alliance
Partnership, a nonutility company to be formed to engage in marketing and
brokering not only of natural gas, but also of electric power and other fuels,
in both wholesale and retail markets.(2) The Energy Alliance Order is broad in
that it permits the Consolidated System to engage, without geographic
restriction, in marketing and brokering activities as a full participant in the
integrated energy markets. The partnership formed to engage in this business
can deal in various types of energy commodities rather than limiting itself to
energy of the type sold by the utilities in the registered system (in this
______________________
(2) The Commission found "...that approval of the proposed acquisitions would
not be 'detrimental to the carrying out of the provisions of section 11'
and so require an adverse finding under section 10(c)(1)." In addition,
the Commission noted "...that the transactions would appear to be within
the plain meaning of the statute, viz the proposed brokering and marketing
and related activities are 'reasonably incidental, or economically
necessary or appropriate on a finding that they are necessary or
appropriate in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning of the integrated
public-utility system.'" HCAR No. 2652, P. 14.
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case, gas).(3) Energy Services should be granted the same authority as has
already been granted to its subsidiary.
The Commission in the Energy Alliance Order reserved jurisdiction over
the proposed retail electric marketing activities of the new company. Energy
Services seeks authority in this proceeding not only to engage in the same type
of marketing activities available to its subsidiary under the Energy Alliance
Order and the other orders discussed immediately below, but also to
participate in the NHPilot, the MPilot and similar state approved pilot
programs through the partnership authorized in the Energy Alliance Order.
The Commission by supplemental order dated May 23, 1996 (the "EUA
Order"), HCAR No. 26519, issued subsequent to the Energy Alliance Order,
released its reservation of jurisdiction over retail marketing of electric
power with respect to the NHPilot and MPilot. In the EUA Order the Commission
noted that competitive pressures are rapidly increasing in the contemporary
electric business. This increased competition until now has been most evident
in the bulk power market, but there have recently been an increasing number of
proposals that would allow a retail customer to choose its electricity supplier
and require utilities to engage in retail wheeling. The Commission further
___________________
(3) With respect to gas registered systems in particular, the Commission noted
"...that federal legislation specifically encourages gas holding companies
to invest and participate in.....projects involving electric power." Id.,
P.12.
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stated that it recognized the need to apply the standards of Section 9(a)(1)
and 10, and by reference Section 11(b)(1), in light of the changing realities
of the utility industry. It noted, among other things, the national policy
(reflected most recently in Order No. 888 of FERC) to promote efficient and
competitive energy markets. In Eastern Utilities Assocs., HCAR No. 26232 (Feb.
15, 1995), the Commission acknowledged that participation of registered system
companies in energy marketing and brokering activities may promote greater
competition and thus further the public interest in a sound electric and gas
utility industry. The Commission stated in the EUA Order that these same
concerns extend to competition in retail as well as wholesale markets.
By order dated May 23, 1996, HCAR No. 26520, the Commission authorized
New England Electric System to, among other things, establish marketing
companies to market electric power at retail and wholesale at negotiated prices
in certain enumerated states. By order dated May 31, 1996, HCAR No. 26527, the
Commission authorized the expansion of electricity, natural gas and other
energy commodities marketing activities for a subsidiary of Unitil Corporation.
The Commission reserved jurisdiction over retail sales except those occurring
as part of these registered systems' participation in the NHPilot and MPilot.
Both orders contain a discussion of the increasingly competitive energy markets
similar to that in the EUA Order.
Changes in the structure and functioning of the energy industry were
examined in a recent study and report by the Division of Investment Management.
See The Regulation of Public-Utility Holding Companies, Report of the Division
<PAGE> 19
of Investment Management, Securities and Exchange Commission (June 1995) (the
"Report"). The Commission approved the issuance of the Report on June 20,
1995. In the Report, the Commission recognized the national policy to promote
efficient and competitive energy markets. The Report further recognizes the
evolution of the registered holding companies away from traditional utility
activities and towards broader energy-related businesses(4).
Pursuant to a recommendation in the Report(5), the Commission on June 20,
1995 proposed the adoption of Rule 58, HCAR No. 26313. Rule 58 would exempt
from prior Commission approval, as being in the ordinary course of business
pursuant to Section 9(c)(3), the acquisition by a registered holding company
or any of its subsidiaries of securities of an energy-related company or gas-
____________________
(4) "In recent years, there has been a dramatic increase in the volume of
applications by registered holding companies seeking to engage in
nonutility activities that compliment, or are natural extensions of, the
gas and electric utility businesses. These filings reflect an evolution of
the registered holding companies away from traditional, regulated utility
functions and towards broader energy-related businesses." The Report,
P. 88.
(5) "The SEC must continue to respond flexibly to change in the utility
industry. Toward this end, the Division believes that the registered
holding companies should be permitted to invest in diversified activities
without unnecessary regulatory obstacles and recommends consideration of a
rule that would exempt, subject to certain conditions, investments in
specified energy-related activities from prior SEC approval." Id., P. 87.
<PAGE> 20
related company (as respectively defined in the proposal).(6) Acquisitions of
securities under the rule would be subject to certain reporting requirements,
and acquisitions of securities of an energy-related company would also be
subject to certain investment limitations. The applicants believe that the
Enhanced Energy Activities for which approval is requested in this proceedings
would come within the types of activities enumerated in the proposed rule as
permitted for an energy-related company.
Considering the above authorities, the granting of authority for Energy
Services to engage in Enhanced Energy Activities would clearly be within the
perimeters of the Commission's current interpretation of Section 11(b)(1)
policy under the Act.
____________________
(6) "The proposed rule and related rule amendments will eliminate unnecessary
regulatory burdens and paperwork associated with filings by a registered
holding company for Commission approval to invest in nonutility businesses
that are closely related to a system's core utility business." HCAR No.
26313, P. 1. "The Commission believes that the registered holding-company
systems should be relieved of the regulatory burden of having to file
multiple applications for authority to engage in nonutility activities,
through investments in the securities of other companies, that are of the
same or similar character or type as those the Commission has allowed in
previous cases." Id. P. 24.
<PAGE> 21
VI. 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, $1.00 par value, to
Consolidated at an amount greater than par up to a maximum of $10,000 per
share, (ii) open account advances as described below, or (iii) long-term loans
from Consolidated, in any combination thereof. Transactions in amounts in
excess of $250,000,000 used to engage in Enhanced Energy Activities will occur
pursuant to Rule 52. 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
SEC. Open account advances will be made under letter agreement
with Energy Services and pursuant to a note issued by it, 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
<PAGE> 22
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
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.
VII. GUARANTEES
Energy marketing companies, though entering many contracts for high
volumes of gas or power, 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
<PAGE> 23
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.
By order dated March 28, 1996, Release No. 35-26500, File No. 70-8667,
the SEC authorized Consolidated, through March 31, 2001, to enter into
guarantee arrangements, obtain letters of credit and otherwise provide credit
support with respect to the obligations of Energy Services and other applicants
in such proceeding. The aggregate amount of all such arrangements would not
exceed $2 billion. Guarantees by Consolidated of Energy Services' obligations
arising in connection with it engaging in Enhanced Energy Activities would
occur under such authorization. Energy Services requests the authority to
provide the same type of credit support, in an amount not to exceed an
aggregate of $250 million, to its Special Purpose Entities as it may be able to
obtain from Consolidated.
VIII. 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
<PAGE> 24
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;
and any financing between Energy Services and any of its subsidiaries 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 the respective subsidiary. All the authorizations described below
would be for a period ending December 31, 2001.
(1) For Energy Services to obtain up to $250,000,000 from Consolidated
for the purpose of accomplishing its direct or indirect investment
in Enhanced Energy Activities.
(2) For Special Purpose Entities to obtain up to $250,000,000 from
Energy Services needed for such Special Purpose Entities to engage
in Enhanced Energy Activities.
(3) For Energy Services to make guarantees and provide other credit
support up to an aggregate of $250,000,000 for Special Purpose
Entities.
IX. 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
<PAGE> 25
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, through CNGPS, an EWG, a 1% general
partnership interest in Lakewood Cogeneration, L.P. ("Lakewood"), also an EWG.
CNG Power Company, a wholly-owned subsidiary of Energy Services, owns a 34%
limited partnership in Lakewood. 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 March 31, 1996
was $722,442,000; 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 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 at this time do not render
services, directly or indirectly, to the EWGs in the Consolidated System,
<PAGE> 26
thereby satisfying Rule 53(a)(3). Copies of the Form U-1 filings have been
sent to the state regulators pursuant to Rule 53(2)(4) in connection with
Consolidated's only filing for EWG and FUCO financing, File No. 70-8759. An
order was issued in such proceeding on May 30, 1996 (Release No. 35-26523).
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.
X. RULE 24 CERTIFICATES
It is also requested that Rule 24 Certificates of Notification be filed
within 45 days after the end of each quarterly calendar period to report to the
Commission with respect to transactions authorized pursuant to this filing.
Such certificates shall contain the following information:
1. A balance sheet as of the end of such period, and a statement of
income and expense for the period for each Special Purpose Entity.
2. A statement indicating as a percentage of total revenues of Energy
Services for the period, the amount of revenues attributable to
Enhanced Energy Activities.
3. The agreement and transaction information contained in the
attachments to the Energy Services' power marketing informational
filings with FERC.
<PAGE> 27
4. Energy Services' guarantees or other credit support of Enhanced
Energy Activities of Special Purpose Entities.
The above information will be reported in the Rule 24 Master Certificates
of Notification filed under File No. 70-8667.
Item 2. Fees, Commissions and Expenses
______________________________
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 $22,000, consisting of the
$2,000 filing fee under the Act, $15,000 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, and $5,000 for miscellaneous other
expenses.
The charges of Consolidated Natural Gas Service Company, Inc., 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> 28
Item 3. Applicable Statutory Provisions
_______________________________
Sections 6(a) and 7 and Rule 43 are deemed applicable to the issuance of
securities by Energy Services and/or Special Purpose Entities.
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 or other equity
interests, open account advance debits and notes of Special Purpose Entities
and (iii) by Special Purpose Entities of the capital stock or other equity
interests, open account advance debits and notes of Special Purpose Entities at
the next lower tier.
Sections 12(b) and Rule 45 are considered applicable to guarantees or
other credit support arrangements by Energy Services and/or Special Purpose
Entities of their respective subsidiaries in connection with Enhanced Energy
Activities.
Section 11(b)(1) of the Act applies to the Enhanced Energy Activities
proposed by Energy Services.
<PAGE> 29
If the Commission considers the proposed future transactions to require
any authorization, approval or exemption, under any section of the Act for Rule
or Regulation other than those cited herein above, such authorization, approval
or exemption is hereby requested.
Item 4. Regulatory Approval
___________________
The financing authorization sought herein is not subject to the
jurisdiction of any State or Federal Commission (other than the Commission).
Item 5. Procedure
_________
Given the pressing competitive conditions and the need to immediately
enter into test markets, it is hereby requested that the Commission issue its
order with respect to the transaction proposed herein as soon as possible, but
in any event on or before September 2, 1996.
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.
<PAGE> 30
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)
F Opinion of counsel for Consolidated and Energy Services.
(To be filed by amendment)
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
_______________________________________
The proposed financing transactions do not involve major federal action
having a significant effect on the human environment.
No federal agency has prepared or is preparing an environmental
impact statement with respect to the proposed transaction.
<PAGE> 31
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 D. M. Westfall
Senior Vice President
and Chief Financial Officer
CNG ENERGY SERVICES CORPORATION
By N. F. Chandler
Its Attorney
Date: July 12, 1996
<PAGE> 1
EXHIBIT O
(Proposed Notice Pursuant to Rule 22f)
(Release No. 35- )
FILINGS UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("ACT")
July , 1996
Notice is hereby given that the following filing(s) has/have been made with the
Commission pursuant to provisions of the Act and rules promulgated thereunder.
All interested persons are referred to the application(s) and/or declaration(s)
for complete statements of the proposed transaction(s) summarized below. The
application(s) and/or declaration(s) and any amendments thereto is/are
available for public inspection through the Commission's Office of Public
Reference. Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in writing by
August , 1996 to the Secretary, Securities and Exchange Commission,
Washington, DC 20549, and serve a copy on the relevant applicant(s) and/or
declarant(s) at the address(es) specified below. Proof of service (by
affidavit or, in case of an attorney at law, by certificate) should be filed
with the request. Any request for hearing shall identify specifically the
issues of fact or law that are disputed. A person who so requests will be
notified of any hearing, if ordered, and will receive a copy of any notice or
order issued in the matter. After said date, the application(s) and/or
declaration(s), as filed or as amended, may be granted and/or permitted to
become effective.
<PAGE> 2
Consolidated Natural Gas Company, et al. (70- )
__________________________________________________
Consolidated Natural Gas Company ("Consolidated"), CNG Tower, Pittsburgh,
Pennsylvania 15222-3199, a registered holding company, and its wholly-owned
non-utility subsidiary, CNG Energy Service Corporation ("Energy Services"), One
Park Ridge Center, Pittsburgh, Pennsylvania 15244-0746, have filed an
application-declaration under Sections 6(a), 7, 9(a), 10 and 12(b) of the Act
and Rule 45 thereunder.
CNG Energy Services Corporation ("Energy Services"), a Delaware
corporation, is a wholly-owned nonutility subsidiary of Consolidated. Energy
Services, pursuant to various orders issued by the Securities and Exchange
Commission ("SEC" or "Commission") beginning in 1987 (See order dated February
27, 1987, Release No. 35-24329, File No. 70-7225), engages in the gas marketing
and power generation business.
The applicants seek authority for Energy Services to do the following:
1. To invest, through December 31, 2001, up to $250 million to expand its
business to include that of power marketing, fuel management and other
energy related activities ("Enhanced Energy Activities").
2. To participate in retail power programs authorized by state regulatory
authorities, and to sell power at retail to large industrial customers
obtaining power from the Bonneville Power Agency.
<PAGE> 3
3. To form one or more subsidiaries in order to participate in individual
state retail power programs and as otherwise required or appropriate to
engage in its energy marketing business.
4. To provide up to $250 million in guarantees or other credit support to
subsidiaries engaged in Enhanced Energy Activities.
Energy Services seeks the authority to engage in Enhanced Energy
Activities as follows. Energy Services seeks to be an electric power and fuel
marketer in addition to being a gas marketer. Energy Services desires to be
able 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.
It is expected that the other fuels will include oil and other
hydrocarbons, coal, 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 or electric power.
CNG Power Services Corporation ("CNGPS") is a wholly-owned subsidiary of
Consolidated that is an exempt wholesale generator ("EWG") under Section 32 of
the Act and a power marketer. To the extent that the Enhanced Energy
Activities of Energy Services would include that of a power marketer, they
would broadly encompass the same kind of business as that currently being
<PAGE> 4
conducted by CNGPS. It is anticipated that CNGPS, since it is limited as to
its activities as an EWG, will evolve into having a proportionally smaller role
as a power marketer once Energy Services is authorized to be a power marketer.
For example, Energy Services desires to engage in retail sales of electric
power whereas CNGPS as an EWG is barred from such business.
It is proposed for Energy Services to raise funds for the purposes
described herein by (i) selling shares of its common stock, $1.00 par value, to
Consolidated at an amount greater than par up to a maximum of $10,000 per
share, (ii) open account advances as described below, or (iii) long-term loans
from Consolidated, in any combination thereof. Transactions in amounts in
excess of $250,000,000 used to engage in Enhanced Energy Activities will occur
pursuant to Rule 52. 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
SEC. Open account advances will be made under letter agreement
with Energy Services and pursuant to a note issued by it, 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
<PAGE> 5
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
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.
By order dated March 28, 1996, Release No. 35-26500, File No. 70-8667,
the SEC authorized Consolidated, through March 31, 2001, to enter into
<PAGE> 6
guarantee arrangements, obtain letters of credit and otherwise provide credit
support with respect to the obligations of Energy Services and other applicants
in such proceeding. The aggregate amount of all such arrangements would not
exceed $2 billion. Guarantees by Consolidated of Energy Services' obligations
arising in connection with it engaging in Enhanced Energy Activities would
occur under such authorization. Energy Services requests the authority to
provide the same type of credit support, in an amount not to exceed an
aggregate of $250 million, to its energy marketing subsidiaries as it may be
able to obtain from Consolidated.
____________________________
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
Jonathan G. Katz
Secretary
