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File Number 70-8853
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
AMENDMENT NO. 1
DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
By
CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
Names and addresses of agents for service:
S. E. WILLIAMS, Senior Vice President D. M. WESTFALL, Senior Vice
and General Counsel President and Chief Financial
Consolidated Natural Gas Company Officer
CNG Tower Consolidated Natural Gas Company
625 Liberty Avenue CNG Tower
Pittsburgh, Pennsylvania 15222-3199 625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
J. M. HOSTETLER, Attorney
Consolidated Natural Gas Service Company, Inc.
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
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File Number 70-8853
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1 TO FORM U-1
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.
GUARANTEE OF CNG POWER SERVICES CORPORATION OBLIGATIONS
This Declaration is filed by Consolidated Natural Gas Company
("Consolidated") to request authorization under the Public Utility Holding
Company Act of 1935 ("Act") to guarantee obligations of its wholly-owned
subsidiary, CNG Power Services Corporation ("Power Services").
Consolidated is a public utility holding company registered as such under
the 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 companies, most of which are in the natural gas
business. Power Services is the Consolidated system's ("CNG System")
national power marketing entity and has exempt wholesale generator ("EWG")
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status under Section 32 of the Act. In 1995, Power Services became a
leading power marketer in the U. S. -- in terms of mega-watt hour sales
of electricity.
By order dated March 28, 1996, HCAR No. 25600, File No. 70-8667
("Financing Order"), the Securities and Exchange Commission ("SEC")
authorized Consolidated and listed subsidiaries to engage in various
financing and related transactions, including guarantees, through March
31, 2001. The Financing Order authorized guarantees of obligations of
applicant subsidiaries by Consolidated and certain other subsidiaries in
an aggregate amount of up to $2.0 billion. Power Services as an EWG is
exempt from all provisions of the Act and therefore was not an applicant
in the Financing Order proceeding. Thus, additional authorization is
required for Consolidated to guarantee the obligations of Power Services
within the $2.0 billion limitation.
NEED FOR PARENT COMPANY GUARANTEES
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 CNG Energy Services Corporation ("Energy Services")
pursuant to certain gas purchase, sales and transportation contracts. This
guarantee authority is now superseded by the new $2 billion system-wide
guarantee authority contained in the Financing Order. The reason for obtaining
the guarantee authority in the November 16, 1993 Order was the structural
change in the gas markets under FERC Order 636, which necessitated gas
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marketing companies, such as Energy Services, to be able to demonstrate
financial credibility with customers. With structural changes in the electric
markets, the same need to show financial credibility now applies to power
marketers, such as Power Services.
Power marketing companies, though entering into many contracts for the
purchase and sale of 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 power marketers.
However, often times power marketers are subsidiaries of financially strong
parent companies.
Consequently, the usual method to establish the financial credibility of
the power marketer is for the parent (such as Consolidated) to stand behind its
subsidiary through guarantees, thus allowing the subsidiary to compete
effectively in an increasingly deregulated market.
Consolidated, therefore, seeks authority through March 31, 2001, to
guarantee, either directly or indirectly, the power transactions of Power
Services, to the extent required by Power Service's customers to consummate
transactions. The aggregate amount of such guarantees will be limited to no
more than $250 million. Thus, Consolidated will not make a guarantee under the
authority granted in this proceeding if the effect of such an additional
guarantee would be for the aggregate of all outstanding guarantees under such
authorization to exceed $250 million. Furthermore, Consolidated will not
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guarantee any obligation of Power Services (1) to the extent that such would
cause all obligations and investments in EWGs and FUCOs (foreign utility
companies) by Consolidated to exceed fifty percent (50%) of the CNG System's
consolidated retained earnings as specified in Commission Rule 53(a)(1), or (2)
to the extent that it would cause Consolidated to not comply with any of the
other standards in Rule 53 (a) and (b).
FINANCIAL EXPOSURE TO PARENT FROM GUARANTEES IS LIMITED
Power Services intends to use many ways which are available to limit
financial risks in today's electric market, 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.
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 on the wholesale electric market. The benefit of market input
was lacking in the wholesale electric market in the past. Sales prices were
determined independently by regulation. Now the market establishes the price
of electricity to be delivered to the wholesale power market, 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 electricity
should be available at the market price at which Power Services would be
obligated to perform.
MARKET HEDGING TOOLS. Generally, Power Services would strive to match
its portfolio of its power sales contracts with a portfolio of power purchase
contracts with similar terms. For instance, long-term firm sales contracts
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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 Power Services' 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 electric risk-management contracts is new, but growing fast.
Tools such as electric futures contracts and options on electric futures, are
now traded on the New York Mercantile Exchange, and electric price swap
agreements which are binding agreements between parties on a private contract
basis, are available and will become essential tools to manage risk on some
types of electric sales that cannot be matched with a corresponding electric
purchase.
In its use of hedging tools, Power Services 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 Power Service'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
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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 power that should have been provided to a
customer and the cost of replacement power when the performance failure occurs.
Consequential damages are generally excluded.
SPECIFICATION OF OBLIGATIONS. Contractual obligations are now specific.
In the past, electric sales in the wholesale power market were typically made
under full requirements contracts. Today such contracts have specific megawatt
obligations, thus limiting the exposure.
SHORTER TERMS. There is also less risk exposure because the terms of
electric contracts for the wholesale power market are now generally month to
month, as compared to the previous industry standard of several years.
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 Power Services 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 as available as those for gas transactions.
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AUTHORIZATION REQUESTED
Consolidated requests that, for the reasons given above, it be
authorized to issue guarantees of the electric purchase and sales contracts of
Power Services, from time to time through March 31, 2001, with the aggregate
amount of such guarantees not to exceed $250 million at any one time. The
actual risk exposure to Consolidated is expected to be much less due to the use
of price hedging tools and limiting contract terms. Additionally, no new
guarantees of Power Services' sales obligations would be made by Consolidated
as long as there are any current defaults by Power Services on any of its
delivery obligations.
RULE 24 CERTIFICATES OF NOTIFICATION
Consolidated proposes to file Rule 24 Certificates of Notification
within 60 days after the end of each of the first three calendar quarters and
within 90 days after the end of the fourth calendar quarter, setting forth:
(i) a balance sheet as of the end of such quarter, and statement of income and
expense for such quarter, for Power Services; (ii) the aggregate amount, as of
the relevant quarterly reporting date, of all guarantees issued by or for the
account of CNG on behalf of Power Services; (iii) the face amount of any
guarantee issued by or for the account of CNG on behalf of Power Services since
the prior quarterly report; and (iv) the amount of any fees or interest
payable in respect of any guarantee issued by or for the account of CNG on
behalf of Power Services since the prior quarterly report.
RULE 53 SATISFIED
Rule 53 promulgated under the Act states that in determining whether to
approve the guarantee of an EWG by a registered holding company, the Commission
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shall not make a finding that the circumstances are such as to constitute the
making of such guarantee an improper risk for such company 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 FUCO at
this time. 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, 1995
was $654,953,000; 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
$17,543,000, 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,
thereby satisfying Rule 53(a)(3). There has been compliance with Rule 53(2)(4)
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in regard to Consolidated's only filing for EWG and FUCO financing, currently
pending at File No. 70-8759.
None of the conditions described in Rule 53(b) exist with respect to
Consolidated, thereby satisfying Rule 53(b) and making Rule 53(c) inapplicable.
(b) Describe briefly, and where practicable state the approximate
amount of, any material interest in the proposed transaction, direct or
indirect, of any associate company or affiliate of the applicant or declarant
or any affiliate of any such associate company.
None, except as set forth in Item 1(a).
(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, describe 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).
Item 2. Fees, Commissions and Expenses
______________________________
(a) State (1) the fees, commissions and expenses paid or incurred, or
to be paid or incurred, directly or indirectly, in connection with the proposed
transaction by the applicant or declarant or any associate company thereof, and
(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 in connection with the
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proposed transaction will not exceed $7,000, consisting of $2,000 paid to
the Commission as a filing fee for this Form U-1, $4,000 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 Form U-1 and other documents, and $1,000 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 in
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 Declaration and other related
documents and papers required to consummate the proposed transactions are
not considered to be fees or commissions.
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 12(b) of the Act and Rule 45 promulgated thereunder are
deemed applicable to the proposed transaction set forth in this
Declaration.
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If the Commission considers the proposed transaction to require any
authorization, approval or exemption, under any section of the Act for
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.
No State or Federal Commission (other than the Commission) has
jurisdiction over the transactions proposed herein.
(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.
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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 June 10, 1996.
(b) State (i) whether there should be a recommended decision by a
hearing officer, (ii) whether there should be a recommended decision by any
other responsible officer of the Commission, (iii) whether the Division
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.
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Item 6. Exhibits and Financial Statements
_________________________________
The following exhibits and financial statement are made a part of his
statement:
(a) Exhibits
B Form of Guarantee (See original U-1 filed April 24, 1996.)
F Legal Opinion
O Draft of Rule 22(f) Notice - (See original U-1.)
(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. 4312(2) (C)]. If the response to
this item is a negative statement as to the applicability of Section 102(2) (C)
in connection with the proposed transaction, also briefly state the reasons or
that response.
The proposed transactions do not involve major federal action having a
significant effect on the human environment. See Item 1(a).
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(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.
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
Date: August 2, 1996
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EXHIBIT F
August 2, 1996
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Consolidated Natural Gas Company, et al.,
Declaration on Form U-1
SEC File Number 70-8853
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 proposed guarantees by Consolidated Natural Gas Company
("Consolidated"), of power marketing transactions by CNG Power Services
Corporation ("Power Services"), as set forth in the captioned declaration at
SEC File No. 70-8853("Declaration").
I have examined the certificate of incorporation and bylaws of
Consolidated, the Declaration on Form U-1 and such other documents as I have
deemed necessary for the purpose of rendering this opinion. Based on such
examination and relying thereon, I am of the opinion that when the SEC shall
have permitted the Declaration to become effective, all requisite action will
have been taken by Consolidated, a party to the Declaration, except the actual
carrying out thereof.
In the event the proposed transactions are consummated in accordance with
the 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) The guarantees by Consolidated of the aforesaid obligations of
Power Services will be valid and binding obligations of
Consolidated in accordance with their terms; and
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(d) The consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by
Consolidated or by an associate company thereof.
I hereby consent to the use of this opinion in connection with the
Declaration.
Sincerely,
J. M. Hostetler
Attorney
