File Number 70-8759
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Post-Effective Amendment No. 3
to
Form U-1
APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
By
CONSOLIDATED NATURAL GAS COMPANY
CNG INTERNATIONAL CORPORATION
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
Consolidated Natural Gas Company, a registered holding company,
is the parent of the other party
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>
File Number 70-8759
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Post-Effective Amendment No. 3
to
FORM U-1
APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY
HOLDING COMPANY ACT OF 1935
Item 1. Description of Proposed Transaction
-----------------------------------
1.1 Introduction. Consolidated Natural Gas Company (the "Company"
------------
or "CNG"), a registered holding company under the Public Utility Holding
Company Act of 1935, seeks to expand the geographic scope of certain of its
core business activities to foreign energy markets. These activities,
which will be conducted through CNG's newly-formed subsidiary CNG
International Corporation ("CNG International"), include gas transmission
and storage, gas exploration and production, the brokering and marketing of
electricity, gas and other energy commodities, energy consulting in foreign
energy markets, and the provision of administrative, technical,
construction, operating, maintenance and other management services to
nonassociates with respect to their foreign operations (collectively,
"Foreign Energy Activities").
By order dated May 30, 1996, CNG was authorized to establish CNG
International to invest in foreign utility companies ("FUCOs") and exempt
wholesale generators ("EWGs") located outside of the United States.
Holding Co. Act Release No. 26523.<1> The order further authorized the
formation and capitalization of intermediate subsidiaries to hold interests
in such EWGs and FUCOs, and the provision of up to $300 million credit
support for these entities. The order, however, reserved jurisdiction
over the proposed investment of up to $300 million in Foreign Energy
---------------------
<1> A notice of the filing was issued on February 9, 1996. No requests
for hearing were received.
<PAGE>
Activities, the up to $300 million credit support as it relates to these
activities, and related transactions.
Accordingly, CNG requests authority through March 31, 2001 to invest
up to $300 million through CNG International in gas transmission and
storage, gas exploration and production, and energy brokering and marketing
activities outside of the United States. To the extent Commission approval
may be required, CNG further requests authority to provide guarantees and
other credit support for these activities through March 31, 2001, up to an
aggregate amount of $300 million at any one time outstanding, and for
related transactions. In this post-effective amendment, CNG seeks specific
authority with respect to proposed investments by CNG International of up
to $50 million in a Bolivian pipeline project, and up to $25 million in an
Uruguayan pipeline project, including the formation and capitalization of
such entities as may be required to hold CNG International's interests in
the pipeline projects and related transactions, and asks the Commission to
reserve jurisdiction over the balance of the proposed transactions,
including retention of the oil pipeline in connection with the Bolivian
project.
CNG has been providing, and will continue to provide, copies of
filings in this matter to its state regulators, Ohio Public Utilities
Commission, Pennsylvania Public Utility Commission, and West Virginia
Public Service Commission. There has been no adverse comment from those
regulators.
Time is of the essence. As explained herein, the bid bond in
connection with the Bolivian project must be submitted in the near future.
Accordingly, CNG requests the Commission issue its order approving
the proposed investments no later than October 25, 1996.
1.2 Background. CNG, through its subsidiaries, is engaged in all
----------
phases of the natural gas business: exploration, production, purchasing,
gathering, transmission, storage, distribution and marketing. It is also
involved in gas storage activities and the extraction and sale of oil,
condensate, natural gasoline, butane, propane and ethane, and electric
power marketing.
<PAGE>
For the year ending December 31, 1995, CNG had operating revenues of
$3.307 billion. As of December 31, 1995, CNG had consolidated assets of
$5.418 billion.
CNG continues to be one of the financially strongest companies in the
industry. The ratio of long-term debt to total capitalization is a
conservative 35 percent. The major rating agencies maintain high quality
credit ratings of AA, AA-minus or A for the Company's senior debentures,
and its commercial paper has the highest ratings. These factors combine to
give CNG flexibility and a solid foundation for its business strategy.
As part of its business strategy, the Company is systematically
seeking new ventures, both international and domestic, that will build upon
the system's core competency as a provider of energy and energy services.
In 1995, CNG formed a strategic alliance with EnergyAustralia,
Australia's largest electric utility. CNG is helping EnergyAustralia to
develop its natural gas marketing capabilities in the restructured
Australian energy market. It is anticipated that the two companies
together will identify and develop energy infrastructure projects in
Australia and Asia.
Earlier this year, the Commission authorized CNG to enter into a joint
venture with two Canadian firms: Hydro-Quebec, North America's largest and
lowest-cost generator of electricity, and Noverco, parent of Quebec's
largest gas distributor.<2> It is anticipated that the companies together
will market a broad range of electric, gas and other energy supplies and
services initially in the northeastern United States but may move into
other market areas.
----------------------
<2> Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (Apr.
----------------------------
30, 1996).
<PAGE>
As the Commission has recognized, the energy industry is rapidly
evolving. Competition is overtaking regulation as the guiding force.<3>
As recent events illustrate, the industry is moving quickly toward a more
integrated, more dynamic global energy marketplace. The Wall Street
------
Journal, on August 13, 1996, reported that the first-ever Mexican gas
concession has been awarded to a consortium of U.S. and Mexican firms:
The exclusive, 12-year concession to serve the border city of
Mexicali, begins a privatization process that will open the entire
country to natural-gas providers, creating a $3 billion-a-year market
for private utilities over the next decade, according to industry
sources.<4>
The following day, the Journal reported that "giant energy companies,
mainly U.S. ones, are vying to dominate access routes between Latin
America's natural-gas fields and its big cities." The paper reported that:
Neighboring countries in the Southern Cone . . . have decided that
knitting a vast gas-delivery system is the solution to the energy
shortages that are accompanying their fast economic growth. Within 20
years, the network will connect gas fields in the Patagonian desert of
Argentina and the jungles of Bolivia and Peru with the cities of
Buenos Aires, Santiago, Sao Paulo and Rio de Janeiro. It will cross
some of the world's most environmentally sensitive areas. And it will
cost billions of dollars, mostly from private-sector coffers.
* * * * *
[The current situation] is a mess that needs to be sorted out soon.
Brazil has run out of feasible hydroelectricity sites, and gas is far
less polluting than oil. Electricity shortages are just a year or two
away. "We are already operating without a margin of error," says
Carlos Roberto Silvestrin, director of Agencia Desenvolvimento Tiete
Parana, a private-sector development group in Brazil. "We need gas,
and we need it quickly."
At present, CNG is constrained by the 1935 Act from participating fully in
these developing markets. In contrast, non-registered U.S. companies, such
--------------------
<3> See generally The Regulation of Public-Utility Holding Companies,
----------------------------------------------------------------
Securities and Exchange Commission, Division of Investment Management
(1995)("Study").
<4> The U.S. companies in the winning consortium, were Enova's San Diego
Gas & Electric Co. and Pacific Enterprises' Southern California Gas
Co.
<PAGE>
as Enron Corp., CMS Energy Corp., and AES Corp., are already actively
competing in Latin gas markets.
The ability to participate in international gas markets is critical to
CNG's long-term continued success. Although CNG intends to strengthen and
expand its core businesses of local gas distribution and interstate gas
transportation, it also intends to pursue opportunities for growth in the
unregulated parts of the energy market, including gas exploration and
production, transportation and storage, and brokering and marketing of gas,
electricity and other forms of energy -- the activities that are the
subject of this filing. By pursuing these activities in highly competitive
foreign markets, CNG will gain expertise that will benefit its domestic
utility consumers.
In this regard, it is important to note that the Company's primary
focus will continue to be on customers and opportunities domestically, even
as it seeks to participate in carefully selected projects in key
international markets.
1.3 Foreign Energy Activities. CNG has identified core
-------------------------
competencies in which it can best respond to opportunities for growth in
foreign energy markets. Accordingly, in this post-effective amendment, CNG
proposes that CNG International be authorized to identify, evaluate and
engage in gas exploration and production, transmission and storage, and
energy marketing activities in the foreign energy sector.
Gas-Related Activities. The world gas industry is rapidly evolving.
----------------------
Until recently, production companies (generally oil companies) have been
multinational in scope while distribution companies have been limited to
<PAGE>
domestic markets.<5> Institutional changes, however, such as the opening
of the gas market to new entrants, provide the conditions for a
transformation of the gas business from a more domestically focused one
into a more global industry. Some companies, such as British Gas and
Enron, have already designed and adopted strategies to become major actors
in the global gas market.<6>
A number of factors have contributed to the increased use of natural
gas over the last decade. Gas produces about half the carbon dioxide
emissions of coal and about two thirds the emissions of fuel oil. Thomas
Land, writing for the Petroleum Economist Ltd. [UK] states, "The growing
global need for environmentally clean fuel and availability of the
plentiful natural gas reserves can be expected to combine as the major
factor determining international trade and other economic activities in the
medium term."<7>
In a similar vein, Andrew Slaughter who is responsible for DRI/McGraw-
Hill's International Energy Services comments that natural gas receives
high marks for its environmental advantages, abundance, widespread
geographical dispersion of its reserves, and the overall economics of gas
use versus other fuels.<8> Slaughter sees the strongest regional growth
--------------------
<5> Gas transportation by pipeline has been handled by consortiums of
producing and buying companies, while liquid natural gas has been
typically in the hands of the major oil companies.
<6> The investing community measures Consolidated's performance against
the Value Line group of diversified natural gas companies (see Exhibit
B-1), many of which are aggressively moving into international
markets.
<7> Growth of Gas Could Boost World Economy; International Monetary Fund
--------------------------------------------------------------------
Report on Natural Gas, Gas World International, May 1994.
---------------------
<8> Power Generation Key to Global Natural Gas, Electrical World, Nov.
------------------------------------------
1994.
<PAGE>
rates in Latin America and the Asia/Pacific region.<9> Energy, the economy
and the environment will become even more closely linked as market
globalization intensifies.<10>
The development of energy infrastructure overseas, including
hydrocarbon reserves, oil and gas pipelines, gas storage facilities, power
generation, electric transmission lines, and retail distribution, also
contributes to global energy security and price stabilization. To the
extent that there are additions to the supply and related infrastructure of
different forms of energy that compete with each other, there will be less
price volatility caused by disruption in any one energy source.
CNG, as one of the largest integrated energy suppliers in the United
States, has already responded to challenges in the domestic market by
devoting additional resources to exploration and production, expanding its
pipeline and storage capacity, and developing its energy services business.
CNG now wishes to build upon this expertise to enable it to compete
effectively in the global energy market. The additional knowledge derived
from these ventures will enable CNG to better serve consumers in the
increasingly competitive domestic markets.
Energy Marketing. CNG is currently authorized to engage in the
----------------
brokering and marketing of gas through its wholly-owned subsidiary CNG
-------------------
<9> A list of natural gas-fired facilities by region is attached as
Exhibit B-2.
<10> Infrastructure investments result in orders for goods and services
which frequently will be supplied by U.S. firms. Examples in the
energy sector would include pipe, compressors, turbines, engineering
services, construction management, and operating management. Filed as
Exhibit B-3 are a number of news releases of the Export-Import Bank
of the United States regarding foreign energy projects that have been
supported by Bank financing and the importance of exports to the
domestic economy. The Bank's support is directly related to an
estimated 358,000 U.S. jobs and indirectly supports 2 million more.
<11> Among other things, the CNG system is the largest gas storage operator
in North America with a total capacity of 876 Bcf, and is arguably the
best in the world at operating storage facilities.
<PAGE>
Energy Services Corporation,<12> and the marketing of electricity through
its wholly-owned subsidiary CNG Power Services Corporation, an exempt
wholesale generator. CNG, through CNG Energy Arbitrage Corporation, is
also authorized to engage in the marketing and brokering of electricity,
gas and other fuels, the provision of electricity or fuel management
services, and related activities and services.<13> It is anticipated that
CNG International will invest in brokering and marketing of electricity,
oil, propane, natural gas liquids and other petroleum products, coal, wood
chips and other fuels, in foreign energy markets.<14>
1.5 Risk Profile of Foreign Energy Activities. Investments in foreign
-----------------------------------------
ventures involve a variety of risks that are not necessarily present in the
traditional, regulated public-utility industry. CNG has addressed these
concerns in the first instance by staffing CNG International with
experienced professionals who have worked extensively with international
project development and financing.<15> By seeking project partners, using
project financing and limiting the size of any one investment, CNG acts to
ensure that the risks associated with foreign ventures do not adversely
affect the financial strength of the CNG system. In addition, CNG has
established comprehensive procedures to identify and limit or mitigate the
risks that may be associated with a specific project.
--------------------
<12> See Holding Co. Act Release No. 25600 (Aug. 7, 1992).
<13> Consolidated Natural Gas Co., Holding Co. Act Release No. 26512
---------------------------
April 30, 1996).
<14> The proposed combination of gas, electric and other energy commodity
brokering and marketing in CNG International or a subsidiary thereof
is similar to activities for which CNG Energy has made application in
a pending Form U-1 proceeding at File No. 70-8883.
<15> Additional technical expertise will come primarily from CNG's domestic
nonutility operations.
<PAGE>
The Project Review Process. Every investment opportunity pursued by
--------------------------
CNG is subjected to a series of formal reviews to ensure that the project
satisfies the Company's standards for investment. The process begins with
the identification of an investment opportunity. An analysis of the host
country focuses on the political and economic stability of the particular
country, the government's commitment to energy services, the legal and
regulatory framework for private investment, and the potential effect of
local business practices with respect to long-term investment of private
capital.
CNG has developed a formula and process for evaluating prospective CNG
International investments in foreign countries. The so-called "hurdle
rate" study assesses the additional risks of operating in a foreign
business environment and the uncertainty of projects in the development and
construction stages, or with complex or new technology.
The required rate of return or "hurdle rate" is calculated for high
and low commercial risk projects in the foreign country. Higher rates are
applied to projects in the development and construction phases. Tables are
then prepared showing each country and the appropriate hurdle rates for
each project stage. The tables will be revised on a periodic basis to
reflect changes in the country risk premiums, and to include countries
where CNG International is actively developing projects.
The hurdle rate table can then be used by developers to screen
potential projects. If the expected market rate is below the hurdle rate,
the project can be rejected or the developer can look for income
enhancements to boost the expected return on the project.<16> After the
project passes the initial screening process, a more intensive review of
the project and the country will be undertaken. The hurdle rate will be
----------------------
<16> In the past with EWGs and FUCOs, for example, CNG could earn
additional income by securing the Operation & Maintenance contract, or
by managing the fuel supply to the project.
<PAGE>
further refined to take into account the risk profile of the project. For
example, the rate may be reduced if the developer is able to (i) purchase
political risk insurance from the Overseas Private Investment Corporation,
a U.S. Government agency, or the Multilateral Investment Guarantee Agency,
a World Bank unit, or (ii) obtain sovereign guarantees from the host
government for any of the project contracts or for foreign exchange
availability. The rate may also be modified upward or downward if a
detailed review forecasts a significant change in the fundamental economic
or political conditions of the country.<17>
Once project development is undertaken, milestones are established
and the project team monitors the major technical, financial, commercial
and legal risks associated with the project and the management of those
risks.
In addition, each project is subjected to increasing levels of
management review. Depending on the amount of the potential exposure to
the CNG system, a project must be approved by the Chairman and the Chief
Executive Officer, the Chief Financial Officer, and by the full board of
directors of CNG.
Significantly, this internal review process is largely duplicated by
the lenders who provide debt financing for a foreign project, since
repayment of the debt will depend, in the first instance, on the success of
the project. Project debt documents typically require the establishment of
debt service and other funded reserves.
CNG has specifically undertaken that it will not seek recovery
through higher rates to the CNG system operating companies' customers to
compensate it for any possible loss that it might sustain by reason of
the proposed Foreign Energy Activities, including the two pipeline
projects that are the subject of this post-effective amendment, or for
any inadequate returns on such Foreign Energy Activities.
CNG has been providing, and will continue to provide, copies of
filings in this mater to its state regulators. There has been no adverse
comment from those regulators.
--------------------------
<17> Attached as Exhibit B-4 is a detailed discussion of risks that are
considered in connection with foreign ventures.
<PAGE>
1.6 Immediate Pipeline Investment Opportunities. Over the past year,
-------------------------------------------
CNG has reviewed literally dozens of potential foreign ventures. On the
basis of that review, CNG has identified two projects in Bolivia and
Uruguay that meet the Company's criteria for investments. Specific
authority is requested for those projects as discussed below.
Bolivia Hydrocarbon Transportation
----------------------------------
Bolivia is privatizing the state-owned oil and gas company Yacimientos
Petroliferos Fiscales Bolivianos ("YPFB") through a public tender on
interests in five separate units: two exploration and production units, one
hydrocarbon transportation unit, one refining unit, and one marketing
unit. CNG has been prequalified by the Bolivian government to bid for the
hydrocarbon transportation unit, which consists almost exclusively of gas
pipelines. It is anticipated that CNG International will participate in a
bidding consortium. The three members of the consortium would have equal
economic interests in the bid. <18>
The successful bidder will acquire a 50% economic interest and
operational control of the existing natural gas transmission system in
Bolivia.<19> At present, the Bolivian system includes more than 2900 km of
gas pipeline covering the southern and central part of the country.
--------------------
<18> A list of the qualified bidders for the Bolivian pipeline project is
attached as Exhibit B-1.
<19> The remaining 50% interest will be retained by YPFB.
<PAGE>
Current transmission throughput is about 460 mmcfd including exports to
Argentina. Also included is a 35,000 b/d capacity oil pipeline from Santa
Cruz, Bolivia to Arica, Chile. <20>
In addition, the successful bidder will acquire 50% of the YPFB
position in certain key transportation projects. YPFB has a key ownership
in a proposed major Bolivia to Brazil gas pipeline project, in which from
283 to 565 mmcfd of gas is planned for export to Brazil. YPFB's interest
includes 51% of the Bolivia portion of the pipeline and 12% of the
Brazilian portion. Additional YPFB pipeline projects are under development
including pipelines to Chile and Paraguay.
Bolivia's geographic position affords it the potential for serving a
central role in the South American energy market, particularly in the
southern cone. Thus, participation in this capitalization is a key
opportunity for CNG to establish a competitive position in these growing
energy markets.
CNG seeks authority to invest up to $50 million in the
Bolivian project.
Uruguay Pipeline: Buenos Aires to Montevideo
--------------------------------------------
CNG International has been prequalified to submit a bid to construct,
own, and operate a gas pipeline from Buenos Aires, Argentina to
-----------------------
<20> Based on information provided to CNG by the Bolivian
government, the present book value of the gas and oil pipelines
is approximately $293 million. The oil pipeline assets will
initially represent approximately 28% of that total; however,
upon completion of the proposed Bolivia to Brazil pipeline
project in 1999, that percentage will decrease so that the oil
pipeline will represent only 11% of the total pipeline assets.
In absolute terms, CNG will acquire one-third of a 50% interest
in the project.
The proposed Bolivia to Brazil gas pipeline, of course, is
the reason that CNG is seeking to bid on the hydrocarbon
transportation unit. The oil pipeline has been packaged with the
gas transportation assets, and bids must be submitted on the
project as a whole.
CNG believes that the oil pipeline is a proper incident of
the gas transportation business but requests that the Commission
not reach the issue at this time but rather reserve jurisdiction
over the retainability of the oil pipeline for a period of three
years, During that time, the applicants undertake that they will
either demonstrate that the standards of the Act, as set forth in
section 11 or as modified by the GRAA, are satisfied with respect
to retention of the oil pipeline and obtain a supplemental order
of the Commission to that effect, or else divest their interest
in the oil pipeline.
<PAGE>
Montevideo, Uruguay. It is anticipated that final bids will be submitted
early this fall.<21> If successful, CNG would participate in the
construction and operation of an approximately 140 mile pipeline,
including 30 miles under the river Plate, to provide transportation
services on a non-discriminatory basis to substantial markets in
Montevideo <22>. It is anticipated that this project may eventually
connect to other projects such as a planned pipeline to southern Brazil
or a storage facility. A successful bid on this project, besides providing
an economic opportunity, could also provide a basis for developing
additional energy markets in this region of South America. CNG seeks
authority to invest up to $25 million in the project.
----------------------
<21> A list of the prequalified companies for the Uruguay pipeline project
is attached as Exhibit B-1.
<22> The Uruguayan government may take a minority interest in the
pipeline.
<PAGE>
CNG International will carry on the proposed activities through one or
more special-purpose subsidiary or associate companies, partnerships,
limited liability companies, joint ventures or other entities (depending
upon the legal and regulatory requirements of the particular project) to be
formed with unrelated persons or entities for the sole purpose of engaging
in Foreign Energy Activities.
It is anticipated that financings by and among CNG International and
its subsidiaries will be generally exempt pursuant to Rule 52 under the
Act. CNG requests the Commission reserve jurisdiction over any financing
transactions that are not so exempt. <23>
Pursuant to the authorizations requested above and without limiting
the same, CNG International and its subsidiaries would be able to acquire,
without further Commission approval, voting or nonvoting stock in one or
more corporations, general partnership interests or voting equity
interest in one or more other joint business entities such as joint
ventures or limited liability companies, or up to 100% of the limited
partnership interests in one or more partnerships, provided all of such
corporations, partnerships or other entities are established for the sole
purpose of engaging in Foreign Energy Activities authorized by the
Commission.<24>
CNG International will fund the proposed transactions by (i) selling
shares of its common stock, $10,000 par value per share, to CNG, (ii) open
account advances as described below, or (iii) long-term loans from CNG, in
---------------------------
<23> CNG will file a post-effective amendment describing the general terms
of each such security and requesting a supplemental order of the Commission
authorizing such transactions. CNG requests that supplemental orders be
issued without further public notice.
<24> This would be similar to the authorization granted to CNG Energy in
Commission order dated July 26, 1995, Holding Co. Act Release No. 26341,
File No. 70-8621.
<PAGE>
any combination thereof. The open account advances and long-term loans
will have the same effective terms and interest rates as related borrowings
of CNG in the forms listed.
Open account advances may be made to CNG International on a revolving
basis to provide working capital and to finance the activities authorized
by the Commission. Open account advances will be made under letter
agreement with CNG International 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 CNG'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. Only outstanding amounts
of open account advances will be calculated against the $300 million cap
on financing requested herein.
CNG may make long-term loans to CNG International for the financing
of its activities. Loans to CNG International shall be evidenced by
long-term non-negotiable notes of CNG International (documented by book
<PAGE>
entry only) maturing over a period of time (not in excess of 50 years) to
be determined by the officers of CNG, with the interest predicated on and
equal to CNG's cost of funds for comparable borrowings. In the event CNG
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.
CNG will obtain the funds required for CNG International either
through internal cash generation or from financings at the time authorized
by the Commission, such as pursuant to the five year intrasystem financing
authorization under Holding Co. Act Release No. 26500 (March 28, 1996).
Authority is sought for CNG, CNG International and its subsidiaries
engaged in Foreign Energy Activities to enter guarantee arrangements,
obtain letters of credit, and otherwise provide credit support with respect
to obligations of their respective subsidiaries to third parties as may be
needed and appropriate to enable them to carry on in the ordinary course of
their respective businesses. The maximum aggregate limit on all credit
support by CNG, CNG International and its subsidiaries, including the
credit support previously authorized for EWGs and FUCOs, will be up to
$300 million at any one time outstanding. The $300 million in guarantees
and other credit support is in addition to the $300 million investment
authority requested elsewhere herein.
RULE 54 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,
<PAGE>
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 CNG owns indirectly, through CNG Power Services Corporation,
an EWG, a 1% general partnership interest in Lakewood Cogeneration, L.P.
("Lakewood"), also an EWG. CNG Power Company, a wholly-owned
subsidiary of CNG Energy Services Corporation, owns a 34% limited
partnership interest in Lakewood. CNG does not own any interests in a
FUCO. CNG believe that Rule 53(a), (b) and (c) are satisfied in
its case as follows.
Fifty percent of CNG's retained earning as of June 30, 1996
was $716,932,000; CNG's aggregate investment (as defined in Rule
53(a)(1)(i)) in Lakewood on such date and in both its EWGs as of
the date of filing of this Post-Effective Amendment is estimated to
be approximately $18,000,000, thereby satisfying Rule 53(a)(1).
CNG and its subsidiaries maintain books and records to identify the
investments in and earning 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 the United States generally accepted accounting
principles ("GAAP"), the financial statements are prepared according
to GAAP, and CNG undertakes to provide the SEC access to such books and
records and financial statements as it may request. Employees of CNG's
domestic public-utility companies at this time do not render services,
directly or indirectly, to the EWGs in the CNG system, thereby satisfying
Rule 53(a)(3). Copies of the Form U-1 filings and the other filings
required pursuant to Rule 53(a)(4) are being sent to the state
regulators. None of the condition described in Rule 53(b) exist with
respect to CNG, thereby satisfying Rule 53(b) and making rule
53(c) inapplicable.
<PAGE>
Item 2. Fees, Commissions and Expenses.
------------------------------
The fees, commissions and expenses to be paid or incurred in
connection with the filing of this Application-Declaration are estimated
not to exceed $25,000, including the Commission's $2,000 filing fee,
fees payable to Consolidated Natural Gas Service Company, Inc.
("Service Company") for services on a cost basis (including fees of
regularly employed counsel).
Item 3. Applicable Statutory Provisions.
-------------------------------
3.1 Authorization Requested. By order dated May 30, 1996, CNG was
-----------------------
authorized to establish CNG International to invest in FUCOs and EWGs
located outside of the United States. Holding Co. Act Release No.
26523. The order further authorized the formation and capitalization of
intermediate subsidiaries to hold interests in such EWGs and FUCOs, and
the provision of $300 million credit support for these entities. The
order, however, reserved jurisdiction over the proposed investment of up
to $300 million in Foreign Energy Activities, the up to $300 million
credit support as it relates to these activities, and related
transactions.
CNG now requests authority through March 31, 2001 to invest up to
$300 million through CNG International in gas transmission and storage, gas
exploration and production, and energy brokering and marketing activities
outside of the United States. To the extent Commission approval may be
required, CNG further requests authority to provide guarantees and other
credit support for these activities through March 31, 2001, up to an
aggregate amount of $300 million at any one time outstanding, and for
related transactions. In this post-effective amendment, CNG seeks specific
authority with respect to proposed investments by CNG International of up
to $50 million in a Bolivian pipeline project, and up to $25 million in an
Uruguayan pipeline project, including the formation and capitalization of
such entities as may be required to hold CNG International's interests in
the pipeline projects and related transactions, and asks the Commission to
reserve jurisdiction over the balance of the proposed transactions,
including the retention of the oil pipeline in connection with the
Bolivian project.
3.2 General Provisions. The proposal herein is subject to sections
------------------
9(a), 10, 11, 32 and rule 54 and the Gas Related Activities Act of 1990.
<PAGE>
If, however, the Commission considers the proposed transactions to require
any authorization, approval or exemption, under any section of the Act or
rule or regulation other than those cited hereinabove, such authorization,
approval or exemption is hereby requested.
3.3 Analysis of Section 11 Issues.
-----------------------------
Under section 10(c)(1) of the Act, the SEC cannot approve an
acquisition that would be "detrimental to the carrying out of the
provisions of section 11." That section, in turn, directs the SEC to limit
the nonutility interests of a registered holding company to those that are
"reasonably incidental, or economically necessary or appropriate" to such
company's utility operations, including interests in any other business
which the SEC 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."
In the instant matter, these requirements are satisfied either by
reason of the Gas Related Activities Act of 1990 ("GRAA"),<25> the plain
meaning of section 11(b)(1) or consistent with SEC precedent under sections
9, 10 and 11 of the Act.
1. MANY OF THE FOREIGN ENERGY ACTIVITIES CAN BE AUTHORIZED UNDER THE
GRAA.
The GRAA deems the requirements of section 11(b)(1) to be met with
respect to certain gas-related activities. In particular, the proposed gas
transportation and storage activities are deemed to satisfy section
11(b)(1) pursuant to section 2(a) of the GRAA. The remaining activities,
relating to gas exploration, development, production, marketing,
manufacture and other similar activities related to the supply of natural
or manufactured gas ("gas supply activities"), can be found to satisfy the
standards of section 11 pursuant to section 2(b) of the GRAA. That
section, in turn, requires a Commission finding that the proposed activity:
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 . . .
---------------------
<25> Pub. L. No. 101-572, 104 Stat. 2810 (codified at 15 U.S.C. sec. 79k
note).
<PAGE>
such acquisition will not be detrimental to the interest of consumers
of any such gas utility company or other subsidiary as 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 gas supply activities clearly satisfy the standards for
approval under section 2(b) of the GRAA. These activities are in the
interest of system consumers. The activities of CNG International will
benefit domestic utility consumers both directly, by enabling CNG to
develop greater expertise in operating in competitive markets, and
indirectly, by generating economic profits that will contribute to the
financial strength of the CNG system and so result in continued low rates
for CNG's consumers. Such profits would be due, in part, to the higher
rate of return associated with investments in foreign energy markets.
As used in the GRAA, the term "consumers" also refers to customers
of other system companies, such as pipelines and other nonutility
subsidiaries.<26> To succeed in a competitive marketplace, CNG
International must provide benefits for these consumers as well. The
interchange of technical and other expertise, between the domestic and
foreign portions of the CNG system will also contribute to the strength of
the system as a whole. Energy markets in other parts of the world are more
developed than those in the Unites States. The ability to move
technological and market intelligence to and from CNG's domestic markets
will make the Company more competitive, and so benefit consumers of both
utility and nonutility companies in the CNG system. In addition, the
proposed activities will contribute to the optimal use of system resources,
allowing such resources to be deployed over larger market areas, and
permitting full utilization of system personnel.
------------------------
<26> National Fuel Gas Co., Holding Co. Act Release No. 26181 (Dec. 6,
---------------------
1994).
<PAGE>
Further, as the sponsors of the GRAA recognized:
Technical advances and expertise may also be developed through these
activities that may benefit consumers. 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. <27>
In this matter, investors and not consumers will bear the risks that may be
associated with these new ventures. As explained previously, CNG conducts
a thorough review of any proposed investment, with a view toward risk
management. The international operations will be conducted with the same
prudence and sound business judgment that has resulted in CNG's present
status as one of the country's most financially sound energy providers.
There is no geographic limit under the GRAA. In this matter, the
public interest standard is readily satisfied.
For the reasons explained previously, the proposed activities will not
lead to a recurrence of the abuses the Act was intended to correct.<28>
2. THE PROPOSED ACTIVITIES SATISFY THE PLAIN MEANING OF SECTION
11(b)(1).
The proposed activities can be approved under sections 9, 10 and 11
of the Act. In the first instance, gas transmission and storage,
exploration and development, and the marketing and brokering of energy
commodities all satisfy the plain meaning of section 11: they are both
"reasonably incidental, or economically necessary or appropriate" to CNG's
utility operations and "not detrimental" to the protected interests or to
-----------------------
<27> S17585 Cong. Rec. (Oct. 27, 1990).
<28> See Gaz Metropolitain, Inc., Holding Co. Act Release No. 26170 (Nov.
--- -----------------------
23, 1994) (permitting a foreign holding company to acquire U.S.
utility operations), and Southern Co., Holding Co. Act Release No.
------------
25639 (Sept. 23, 1992) (permitting acquisition of foreign utility
operations by a registered holding company).
<PAGE>
the proper functioning of the CNG system. There is precedent for this
approach. At the end of 1994, the SEC approved a proposal by The Southern
Company to develop a wireless communications system to provide services to
system companies and regional nonassociates. In addition to approving the
transaction under the functional relationship test, the SEC noted that the
activities were permissible under the plain meaning of section 11, as
"reasonably incidental, or economically necessary or appropriate" to the
system's core utility operations, and "necessary or appropriate in the
public interest or for the protection of investors or consumers and not
detrimental" to the proper functioning of the integrated system.<29>
Thereafter, in its study of the regulation of public-utility holding
companies, the Division of Investment Management recommended that the SEC
adopt a more flexible approach to diversification. The study stated that:
Specifically, the Division contemplates an interpretation of the
language of section 11(b)(1) that would allow registered holding
companies to engage in nonutility businesses that are economically
appropriate and in the public interest, regardless of whether such
--------------------------
activities are ancillary to the utility business (emphasis added).
------------------------------------------------
The report cited the Southern mobile communications order discussed above,
--------
and the 1946 Study of Operations.<30> The Division's recommendation is
noteworthy because, as the staff is aware, the report was the result of a
year-long process of consensus-building at all levels of the SEC, in
consultation with congressional staff and the NARUC, as well as the
companies and other interested parties.
-----------------------
<29> Southern Co., Holding Co. Act Release No. 26211 (Dec. 30, 1994).
------------
<30> Study of Operations Pursuant to Public Utility Holding Company Act of
---------------------------------------------------------------------
1935: Hearings before the Securities Subcommittee of the House of
------------------------------------------------------------------
Representatives Committee on Interstate and Foreign Commerce, 79th
------------------------------------------------------------
Cong., 2d Sess., pt. 3 at 851 (1946).
<PAGE>
3. THE PROPOSED ACTIVITIES ARE CONSISTENT WITH COMMISSION PRECEDENT UNDER
SECTIONS 9, 10 AND 11 OF THE ACT.
In the alternative, the activities are consistent with Commission
precedent. Clearly, gas transmission and storage, gas exploration and
production, and the marketing and brokering of energy commodities are all
closely related to the CNG system's core utility business. The fact that
these activities will be conducted outside of the United States does not
destroy that relationship.
Although the SEC has traditionally required an operating or
"functional relationship" between the nonutility business and the system's
utility operations, the interpretation of this test has evolved in recent
years, in response to changes in the utility industry. In 1995, in an
order removing the percentage limitation on the EUA system's energy
management services business, the SEC found the standards of section 11
satisfied because the subject activities were "closely related to the core
business of the utility."<31> The SEC explained that:
The Act "creates a system of pervasive and continuing economic
regulation that must in some measure at least be refashioned from
time to time to keep pace with changing economic and regulatory
climates." The Commission is satisfied that, "On the facts of
this matter we do not believe that the proposed acquisition will
lead to a recurrence of the evils the Act was intended to
address."<32>
Since the report was issued, the SEC has taken several major steps toward
implementing its recommendations. Proposed rule 58 would exempt from the
requirement of prior SEC approval under sections 9(a)(1) and 10 of the Act,
pursuant to section 9(c)(3), the acquisition by a registered holding
---------------------
<31> Eastern Utilities Associates, Holding Co. Act Release No. 26232 (Feb.
----------------------------
15, 1995) (footnote omitted).
<32> Id., quoting Union Electric Co., 45 S.E.C. 489, 503 n. 52 (1974),
--- -----------------
aff'd sub nom. City of Cape Girardeau v. SEC, 521 F.2d 324 (D.C. Cir.
----- --- ---- -----------------------------
1975), and Southern Co., Holding Co. Act Release No. 25639 (Sept. 23,
------------
1992) (approving acquisition of foreign public-utility subsidiary
companies).
<PAGE>
company of the securities of an energy-related company, subject to certain
investment limitations and reporting requirements, and the acquisition by a
registered gas-utility holding company of the securities of a gas-related
company, subject to certain reporting requirements.<33>
Most recently, in the CNG Energy Alliance order, the SEC authorized
the system to engage, without geographic restriction, in marketing and
brokering activities as a full participant in the integrated energy
markets. Under the order, CNG can deal in various types of energy
commodities rather than limiting itself to gas, the energy sold by system
utilities.<34> The SEC noted that it is appropriate to assess issues in
light of the "changing realities" of the utility industry."
(i) THE FOREIGN ENERGY ACTIVITIES ARE CLOSELY RELATED TO CNG'S CORE
UTILITY BUSINESS.
The Foreign Energy Activities are "energy-related" or "gas-related"
within the meaning of proposed rule 58. The proposed brokering and
marketing of electricity and other energy commodities would also be energy-
related activities under section b(1)(v) of the rule. The proposing
release cites various orders in which registered holding companies have
been authorized to engage in energy marketing and brokering activities:
Consolidated Natural Gas Co., Holding Co. Act Release No. 24329 (Feb. 27,
--------------------
<33> Exemption of Acquisition by Registered Public-Utility Holding
Companies of Securities of Nonutility Companies Engaged in Certain
Energy-Related and Gas-Related Businesses; Exemptions of Capital
Contributions and Advances to Such Companies, Holding Co. Act Release
No. 26313 (June 20, 1995).
<34> Consolidated Natural Gas Co., Holding Co. Act Release No. 26512 (Apr.
---------------------------
30, 1996). The description of the CNG Energy Arbitrage order is taken
from Eastern Utilities Associates, Holding Co. Act Release No.
----------------------------
26519 (May 23, 1996), in which the SEC authorized retail marketing of
electric power with respect to pilot programs adopted in New Hampshire
and Massachusetts.
<PAGE>
1987); Entergy Corp., Holding Co. Act Release No. 25848 (July 8, 1993); and
------------
UNITIL Corp., Holding Co. Act Release No. 25816 (May 24, 1993). In
------------
addition, as noted above, the SEC has recently authorized CNG in a wide
range of energy marketing and brokering activities.<35>
The activities related to gas exploration and production, transmission
and storage, and brokering and marketing of natural gas are all "gas-
related" activities within the meaning of the rule. The definition of gas-
related company under rule 58 is derived, in turn, from the Gas Related
Activities Act of 1990 in which Congress intended, by permitting gas
registered holding companies to invest in gas production, transportation,
storage, marketing and similar activities, to promote competition in the
natural gas markets. As the SEC noted in the proposing release for rule
58, "the activities contemplated by the GRAA are per se closely related
--- --
to the core utility business of the gas registered holding companies."
(ii) THE SEC HAS PREVIOUSLY AUTHORIZED REGISTERED HOLDING COMPANIES TO
ENGAGE IN FOREIGN NONUTILITY ACTIVITIES.
It is our understanding that the SEC staff distinguishes the instant
matter from the precedent largely on the basis of the foreign nature of the
proposed activities. The basis for this distinction, however, is unclear.
The matter is not unprecedented. Rather, there is ample precedent in
orders issued by the SEC over the past 25 years, permitting registered
holding companies to engage in a wide range of nonutility activities
worldwide.
Beginning in 1981, the SEC permitted The Southern Company to provide
management, technical and training services to nonassociates including
"unaffiliated domestic or foreign governmental agencies, public utilities,
-------------------
<35> Indeed, a survey of the FERC Docket filings indicates that more than
half of the power marketing applicants have gas, as well as electric
marketing capability.
<PAGE>
industrial concerns, or entities owning, operating or performing services
for any of them." Southern Co., Holding Co. Act Release No. 22132 (July
------------
17, 1981). A year later, the SEC authorized American Electric Power
Company to sell "management, technical, and training expertise in the open,
competitive market to non-affiliated entities including domestic and
foreign governmental agencies, public utilities and other business
concerns." American Electric Power Co., Holding Co. Act Release No. 22468
---------------------------
(Apr. 21, 1982). See also New England Electric System, Holding Co. Act
--- ---- ---------------------------
Release No. 22719 (Nov. 19, 1982), and Middle South Utilities, Holding Co.
----------------------
Act Release No. 22828 (Jan. 11, 1983).
In 1992, the SEC issued a series of orders permitting public-utility
holding companies, both registered and exempt, to acquire interests in
foreign utility operations. In authorizing Southern Electric
International, Inc., a subsidiary of The Southern Company to acquire an
ownership interest in an Australian power station, the SEC stated:
Since the Act was adopted in 1935, the world economy has changed
vastly. Products and services are increasingly traded on a global
market. Financial and securities markets are becoming more
international. There is every reason to believe that this development
will continue, and even accelerate.
Against this backdrop, we note the increasing opportunities for
international utility investments and demand for American utility
expertise abroad. . . . We agree with the commmenter, CNG, that
"there is nothing in the 1930 era abuses cited in Section 1(b) which
is apropos to the concentrated and project directed financings in the
foreign utility investment transactions in the 1990s."
Southern Co., Holding Co. Act Release No. 25639 (Sept. 23, 1992) (citation
------------
omitted). The Energy Policy Act of 1992 subsequently amended the Act to
create new sections 32 and 33 which expressly permit registered holding
companies to invest in foreign utility operations. In a floor statement,
Senator Riegle explained that it was Congress' intention that registered
holding companies be able to respond to "immediate and fleeting
<PAGE>
opportunities for U.S. companies."<36>
Although the same logic would apply in the instant matter, the
exemption under section 33, which tracks the statutory definitions of gas
and electric utility companies, does not by its terms extend to investments
in foreign gas exploration, production, transportation and storage as such.
The omission of these activities may be viewed as an unintended consequence
of the decision in 1935 to narrow the definition of gas utility company to
lessen the regulatory burden on the oil and gas industry.<37> If, as
originally proposed, the definition of gas utility had extended to
production and transportation, as well as to distribution, it is likely
that these activities would have been similarly exempted by the Energy
Policy Act of 1992. As it remains, and as recognized by the GRAA, these
activities are integral to the operation of a gas utility system. Their
characterization as "nonutility" activities is a legal fiction that follows
from the decision of the Congress in 1935 not to attempt to regulate the
entire oil and gas industry.
The Energy Policy Act also implicitly authorized registered holding
companies to engage in foreign nonutility activities. The Federal Energy
Regulatory Commission has interpreted section 32 of the Act, which requires
that an exempt wholesale generator be engaged "exclusively" in owning or
---------------------
<36> Statement of Sen. Riegle, Cong. Rec. S17629 (Oct. 8, 1992).
<37> The Senate Report explains:
"Gas utility company" had been defined in the original title to
include every person in the business of producing, transporting, or
selling natural or manufactured gas. The committee did not find it
desirable to include so broad a group of persons and has limited the
definition for the purposes of [the 1935 Act] so as to reach only
companies in the business of distribution at retail, thus excluding
companies, whose only interest in the gas business is in the sources
of supply or in transportation.
S. Rep. No. 621, 74th Cong., 1st Sess. 5 (1935) ("Senate Report").
<PAGE>
operating eligible facilities, to permit certain incidental nonutility
activities. Section 33, which does not contain an "exclusively"
requirement, on its face would seem to permit foreign nonutility activities
by an entity that has notified the SEC of its status as a foreign utility
company.
In addition, since 1992, the SEC has issued a series of orders
enlarging the scope of permissible nonutility activities. In 1994, the SEC
authorized Central and South West Corporation to provide a wide range of
services, including design, construction, engineering, operation,
maintenance, management, administrative, employment, tax, accounting,
economic, financial, fuel environmental, communications, energy
conservation, demand side management, overhead efficiency, utility
performance and electronic data processing, as well as software development
and support, services to "foreign electric utility enterprises." Central
-------
and South West Corp., Holding Co. Act Release No. 26156 (Nov. 3, 1994). A
--------------------
year later, in the EUA Cogenex order discussed above, the SEC removed
-----------
previous restrictions on sales of goods and services to nonassociates,
implicitly authorizing that company to render energy management services
worldwide. Eastern Utilities Associates, Holding Co. Act Release No. 26232
----------------------------
(Feb. 15, 1995).<38> Similarly, the SEC removed the 50% limitation on the
activities of HEC Canada and HEC International, permitting those companies
to provide energy management, demand side management and consulting service
worldwide. Northeast Utilities, Holding Co. Act Release No. 26335 (July
-------------------
19, 1995). See also Central and South West Corporation, Holding Co. Act
--- ---- ----------------------------------
Release No. 26367 (Sept. 1, 1995), and Allegheny Power System, Holding Co.
----------------------
Act Release No. 26401 (Oct. 27, 1995). Concurrently, in its release
-------------------
<38> The SEC had previously authorized the formation of a subsidiary EUA
Cogenex Canada for the sale of energy management and demand-side
management services to Canadian institutional customers. EUA
---
Cogenex, Holding Co. Act Release No. 26135 (Sept. 30, 1994).
-------
<PAGE>
proposing rule 58, the SEC stated that "it is unnecessary to restrict the
extent to which an energy-related company or a gas-related company may
serve nonassociate companies."
(iii) THE FOREIGN ENERGY ACTIVITIES WILL BENEFIT CNG'S CONSUMERS.
The activities of CNG International will benefit domestic utility
consumers both directly, by enabling CNG to develop greater expertise in
operating in competitive markets, and indirectly, by generating economic
profits that will contribute to the financial strength of the CNG system
and so result in continued low rates for CNG's consumers. Such profits
would be due, in part, to the higher rate of return associated with
investments in foreign energy markets.
To succeed in a competitive marketplace, CNG International must
provide benefits for these consumers as well. The interchange of technical
and other expertise, between the domestic and foreign portions of the CNG
system will also contribute to the strength of the system as a whole. Many
energy markets in other parts of the world are more developed than those in
the United States. The ability to move technological and market
intelligence to and from CNG's domestic markets will make the Company more
competitive, and so benefit consumers of both utility and nonutility
companies in the CNG system. In addition, the proposed activities will
contribute to the optimal use of system resources, allowing such resources
to be deployed over larger market areas, and permitting full utilization of
system personnel. As the sponsors of the GRAA recognized, technical
advances and expertise may also be developed through these activities that
may benefit consumers.<39>
-------------------
<39> S17585 Cong. Rec. (Oct. 27, 1990).
<PAGE>
(iv) CONCLUSION
Clearly much has changed since 1981 when CNG sold its Canadian
operations because they were unable to use the properties as a direct
source of supply for the CNG domestic utility system. See Consolidated
--- ------------
Natural Gas Co., Holding Co. Act Release No. 22016 (Apr. 21, 1981, as
---------------
amended Apr. 23, 1981). With developments in infrastructure and
technology, the gas from those operations is now serving utility customers
in California.
The gas industry, which has already undergone the first round of
restructuring, now faces a second wave of challenges as companies seek to
compete in a global energy market. Other companies, that are not subject
to the 1935 Act, have already penetrated these markets. As noted
previously, Enron Corporation, for example, has proclaimed its intention to
be the first gas "major," with the capability of providing energy for all
classes of customers world-wide. At present, Enron and its subsidiaries
are engaged in the gathering, transportation and marketing of natural gas
throughout the United States and internationally through approximately
44,000 miles of pipelines. The company is also involved in the exploration
for and production of natural gas and crude oil in the United States and
internationally, the production, purchase, transportation and world-wide
marketing of natural gas liquids and refined petroleum products, the
independent development, construction and operation of gas-fired power
plants in the United States and internationally, and a wide range of energy
marketing and brokering activities.
Exempt holding companies, as well, have acquired significant interests
in foreign gas-related ventures. In 1995, CMS Energy Corporation, an
exempt gas and electric utility holding company, through its pipeline
subsidiary, acquired a 25% interest in Argentina's Trasportadora Gas del
Norte pipeline for approximately $140 million. In addition, the company
<PAGE>
has announced that its oil and gas exploration and production subsidiary
has entered into an agreement to acquire Pecten Yemen Company, an affiliate
of Shell Oil Company, that holds a working interest in the East Shabwa
Contract Area. These efforts are in addition to the company's significant
domestic activities, including power marketing and brokering.
The proposed Foreign Energy Activities are a necessary complement to
the foreign utility activities authorized under the Energy Policy Act of
1992. Strategic benefits are anticipated to stem from the company's
participation in new energy markets. While investments in foreign projects
may pose risks that do not arise in the domestic electric utility industry,
these risks are not an absolute bar to foreign investment. Rather, as the
SEC emphasized in its recent order permitting Southern to invest an amount
equal to 100% of its consolidated retained earnings in exempt wholesale
generators and foreign utility companies, there is a need for the
registered holding company to establish procedures to identify and mitigate
such risks.<40>
In this matter, as discussed previously, there are ample safeguards
for consumer interests. The transactions will be structured so that
investors and not consumers will bear the risks that may be associated with
these new ventures. As explained previously, CNG conducts a thorough
review of any proposed investment, with a view toward risk management. The
international operations will be conducted with the same prudence and sound
business judgment that has resulted in CNG's present status as one of the
country's most financially sound energy providers.
Accordingly, for the reasons set forth above, CNG requests that the
SEC authorize the proposed pipeline investments and reserve jurisdiction
over the other proposed gas transmission and storage, gas exploration
------------------
<40> Southern Co., Holding Co. Act Release No. 26501 (Apr. 1, 1996).
------------
<PAGE>
and production and the marketing and brokering of energy commodities,
pending completion of the record. Further, to the extent necessary, CNG
requests that the Commission reserve jurisdiction with respect to the
retainability of the oil pipeline in connection with the Bolivian project.
Based on information provided to CNG by the Bolivian government,
the present book value of the gas and oil pipelines is approximately $293
million. The oil pipeline assets will initially represent approximately
28% of that total; however, upon completion of the proposed Bolivia to
Brazil pipeline project in 1999, that percentage will decrease so that
the oil pipeline will represent only 11% of the total pipeline assets.
In absolute terms, CNG will acquire one-third of a 50% interest
in the project.
The proposed Bolivia to Brazil gas pipeline, of course, is
the reason that CNG is seeking to bid on the hydrocarbon transportation
unit. The oil pipeline has been packaged with the gas transportation
assets, and bids must be submitted on the project as a whole.
CNG believes that the oil pipeline is a proper incident of the
gas transportation business but requests that the Commission not reach the
issue at this time but rather reserve jurisdiction over the retainability
of the oil pipeline for a period of three years, During that time, the
applicants undertake that they will either demonstrate that the standards
of the Act, as set forth in section 11 or as modified by the GRAA, are
satisfied with respect to retention of the oil pipeline and obtain a
supplemental order of the Commission to that effect, or else divest their
interest in the oil pipeline.
Item 4. Regulatory Approval
-------------------
The authorization sought herein is not subject to the jurisdiction
of any State or Federal Commission (other than the Commission).
Item 5. Procedure
---------
It is hereby requested that the Commission issue its order with
respect to the two proposed pipeline transactions on or before October 25,
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 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.
Subject to the terms and conditions prescribed in Rule 24 under the
Act, in lieu of certificates required to be filed thereunder, the
applicant shall file:
(1) within ninety days following the acceptance or rejection of
its bid on each pipeline project, a certificate so stating the applicant's
bidding status or investment position, as the case may be, accompanied by
a detailed description of each pipeline project (including, as applicable,
the oil pipeline) in respect of which the applicant's bid has been
accepted; and
(2) on an annual basis with ninety days following each June
30 and December 31, in respect of each pipeline project entity in which
the applicant has acquired an interest, a description of each pipeline
project, including, as applicable, the oil pipeline) and a copy of such
entity's balance sheet, income statement and any related notes, all in
English.
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 CNG International.
A-2 By-laws of CNG International.*
B-1 List of Diversified Natural Gas Companies Moving into
International Markets.
B-2 List of Natural Gas Fired Facilities by Region (1990-2015).
B-3 News Releases of Export-Import Bank Concerning Foreign Energy
Projects.
B-4 Analysis of Foreign Investment Risks
F Opinion of counsel for CNG and CNG International.
- -------------
* Filed Previously
Item 7. Information as to Environmental Effects
_______________________________________
The proposed 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>
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 /s/ D. M. Westfall
-----------------------------
D. M. Westfall
Senior Vice President
and Chief Financial Officer
CNG INTERNATIONAL CORPORATION
By /s/ N. F. Chandler
----------------------------
N. F. Chandler
Its attorney
Date: October 18, 1996
