<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
THE PEOPLES NATURAL GAS COMPANY
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3197
And
CNG PRODUCING COMPANY
CNG Tower
1450 Poydras Street
New Orleans, Louisiana 70112-6000
Subsidiaries of
CONSOLIDATED NATURAL GAS COMPANY
CNG Tower
625 Liberty Avenue
Pittsburgh, Pennsylvania 15222-3199
(a registered holding company )
Names and addresses of agents for service:
W. P. BOSWELL, Vice President D. M. JOHNS, JR., Vice President
and General Counsel and General Counsel
The Peoples Natural Gas Company CNG Producing Company
625 Liberty Avenue CNG Tower
Pittsburgh, Pennsylvania 15222-3197 1450 Poydras Street
New Orleans, Louisiana 70112-6000
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
___________________________________
Consolidated Natural Gas Company ("Consolidated") is a Delaware
corporation and a public utility holding company registered as such under
the Public Utility Holding Company Act of 1935 ("Act"). It is engaged
solely in the business of owning and holding all of the outstanding
securities, with the exception of certain minor long-term debt, of sixteen
subsidiaries. These subsidiary companies are engaged in the energy
business, principally in natural gas exploration, production, purchasing,
sales, gathering, transmission, storage, distribution, by-product
operation, and other activities related to natural gas. Consolidated and
its subsidiaries are referred to herein as the "CNG System."
The Peoples Natural Gas Company ("PNG"), a Pennsylvania corporation,
is a wholly-owned subsidiary of Consolidated. It is A gas utility company
in the CNG System serving over 348,000 customers in western
Pennsylvania.(1) Principal cities served at retail by PNG are Pittsburgh
(a portion), Altoona and Johnstown. Like many other gas utilities, PNG has
also been engaged in local gas production (in Pennsylvania) as an ancillary
part of its gas distribution business.
______________
(1) The other utility companies in the CNG System are The East Ohio Gas
Company, Hope Gas, Inc. and Virginia Natural Gas, Inc.
<PAGE> 3
CNG Producing Company, a Delaware corporation, is also a wholly-owned
subsidiary of Consolidated. Headquartered in New Orleans, Louisiana with
offices in Pennsylvania, Oklahoma, Utah and Texas, CNGP is the exploration,
development and production arm of Consolidated's integrated natural gas
system. The majority of its operations are located in the Gulf of Mexico
area and in the Appalachian region. It currently owns an interest in
approximately 520 offshore wells, 3,270 onshore wells, one million net
acres of leases in nineteen states and in Canada, having reserves of
approximately one trillion cubic feet of natural gas and 50 million barrels
of oil.
PNG has signed a binding letter of intent ("Agreement"), contingent
upon Securities and Exchange Commission ("Commission") approval, selling
all its gas production properties ("Properties") currently owned by it to
CNGP for approximately $14.5 million. The Agreement is filed as Exhibit
A-1. The $14.5 million represents the net book value of the Properties on
PNG's books as of November 30, 1997, which net book value will be adjusted
for further depreciation at the time of closing.
The Properties consist of PNG's 100% or less ownership interest in
1,421 gross wells, or a 100% interest in 925 net wells, with reserves of
approximately 41.9 billion cubic feet. The Properties also include
associated oil and gas leases covering approximately 175,000 acres, all
contracts and agreements to the extent they affect the oil and gas leases,
the related measurement equipment, certain portions of gathering lines, and
other miscellaneous attached equipment.
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CNGP has also agreed to sell to PNG an amount of gas equal to the
production from the wells being transferred pursuant to the Agreement. The
amount of such gas is based on production reserve estimates from an
independent third party for six twelve-month periods, commencing with the
date of transfer of the Properties, at an annually ascending price ranging
from $1.47 to $2.63 per thousand cubic feet. These prices are based on
PNG's projected unit cost of production assuming PNG were to continue to
own and operate the Properties.
CNGP has also agreed to pay to PNG an amount equal to any incremental
state and federal deferred income taxes that become due and payable as a
result of the consummation of the purchase and sale of the Properties.
Consolidated is in the process of centralizing certain office
functions and realigning assets and work functions throughout the CNG
System. As part of this effort, PNG is seeking to sell the Production
Properties to the Consolidated subsidiary whose core business is
exploration, development and production of natural gas, namely, CNGP.
Consistent with this approach, Hope Gas, Inc. obtained authorization in
Commission order dated January 18, 1996, HCAR No. 26456, File No. 70-8757,
to sell its gas production facilities to CNGP.
At the same time, PNG wishes to refocus its interest, energy and
resources on its core business, which is delivering retail and
transportation services to its customers. Over the years since its
inception, PNG's dependence on its own
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gas production has been drastically reduced to the point that only 6% of
its system supply comes from such production. Because of the increased
availability of gas supplies from competitive markets and access to
transportation capacity to get these supplies into PNG's system, PNG's
production is no longer necessary for PNG to be able to continue to obtain
reliable gas supplies in the future.
Further, PNG has not invested any capital in drilling new gas wells
since 1982. Since PNG's remaining wells continue to deplete their
reserves, the responsibility and cost for reworking and ultimately plugging
and abandoning them will be shifted from PNG and its ratepayers to CNGP.
Also, an increasing number of PNG's endusers have begun over the last ten
years to purchase their own supply and arrange for PNG to provide only
transportation. Approximately 49% of the gas volume consumed on PNG's
system are subject to transportation-only arrangement. With this reduction
in demand for retail service, PNG's need to acquire natural gas for system
supply has been substantially reduced.
It is for the above reasons that PNG and CNGP hereby request that they
be authorized to consummate the purchase and sale of the Properties as
described herein.
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PNG has filed an application with the Pennsylvania Public Utility
Commission for approval of the sale of the Properties to its affiliate
CNGP. The state commission issued an approving order on September, 17
1998. The application and the order are filed as Exhibits D-1 and D-2,
respectively.
Rule 54 promulgated under the Act states that in determining whether
to approve the issue or sale of a security by a registered holding company
for purposes other than the acquisition of an EWG or a FUCO, or other
transactions by such registered holding company or its subsidiaries other
than with respect to EWGs or FUCOs, the Commission shall not consider the
effect of the capitalization or earnings of any subsidiary which is an EWG
or a FUCO upon the registered holding company system if Rules 53(a), (b)
and (c) are satisfied. CNG believes that Rule 53(a), (b) and (c) are
satisfied in its case as follows.
Rule 53 requires that the aggregate investment in EWGs and FUCOs not
exceed 50% of a system's consolidated retained earnings.(7) CNG's present
investments in EWGs and FUCOs satisfies the 50% limitation, and the CNG
system will not make any additional investments in EWGs and FUCOs if such
were to cause it to exceed that limitation, unless the Commission otherwise
authorizes.
______________
(7) The amount of the CNG limit remaining unused as of June 30, 1998 is
calculated to be approximately $648,266,000.
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CNG and its subsidiaries maintain books and records to identify the
investments in and earnings from its EWGs and FUCOs in which they directly
or indirectly hold an interest, thereby satisfying Rule 53(a)(2). The
books and records of CNG's EWGs 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
Commission access to such books and records and financial statements as it
may request.
CNG owns less than 50% of the FUCOs in which it has invested. The
books and records of such FUCOs are maintained according to the
comprehensive body of accounting principles applicable in the respective
countries in which such FUCOs operated. Material variations from GAAP in
such books and records and related financial statements will be described
and quantified upon the Commission's request. CNG undertakes to provide
the Commission access to such books, records and financial statements, in
English, as it may request.
It is anticipated that a minimal number of employees of CNG's domestic
public-utility companies will render services, directly or indirectly, to
EWGs and FUCOs in the CNG system, and the number of such employees shall
not in any event exceed two percent of the total number of employees of
such utility companies, thereby satisfying Rule 53(a)(3).
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All Form U-1 filings seeking authority to finance EWGs or FUCOs,
together with related filings of Rule 24 and Item 9 of Form U5S (including
Exhibits G and H thereof), have been, or will be, submitted to the public
utility commissions of the states having jurisdiction over the rates of the
public-utility companies in the CNG system, thereby satisfying Rule
53(a)(4).
None of the conditions described in Rule 53(b) under the Act exist
with respect to Consolidated, thereby satisfying Rule 53(b) and making Rule
53(c) inapplicable.
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 $12,000
consisting of $10,000 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 $2,000 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.
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Item 3. Applicable Statutory Provisions
_______________________________
The Properties are utility assets within the meaning of the
definition in Section 2(a)(18) of the Act. Section 12(d) of the Act and
Rules 43 and 44 under the Act apply to the sale of the Properties by PNG to
CNGP. Section 9(a) of the Act may apply to the acquisition of the
Properties by CNGP from PNG.
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 authorization sought herein is subject to the jurisdiction of the
Pennsylvania Public Utility Commission and is not subject to the
jurisdiction of any other 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 transaction proposed herein on or before December 31, 1998.
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It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed with respect to the
proposed transactions. The office of the Division of Investment Management
- - Office of Public Utility Regulation may assist in the preparation of the
Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements
_________________________________
The following exhibits and financial statements are made a part of
this statement:
(a) Exhibits
A Form of Agreement between PNG and CNGP.
D-1 Application of PNG to the Pennsylvania Public Utility
Commission.
D-2 Order of the Pennsylvania Public Utility Commission.
F Opinion of counsel for PNG and CNGP.
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.
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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.
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.
THE PEOPLES NATURAL GAS COMPANY
By W. P. Boswell
Vice President and General Counsel
CNG PRODUCING COMPANY
By P. P. Gregg
Senior Vice President and Chief
Financial Officer
Date: October 13, 1998
<PAGE> 1
Exhibit A
ASSET SALE AGREEMENT
THIS ASSET SALES AGREEMENT ("Agreement") dated February ____, 1998,
is made and entered into by and between The Peoples Natural Gas Company, a
Pennsylvania corporation, (hereinafter referred to as "Seller"), and
CNG Producing Company a Delaware corporation with a mailing address of 1450
Poydras Street, New Orleans, LA 70112-6000 (hereinafter referred to as
"Buyer").
WITNESSETH:
That for and in consideration of the mutual agreements contained
herein, and other good and valuable consideration, the receipt and adequacy
of which are hereby acknowledged, Seller desires to sell to Buyer and Buyer
desires to purchase from Seller those certain oil and gas interests and
associated assets identified in Paragraph 1.1 Assets to be Conveyed.
Accordingly, Seller and Buyer agree as follows:
1. SALE AND PURCHASE OF ASSETS
1.1 Assets To Be Conveyed. Subject to the terms and conditions of
this agreement, Seller agrees to sell, assign, transfer and
convey to Buyer, and Buyer agrees to purchase, assume, accept and
acquire from Seller all of Seller's rights, title and interest in
and to the following:
a) The oil and gas lease(s) listed in the accounts of Seller
described in Exhibit "A" insofar and only insofar as such
lease(s) cover and affect the lands and depths listed in
Seller's accounts described in Exhibit "A" (hereinafter
referred to as the "Leases", whether one or more), subject
to any contracts, farmouts, or overriding royalties
affecting the leases, together with Seller's interest in any
pooled, communitized or unitized acreage derived by virtue
of Seller's ownership of those interests listed in the
accounts described in Exhibit "A";
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b) All contracts and agreements to the extent that same affect
the Leases and wells listed in Seller's accounts described
in Exhibit "A".
c) All surface use agreements, easements, rights of way,
licenses, authorizations, permits, and similar rights and
interests applicable to, or used or useful in connection
with, any or all of the interests listed in Seller's
accounts described in Exhibit "A" provided, however, Seller
shall retain all of its right, title and interest in and to
the same insofar as they pertain to, or are used or useful
in connection with any interests in the Leases not conveyed
to Buyer; and
d) Wells, pipelines and other related equipment or interests in
wells drilled and operated pursuant to oil and gas leases or
Joint Operating Agreements set forth in Seller's accounts
described in Exhibit "A".
Such interests described in a), b), c), and d) above are
hereinafter collectively referred to as the "Assets". Such
transfer of Assets will be made at Closing, but shall be made
effective, subject to the terms hereof, as of the Effective Date,
as same is hereinafter defined.
1.2 Purchase Price. The aggregate purchase price for the Assets
shall be equal to the net book value of the Assets set forth in
the accounts described in Exhibit "A" as of the Effective Date,
which shall hereinafter be referred to as the "Purchase Price",
which may be subject to adjustments prior to Closing as provided
for herein. Such Purchase Price shall also include a federal and
state income tax adjustment as described in Section 5.3 and
Exhibit "C". The adjusted Purchase Price, in immediately
available funds, shall be wire transferred to Seller's account on
the morning of the Closing Date. In the event any preferential
rights for any of the Assets covered by this agreement are
exercised pursuant to paragraph 7.3, then the purchase price to
be allocated to the Assets subject to the exercised preferential
rights shall include a pro-rata allocation of the federal and
state income tax adjustment, to be determined on the basis of oil
and gas reserves, or on any other basis agreed to by Seller and
Buyer.
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1.3 Conveying Instruments. The Assets to be conveyed by Seller to
Buyer pursuant to this agreement shall be conveyed with a special
warranty of title, as noted herein as to Seller's interest
pursuant to an assignment in like form to that which is attached
hereto as Exhibit "B", which assignment shall be made subject to
the terms and provisions of this agreement.
2. ADDITIONAL CONSIDERATIONS
2.1 Buyer's Plugging and Abandonment Obligations. Specific to the
Assets being purchased hereunder and as of the Effective Date,
Buyer agrees to accept full responsibility for all costs incurred
in complying with the rules and regulations of any governmental
agency having jurisdiction over the
Leases and with all applicable provisions of the Leases
concerning plugging and abandoning all wells drilled by Buyer or
Seller on the Leases, proper abandonment of all pipelines owned
by Buyer on the Leases and restoration of the surface area of the
Leases.
2.2 Buyer's Indemnities. Buyer shall fully protect, indemnify and
defend Seller, its affiliates or parent company, as well as the
officers, agents and employees of each (collectively, "Seller
Group") and hold them harmless from any and all expenses, claims,
losses, damages, demands, suits and liabilities including
attorneys' fees and costs of litigation of every kind
(collectively, "Claims"), including without limitation those
relating to injury to or death of persons, and damage to or loss
of property, arising out of or connected directly, or indirectly
with Buyer's ownership or operation of the Assets, accruing on or
after the Effective Date, REGARDLESS OF THE CAUSE OR OF THE
NEGLIGENT ACT OR OMISSION OR STRICT LIABILITY, WHETHER SOLE OR
PARTIAL, OF SELLER, ITS OFFICERS, AGENTS AND EMPLOYEES. Buyer
shall fully protect, indemnify, defend and hold Seller Group
harmless against any and all Claims for pollution and/or
environmental damage of any kind, including costs of clean-up,
response and remediation, any fines or penalties assessed on
account of such damage, caused by, arising out of, or in any way
incidental to Buyer's ownership or operation of the Assets if
asserted after the Effective Date.
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2.3 Seller's Indemnities. Seller shall fully protect, indemnify and
defend each company listed as Buyer, its affiliates or parent
company, as well as the officers, agents and employees of each
(collectively "Buyer Group") and hold them harmless for any and
all expenses, claims, loses, damages, demands, suits and
liabilities, including attorney's fees and costs of litigation of
every kind (collectively "Claims"), including without limitation
those relating to injury to or death of persons, and damage to or
loss of property, arising out of or connected directly or
indirectly with Seller's ownership or operation of the Assets,
accruing before the Effective Date, REGARDLESS OF THE CAUSE OR OF
THE NEGLIGENT ACT OR OMISSION OR STRICT LIABILITY, WHETHER SOLE
OR PARTIAL, OF BUYER, ITS OFFICERS, AGENTS AND EMPLOYEES. Seller
shall fully protect, indemnify, defend and hold Buyer Group
harmless against any and all Claims for pollution and/or
environmental damage of any kind, including costs of clean-up,
response and remediation, any fines or penalties assessed on
account of such damage, caused by, arising out of, or in any way
incidental to Seller's ownership or operation of the Assets if
asserted prior to the Effective Date.
2.4 Sale Subject To. The Sale will be subject to the terms of the
Leases and those contracts and agreements affecting the Assets
listed in the accounts described in Exhibit "A".
3. EFFECTIVE DATE AND CLOSING DATE
3.1 Effective Date. The Effective Date of the sale of the Assets
described herein shall be the later of December 1, 1998 or thirty
(30) days after an Order is entered by the Pennsylvania Public
Utility Commission issuing a Certificate of Public Convenience
which would permit Seller to transfer the Assets to Buyer,
subject to the provisions set forth in Article 7.2 herein where
the Assets are located.
3.2 Closing Date of Sale. Unless delayed pursuant to provisions
hereof, the Closing Date of the transaction contemplated herein
and the delivery of the executed documents to accomplish the
transfer of the Assets shall occur no later that thirty (30) days
after the date the Order of the Pennsylvania Public Utility
Commission is entered at Seller's office in Pittsburgh and shall
be the same date as the Effective Date.
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3.3 Actual Closing. Closing will occur upon confirmation of the
receipt of the adjusted Purchase Price at which time fully
executed copies of the Assignment instruments, sufficient in
number for filing in each county affected, will be delivered to
Buyer. The delivery of the Assignment instrument to Buyer shall
be by hand in Seller's offices in Pittsburgh. Upon delivery of
the Assignment, Buyer shall promptly file and record same in the
appropriate counties and/or with the appropriate Federal and/or
State Governmental Agencies whichever is applicable.
4. PURCHASE PRICE ADJUSTMENTS
4.1 Pre-Closing Adjustments. At least three (3) days prior to the
Closing, Seller shall prepare and present to Buyer a statement
(herein referred to as the "Initial Settlement Statement")
reflecting the adjustments to the Purchase Price as follows:
a) The Purchase Price shall be adjusted upward by the following:
1) The amount of all expenditures (including but not limited
to, capital expenditures, operating expenditures, prepaid
expenses, severance taxes, production taxes, royalties,
rentals, and other expenses billed under applicable
operating agreements such as combined fixed rate overhead
charges) paid by Seller in connection with the operation
of the interests attributable to the period from the
Effective Date of Sale to the closing.
2) Any other amount agreed upon by Buyer and Seller.
b) The Purchase Price shall be adjusted downward by the
following:
1) Any agreed to amounts attributable to environmental
Condition or Title Defect.
2) Any amounts equal to the value of the assets determined
pursuant to Section 7.3 Preferential Purchase Right, that
have been exercised.
3) An amount equal to all unpaid ad valorem, property,
production, windfall profit, severance, and similar taxes
and assessments, which amount shall, to the extent not
actually assessed, be computed based upon such taxes and
assessments for the tax related year last ended.
<PAGE> 6
4) Suspended royalty attributable to the interest Seller is
conveying to Buyer that will be assumed and administered
by Buyer.
5) Any other amount agreed upon by Buyer and Seller.
4.2 Post-Closing Adjustments. As soon as practicable, but no later
than ninety (90) days after the Closing, Seller shall prepare, in
accordance with this Agreement and with generally accepted
accounting principles, and submit to Buyer a statement
(hereinafter referred to as "Final Settlement Statement"),
setting forth each adjustment or payment that was not finally
determined as of the Closing and showing the calculation of such
adjustments. Seller shall afford Buyer access to Seller's
records pertaining to the computation of the Final Settlement
Statement. Within thirty (30) days after receipt of the Final
Settlement Statement, Buyer shall deliver to Seller a written
report containing any changes that buyer proposes be made to the
Final Settlement Statement. The parties shall then undertake to
agree with respect to the amounts due pursuant to such post-
closing adjustment by a date no later than one hundred fifty
(150) days after Closing, which date shall hereafter be referred
to as the "Final Settlement Date." If the parties hereto reach
agreement as to the Final Settlement Statement, the Buyer or
Seller, as the case may be, shall make the agreed upon payment to
the other party within fifteen (15) days of the Final Settlement
Date. In the event the parties are unable to reach an agreement
with respect to the Final Settlement Statement by the Final
Settlement Date, then payment shall be made by the Buyer or
Seller, as the case may be, to the other party within fifteen
(15) days of the Final Settlement Date as to all items on which
the parties have reached agreement. The parties shall continue
to negotiate in good faith on the remaining disputed items until
a resolution is achieved.
5. TAXES
5.1 Payment of Taxes. All Ad valorem, property, and other similar
forms of taxes, which have been paid by Seller and which have
accrued on or before the Effective Date of the sale, shall be
prorated based on the representative holding period of each Party
during the assessment period applicable to such tax. If a
proration payment between Seller or Buyer is necessary, it shall
be paid by adjustment to the purchase price at Closing.
<PAGE> 7
Buyer shall be responsible for all sales, use, real estate
transfer taxes and similar taxes arising out of the sale of the
Assets (hereinafter collectively referred to as "Sales Taxes").
The sale of Assets pursuant to this Agreement is anticipated to
be an isolated or occasional sale which will not be subject to
Sales Tax with any of the taxing authorities having jurisdiction
over this transaction and therefore no Sales Tax will be
collected by Seller from Buyer at the date of Closing unless it
is determined by Buyer prior to Closing that the purchase and
sale will be subject thereto. Seller agrees to cooperate with
Buyer in demonstrating that the requirements for an isolated or
occasional sale or any other Sales Tax exemption have been met.
If it is determined by Buyer prior to Closing that the purchase
and sale contemplated by this Agreement is subject to Sales Tax,
Buyer shall pay Seller at Closing all state and local Sales Taxes
applicable to that portion of the Assets which is subject to
Sales Tax, and Seller shall remit such amount to the appropriate
taxing authority in accordance with applicable law; provided,
however, that if Buyer desires to assume all responsibility for
remitting to the appropriate taxing authority the state and local
Sales Taxes due, it shall provide Seller with any exemption
certificates or other documentation required under applicable law
in lieu of paying Seller the taxes due. Buyer shall assume
liability for any Sales Taxes assessed by any taxing authority
with respect to this sale, including the amounts of any penalties
and interests. Buyer shall hold harmless and shall indemnify
Seller for any Sales Taxes assessed against Seller by any taxing
authority in respect of this sale, including the amounts of any
penalties, interest and attorney's fee. Any legal expenses
incurred by Seller to reduce or avoid any of the aforementioned
taxes shall be paid or reimbursed by Buyer.
5.2 Federal Tax Issues. Seller and Buyer agree that the Assets
subject to this Agreement do not constitute an "applicable asset
acquisition" as described under Internal Revenue Code section
1060 and the regulations thereunder, nor do they constitute a
trade or business in the ordinary sense of the term.
Nonetheless, in the event that these Assets are determined by the
Internal Revenue Service (or any other regulatory body) to
constitute an "applicable asset acquisition", then both Seller
and Buyer agree and proclaim that any and all transferred Assets
are limited to reserves in the ground and tangible equipment and
are "Class III Assets"; and that there is no "goodwill" or "going
concern value" attached to the transferred Assets. Both Parties
agree to the necessary and timely exchange of information
required to complete Federal Form 8594, and any other form
required by the Internal Revenue Service or any other regulatory
agency.
<PAGE> 8
5.3 Federal and State Income Tax Adjustment. Buyer agrees to pay to
Seller at Closing the "Federal and State Income Tax Adjustment"
as described in this Section 5.3 and Exhibit "C". The Federal
Income Tax Adjustment shall include:
- the balance of any "Regulatory Assets or Liabilities" (after
excluding the balance of any tax gross-up amounts which were
recorded under FAS 109) attributable to the Assets and included
in accounts 186.910, 186.920, 253.800 and 253.900.
- all incremental federal and state income taxes that will be due
and payable in the year of the sale by Peoples as a direct result
of the purchase and sale contemplated by this Agreement.
- any deferred tax adjustments (excluding any tax gross-up
adjustments required under FAS 109) attributable to and resulting
from the sale of the Assets including any deferred tax
adjustments required under FAS 109.
Seller and Buyer agree that the Federal and State Income Tax
Adjustment provided for under this Section 5.3 constitutes
additional sales proceeds to Seller. Buyer agrees to provide
Seller with the amount of incremental income taxes incurred as
soon as possible after the Closing Date.
6. REPRESENTATIONS AND WARRANTIES
6.1 Seller's Representations and Warranties. Seller represents and
warrants:
a) Seller is a corporation duly organized and validly existing,
in good standing, under the laws of the Commonwealth of
Pennsylvania. Seller has the requisite corporate power and
authority to own the oil and gas properties described herein
and to carry on business with regard to same as is now being
conducted and to enter into and to carry out the terms of
this Agreement.
b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on
behalf of Seller.
c) Seller is not a party to, or in any way obligated under, nor
does Seller have any knowledge of, any contract or
outstanding claim for the payment of any broker's or finder's
fee in connection with the origination, negotiation,
execution, or performance of this Agreement.
<PAGE> 9
d) This agreement has been duly executed and delivered on behalf
of the Seller. This agreement constitutes the valid, legal
and binding obligation of the Seller and is enforceable
against it in accordance with its terms. All instruments
required to be executed and delivered by Seller at the
Closing will constitute valid, legal and binding obligations
of Seller enforceable against Seller in accordance with their
terms.
e) Seller's execution, delivery and performance of this
agreement does not conflict with or violate its Articles of
Incorporation, or any agreements or instruments to which
Seller may be a party or by which Seller or any of Seller's
Assets are bound, or any law, administrative regulation or
rule, or court order, judgment or decree applicable to Seller
or to the Assets, non-compliance with which would have an
adverse effect on Buyer or its ownership or operation of the
Assets after the Closing Date.
f) There are no bankruptcy, reorganization, or arrangement
proceedings pending, being contemplated by or, to the best
knowledge of Seller, threatened against the Seller.
g) There is no claim, dispute, suit, action, investigation or
other proceeding pending before any court or governmental
agency to which Seller is a party, or has knowledge of which
has resulted or might result in the impairment or loss of
Seller's title to any of the Assets.
h) The Leases are in full force and effect, and all royalties,
rentals and other payments due thereon by or on behalf of
Seller have been timely and properly paid in full on or
before the due dates thereof and all conditions necessary to
keep the Leases in full force and effect have been fully and
punctually performed.
i) Subject to section 7.5 below, the working interest and net
revenue interest described in Seller's accounts listed on
Exhibit "A" to the best of Seller's knowledge are correct.
j) That there are no liens, burdens, mortgages or other
encumbrances of any kind affecting Seller's interest other
than its proportionate share of lessor's royalty burden.
<PAGE> 10
k) That the interest Seller is conveying to Buyer is free and
clear of all rights of reassignment, reversionary rights,
calls on production, prepayment arrangements, dedications of
the Leases or production therefrom to sales, gathering or
transportation contracts or other similar agreements or
arrangements that would encumber the interest that Buyer is
acquiring hereunder.
6.2 Buyer's Representations and Warranties. Buyer represents and
warrants:
a) Buyer is a U. S. corporation duly organized and validly
existing, in good standing, under the laws of the State of
Delaware and has the requisite corporate authority to own the
oil and gas properties described herein and to carry on
business with regard to same as is now being conducted and
to enter into and to carry out the terms of this Agreement.
b) The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have
been duly authorized by all necessary corporate action on
behalf of Buyer.
c) Buyer is not a party to, or in any way obligated under, nor
does Buyer have any knowledge of, any contract or outstanding
claim for the payment of any broker's or finder's fee in
connection with the origination, negotiation, execution, or
performance of this Agreement.
d) Buyer shall comply with all applicable laws, ordinances,
rules and regulations and shall promptly obtain and maintain
all permits required by public authorities in connection with
the Assets purchased.
e) Buyer is not subject to any charter, by-law, lien or
encumbrance of any kind, agreement, instrument, order or
decree of any court or governmental body which would prevent
consummation of the actions contemplated by this Agreement.
f) Buyer has, or will have on the Closing Date, sufficient cash,
available lines of credit or other sources of immediately
available funds to enable it to make payment of the Purchase
Price to Seller on the Closing Date.
<PAGE> 11
g) Buyer is an experienced and knowledgeable investor in oil and
gas properties and has the financial and business expertise
to evaluate the merits and risks of the transactions
contemplated by this Agreement. Buyer has sought the advice
of persons it deems appropriate concerning this Agreement.
Buyer is acquiring the Assets for its own account and is not
acquiring the Assets in contemplation of a distribution of
the Assets in violation of any applicable Federal or States
securities laws.
7. ADDITIONAL COVENANTS
7.1 Antitrust Review. If the consummation of the transactions
contemplated by this Agreement is subject to review under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act"),
Seller and Buyer shall cooperate with each other and with the
reviewing agencies, and shall promptly undertake to take such
reasonable action as may be required to obtain such review. The
Closing Date for the transaction contemplated herein shall be
extended until (i) all filings required to be made under the HSR
Act have been made (ii) the waiting period thereunder shall
either have expired or have been terminated and (iii) no adverse
actions by any federal agency that has jurisdiction over same
shall have been taken or threatened. If a filing under the HSR
Act is required, Buyer agrees to pay all fees associated with
same.
7.2 Approvals and Consents. If the transfer of the Assets, or any
portion thereof, requires any prior approvals, or other forms of
consent, Buyer and Seller shall jointly work to obtain such
necessary approvals and consents prior to Closing. In
particular, Seller shall seek the approval of the Securities
Exchange Commission and the Pennsylvania Public Utility
Commission, and such approvals are conditions precedent to the
sale of the Assets contemplated herein. The consummation of the
sale of Assets anticipated under the terms of this Asset Sale
Agreement shall be conditioned upon Buyer's satisfaction with any
terms or conditions contained within an Order of the Pennsylvania
Public Utility Commission pertaining to the issuance of a
Certificate of Public Convenience to Seller authorizing the sale
of Assets to Buyer.
7.3 Preferential Purchase Rights. Seller and Buyer agree that
preferential rights exist in some of the Assets to the extent
preferential rights are exercised, Seller agrees to adjust the
Purchase Price.
<PAGE> 12
7.4 Title and Document Review. After execution of this Agreement and
prior to Closing, Seller shall make available to Buyer copies of
all title and related information, including but not limited to,
information necessary to effect an electronic conversion of lease
and well data, and shall furnish Buyer with a list and copies of
all contracts or agreements to which the Assignment of Assets
will be subject, for a minimum period of ninety (90) days. Prior
to Closing Buyer may review such information at Seller's offices
during normal business hours. Failure to provide such
information will delay closing to the extent necessary to provide
Buyer a period of ninety (90) days for review. In the event
Buyer discovers a title defect, Buyer shall, prior to Closing,
deliver to Seller a notice of such defect, together with Buyer's
proposed adjustment to the Purchase Price attributable to such
title defect and/or Buyer's estimated cost to cure such title
defect. If, prior to Closing, Buyer has not agreed to waive such
title defect and if Seller and Buyer cannot agree on a resolution
(monetary or otherwise) with regard to such defect, Buyer shall
have the following remedies available in the order hereinafter
noted (a) to delay, without penalty or liability, the Closing for
fourteen (14) days in order to allow Seller time to cure the
defect at its own expense, or (b) to have Seller fully warrant
its title to the Leases affected by the title defect to Seller,
or (c) to cancel the sale, and this Agreement shall be deemed
terminated without further liability or obligation to either
party hereunder.
7.5 Special Warranty of Title. Seller and its successors and assigns
represent that the Assets are free and clear of liens, claims,
mortgages, encumbrances burdens including royalties due as of the
Effective Date (other than the existence of Lessor's royalty
interest) and other adverse claims, including claims by gas
purchasers or others for delivery of prepaid gas or liability for
refunds, or delivery of future production without full payment
therefor. Seller and its successors and assigns warrant and
agree to forever defend all and singular the Assets unto Buyer,
its successors and assigns, against every person whomsoever
lawfully claiming the Assets or any part thereof by, through or
under Seller, but not otherwise.
7.6 Suspended Royalty. Upon Closing, Buyer shall assume the
responsibility for the proper payment of all suspended royalty
amounts. Seller agrees to reimburse Buyer for Suspended
Royalties attributable to Seller's obligation to pay such
royalties up to and including the Closing Date that have been
assumed and administered by Buyer.
<PAGE> 13
8. OPERATIONS PRIOR TO CLOSING - OPERATED ASSETS
Seller, if Seller is the Operator, warrants that, after execution of
this Agreement and prior to Closing, it will not, without the consent
of Buyer, conduct any drilling or other operations on the Assets, nor
will it place any structures, facilities, pipelines or other equipment
on the Assets which would constitute out of the ordinary operations.
9. INTERIM AGENCY OF SELLER
Seller shall act as Buyer's interim agent after Closing for the
payment of royalties, delay rentals and other payments due third
parties in connection with the ownership and operation of the Assets
until such time as the data necessary for Buyer to make such payments
directly to such third parties is fully incorporated into Buyer's land
records and accounting systems. Buyer agrees to compensate Seller at
cost for services provided hereunder.
10. GAS IMBALANCE
Seller warrants that there are no gas imbalances owed to or owed by
Seller to other working interest owners of the Assets.
11. GAS PURCHASE
Subject to the provisions of 7.2, Buyer agrees to sell to Seller and
Seller agrees to buy from Buyer an amount of gas, equal to the
production from the wells transferred hereunder based on production
reserve estimates as of the Closing Date from the January 1998 Ralph
E. Davis Associates, Inc. report for six twelve-month periods from
the date of transfer of the properties to CNGP. For such volumes,
Seller agrees to charge a price equal to the following:
Cost per Mcf
Year One $1.47
Year Two $1.73
Year Three $1.85
Year Four $2.20
Year Five $2.36
Year Six $2.63
<PAGE> 14
The above prices represent the Sellers projected unit cost of
production assuming Seller continues owning and operating the
Production Assets. When any gas is sold to Seller from the wells
transferred hereunder, it shall be sold at the wellhead free of
gathering charges. To the extent seller is required to exit the
merchant function by legislation or regulation during this six-year
period, Buyer shall cease to be obligated to supply gas to Seller
pursuant to the terms of this Section.
12. MISCELLANEOUS
12.1 Payment of Expenses and Fees. Buyer and Seller shall each bear
their own costs and expenses, including but not limited to
attorney's fees incurred in connection with the transactions
contemplated in this Agreement; provided, however, Buyer shall
pay all recording fees or transfer taxes in connection with the
recording of any instrument of transfer of Assets from Seller to
Buyer hereunder.
12.2 Data and Records. Within a reasonable time after Closing, as
applicable, Seller shall deliver to Buyer copies of any land
contracts or agreement files, well logs, well files, geological
and engineering data and royalty ledger in Seller's files that
pertain to the Assets. Seller shall not furnish copies of
geophysical, seismic and other technical, confidential or
proprietary data and interpretations thereof unless they are
transferable under license agreements.
12.3 Publicity. Seller and Buyer shall each notify the other party in
writing In advance of any press release concerning the
transactions contemplated by this Agreement. Such notice shall
include a full copy of the proposed press release. Unless a
party so notified objects to such proposed press release in
writing within seventy-two (72) hours after receipt of such
notice, it shall be deemed approval of same. Any party receiving
an objection shall make a good faith effort to accommodate the
objecting party's comments.
12.4 Further Assurances. From time to time after Closing, Seller and
Buyer shall execute, acknowledge and deliver to the other such
further instruments, and take such other action as may be
reasonably requested, in order to assure the delivery of the
interests contemplated by this Agreement.
<PAGE> 15
12.5 Entire Agreement. This Agreement and the attached exhibits
constitute the entire agreement between Seller and Buyer with
respect to the transactions contemplated herein, and shall
supersede all prior oral or written agreements, commitments,
understandings or information otherwise furnished by Seller to
Buyer with respect to such matters. No amendment of this
Agreement shall be binding unless same is in writing and signed
by representatives of all parties hereto. Headings used in this
Agreement are only for convenience of reference and shall not be
used to define the meaning of any provision.
12.6 Notices. All notices and consents to be given hereunder shall be
in writing and shall be deemed to have been duly given when
delivered personally or sent by facsimile transmission with
receipt acknowledged, or delivered by the U.S. mail or a
recognized commercial mail courier to the party at the address
set forth in this Agreement or such other address as any party
shall have designated by ten days notice to the other party.
12.7 Governing Law. This Agreement shall be governed by the law of
the Commonwealth of Pennsylvania without regard to rules
concerning conflicts of law.
12.8 Survival. All obligations of the parties with respect to
representations, warranties, indemnities and other provisions set
forth herein shall survive Closing and shall continue thereafter
for as long as permitted by applicable statutes of limitation or
prescription.
12.9 Negotiated Agreement. Despite the extent of any party's
participation in the drafting process, this Agreement is the
result of extended, arms-length negotiations and shall not be
construed against or in favor of any party merely on the basis
that such party drafted this Agreement or any particular portion
of this Agreement.
12.10 Successor and Assigns. This Agreement shall extend to, be
binding upon and inure to the benefit of the parties and their
respective heirs, devisees, legal representatives, successors,
and assigns, and shall constitute a covenant running with the
Lease(s) and the lands and Assets conveyed hereby.
12.11 Counterpart Execution. This Agreement may be executed in
counterpart originals, and shall be binding on those who sign any
counterpart, regardless of whether all parties join in executing
this Agreement or a counterpart. If this Agreement is executed
in counterparts, all counterparts taken together shall have the
same effect as if all parties had signed the same agreement.
<PAGE> 16
12.12 Term. This Agreement shall remain in full force and effect
until the expiration of ninety (90) days after cessation of
production from, or lease maintenance operations on any of the
assets transferred hereunder.
IN WITNESS WHEREOF, Seller and Buyer have executed this Agreement as
of the date first written above.
CNG PRODUCING COMPANY
By:
Paul P. Gregg
Senior Vice President
and Chief Financial Officer
THE PEOPLES NATURAL GAS COMPANY
By:
(Name)
(Title)
<PAGE> 1
Exhibit D-1
BEFORE THE
PENNSYLVANIA PUBLIC UTILITY COMMISSION
In Re: Application of The Peoples :
Natural Gas Company for the approval :
of the transfer of property used or : Application Docket No.
useful in the public service to CNG : ____________________
Producing Company, an affiliate of the :
Applicant. :
TO THE PENNSYLVANIA PUBLIC UTILITY COMMISSION:
AND NOW, this 11th day of February, 1998, comes The Peoples Natural
Gas Company (PNG), by its counsel, pursuant to the provisions of the Public
Utility Code, 66 Pa. C.S. Sections 1102 and 1103, and pursuant to the
provisions of 66 Pa. C.S. Sections 2101 and 2102, and requests the Commission
to approve the sale of property from it to its affiliate, the CNG Producing
Company (CNGP), and assigns the following reasons therefor:
1. The name and address of the Applicant are:
The Peoples Natural Gas Company
625 Liberty Avenue
Pittsburgh, PA 15222-3197
(412) 497-6635
2. The names and addresses of the Applicant's attorneys are as
follows:
Margaret H. Peters Joseph J. Malatesta, Jr.
The Peoples Natural Gas Company Kevin J. McKeon
625 Liberty Avenue Malatesta Hawke & McKeon
Pittsburgh, PA 15222-3197 100 North Tenth Street
(412) 497-6892 P.O. Box 1778
Harrisburg, PA 17105
(717) 236-1300
<PAGE> 2
3. PNG, a Pennsylvania corporation with its principal place of
business located in Pittsburgh, Pennsylvania, is organized under the Act of
Assembly approved May 29, 1885. The present corporation results from a
consolidation with the Columbia Natural Gas Company made effective by
Letters of Patent issued by the Governor of the Commonwealth on December
31, 1938. The corporation has adopted the Pennsylvania Business
Corporation Law of May 5, 1933, P.L. 364, as amended, and it is vested with
authority to produce, purchase, and transport natural gas in the territory
and along the pipeline routes described in its original Certificate of
Incorporation and the various consolidation agreements and amendments on
file in the Office of the Secretary of the Commonwealth, and to store and
supply natural gas and to render natural gas service to the public in the
counties of Allegheny, Armstrong, Beaver, Blair, Butler, Cambria, Clarion,
Fayette, Greene, Huntingdon, Indiana, Jefferson, Lawrence, Mercer, Venango,
Washington, and Westmoreland. A list of all of the communities served by
PNG is attached to the instant application as Exhibit "A."
4. CNGP, headquartered in New Orleans, Louisiana with offices in
Pennsylvania, West Virginia, Oklahoma, Utah and Texas, is a Delaware
corporation involved in the exploration for and production of natural gas
and oil, the majority of which operations are located in the Gulf Coast and
Gulf of Mexico areas and in the Appalachian region. CNGP was incorporated
in 1972 and now owns an interest in 521 offshore wells, 3,274 onshore
wells, and approximately 1 million net acres of leases in nineteen states
and in Canada, and has reserves of 1 trillion cubic feet of natural gas
and 50 million barrels of oil.
<PAGE> 3
5. PNG and CNGP are both wholly owned subsidiaries of Consolidated
Natural Gas Company, a public utility holding company headquartered in
Pittsburgh, Pennsylvania.
6. The number of consumers, by classes, to whom PNG furnishes public
service is as follows: 317,490 residential customers; 28,940 commercial
customers; 200 industrial customers, and 2 customers that buy gas for
resale, for a total of 346,632 customers.
7. There are attached hereto as Exhibit "B" balance sheets of PNG
and CNGP as of November 30, 1997.
8. There are attached hereto as Exhibit "C" income accounts of PNG
and CNGP as of November 30, 1997.
9. All the annual reports, tariffs, certificates of notification,
applications for certificates of valuation, applications for approval of
the issuance of securities, and securities certificates, filed with your
Honorable Commission by PNG and CNGP and by their predecessor, constituent,
and affiliated companies are made part hereof by reference.
10. PNG intends to sell and CNGP intends to buy all of PNG's
interests in natural gas wells owned in whole or in part by PNG, all of
which are located in western Pennsylvania. PNG owns a 100% or less
interest in 1,421 gross wells, or a 100% interest in 925 net wells, with
<PAGE> 4
reserves of approximately 41.9 Bcf. In addition, CNGP will purchase the
associated oil and gas leases covering 174,698 acres, all contracts and
agreements to the extent that they affect the said oil and gas leases, the
related measurement equipment, and certain portions of gathering lines, as
well as other miscellaneous attached equipment. CNGP also agrees to assume
all responsibility for plugging and abandoning all of PNG wholly owned
wells and to share (with PNG's co-owners) in the costs of plugging and
abandoning wells that PNG has a partial interest in. CNGP agrees to accept
further liabilities, associated with tort or environmental claims, as more
fully set forth in the Asset Sales Agreement, a copy of which has been
attached hereto as Exhibit "E."
CNGP has also agreed to sell to PNG an amount of gas to PNG equal to
the production from the wells transferred hereunder based on production
reserve estimates from an independent third party for six twelve-month
periods commencing with the date of transfer of the properties to CNGP at
a price equal to the following:
Cost per Mcf
Year One $1.47
Year Two 1.73
Year Three 1.85
Year Four 2.20
Year Five 2.36
Year Six 2.63
The above prices are based on PNG's projected unit cost of production
assuming that PNG would continue to own and operate the assets that are the
subject of this application.
<PAGE> 5
There are no customers of PNG served from the portions of gathering
line which are being acquired by CNGP and, therefore, there are no
customers being transferred.
11. The consideration for the transfer of property used or useful in
the public service is cash in the amount of $14.5 million, which
represents the net book value of all the wells, leases, associated
contracts and agreements, measurement equipment, pipelines, and
miscellaneous equipment that are a part of this transaction as shown on
PNG's books of accounts as of November 30, 1997, which net book value will
be adjusted for further depreciation at the time of closing.
CNGP has also agreed to pay to PNG an amount equal to any incremental
state and federal deferred income taxes that become due and payable as a
result of the consummation of the purchase and sale contemplated in this
application.
12. There are attached hereto as Exhibit "D" statements of all the
fixed capital, or plant, to be transferred, which show (a) the book value
thereof; (b) the original cost thereof when first devoted to public use,
plus additions and less retirements; (c) the actual cash or cash equivalent
cost thereof to PNG; (d) the amount of depreciation reserve, or reserve for
renewals or replacements, applicable to said book cost; and (e) the
depreciation requirements applicable to the actual cash or cash equivalent
cost to PNG, if such actual cost is not identical with the book value.
<PAGE> 6
13. There are attached hereto as Exhibit "F" pro forma balance sheets
as of November 30, 1997 of CNGP and PNG giving effect to the transfer of
property used or useful in the public service.
14. There is attached hereto a pro forma consolidated income statement
of PNG and CNGP as Exhibit "G" for the twelve months ended November 30,
1997.
15. There are attached hereto as Exhibit "H" certified copies of the
meeting minutes of the boards of directors of transferor and transferee
authorizing the transfer herein proposed.
16. There will be no impact on the service provided to PNG's
customers. No customers are being transferred under this transaction.
17. Because the sale of these wells and related properties by PNG to
CNGP will reduce PNG's costs by the associated production cost of service,
PNG is proposing that its retail rates and certain of its transportation
rates be reduced by the same amount. The total proposed rate reduction is
$0.0884/mcf. Tariff sheets reflecting the proposed reduction to rates are
attached hereto as Exhibit "I."
In addition, as a result of CNGP's agreement to sell to PNG an
equivalent amount of gas equal to PNG's estimated production (had PNG
remained the owner and operator of the production assets) at PNG's
projected unit cost of production for the first six years of the agreement,
<PAGE> 7
PNG's ratepayers will be unaffected by the sale of production assets to
CNGP for the first six year period. After the initial six year period, PNG
projects that the cost of production will exceed the cost of purchasing gas
supplies on the market; and the difference in the market prices from the
projected cost of production will accrue as a direct benefit to PNG's
retail ratepayers.
18. The reasons for the proposed transfer are as follows:
a. Consolidated Natural Gas Company (CNG), the parent corporation
and sole shareholder of both PNG and CNGP, is in the process of
centralizing certain office functions and realigning assets and work
functions throughout the CNG system. As part of this effort, PNG is asking
for authorization to sell its production assets to the CNG subsidiary whose
core business is exploration and production of natural gas, namely, CNGP.
Consistent with this approach, in 1996, Hope Gas, Inc., a public utility
operating in West Virginia which is also, like PNG, a wholly-owned
subsidiary of CNG, sought and received authorization from the West Virginia
Public Service Commission to sell its production facilities to CNGP. PNG's
request for authorization to sell its production facilities to CNGP is a
continuation of the CNG strategy of aligning similar assets within one
corporate entity.
b. At the same time, PNG wishes to refocus its interest, energy and
resources on its core business, which is delivering retail and
<PAGE> 8
transportation services to its over 340,000 customers throughout western
Pennsylvania. When PNG first engaged in selling natural gas to endusers in
1885, all the gas sold was produced from PNG's own wells. Over the last
112 years, PNG's dependence on its own production as part of its supply mix
has been drastically reduced, with the advent of interstate pipelines and
the development of a flourishing spot market, so that PNG's own production
now accounts for only 6 % of its system supply today. Because of the
increased availability of gas supplies and access to transportation
capacity to get these supplies onto PNG's system since PNG first started
its business, PNG's production is not necessary for PNG to be able to
continue to obtain reliable gas supplies in the future.
c. PNG has not invested any capital in drilling new gas wells since
1982. Since then, PNG's remaining wells continue to deplete their
reserves, and many of them are reaching an age where, without substantial
capital investments to rework them, these wells will have to be plugged and
abandoned at substantial cost. By transferring these production assets to
CNGP, the responsibility for reworking the wells and ultimately plugging
and abandoning the wells will be shifted from PNG and its ratepayers to
CNGP.
d. Over the last ten years, an increasing number of PNG's endusers
have begun purchasing their own gas supplies for PNG to transport to them,
and today approximately 49% of the volumes of gas consumed on PNG's system
<PAGE> 9
are transported to endusers. With this reduction in demand for retail
service, PNG's need to acquire natural gas for system supply purposes has
been substantially reduced.
WHEREFORE, for all of the foregoing reasons, The Peoples Natural Gas
Company prays your Honorable Commission to approve the aforesaid transfer.
__________________________________
Margaret H. Peters, Esquire
Joyce C. Dailey, Esquire
625 Liberty Avenue
Pittsburgh, PA 15222-3197
(412) 497-6892
Joseph J. Malatesta, Jr.
Kevin J. McKeon
Malatesta Hawke & McKeon
100 North Tenth Street
P.O. Box 1778
Harrisburg, PA 17105
(717) 236-1300
Counsel for:
The Peoples Natural Gas Company
Dated: February ____, 1998
<PAGE> 1
Exhbit D-2
PENNSYLVANIA
PUBLIC UTILITY COMMISSION
Harrisburg, PA 17105-3265
Public Meeting held September 17, 1998
Commissioners Present:
John M. Quain, Chairman
Robert K. Bloom, Vice Chairman
David W. Rolka
Nora Mead Brownell
Aaron Wilson, Jr.
Docket Nos.
Pennsylvania's Public Utility Commission R-00984281
Anthony Perman R-00984281CO001
The Office of Consumer Advocate R-00984281CO002
v.
The Peoples Natural Gas Company
Peoples Industrial Intervenors,
The Independent Oil and Gas
Association of Pennsylvania,
Enron Capital Trade Resources Corp., and
Columbia Energy Services Corp.,
Intervenors
In re: Application of the Peoples Natural Gas
Company for the approval of the transfer of A-122250F.0008
property used or useful in the public service to
CNG Producing Company, an affiliate of the
Applicant
OPINION AND ORDER
BY THE COMMISSION:
<PAGE> 2
I. HISTORY OF THE PROCEEDING
A. Peoples' Application
On February 11, 1998, The Peoples Natural Gas Company (Peoples)
filed with the Commission an Application, under Sections 1102(a)(3) and
2102 of the Public Utility Code, 66 Pa. C. S. Sections I 102(a)(3) and
2102, for approval of Peoples' transfer of certain used and useful property
to its affiliate, CNG Producing Company (CNGP). Peoples proposes to
transfer its interests in natural gas wells, oil and gas leases, related
contracts and agreements, related measurement equipment, and certain
portions of gathering lines, as well as other miscellaneous attached
equipment ("production assets"). As part of the same transaction, CNGP
agrees to sell natural gas to Peoples, equal to the anticipated levels of
production from the transferred assets, over the six-year period from
January 1, 1999 through December 31, 2004. The prices that Peoples has
agreed to pay for those natural gas supplies is set forth in the Asset Sale
Agreement between Peoples and CNGP.
Peoples accompanied its Application with various attachments,
including a description of the assets to be transferred, Peoples' Asset
Sale Agreement with CNGP, and illustrative tariff sheets reflecting the
effect of the proposed transfer on certain of Peoples' retail and
transportation rates. The tariff sheets show that, if the Commission
grants Peoples' Application, the affected rates will be reduced by $0.0884
per mcf effective January 1, 1999, exclusive of the Pennsylvania Gross
Receipts Tax (which affects retail rates only).
The Asset Sale Agreement contained an effective date of the later
of December 1, 1998, or thirty days following the Commission's issuance of
a certificate of public convenience under Section 1102(a)(3) of the Public
Utility Code, evidencing the Commission's grant of the Application and
approval of the transfer of the production assets. 66 Pa. C.S. Section 1
<PAGE> 3
102(a)(3). On April 1, 1998, Peoples filed with the Commission a document
captioned, "Modification to Asset Sale Agreement," through which Peoples
and CNGP have modified the effective date of the Asset Sale Agreement by
substituting December 31, 1998 for December 1, 1998. On March 21, 1998,
the Commission published Notice of Peoples' Application in the Pennsylvania
Bulletin. 28 Pa. B. 1482. The Commission's Notice allowed interested
persons to file protests or petitions to intervene in response to Peoples'
Application on or before April 6, 1998. On March 24, 1998, the Office of
Consumer Advocate (OCA) filed both a Protest to and a Notice of
Intervention in Peoples' Application. No other persons filed protests to
or petitions to intervene in Peoples' Application.
B. Peoples' 1307(f) Filing
On March 2, 1998 Peoples filed a Request for Confidential
Treatment of Certain 1307(f) Prefiling Submissions. On April 1, 1998,
Peoples filed Supplement-No. 132 to Tariff Gas - Pa. P.U.C. No. 42, with
an effective date of October 1, 1998. Supplement No. 132 initiated
Peoples' 1998 natural gas cost recovery proceeding under Section 1307(f) of
the Public Utility Code, 66 Pa. C.S. Section 1307(f). Supplement No. 132
proposed the following changes in the natural gas cost recovery levels
incorporated within Peoples' various rates:
1. a decrease of $0.1154/mcf (including Pennsylvania Gross
Receipts Tax) in the commodity charges applicable to Peoples'
retail customers under its Rates RS, CS-S and CS-L;
2. a decrease of $0.1588 per mcf (including Pennsylvania Gross
Receipts Tax) in the commodity charge applicable to Peoples'
retail customers under its Rate IS-SB;
<PAGE> 4
3. an increase of $0.0413 per mcf (excluding Pennsylvania Gross
Receipts Tax) in the various demand or entitlement charges
applicable to users of Peoples' standby services and
industrial retail service under its Rates GS-SB and IS-SB;
4. an increase of $0.0655 per mcf in the banking, balancing and
advancing ("BB&A") charge applicable to residential and
commercial transportation customers under Peoples' Rate GS-T;
5. a decrease of $0.0009 per mcf in the BB&A charge applicable
to industrial transportation customers under Peoples' Rate T;
and
6. a decrease of $0.1251 per mcf in Peoples' Migration Rider.
In addition to the above, proposed changes in rates, Peoples also
presented two related proposals as part of its 1307(f) filing. Peoples
proposed changes to the imbalance provisions in its tariff that would apply
new charges and penalties to transportation customers who exceed Peoples'
monthly banking and advancing tolerance. Second, Peoples sought to extend
its existing performance-based gas procurement program indefinitely beyond
its scheduled expiration date of September 30, 1998.
Anthony Perman and the Office of Consumer Advocate filed timely
Complaints against Peoples' 1307(f) filing. Mr. Perman did not actively
participate in the proceeding.
On April 1, 1998, Peoples filed a Motion requesting that the
Commission consolidate for hearing and decision its Application for
transfer of its production assets and its annual 1307(f) filing.
<PAGE> 5
By Prehearing Order issued on April 13, 1998, Administrative Law
Judge (ALJ) Larry Gesoff granted, among other things, the following:
Peoples' Motion to Consolidate its 1307(f) proceeding with its Application;
the Independent Gas and Oil Association of Pennsylvania's (IOGA) request to
participate in the 1307(f) proceeding as a party; consolidated Mr. Perman
and the OCA's Complaints with the 1307(f) proceeding.
The Commission's Office of Trial Staff (OTS) and the Office of
Small Business Advocate (OSBA) became parties to this proceeding by Notices
of Intervention dated April 7, and April 1, respectively.
By Interim Order No. 4, ALJ Gesoff granted the Petition to
Intervene of Peoples Industrial Intervenors (PII). 3
An evidentiary hearing was held on June 10, 1998. At the
hearing, the OTS and the OCA represented that they had reached a settlement
regarding the issues in dispute between them. On June 30, 1998, the OTS,
OCA, OSBA and Peoples filed a Joint Petition for Approval of Settlement
Agreement (Agreement) which purported to resolve all of the issues of
interest to them in Peoples' Application and 1307(f) proceeding. The
record was closed on July 6, 1998.
Peoples, the OTS, the OCA and PII filed Main Briefs and Reply
Briefs. IOGA filed a Notice of Endorsement indicating that in lieu of
filing its own Main Brief, it would adopt the arguments and positions
advocated by PII in its Main Brief IOGA did not file a Reply Brief.
The Recommended Decision of ALJ Gesoff was issued on August 5,
1998. PII filed Exceptions to the Recommended Decision. Replies to
Exceptions were filed by the OCA, the OTS and Peoples.
<PAGE> 6
II. SETTLEMENT AGREEMENT
A. Peoples' Application
In the Settlement Agreement, the Parties agreed that Peoples is
authorized to transfer to its gas production and gather assets to its
affiliate, CNG Producing Company, in accordance with the February 10, 1998
Asset Sale Agreement between Peoples and CNGP, as subsequently modified by
the March 30, 1998 Modification to Asset Sale Agreement and terms of the
Settlement Agreement, to the extent necessary.
The Parties also stipulated that three (3) modifications would
be made to Peoples' Application. The first modification increased the
level of reduction to base rates resulting from the asset transfer, from
the 8.84$/Mcf proposed by Peoples to 9.55$/Mcf, effective January 1, 1999.
The rate reduction will be applied to: (a) All of the retail commodity
rates contained in Peoples' Rates RS, CS-S, CS-L, and IS-SB; (b) The
maximum rates for the transportation of interstate gas supplies contained
in Peoples' Rates GS-T and T; and (c) The maximum rates for the
transportation of Pennsylvania-produced supplies, for residential and
small commercial ratepayers, contained in Peoples' Rate GS-T.
The second modification provided that if market prices turn out
to be lower than the cost-of-service prices, Peoples' purchase agreement
with CNGP would be terminated, and Peoples would be able to purchase
replacement supplies at market prices.
The third modification was intended to ensure that the benefits
of the purchase agreement flow to Peoples' customers, regardless of whether
they elect to become transportation customers or remain as sales customers.
<PAGE> 7
OTS supported the Agreement as in the public interest. OCA
maintained that it supported the Agreement and that the proposed
modifications to the Peoples' Application would protect Peoples' ratepayers
from any adverse effects resulting from the transfer of Peoples' natural
gas production assets and associated facilities to its affiliate, CNGP.
The OCA was also of the opinion that the Agreement was in the public
interest and addressed the concerns it had with Peoples' 1307(f) filing.
The ALJ recommended approval of the Peoples' Application as
modified by the Agreement. The ALJ concluded that the terms of the
Agreement referring to Peoples' Application were in the public interest.
The ALJ noted that the Agreement provided for reasonable reductions in
Peoples' retail and transportation rates, appropriate conditions for the
termination of the CNGP supply arrangement, acceptable conditions for the
continued availability of CNGP gas supplies, and an acceptable forbearance
from claims on the part of Peoples. (R.D., p. 65).
We note that no party filed Exceptions to Peoples' Application or
the ALJ's recommendation to approve the Application. Finding that Peoples'
Application, as modified by the Agreement is in the public interest, it is
adopted.
B. Peoples Section 1307(f)
Under the Settlement, Peoples agreed to include the following as
part of its 1999 Section 1307(f) filing that it will make on or about April
1, 1999:
a. A proposal to reduce the monthly banking and advancing
tolerances contained in its Rates GS-T and T to 3.5% for
service rendered on and after October 1, 1999; and
<PAGE> 8
b. Testimony and analysis that describes Peoples' plans for
maintaining or abandoning the provision of retail service,
including plans with respect to Peoples' renewal or
termination of interstate transportation and storage
contracts, its obligations to serve, metering and billing
service, standby service, storage service, and recovery of
stranded natural gas costs.
(Settlement, p. 11).
The ALJ recommended approval of Peoples' Section 1307(f) filing
as modified by the Settlement. The ALJ concluded that the Settlement
addressing Peoples' filing was in the public interest. ALJ Gesoff also
determined that the Settlement and the record demonstrated that Peoples is
pursuing a "least cost gas fuel procurement policy," pursuant to Section 13
18 of the Public Utility Code, 66 Pa. C. S. Section 13 18, and supported a
determination that the seven specific findings set forth in section 1318
were met.
The ALJ also recommended approval of the two the terms of the
agreement: the proposed reduction from 5% to 4% in the monthly tolerance
for the banking and advancing of natural gas on behalf of transportation
customers under Peoples' Rates GS-T and T; and second, the imbalance fee
provisions concerning Peoples' contracts for the pooling of transportation
customer supplies.
III. PEOPLES' MONTHLY BANKING AND ADVANCING TOLERANCE
A. Arguments of Parties
In its Supplement No. 132 filed on April 1, 1998, Peoples did not
propose any changes in its present monthly banking and advancing tolerance
of 5%. In the Agreement, Peoples agreed to reduce the monthly tolerance
from 5% to 4%, for service rendered by Peoples on and after October 1,
1998.
<PAGE> 9
Peoples maintained that the proposed 4% banking and advancing
tolerance encourages a "least cost fuel procurement policy" and does not
unreasonably discriminate between its retail and transportation customers.
Peoples pointed out that its monthly banking and advancing tolerance affect
its cost of natural gas in two ways. First, Peoples must incur natural gas
demand costs for peak day design capacity used to provide banking and
advancing service up to the monthly tolerance. (Peoples St. No. 5, p. 2).
Second, Peoples stated that its monthly banking and advancing tolerance
allows its transportation customers the opportunity to reduce their own
commodity costs of natural gas at the possible expense of Peoples' retail
customers. (Peoples St. No. 5, p.3). Peoples noted that under its existing
5% tolerance, Peoples must reserve a total of 13 MMcf of peak day design
capacity for banking and advancing services to its transportation
customers. Under the proposed 4% tolerance, Peoples would need to reserve
only 10 MMcf of peak day design capacity for banking and advancing
purposes. Peoples remarked that while a 4% tolerance would not immediately
result in a reduction of its costs of natural gas, it should have that
effect over the long-term as opportunities present themselves for Peoples
to reduce or terminate existing levels of interstate pipeline capacity.
(Peoples St. No. 5, p. 4).
Peoples, in responding to an IOGA proposal, emphasized that the
10% banking and advancing tolerance advocated by IOGA would require it to
increase its design day capacity for banking and advancing purposes to 24
MMcf. The additional capacity, Peoples argued, would increase its natural
gas costs, which would affect Peoples and its ratepayers.
With respect to commodity costs, Peoples proffered that its 4%
proposed banking and advancing tolerance would afford its transportation
customers the opportunity to either under-deliver gas supplies when the
cost of supplies is high, or over-deliver when the cost of supplies is low.
Peoples maintained that under either situation, Peoples' retail customers
<PAGE> 10
pay more in natural gas commodity cost because Peoples may have to buy
higher-priced gas for its general system supply. (Peoples St. No. 5, p. 3).
PII opposed Peoples' 4% banking and advancing tolerance.
According to PII, Peoples' Agreement with the OTS and OCA did not relieve
Peoples from demonstrating that the 4% tolerance was just and reasonable.
PII argued that Peoples offered no independent reason for reducing the
monthly tolerance from 5% to 4%, other than the stipulation with the OCA
and the OTS. PII also contended that Peoples failed to prove that changes
to its imbalance tolerances would effect the gas costs of retail customers.
PII concluded that because Peoples did not provide sufficient evidence to
support the need for any of its proposed tariff changes, the proposed
changes to the imbalance tolerance and fees should be rejected.
IOGA proposed to increase the banking and advancing monthly
tolerances to 10%. IOGA asserted that it is difficult for its members to
operate under the current 5% tolerance level. IOGA did not file Brief
Instead, it endorsed PII's Main Brief.
The OTS disagreed with IOGA's proposal. The OTS argued that
Peoples' banking and advancing tolerances should be reduced for two
reasons. First, the OTS argued that Section 137(f) ratepayers would be
protected from increased gas costs caused by imbalances and unlawful
discrimination by the reduction of the tolerance and using the highest or
lowest cost of gas when the imbalances occur. The OTS pointed out that
this is provided for under the Agreement. The OTS continued that the
record indicates that the current 5% tolerance leaves Section 1307(f)
customers vulnerable to increased gas costs when transportation customers
incur imbalances. This type of discrimination, according to the OTS, is
contrary to Commission's Regulations at 52 Pa. Code Section 60.3(a). The
OTS also argued that increasing the tolerances to 10% enhances the chances
for potential discrimination.
<PAGE> 11
Second, the OTS also believed that IOGA was flawed on another
ground. The OTS pointed out that natural gas companies such as Equitable
Gas Company, who compete with Peoples, have lower banking and balancing
tolerances. The OTS remarked that IOGA's witness was unable to state
whether IOGA's customers on Equitable's system were having difficulty
operating within Equitable's 2.5% tolerance.
The OCA advocated the rejection of IOGA's proposal to increase
Peoples' monthly tolerance. The OCA argued that the 4% imbalance tolerance
level proposed in the Settlement is reasonable and consistent with the
record evidence. The OCA noted that if Peoples' monthly banking and
advancing tolerance were increased to +10%, Peoples would have to reserve
almost double the design day capacity to serve transportation customer
imbalances.
The OCA emphasized that the Commission has historically supported
reductions in Peoples' tolerance levels to reduce subsidies to
transportation service resulting from balancing. In 1993, Peoples
implemented a 10% monthly tolerance, which was subsequently reduced to 5%
in 1994.
B. ALJ's Recommendation
The ALJ agreed with Peoples, the OTS and OCA and recommended the
reduction in the monthly banking and advancing tolerance contained in
Peoples' Rates GS-T from 5% to 4%. (R.D., p. 71). ALJ Gesoff agreed with
Peoples, the OTS and the OCA, that reducing the tolerance levels to 4% as
provided for in the Settlement Agreement, reduces the transportation
customers' opportunity to "game" Peoples' system. He was able to infer
that this would result in reduced gas costs. (R.D., p. 70). ALJ Gesoff
also observed that Equitable Gas Company, a competitor of Peoples, has a
banking and balancing tolerance for its transportation customers of 2.5%.
<PAGE> 12
And, the ALJ noted that IOGA members have been able to effectively manage
their pools within this lower tolerance. (R.D., at 7 1). On the basis of
the foregoing, ALJ Gesoff concluded that Peoples met its burden of proof on
the issue and so recommended the acceptance of the reduction.
C. Exceptions
As noted, only PII filed Exceptions to the Recommended Decision.
In its Exceptions, PII contends that there was no record evidence to
support a reduction of Peoples' monthly imbalance tolerance to +/ 4% and
that the ALJ erred in adopting the
Settlement provision on this issue. According to PII, Peoples failed to
demonstrate that the change in the imbalance tolerance is necessary and
that the change results in just and reasonable terms of service for
transportation customers.
PII states that the ALJ cited five reasons to support his decision to
adopt monthly imbalance tolerance reduction in the Settlement. According
to PII, the ALJ's statement that a 4% tolerance will not unreasonably
discriminate against transportation customers is unsupported in the record.
PII argues that the ALJ failed to note that none of the Parties to the
Settlement presented evidence that the current 5% tolerance represented an
unjust balancing of the interests of retail and transportation customers.
Second, PII is of the opinion that the ALJ's concerns regarding
the ability of transportation customers to "game" the system are
unwarranted and without an evidentiary basis. Third, PII asserts that the
ALJ's conclusion that retail gas customers' costs will be reduced by the
change in the imbalance tolerance is contrary to the record evidence. PII
maintains that the testimony of Peoples' witness that the reduction should,
over time, have the impact of reducing costs was vague and speculative.
PII further posits that neither Peoples nor the OTS established that the
<PAGE> 13
use of the percentage tolerance in the current tariff increased actual
retail customer costs in any historic month. Fourth, PII remarks that the
ALJ 's statement concerning the balancing tolerance for Equitable, as a
competitor of Peoples, lacks factual and legal importance in ruling on the
proper imbalance tolerance for Peoples. In PII's view, the fact that
Equitable has an approved 2.5% tolerance is insufficient to prove that a 4%
tolerance is the appropriate percentage for Peoples' retail and
transportation customers. Fifth, PII objects to the ALJ's statement that
the PII and IOGA were in better positions to introduce evidence of the
effect of the reduction on transportation customers. PII urges the
Commission to modify the Settlement and eliminate the proposed change in
monthly transportation imbalance tolerance levels.
D. Disposition
We disagree with PII's contention. In our view, the ALJ's
finding that, based on history, a 4% tolerance will not unreasonably
discriminate against Peoples' transportation customers is supported by the
record evidence. Peoples' witness stated that the monthly banking and
advancing tolerance affect both the demand costs and commodity costs of
natural gas. (Peoples St. No. 5, pp. 2-3). The record also indicates that
under Peoples' current 5% advancing and banking tolerance level, Peoples'
retail customers must endure the burden of increased gas costs when Peoples
transportation customers take advantage to under-deliver when the cost of
gas supplies is high or to over-deliver when the cost of gas supplies is
low. (OCA R. Exc., p. 3; Peoples St. No. 5, p. 3). This occurs when
Peoples is compelled to purchase gas at a higher price in order to have
supplies for its general system supply. (Peoples St. No. 5, p. 3; OTS St.
No. 1R, p. 3). The 4% imbalance tolerance provided in the Settlement will
serve to reduce transportation customers' opportunity to game the system as
well allow for reduced costs in the long term to Peoples and its retail
customers affected by the gaming. (Peoples St., No. 5, p. 4).
<PAGE> 14
Contrary to PII's contention, the ALJ did not unequivocally state
that a smaller banking and advancing tolerance would reduce gaming by
transportation customers on Peoples' system. The ALJ properly concluded
that a reduction in the tolerance level to 4% would lessen the opportunity,
for transportation customers to game Peoples' system. (R.D., p. 70). In
our view, Peoples was not required to prove evidence of widespread gaming
on its system to meet its burden of proof.
We further disagree with PII's argument that the ALJ's statement
that retail customers' costs will be decreased by a reduction in the
monthly banking and advancing tolerance is unsupported in the record.
Peoples' witness testified and IOGA's witness agreed that People must incur
higher natural gas demand and gas commodity. costs with a 5% tolerance than
with a 4% tolerance. (Peoples' St. No. 5, p. 4; Tr. 79-80; 88-89). This
argument is, therefore, rejected.
Similarly, PII's contention that the ALJ relied on Equitable's
monthly banking and advancing tolerance as a factual basis for its ruling
is misplaced. The ALJ made reference to our recent decision in which we
approved a 2.5% tolerance level for Equitable. (Pennsylvania Public Utility
Commission v. Equitable Gas Company, Docket No. R-00963858 (December 4,
1997). It would appear that the ALJ cited the Equitable decision as
precedent for the Commission's policy to reduce banking and advancing
tolerances. We further note that Peoples' witness testified that, since
1989, when its tolerance was 20% over three months, this Commission has
either approved or directed reductions in Peoples' banking and advancing
tolerance to the present level of 5% over one month. (Peoples St. No., p.
5). Clearly, the trend has been to reduce tolerances.
We further find that PII's argument that the ALJ shifted the
burden of proof from Peoples to IOGA and PII is unfounded. The ALJ merely
concluded that the PII and IOGA, as direct representatives of the interest
<PAGE> 15
of Peoples' transportation customers, were in a better position than
Peoples to present evidence of any adverse effects of Peoples' bank' g and
advancing tolerance on those customers activities. (R.D., p. 71). The ALJ
properly concluded that Peoples met its burden of demonstrating the
justness and reasonableness of its proposal. The record evidence indicated
that Peoples' retail customers are at risk of higher natural gas costs from
higher banking and advancing tolerance. In our view, there was
insufficient evidence to show that Peoples' transportation customers will
be unreasonably disadvantaged by a reduction in the tolerance level.
Peoples accomplished its burden of going forward on the question and IOGA
and PII did not adequately rebut this evidence.
Accordingly, we will adopt the 4% monthly banking and advancing
tolerance contained in the Settlement. PII's Exceptions on this issue are
denied.
IV. PEOPLES IMBALANCE FEES PROPOSAL
A. Res Judicata Allegation
Peoples argued the doctrine of res judicata should apply to bar
PII from challenging its proposed imbalance fee for transportation
customers' excess use of Peoples' advancing services that is based on the
monthly cost of gas and that includes a penalty. Peoples noted that the
issue of advancing services was previously raised in its Section 1307(f)-
1997 proceeding. Pennsylvania Public Utility Commission v. Peoples Natural
Gas Company, Docket No. R-00973896 (September 30, 1997). (Peoples 13070-
1997). In the 1997 proceeding, the OCA successfully argued that Peoples
should no longer be allowed to charge its standby rates to transportation
customers' excess use of Peoples advancing service and that, instead,
Peoples charge those customers gas costs for the actual month in which the
excess sue occurred, plus a penalty. Peoples pointed out that in response
<PAGE> 16
to the OCA's contentions, the Commission concluded that changes
be implemented in Peoples' tariff provisions addressing these issues. The
Commission held that the specifics of these changes in Peoples' tariff be
deferred to further discussions between the OCA and Peoples and that
Peoples include these changes in its Section 1307(f)-1998 filing.
Based on the foregoing, Peoples posited that the merits of its
imbalance fee for excess use of its advancing service was adjudicated in
its 1997 proceeding. Peoples further argued that PII had full opportunity
in the 1997 proceeding to challenge the proposal advocated by the OCA and
it failed to do so. Thus, Peoples states that PIII should be precluded by
the doctrine of res judicata from challenging the imbalance fee proposed in
this proceeding, in compliance with the Commission's directive in Peoples'
Section 1307(f)-1997 case.
The ALJ, while appearing to agree with Peoples, declined to make
a recommendation on this issue. He addressed the merits of the imbalance
fee proposal to provide the Commission with an adjudication of the issues
in the event that we would determine that PII is not barred by the doctrine
of res judicata from challenging Peoples' proposal.
On consideration of the positions of the parties, we agree with
the ALJ determination and we will consider the merits of the PII
Exceptions. We disagree with the position advanced by Peoples' that either
principles of issue preclusion or claim preclusion should be applied
against PII. Although the doctrine of res judicata may be applicable to
administrative proceedings, we do not find a complete identity of the issue
and parties sufficient to bar PII in this matter.
<PAGE> 17
B. Arguments of Parties
Peoples argued that its imbalance fee proposal promotes a "least
cost fuel procurement policy." Under this proposal, when transportation
customer exceeds Peoples' monthly advancing tolerance, a fee is applied
which is equal to the highest cost of gas in a particular month. Under the
Settlement, Peoples will use an index price, the price published in the Gas
Daily, for its customers who balance supplies and deliveries on a daily
basis, but its actual cost of gas will be applied to customers who do not.
Similarly, when transportation customers exceed Peoples' monthly banking
tolerance, Peoples' imbalance proposal contains a fee which is equal to the
lowest cost of gas in a particular month, whether such price is an index
price or actual cost of gas. The third component of Peoples' imbalance fee
proposal relates to the penalties that Peoples proposed to apply to those
costs of gas. For advanced gas, the penalty would be a graduated premium
that increases as a customer's excess use of advancing service increases.
For banked gas, the penalty would be a graduated discount that also
increases as a customer's excess use of banking service increases.
Peoples asserted that its proposed imbalance fee assigns cost
responsibility to transportation customers who make excessive use of
banking and advancing services. Peoples further maintained that its
proposal does not unreasonably discriminate between its retail and
transportation customers.
PII argued that Peoples failed to show that its monthly imbalance
fee proposal was just and reasonable. According to PII, Peoples'
imbalances fees would discriminate against transportation customers in
favor of Section 1307(f) customers. PII added that while it did not oppose
reasonable cost-based charges for monthly imbalances greater than an
established tolerance, it opposed Peoples' admittedly punitive fees because
no reason was given for changes. PII maintained that Peoples did not
present substantial evidence that transportation customers require
<PAGE> 18
penalties to prevent them from "gaming" the system under Peoples' existing
tariff provisions. (PII Reply Brief, pp. 5-6). PII believed that the net
effect of Peoples' penalty proposal was an unlawful cost-shift that would
unjustly benefit Section 1307(f) customers at the expense of transportation
customers.
The OCA supported Peoples' imbalance fee as contained in the
Settlement. The OCA asserted that the Peoples' imbalance fee was
reasonable and consistent with substantial evidence in the record.
C. ALJ's Recommendation
The ALJ concluded that Peoples' imbalance fee proposal was
reasonable and recommended its adoption. The ALJ rejected PII's argument
that Peoples failed to meet its burden of proof because it did not assess
the effects of its proposed imbalances fees on its transportation
customers. The ALJ reasoned that because PII consists of Peoples'
customers and IOGA represents pool operators who "stand in the shoes" of
Peoples' customers, PII and IOGA could produce evidence illustrating the
effects of the imbalance fee on transportation customers. The ALJ
determined that PII and IOGA should not be allowed to take advantage of
their failure to put this type of evidence in the record.
D. Exceptions
PII, in its Exceptions, objects to the ALJ's recommendation to
adopt the imbalance fees proposed in the Settlement. PII argues that
Peoples has not met its burden of proving that the proposed fee structure
is just and reasonable. PII reiterates the arguments previously advanced
in this proceeding that Peoples has not demonstrated that the proposed
imbalance fees would eliminate any existing retail customer cost problems.
PII contends that the proposed imbalance fee structure should be stricken
from the Settlement.
<PAGE> 19
E. Disposition
On consideration of the Exceptions of PII, we shall deny them and
adopt the Recommended Decision. As evident from the following, the ALJ
carefully evaluated the evidence and properly concluded that the imbalance
fee structure in the Settlement was reasonable and fair:
When transportation customers exceed Peoples' monthly advancing tolerance,
Peoples' imbalance proposal contains a fee which is equal to the highest
cost of gas in a particular month. When transportation customers exceed
Peoples' monthly banking tolerance, Peoples' imbalance proposal contains a
fee which is equal to the lowest cost of gas in a particular month. IOGA
wants Peoples to use its average cost of gas for a particular month whether
a customer exceeds Peoples' monthly banking or advancing tolerance. IOGA
Statement No. I at pp. 3-4. 1 accept Ms. Meyer's testimony that Peoples'
proposed use of the highest gas price for excessive use of its advancing
services intends to provide "a close proxy of the 'actual gas cost' that
would be incurred by Peoples to bring additional supplies on its system, or
would have been incurred by the transportation customer had it purchased
the gas itself for delivery into Peoples' system." Peoples' Statement No.
4 at p. 6. IOGA's desired use of an average monthly gas price would
encourage customers to take advantage of the system to the disadvantage of
Peoples' retail customers by under-delivering when prices are high and
repaying supplies when prices are low. Peoples' Statement No. 5 at p. 7.
Peoples' Exhibit No. 23 demonstrates this. Retail customers, who do not
make excessive use of Peoples' banking and advancing services, not
transportation customers who do make excessive use of the services, would
have to pay the difference between IOGA's average price and the actual
price Peoples would incur. I agree with Peoples that its proposed
imbalance fee assigns cost responsibility properly because in this instance
it belongs with Peoples' transportation customers, rather than with
Peoples' retail customers.
<PAGE> 20
As the OCA and Peoples point out, Peoples' revisions to its
imbalance fees were justified based on OCA's analysis of cost shifting in
last year's Section 1307(f) proceeding. OCA Reply Brief at 3; Peoples'
Reply Brief at 7-8. Also, the Commission approved an Equitable Gas Company
imbalance fee for the excessive use of banking service which is based on
Equitable's lowest cost gas. Tr. 133-134. This provides further precedent
for Peoples' inclusion of a penalty in its imbalance fee. (R.D., pp. 72-
73).
We find that that the imbalance fee structure contained in the
Settlement is reasonable and in the public interest. The imbalance fee
structure serves to more appropriately assign the appropriate costs to
those customers responsible for producing those costs. We further find
that the imbalance fee, as proposed in the Settlement, does not
unreasonably discriminate against Peoples' transportation customers.
Consequently, we will adopt the imbalance fee provisions of the Settlement.
PII's Exceptions on this issue are denied.
CONCLUSION
On consideration of the Recommended Decision, the Exceptions and
Replies; THEREFORE,
IT IS ORDERED:
1. That the Exceptions filed by Peoples Industrial Intervenors to
the Recommended Decision of Administrative Law Judge Larry Gesoff are
denied.
<PAGE> 21
2. That the Recommended Decision of Administrative Law Judge
Larry Gesoff issued on August 5, 1998, is adopted, consistent with this
Opinion and Order.
3. That the Joint Petition for Approval of Settlement Agreement
executed and filed by The Peoples Natural Gas Company, the Office of Trial
Staff, the Office of Consumer Advocate and the Office of Small Business
Advocate at Docket No. R-00984281 and Docket No. A-122250F.0008 is
approved.
4. That the Application of The Peoples Natural Gas Company for
the approval of the transfer of property used or useful in the public
service to CNG Producing Company, an affiliate of the Applicant at Docket
No. A-122250F.0008 is granted.
5. That The Peoples Natural Gas Company is authorized to
transfer the affected used and useful property in accordance with the terms
and conditions of the February 10, 1998 Asset Sale Agreement between
Peoples and CNGP, as subsequently modified by the March 30, 1998
Modification to Asset Sale Agreement and by any other changes required or
caused by the Settlement Agreement referred to in paragraph number one of
this Order.
6. That The Peoples Natural Gas Company file a tariff
supplement, effective for service rendered on and after January 1, 1999,
that decreases the following rates in The Peoples Natural Gas Company's
Tariff Gas - Pa. PUC No. 42 by $0.0955 per mcf (exclusive of the
Pennsylvania Gross Receipts Tax):
a. All of the retail commodity rates contained in Peoples' Rates
RS, CS-S, CS-L, and IS-SB;
b. The maximum rates for the transportation of interstate gas
supplies contained in Peoples' Rates GS-T and T; and
<PAGE> 22
c. The maximum rates for the transportation of Pennsylvania-
produced gas supplies, for residential and small commercial
ratepayers, contained in Peoples' Rate GS-T.
7. That in each annual proceeding filed by The Peoples Natural
Gas Company under Section 1307(f) of the Public Utility Code over the six-
year period of 1999-2004, The Peoples Natural Gas Company shall include, as
part of its filing requirements, a comparison of the total cost to The
Peoples Natural Gas Company of natural gas supplied by CNGP pursuant to
paragraph I of the Asset Sale Agreement referred to in paragraph three of
this Order and of the total cost of supplies that The Peoples Natural Gas
Company otherwise would purchase if the CNGP supplies were not available to
The Peoples Natural Gas Company.
8. That if the Commission determines that the total contract
cost of the CNGP supplies for the applicable Section 1307(f) collection
period will be greater than the total projected cost of the supplies that
The Peoples Natural Gas Company otherwise would purchase over that period,
The Peoples Natural Gas Company shall terminate its gas supply arrangement
with CNGP under 11 I of the Asset Sale Agreement referred to in paragraph
number three of this Order effective on January 1 of the first calendar
year following the Commission's determination, and provided further that
any amounts paid or payable by The Peoples Natural Gas Company to CNGP for
supplies delivered before The Peoples Natural Gas Company's termination of
the gas supply arrangement shall be considered to be consistent with and in
promotion of a "least cost fuel procurement policy," as that term appears
in Section 1318 of the Public Utility Code, 66 Pa. C.S. Section 1318, and
shall be fully recoverable by The Peoples Natural Gas Company through its
various rates for services that recover natural gas costs.
<PAGE> 23
9. That subject to the provisions of paragraph six of this
Order, The Peoples Natural Gas Company will make available to its customers
the volumes of natural gas, at the contracted prices, supplied by CNGP
under the natural gas supply arrangement set forth in paragraph 11 of the
Asset Sale Agreement referred to in paragraph three of this Order for the
six-year term of that arrangement of January 1, 1999 through December 31,
2004, and provided further that The Peoples Natural Gas Company will make
the CNGP supplies available to its customers either as part of The Peoples
Natural Gas Company's general system supply, used to supply retail service,
or through assignments to its transportation customers or their agents, and
provided further that The Peoples Natural Gas Company's obligation under
this paragraph will not be affected by the Peoples Natural Gas Company's
complete withdrawal from the provision of retail service during the six-
year term of the CNGP supply arrangement.
10. That, regardless of when the claim arose, The Peoples
Natural Gas Company will forebear from making any claims related to the
assets that The Peoples Natural Gas Company transfers to CNGP under the
Asset Sale Agreement referred to in paragraph three of this Order, for the
recovery of either stranded natural gas costs or environmental liability or
remediation costs, in any proceeding filed by The Peoples Natural Gas
Company or any other person or entity on or after the effective date of
this Settlement Agreement, under either Section 1307 or Section 1308 of the
Public Utility Code.
11. That The Peoples Natural Gas Company file tariff(s) or
tariff supplement(s), effective on one day's notice, that make the
following changes in its natural gas cost recovery levels for service
rendered on and after October 1, 1998:
a. A decrease of $0.1487 per mcf (including Pennsylvania Gross
Receipts Tax) in the commodity charges applicable to retail
customers under Rates RS, CS-S and CS-L;
<PAGE> 24
b. A decrease of $0.2198 per mcf (including Pennsylvania Gross
Receipts Tax) in the commodity charges applicable to retail
customers under Rate IS-SB;
c. An increase of $0.0675 per mcf (excluding Pennsylvania Gross
Receipts Tax) in the various demand or entitlement charges
applicable to users of standby and retail services under
Rates GS-SB and IS-SB;
d. An increase of $0.0612 per mcf in the BB&A charge applicable
to residential and commercial transportation customers under
Rate GS-T;
e. A decrease of $0.0038 per mcf in the BB&A charge applicable
to industrial transportation customers under Rate T; and
f. A decrease of $0.1251 per mcf in The Peoples Natural Gas
Company's Migration Rider.
12. That The Peoples Natural Gas Company file tariff(s) or
tariff supplement(s), effective on one day's notice, that reduce the
monthly banking and advancing tolerance contained in The Peoples Natural
Gas Company's Rates GS-T and T from 5% to 4% for service rendered on and
after October 1, 1998.
13. That The Peoples Natural Gas Company file tariff(s) or
tariff supplement(s), effective on one day's notice, that provide for
imbalance fees identical to those contained in paragraph ten of the Joint
Petition for Approval of Settlement Agreement referred to in paragraph one
of this Order.
<PAGE> 25
14. That as soon as practicable following entry of this Order,
The Peoples Natural Gas Company meet with the Office of Trial Staff and any
other interested signatories to the Joint Petition for Approval of
Settlement Agreement referred to in paragraph one of this Order regarding
the manner in which The Peoples Natural Gas Company values natural gas
supplies in storage.
15. That The Peoples Natural Gas Company include the following
as part of the Section 1307(f) - 1999 filing it makes on or about April 1,
1999:
a. A proposal to reduce the monthly banking and advancing
tolerances contained in its Rates GS-T and T to 3.5%, for
service rendered on and after October 1, 1999; and
b. testimony and analysis that describes The Peoples Natural Gas
Company plans for maintaining or abandoning the provision of
retail service, including plans with respect to The Peoples
Natural Gas Company's renewal or termination of interstate
transportation and storage contracts, its obligation to
serve, metering and billing services, standby service,
storage service, and recovery of stranded natural gas costs;
and provided further that The Peoples Natural Gas Company does not have to
comply with its obligation under subparagraph (b) of this paragraph if, any
time before April 1, 1999, The Peoples Natural Gas Company is required,
either by law or Commission directive, to file a proceeding with the
Commission (even if the proceeding does not have to be filed until after
April 1, 1999) that addresses the same basic subject matter as the
testimony and analysis required by subparagraph (b) of this paragraph.
<PAGE> 26
16. That the Complaint of Anthony Perman against The Peoples
Natural Gas Company at Docket No. R-0098428 I COOO I is dismissed.
17. That the Complaint of the Office of Consumer Advocate
against The Peoples Natural Gas Company at Docket No. R-00984281C0002 is
sustained in part and dismissed in part consistent with the decision.
BY THE COMMISSION,
James J. McNulty
Secretary
(SEAL)
ORDER ADOPTED: September 17, 1998
ORDER ENTERED: September 22, 1998
<PAGE> 27
END NOTES
1. Portions of this Opinion have been borrowed from the Recommended
Decision without specific attribution.
2. As required by the Commissioner's regulations on the "Recovery of Fuel
Costs By Gas Utilities," 52 Pa. Code Section 53.61 through 53.68,
Peoples pre-filed supporting information in anticipation of Supplement
No. 132 on January 30 and March 2, 1998.
3. Peoples Industrial Intervenors includes PPG Industry, Inc., J&L
Specialty Steel, Inc., and Standard Steel.
<PAGE> 1
Exhibit F
October 13, 1998
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: The Peoples Natural Gas Company, et al.
Form U-1 Application-Declaration
Dear Sirs and Madams:
The following opinion is rendered on behalf of The Peoples Natural
Gas Company ("PNG") and CNG Producing Company ("CNGP"), each a Delaware
corporation and a wholly-owned subsidiary of Consolidated Natural Gas
Company, a registered holding company under the Public Utility Holding
Company Act of 1935 ("1935 Act"). This opinion is filed in accordance with
the requirements of Exhibit F to Form U-1 of the Securities and Exchange
Commission ("SEC"), promulgated under the 1935 Act with respect to various
proposed transactions ("Proposed Transactions"). The Proposed Transactions
are the subject of the Application-Declaration ("Application") filed with
the SEC concurrently with the date hereof.
The Proposed Transactions involve the sale of production wells,
leases and related equipment by PNG to CNGP for approximately $14.5
million. The property being transferred are considered utility assets as
defined in Section 2(a)(18) of the 1935 Act.
I have examined the Certificate of Incorporation and Bylaws of PNG
and CNGP, the agreement of purchase and sale between such parties relating
to the Proposed Transactions, the proceedings before the Pennsylvania
Public Utility Commission with respect to the Proposed Transactions, and
such other documents, records, laws and other matters as I deemed relevant
and necessary for the purposes of this opinion.
Based on the aforesaid examination and relying thereon, I am of the
opinion that all requisite action with respect to the Proposed Transactions
has been taken by PNG and CNGP which are parties to the Application, except
for the actual carrying out thereof.
<PAGE> 2
In the event the Proposed Transactions are consummated in accordance
with the Application, I am of the opinion that:
(a) All state laws applicable to the Proposed Transactions will have been
complied with;
(b) CNGP will legally acquire the production properties which are the
subject of the Proposed Transactions; and
(c) The consummation of the Proposed Transactions will not violate the
legal rights of the holders of any securities issued by Consolidated
or by any associate company thereof.
I hereby consent to the use of this opinion in connection with the
Application.
Very truly yours,
N. F. Chandler
Attorney
<PAGE> 1
EXHIBIT O
(Proposed Notice Pursuant to Rule 22f)
(Release No. 35- )
FILINGS UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ("ACT")
October , 1998
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 November , 1998 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
The Peoples Natural Gas Company, et al. (70- )
__________________________________________________
The Peoples Natural Gas Company ("PNG"), 625 Liberty Avenue,
Pittsburgh, Pennsylvania 15222-3197, and CNG Producing Company ("CNGP"),
CNG Tower, 1450 Poydras Street, New Orleans, Louisiana, both wholly-owned
subsidiaries of Consolidated Natural Gas Company ("Consolidated"), a
registered holding company, have filed an application-declaration under
Sections 9(a) and 12(d) of the Act and Rules 43 and 44 thereunder.
PNG is a gas utility company serving over 348,000 customers in
western Pennsylvania. Like many other gas utilities, PNG has also been
engaged in local gas production as an ancillary part of its gas
distribution business. CNGP is the exploration, development and
production arm of Consolidated's integrated natural gas system. The
majority of its operations are located in the Gulf of Mexico area and in
the Appalachian region.
PNG has signed a binding letter of intent ("Agreement"), contingent
upon Securities and Exchange Commission ("Commission") approval, selling
all its gas production properties ("Properties") currently owned by it to
CNGP for approximately $14.5 million. The $14.5 million represents the net
book value of the Properties on PNG's books as of November 30, 1997, which
net book value will be adjusted for further depreciation at the time of
closing.
The Properties consist of PNG's ownership interest in wells with
reserves of approximately 41.9 billion cubic feet. The Properties also
include associated oil and gas leases, all contracts and agreements to the
<PAGE> 3
extent they affect the oil and gas leases, related measurement equipment,
certain portions of gathering lines, and other miscellaneous attached
equipment.
CNGP has also agreed to sell to PNG an amount of gas equal to the
production from the wells being transferred pursuant to the Agreement. The
amount of such gas is based on production reserve estimates from an
independent third party for six twelve-month periods, commencing with the
date of transfer of the Properties. CNGP has also agreed to pay to PNG an
amount equal to any incremental state and federal deferred income taxes
that become due and payable as a result of the consummation of the purchase
and sale of the Properties.
____________________________
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
Jonathan G. Katz
Secretary
