File No. 70-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
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APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Dominion Resources, Inc. Consolidated Natural Gas
120 Tredegar Street Company
Richmond, VA 23219 CNG Tower, 625 Liberty Avenue
Pittsburgh, PA 15222
(Name of company filing this statement and
address of principal executive offices)
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None Consolidated Natural Gas
Company
(Name of top registered holding company
parent of each applicant or declarant)
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James F. Stutts Stephen E. Williams
Vice President and Senior Vice President and
General Counsel General Counsel
Dominion Resources, Inc. Consolidated Natural Gas
120 Tredegar Street Company
Richmond, VA 23219 CNG Tower, 625 Liberty Avenue
Pittsburgh, PA 15222
(Name and address of agent for service)
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The Commission is also requested to send copies
of any communications in connection with this matter to:
Douglas W. Hawes, Esq. Gary W. Wolf, Esq.
Tia S. Barancik, Esq. Kevin J. Burke, Esq.
LeBoeuf, Lamb, Greene & Cahill Gordon & Reindel
MacRae, L.L.P. 80 Pine Street
125 West 55th Street New York, NY 10005
New York, NY 10019
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APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2) and 10
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY
AND
RELATED MATTERS
Table of Contents
Item 1. Description of Proposed Transaction..............................5
A. Introduction.....................................................5
1. General Request..............................................6
2. Overview of the Transaction..................................7
B. Description of the Parties to the Transaction....................8
1. DRI and its Subsidiaries.....................................8
a. Virginia Power...........................................8
b. DEI......................................................9
c. DCI......................................................9
2. CNG and its Subsidiaries....................................10
a. The Distribution Companies: VNG, Hope, Peoples and East
Ohio....................................................10
b. CNG Transmission Corporation............................10
c. CNG Producing Company...................................10
d. CNG Retail Services Corporation and CNG Products and
Services, Inc...........................................10
e. CNG International Corporation...........................11
C. Description of the Transaction..................................11
1. Background..................................................11
2. The Merger Agreement........................................13
D. Management and Operations of DRI and CNG Following the Merger...14
Item 2. Fees, Commissions and Expenses..................................14
Item 3. Applicable Statutory Provisions.................................15
A. Approval of the Merger..........................................16
1. Section 10(b)(1)............................................16
a. Interlocking Relationships..............................16
b. Concentration of Control................................17
2. Section 10(b)(2)............................................19
a. Fairness of Consideration...............................19
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b. Reasonableness of Fees..................................20
3. Section 10(b)(3)............................................20
4. Section 10(c)(1)............................................22
a. Section 8 Analysis......................................22
b. Section 11 Analysis.....................................22
5. Section 10(c)(2)............................................25
6. Section 10(f)...............................................25
Item 4. Regulatory Approvals............................................26
Item 5. Procedure.......................................................29
Item 6. Exhibits and Financial Statements...............................29
Item 7. Information as to Environmental Effects.........................30
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APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2) and 10
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
AND
RELATED MATTERS
Item 1. Description of Proposed Transaction.
A. Introduction.
This Application-Declaration is submitted in connection with the proposed
merger (the "Merger") of Dominion Resources, Inc., a Virginia corporation and
currently a holding company exempt from the registration requirements of the
Public Utility Holding Company Act of 1935 (the "1935 Act") pursuant to Section
3(a)(1) thereof and Rule 2 thereunder ("DRI"), and Consolidated Natural Gas
Company, a Delaware corporation and a registered holding company under the 1935
Act ("CNG"), pursuant to the Agreement and Plan of Merger dated as of February
19, 1999, as amended and restated as of March 31, 1999, by and between DRI and
CNG (the "Merger Agreement").
Pursuant to the Merger Agreement, a wholly owned subsidiary of DRI will
merge with and into CNG in a transaction in which CNG will be the surviving
corporation. As a result of the Merger and the other transactions contemplated
by the Merger Agreement (collectively, the "Transaction"), CNG will become a
direct subsidiary of DRI, CNG will remain a registered holding company and each
of CNG's four public utility subsidiaries as well as each of CNG's other direct
subsidiaries will become an indirect subsidiary of DRI. Alternatively, CNG will
merge (the "Alternative Merger") with and into DRI in a transaction in which DRI
will be the surviving corporation. If the Alternative Merger is consummated,
then as a result of such transaction and the other transactions contemplated by
the Merger Agreement (the "Alternative Transaction"), CNG will cease to exist
and each of CNG's four public utility subsidiaries as well as each of CNG's
other direct subsidiaries will become direct subsidiaries of DRI. Following
completion of either the Merger or the Alternative Merger (hereinafter each of
the Merger and the Alternative Merger are referred to as the "Merger" except
where explicitly stated to the contrary and each of the Transaction and the
Alternative Transaction are referred to as the "Transaction" except where
explicitly stated to the contrary), DRI will register as a holding company
pursuant to Section 5 of the 1935 Act.
Prior to completion of the Merger, DRI and CNG will file one or more
additional applications-declarations under the 1935 Act with the Commission with
respect to the ongoing activities, non-utility businesses and other investments
of, and other matters pertaining to, the combined company after giving effect to
the Merger and the registration of DRI as a holding company.
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DRI and CNG believe that their combination provides a unique opportunity
for DRI, CNG and their respective shareholders, customers and employees to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in the majority of states in
which DRI and CNG operate. The energy industry, including both the gas and
electricity segments of the business, is evolving from an industry characterized
by the presence of regulated natural monopolies confined in their operations to
prescribed geographical service territories to a dynamic, competitive industry
in which national and regional participants compete for the right to provide
energy service to retail customers who increasingly have a choice in their
energy supply needs. The result of these increasingly rapid changes wrought by
both legislative and administrative initiatives as well as by demands of the
marketplace, is a far reaching transformation of the US energy industry in which
energy production, transportation/transmission and distribution are reorganizing
along national and regional functional lines. The energy company of tomorrow
will, if it seeks to be an effective competitor, of necessity need to be bigger
and will need to be focused on the development and delivery of newly repackaged
energy products and services designed to meet the changing demands of the
marketplace.
DRI and CNG believe that, in the restructured and competitive energy
industry of tomorrow, the combined companies will be well-positioned to compete
with other national and regional industry participants, a competitive position
that neither DRI nor CNG, acting alone, would be able to achieve. The Merger
will provide DRI and CNG with the ability to integrate their complementary lines
of business: retail and wholesale natural gas and electricity sales, natural gas
exploration and production, international operations and new electric
generation. The Merger will also provide the combined companies with the lower
risk profile inherent in geographic and product diversification. In short, the
Merger will provide the combined companies with the operational and practical
ability to compete for the right to provide energy services to their combined
customer base of 4 million as well as, once the transition to retail competition
has been fully established, 18 million additional electric customers and 12
million additional gas customers in states already served. Moreover, few job
cuts are expected as a result of the Merger as there is not much redundancy
between the two companies.
1. General Request.
Pursuant to Sections 9(a)(2) and 10 of the 1935 Act, DRI and CNG hereby
request authorization and approval of the Commission for DRI to acquire, through
the Merger, all of the issued and outstanding common stock of CNG and,
indirectly , all of the common stock of each of the four public utility
subsidiaries of CNG; namely, (i) Virginia Natural Gas, Inc., a Virginia
corporation ("VNG"), (ii) Hope Gas, Inc., a West Virginia corporation ("Hope"),
(iii) The Peoples Natural Gas Company, a Pennsylvania corporation ("Peoples")
and (iv) The East Ohio Gas Company, an Ohio corporation ("East Ohio"). Following
completion of the Merger, DRI will register as a holding company pursuant to
Section 5 of the 1935 Act. Prior to completion of the Merger, DRI and CNG will
file one or more additional
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applications-declarations under the 1935 Act with the Commission with respect to
the ongoing activities, non-utility businesses and other investments of, and
other matters pertaining to, the combined company after giving effect to the
Merger and the registration of DRI as a holding company.
2. Overview of the Transaction.
Pursuant to the Merger Agreement, DRI and CNG intend for CNG to be merged
with a wholly-owned subsidiary of DRI with CNG as the surviving company. This
will result in CNG becoming a wholly-owned subsidiary of DRI. Alternatively, DRI
and CNG may decide to merge CNG directly into DRI. In that case, DRI will be the
surviving entity. In either event, the companies are sometimes referred to after
the merger as the combined company.
In the Merger, each CNG shareholder will receive 1.52 shares of DRI common
stock for each share of CNG common stock that he or she owns on the date the
Merger is completed. This exchange ratio will not change even if the market
price of DRI or CNG common stock increases or decreases between now and the date
of the Merger. No fractional shares of DRI common stock will be issued in the
Merger. Instead, CNG shareholders will receive cash for any fractional share of
DRI common stock due from the Merger based on the market value of DRI common
stock as of the trading day before the merger is completed. All outstanding
shares of DRI common stock will remain outstanding after the merger. However,
DRI shareholders will own shares of a larger, more diversified company.
As discussed in more detail below, the Merger will produce substantial
benefits to the public interest and the interests of investors and consumers in
the states in which the combined company will operate. The Merger will create a
combined electric and natural gas system with the ability to compete effectively
for the nearly four million retail customers in five states presently served by
the combined company as well as by other retail customers in the region. The
majority of the states in which the combined company will operate as well as
adjacent states have adopted energy restructuring legislation. In the emerging
competitive environment, DRI and CNG believe that their combination into a
regional energy provider will enable them to:
o give the combined company the scale, scope and skills necessary to
be successful in the competitive energy marketplace, allowing the combined
company to offer a broad line of energy products as the gas and electric
industries continue to converge;
o create a platform for growth in a region that is rapidly
deregulating and is the source of approximately 40 percent of the nation's
demand for energy, allowing the combined company to market its portfolio of
energy products to a broad customer base;
o establish a company with combined gas storage, transportation and
electric power production capability concentrated in the Northeast and
Mid-Atlantic region; and
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o enable the combined company to realize cost savings from elimination
of duplicate corporate and administrative programs, greater efficiencies in
operations and business processes, and streamlined purchasing practices.
The Merger requires approval of a majority of all votes cast by the holders
of DRI common stock at a duly called meeting of stockholders at which a quorum
is present as well as approval of the majority of CNG common stock outstanding.
The vote of such shareholders will be solicited pursuant to a Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which will be reviewed and/or
made effective and/or authorized for mailing, as the case may be, by the
Commission under the Securities Act of 1933 and the Securities Exchange Act of
1934, with respect to DRI, and under the 1935 Act, with respect to CNG. In
addition, the Transaction will require (i) clearance by the Department of
Justice ("DOJ") and the Federal Trade Commission ("FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), (ii) approval of the
Federal Energy Regulatory Commission ("FERC") under the Federal Power Act
("FPA"), (iii) approval of the Nuclear Regulatory Commission ("NRC") under the
Atomic Energy Act of 1954 ("AEA"), (iv) approval of the Federal Communications
Commission ("FCC") under the Communications Act of 1934 ("FCA"), and (v)
approval and/or clearance of and/or review by the state regulatory commissions
of the states of Virginia, North Carolina, West Virginia, Pennsylvania and Ohio.
See Item 4 hereto for additional detail regarding these other regulatory
approvals. Apart from the approval of the Commission under the 1935 Act, the
foregoing approvals are the only regulatory approvals required for the
Transaction. In order to permit timely consummation of the Transaction and the
realization of the substantial opportunities the Transaction is expected to
produce, DRI and CNG request that the Commission's review of this
Application-Declaration commence and proceed as expeditiously as possible.
B. Description of the Parties to the Transaction.
1. DRI and its Subsidiaries.
DRI, a diversified utility holding company, has its principal office at 120
Tredegar Street, Richmond, Virginia 23219, telephone (804) 819-2000. DRI's
common stock is listed on the New York Stock Exchange. DRI's principal
subsidiary is Virginia Electric and Power Company ("Virginia Power"), a
regulated public utility engaged in the generation, transmission, distribution
and sale of electric energy. The primary service area of Virginia Power is in
Virginia and northeastern North Carolina. DRI's other major subsidiaries are
Dominion Capital, Inc. ("DCI"), a diversified financial services company, and
Dominion Energy, Inc. ("DEI"), an independent power and natural gas subsidiary.
DRI was incorporated in 1983 as a Virginia corporation. DRI and its subsidiaries
had 11,033 full-time employees as of December 31, 1998. DRI is currently exempt
from registration as a holding company under the 1935 Act. DRI also owns and
operates a 365 Mw natural gas fired generating facility in the United Kingdom.
Attached hereto as Exhibit B-1 is an corporate organization chart of DRI and its
subsidiaries.
a. Virginia Power.
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Virginia Power is a public utility engaged in the generation, transmission,
distribution and sale of electric energy within a 30,000 square-mile area in
Virginia and northeastern North Carolina. Virginia Power operates nuclear,
fossil fuel and hydroelectric generating units with an aggregate capability of
13,635Mw. It supplies energy at retail to approximately two million customers
and sells electricity at wholesale to rural electric cooperatives, power
marketers and certain municipalities. The term "Virginia Power" refers to the
entirety of Virginia Electric and Power Company, including its Virginia and
North Carolina operations and all of its subsidiaries. In Virginia it trades
under the name "Virginia Power." The Virginia service area comprises about 65
percent of Virginia's total land area, but accounts for over 80 percent of its
population. In North Carolina it trades under the name "North Carolina Power"
and serves retail customers located in the northeastern region of the state,
excluding certain municipalities. Virginia Power also engages in off-system
wholesale purchases and sales of electricity and purchases and sales of natural
gas, and is developing trading relationships beyond the geographic limits of its
retail service territory.
b. DEI.
DEI is active in the competitive electric power generation business and in
the development, exploration and operation of natural gas and oil reserves. DEI
is involved in power projects in five states, Argentina, Bolivia, Belize and
Peru. Domestic power projects include the Kincaid Power Station, a 1,108 Mw coal
fired station in Central Illinois; a 600Mw gas-fired peaking facility under
construction in Central Illinois; two geothermal projects and one solar project
in California; three small hydroelectric projects in New York; a waste coal-
fueled project in West Virginia and a waste wood- and coal-fueled project in
Maine. International power projects include one hydroelectric and one gas-fired
project in Argentina, two hydroelectric projects in Bolivia, a run-of-river
hydroelectric project in Belize and two hydroelectric projects and six diesel
oil-fueled projects in Peru. DEI is also involved in natural gas and oil
development, exploration and production in Canada, the Appalachian Basin, the
Michigan Basin, the Illinois Basin, the Black Warrior Basin, the Uinta Basin,
the San Juan Basin and owns net proved oil and natural gas reserves in key
regions of the United States and Canada.
c. DCI.
DCI is a diversified financial services company with several operating
subsidiaries in the commercial lending, merchant banking and residential lending
business. Its principal subsidiaries are First Source Financial, LLP, First
Dominion Capital LLC, Saxon Mortgage, Inc. and Stanton Associates, Inc. DCI also
owns a 46 percent interest in Cambrian Capital LLP. First Source Financial
provides cash-flow and asset-based financing to middle-market companies seeking
to expand, recapitalize or undertake buyouts. First Dominion Capital is an
integrated merchant banking and asset management business located in New York.
Saxon Mortgage and its affiliates originate and securitize home equity and
mortgage loans to individuals. Cambrian Capital provides financing to small and
mid-sized independent oil and
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natural gas producers undertaking acquisitions, refinancings and expansions.
Stanton Associates, Inc. engages in real estate investment and management.
2. CNG and its Subsidiaries.
CNG is a Delaware corporation organized on July 21, 1942, and a public
utility holding company registered under the 1935 Act. CNG's common stock is
listed on the New York Stock Exchange. CNG is engaged solely in the business of
owning and holding all of the outstanding equity securities of nineteen directly
owned subsidiary companies. CNG and its subsidiaries are engaged in all phases
of the natural gas business: distribution, transmission, storage and exploration
and production. The company's principal subsidiaries are described below.
Attached hereto as Exhibit B-2 is an corporate organization chart of CNG and its
subsidiaries.
a. The Distribution Companies: VNG, Hope, Peoples and East
Ohio.
VNG, Hope, Peoples and East Ohio are the four public utility subsidiaries
of CNG. Principal cities served at retail are: Cleveland, Akron, Youngstown,
Canton, Warren, Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion),
Altoona and Johnstown in Pennsylvania; Norfolk, Newport News, Virginia Beach,
Chesapeake, Hampton and Williamsburg in Virginia; and Clarksburg and Parkersburg
in West Virginia. At December 31, 1998, CNG served at retail approximately two
million residential, commercial and industrial gas sales and transportation
customers.
b. CNG Transmission Corporation.
CNG Transmission Corporation operates a regional interstate pipeline system
and provides gas transportation and storage services to each of CNG's public
utility subsidiaries and to non-affiliated utilities, end-users and others in
the Midwest, the Mid-Atlantic states and the Northeast. Through its wholly owned
subsidiary, CNG Iroquois, Inc., CNG Transmission Corporation holds a 16 percent
general partnership interest in the Iroquois Gas Transmission System, L.P., that
owns and operates an interstate natural gas pipeline extending from the
Canada-United States border near Iroquois, Ontario, to Long Island, New York.
The Iroquois pipeline transports Canadian gas to utility and power generation
customers in metropolitan New York and New England.
c. CNG Producing Company.
CNG Producing Company is CNG's exploration and production subsidiary. Its
activities are conducted primarily in the Gulf of Mexico, the southern and
western United States, the Appalachian region, and in Canada.
d. CNG Retail Services Corporation and CNG Products and
Services, Inc.
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CNG Retail Services Corporation was created in 1997 to market natural gas,
electricity and related products and services to residential, commercial and
small industrial customers. CNG Products and Services, Inc. also provides
energy-related services to customers of CNG's local distribution subsidiaries
and others.
e. CNG International Corporation.
CNG International Corporation was formed by CNG in 1996 to invest in
foreign energy activities. CNG International Corporation currently owns
interests in natural gas pipeline companies in Australia, and gas and electric
utility companies in Argentina.
C. Description of the Transaction.
1. Background.
During late 1997 and early 1998, CNG reassessed its strategic plan in
response to business changes caused by slower than expected unbundling of the
gas and electric distribution businesses at the retail level and the company's
decision to exit the wholesale energy business. Management then discussed and
explored alternatives for increasing shareholder value with the CNG Board of
Directors at its meetings throughout 1998.
Throughout 1997 and the first half of 1998, DRI engaged in a number of
acquisition transactions and considered a variety of strategic alternatives to
enable it to compete and grow in the deregulating energy industry. Among the
strategic alternatives DRI considered was the acquisition of regional gas or
other electric utility companies. DRI's growth strategy and specific possible
acquisition candidates were reviewed by the DRI Board of Directors at several
meetings during this period. The DRI Board of Directors encouraged management to
pursue a number of different strategic alternatives, including investigating the
desirability of a transaction with CNG.
The Merger was announced on February 22, 1999.
The Merger of DRI and CNG will result in an integrated electric and natural
gas company, serving nearly four million retail customers in five states. The
companies believe the combined company will be well positioned to be successful
in the increasingly competitive energy marketplace, in particular in the
Northeast quadrant of the United States. The companies expect the Merger to
enhance shareholder value more than either company could do on its own. The
combined company should have three elements key to success in the competitive
energy marketplace: size; geographic focus in strong regional markets; and
efficient assets in the right locations.
o Increase in Scale, Scope and Skills
The Merger will result in the combined company having pro forma 1998
assets of $23.9 billion and revenues of $8.8 billion. DRI and CNG believe
that the combined company's
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increased size and scope will improve its opportunities for expansion,
allowing the company to offer a broad line of energy products. The
combination will expand and diversify DRI's core customer base from
approximately two million retail customers in two states to four million
retail customers in five states. The Merger aligns successful leaders with
seasoned managers proven in the competitive marketplace.
As a result, the combined company should have the scale, scope and
skills to be successful in the competitive energy marketplace.
o Compatible Geographic Markets
The Merger is consistent with DRI's previously announced strategy of
growing in the Northeast quadrant of the U.S.--covering the Midwest,
Mid-Atlantic and Northeast portions of the U.S. This region is referred to
as MAIN-to-Maine. The first MAIN refers to the Mid- America Interconnected
Network. It covers the states of Missouri, Illinois, Wisconsin, Michigan
and Indiana. The reference to the State of Maine designates the northeast
end of this region. Virginia represents the southern boundary of this
region. This area is the source of approximately 40 percent of the nation's
demand for energy.
DRI and CNG believe that the Merger will give the combined company the
platform it needs for growth in a region that is rapidly deregulating,
allowing the company to market its portfolio of energy products to a broad
customer base. In the states where the companies already have operations,
there are an estimated 16 million power customers not currently serviced by
Virginia Power. There are an estimated 8 million additional natural gas
customers not currently served by CNG. Millions of prospective customers
live in adjoining states. The companies intend to seek out these
prospective customers.
DRI has most of its electric power assets in several of the region's
states and has gas reserves located within, or transportable to, the
region. The Merger gives it a strong platform for growth, allowing it to
more rapidly and effectively compete in the emerging electric retail
competition markets in states where CNG currently has facilities.
Pennsylvania and Ohio, especially, have strong policies encouraging new
competition. For CNG, the merger gives it a broader platform in Virginia
and North Carolina, the primary service area of DRI's principal subsidiary,
Virginia Power.
o Efficient and Well Located Assets
DRI and CNG combined will have storage, transportation and electric
power production capability concentrated in the Northeast and Mid-Atlantic
region.
The combined company will have an energy portfolio of more than 20,000
megawatts of domestic power generation, 2.9 trillion cubic feet equivalent
in natural gas and oil reserves producing nearly 300 billion cubic feet
equivalent annually. It will operate a major interstate gas pipeline system
and the largest natural gas storage system in North America with almost 900
Bcfe of storage. The combined company will rank as the eleventh largest
independent
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oil and gas producer in the United States measured by reserves. The
combined company will have more than 5,000 miles of electric transmission
lines. These power lines are well located to transmit power from low-cost
producers in the Southeast, including Virginia Power, into higher-cost
markets in the Northeast and Midwest, including CNG's service territory.
The combined company's assets are well positioned to serve the MAIN to
Maine region.
The companies believe a strategic advantage of the Merger is a better
positioned exploration and production portfolio. After the Merger, the
combined company will have a well balanced mix of offshore and onshore
properties. This should reduce the risk profile of the exploration and
production operations.
Other Reasons For The Merger
When the merger is complete the companies expect to enhance revenues
through integration of their complementary businesses. The combined company will
have the following primary businesses:
o retail natural gas and electricity sales;
o electric and gas distribution;
o wholesale natural gas and electricity sales;
o interstate gas transportation;
o natural gas exploration and production activities;
o electric generation; and
o international operations.
The companies intend to integrate these complementary businesses. They will
not only serve existing retail customers and wholesale customers, but will reach
out to new customers as a full-service energy provider as deregulation proceeds.
In addition, the Merger will enable the combined company to realize cost
savings from elimination of duplicate corporate and administrative programs,
greater efficiencies in operations and business processes, and streamlined
purchasing practices.
2. The Merger Agreement.
Pursuant to the Merger Agreement, DRI and CNG intend for CNG to be merged
with a wholly-owned subsidiary of DRI with CNG as the surviving company. This
will result in CNG becoming a wholly-owned subsidiary of DRI. Alternatively, DRI
and CNG may decide to merge CNG directly into DRI. In that case, DRI will be the
surviving entity. In the Merger, each CNG
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shareholder will receive 1.52 shares of DRI common stock for each share of CNG
common stock that he or she owns on the date the Merger is completed. This
exchange ratio will not change even if the market price of DRI or CNG common
stock increases or decreases between now and the date of the Merger. No
fractional shares of DRI common stock will be issued in the Merger. Instead, CNG
shareholders will receive cash for any fractional share of DRI common stock due
from the Merger based on the market value of DRI common stock as of the trading
day before the merger is completed. All outstanding shares of DRI common stock
will remain outstanding after the Merger. The Merger is subject to customary
closing conditions, including receipt of necessary regulatory approvals,
including approval of the Commission under the 1935 Act.
CNG shareholders will not recognize a gain or loss for the DRI shares they
receive from the Merger. CNG shareholders will be taxed on the gain portion of
any cash they receive in lieu of a fractional share if the cash received is more
than their basis for the fractional share. CNG shareholders will recognize a
taxable loss if the cash received is less than their basis for the fractional
share.
The Merger is intended to qualify as a pooling-of-interests for accounting
and financial reporting purposes. Under this method of accounting, the recorded
assets and liabilities of DRI and CNG will be carried forward to the
consolidated financial statements of DRI at their recorded amounts; income of
DRI will include income of CNG for the entire fiscal year in which the Merger
occurs; and the reported income of the separate corporations will be combined
and restated as income for prior periods of DRI.
D. Management and Operations of DRI and CNG Following the Merger.
Following completion of the Merger, DRI will become the direct parent
company to CNG or, if the Alternative Merger is implemented, the direct parent
company to VNG, Hope, Peoples and East Ohio, and will register as a holding
company under Section 5 of the 1935 Act. CNG will continue to be a registered
holding company under the 1935 Act. Thos. E. Capps will be the President and
Chief Executive Officer of DRI after the Merger, and George A. Davidson, Jr.
will serve as Chairman of the Board of Directors until his previously announced
retirement on August 1, 2000, at which time Mr. Capps will reassume his position
as Chairman. The Board of Directors of DRI will have 17 members, 10 of whom will
be designated by DRI and seven of whom will be designated by CNG. DRI will
continue to use the name Dominion Resources and be headquartered in Richmond,
Virginia. The combined company will continue to maintain significant operating
offices in Pittsburgh, Pennsylvania.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Transaction, including the solicitation of
proxies, registration of securities of DRI under the Securities Act of 1933, and
other related matters, are estimated as follows:
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To be filed by amendment.
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Fee, Commission or Expense Thousands
Commission filing fee relating to $ *
Joint Proxy and Registration Statement
on Form S-4
Accountants' Fees *
Legal Fees and Expenses *
Shareholder Communication and
Proxy Solicitation *
Exchanging Printing and Engraving of
Stock Certificates *
Investment Bankers' Fees and Expenses
Lehman Brothers Inc.
Merrill Lynch & Co. *
Consulting Fees related to human resource
issues, public relations, regulatory support,
and other matters relating to the Transaction *
Expenses relating to integrating the merged
company and miscellaneous *
=======
Total $ *
Item 3. Applicable Statutory Provisions.
The following sections of the 1935 Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
Transaction:
Section of/Rule under Transactions to which such Section or Rule is or
the 1935 Act may be applicable
Sections 8, 9(a)(2), 10 Acquisition by DRI of common stock of CNG,
VNG, Hope, Peoples and East Ohio
To the extent that other Sections of the 1935 Act or the Commission's Rules
thereunder are deemed applicable to the Transaction, such Sections and Rules
should be considered to be set forth in this Item 3.
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To be filed by amendment.
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A. Approval of the Merger.
In pertinent part, Section 9(a) provides that:
Unless the acquisition has been approved by the Commission under
section 10, it shall be unlawful... for any person... to acquire,
directly or indirectly, any security of any public utility company, if
such person is an affiliate, under clause (A) of paragraph (11) of
subsection (a) of section 2, of such company and of any other public
utility or holding company, or will by virtue of such acquisition
become such an affiliate.
For purposes of Section 9(a)(2), an "affiliate" of a specified company is any
person that, directly or indirectly, owns, controls or holds with power to vote
5% or more of the voting securities of such specified company. The Merger
requires approval of the Commission under Sections 9(a)(2) of the 1935 Act
because DRI (which already owns 100% of the common stock of Virginia Power, a
"public utility company" within the meaning of Section 2(a)(5) of the 1935 Act)
will, by virtue of the Merger, also acquire 100% of the outstanding common stock
of each of VNG, Hope, Peoples and East Ohio, each of which is also a "public
utility company" within the meaning of Section 2(a)(5) of the 1935 Act. The
criteria the Commission must consider in evaluating any acquisition for which
approval under Section 9(a)(2) is required are set forth in Section 10 of the
1935 Act. As set forth more fully below, the Transaction complies with all of
the applicable provisions of Section 10. Thus,
- The Transaction will not tend towards interlocking relations or the
concentration of control of public utility companies of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers (Section 10(b)(1))
- The consideration to be paid in the Transaction is fair and reasonable
(Section 10(b)(2))
- The Transaction will not result in an unduly complicated capital
structure for the DRI- CNG combined system and will not be detrimental
to the public interest or the interest of investors or consumers or to
the proper functioning of the DRI-CNG system (Section 10(b)(3))
- The Transaction is not unlawful under the provisions of Section 8 and
is not detrimental to the carrying out of the provisions of Section 11
(Section 10(c)(1))
- The Transaction will serve the public interest by tending towards the
economical and efficient development of an integrated public utility
system (Section 10(c)(2))
- The Transaction will be consummated in accordance with and will comply
with all applicable state laws (Section 10(f))
1. Section 10(b)(1).
a. Interlocking Relationships.
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Section 10(b)(1) was primarily aimed at preventing business combinations
unrelated to operational and economic synergies and was never intended to
prohibit mergers that otherwise were sensible and permissible under the 1935 Act
because, by its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The Merger Agreement provides for the Board of Directors of DRI to
comprise representatives from both the existing boards of DRI and CNG. This is
necessary to integrate fully the two companies and will, therefore be, in the
public interest and the interests of investors and consumers by facilitating the
management of DRI-CNG as an integrated and economically efficient energy
services company. In the context of ongoing industry restructuring, the forging
of such relations is necessary to the creation and efficient management of an
integrated energy services provider and, therefore, is not prohibited by Section
10(b)(1).
b. Concentration of Control.
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968). As discussed
below, the Merger will not create a "huge, complex, and irrational system," but
rather will result in a new registered holding company with the capability of
offering integrated energy services to its combined customer base of 4 million
in a competitive region that is, in fact, much larger.
In evaluating the size of the combined enterprise, it is critical to
recognize that the majority of the states in which DRI and CNG operate and
adjoining states have enacted retail competition legislation. Transition to
competition has already begun in Illinois and Pennsylvania and is slated to
begin in Maryland in 2000 and in Virginia in 2002. Ohio has retail competition
legislation pending. Once the transition to retail competition has been fully
established in the region in which the combined company will operate, the
combined company will have the right to compete to supply the energy needs of 18
million additional electric customers and 12 million additional gas customers in
states already served as well as many more millions in adjoining states.
Efficiencies and Economies: The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. American
Electric Power Co., 46 S.E.C. 1299, 1309. More recent pronouncements of the
Commission confirm that size is not determinative. Thus, in Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the Commission stated
flatly that a "determination of whether to prohibit enlargement of a system by
acquisition is to be made on the
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basis of all the circumstances, not on the basis of size alone." See also
Entergy Corporation, Holding Co. Act Release No. 25952 (December 17, 1993) . In
addition, the Division of Investment Management recommended in its 1995 Report
on The Regulation of Public-Utility Holding Companies (the "1995 Report") that
the Commission approach its analysis of merger and acquisition transactions in a
flexible manner with emphasis on whether the underlying transaction creates an
entity subject to effective regulation and is beneficial for shareholders and
consumers as opposed to focusing on rigid, mechanical tests. 1995 Report at
73-4.
By virtue of the Transaction and, in particular, its convergence nature,
DRI and CNG will be in a position to realize substantial opportunities to become
an effective competitor in a rapidly deregulating and increasingly competitive
national and regional energy market that neither, acting alone, would be in a
position to achieve. The combination of DRI and CNG offers the same type of
synergies and efficiencies that were sought and are now being realized by the
applicants (both exempt and registered) in TUC Holding Company, Holding Co. Act
Release No. 35-26749 (Aug. 1, 1997); Houston Industries Incorporated, Holding
Co. Act Release No. 35-26744 (July 24, 1977); WPL Holdings, Inc., Holding Co.
Act Release No. 35-26856 (April 14, 1998); and New Century Energies, Inc.,
Holding Co. Act Release No. No. 35-26748 (Aug. 1, 1997). Moreover, the retail
operations of DRI-CNG will continue, as prior to the Merger, to be fully subject
to the jurisdiction of state regulators in the states in which such operations
are conducted. Thus, the Transaction, by virtue of the fact that DRI will
register as a holding company upon completion of the Transaction, will in fact
increase the regulation to which DRI and CNG are presently subject rather than
provide a means for evading regulation.
Competitive Effects: In Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged consumers." DRI and CNG will file Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Merger on competition in the relevant market and it is a condition to the
consummation of the Merger that the applicable waiting periods under the HSR Act
shall have expired or been terminated.
In addition, the competitive impact of the Merger will be fully
considered by the FERC pursuant to Section 203 of the Federal Power Act in its
review of the Merger. As explained more fully in the FERC application, a copy of
which is attached hereto as Exhibit C-2, the Merger will not have an adverse
effect on competition. With the exception of a small area in Virginia, the
retail operations of DRI and CNG do not overlap. Moreover, as discussed above,
the Virginia legislature has adopted legislation which will permit other energy
providers to compete directly with Virginia Power for customers in Virginia
commencing in 2002. Finally, in the past, the Commission has largely relied on,
or "watchfully deferred" to the determination of these other regulators.1 In at
least three recent cases, interveners have challenged the Commission's policy
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1 See City of Holyoke Gas & Electric Department v. SEC, 972 F.2d 358, 363
(D.C. Cir. 1992), citing Wisconsin's Environmental Decade v. SEC, 882 F.2d
523 (D.C. Cir. 1989) ("we are not prepared to say that the Commission
abdicates its duty in an exemption determination by deciding to rely,
watchfully, on the course of state regulation").
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of watchful deference but without success.2 In both WPL Holdings, Inc. and New
Century Energies, Inc., the Commission rejected interveners' claims that the
resulting holding companies would be anti-competitive and declined to reconsider
issues of size and market dominance that had been fully considered by and
litigated before the FERC in addition to having been reviewed and cleared by
federal antitrust regulators.
For these reasons, the Merger will not "tend toward interlocking relations
or the concentration of control" of public utility companies, of a kind or to
the extent detrimental to the public interest or the interests of investors or
consumers within the meaning of Section 10(b)(1) and the Commission may
justifiably rely on the FERC and the DOJ/FTC to review any other allegations
that the Merger will result in anti-competitive effects.
2. Section 10(b)(2).
Section 10(b)(2) requires the Commission to determine whether the
consideration to be paid in connection with the combination of DRI and CNG,
including all fees, commissions and other remuneration, is reasonable and
whether it bears a fair relation to, investment in and earning capacity of the
underlying utility assets.
a. Fairness of Consideration.
For the reasons set forth below, the requirements of Section 10(b)(2) are
satisfied in this Transaction.
First, the Transaction is a pure stock-for-stock exchange and qualifies for
a pooling-of-interests treatment for accounting purposes. As set forth more
fully above, each share of CNG common stock will be converted into the right to
receive 1.52 shares of DRI common stock. The Transaction will, therefore,
involve no "acquisition adjustment" or other write up of the assets of CNG.
Second, the exchange ratio is the product of extensive and vigorous
arm's-length negotiations between DRI and CNG. These negotiations were preceded
by extensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of DRI and CNG. See "Background of the Merger" of
the Joint Proxy and Registration Statement on Form S-4 of DRI and CNG which is
attached hereto as Exhibit C-1. As recognized by the
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2 WPL Holdings, Inc., et al., Holding Co. Act Release No. 35-26856 (April 14,
1998), aff'd sub nom., Madison Gas and Electric Company v. Securities and
Exchange Commission, (D.C. Cir. 1999) and New Century Energies, Inc.,
Holding Co. Act Release No. 35-26748 (Aug. 1, 1997).
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Commission in Ohio Power Co., 44 S.E.C. 340, 346 (1970), prices arrived at
through arm's- length negotiations are particularly persuasive evidence that
Section 10(b)(2) is satisfied.
Finally, nationally recognized investment bankers for each of DRI and CNG
have reviewed extensive information concerning the companies and have analyzed
the exchange ratio employing a variety of valuation methodologies, and have
opined that the exchange ratio is fair from a financial point of view, to the
respective holders of DRI common stock and CNG common stock. The investment
bankers opinions are attached as Exhibits to the Joint Proxy and Registration
Statement on Form S-4 of DRI and CNG which is attached hereto as Exhibit C-1 and
are described in such Joint Proxy and Registration Statement. The assistance of
independent consultants in setting consideration has been recognized by the
Commission as evidence that the requirements of Section 10(b)(2) have been met.
The Southern Company; SV Ventures, Inc., Holding Co. Act Release No. 245709
(February 12, 1988).
b. Reasonableness of Fees.
DRI and CNG believe that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Merger are reasonable and
fair in light of the size and complexity of the merger relative to other
transactions and the anticipated benefits of the Merger to the public, investors
and consumers; that they are consistent with recent precedent; and that they
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, DRI and CNG
together expect to incur a combined total of approximately $* million in fees,
commissions and expenses in connection with the Merger. By contrast, American
Electric Power Company and Central and South West Corporation have represented
that they expect to incur total transaction fees and regulatory processing fees
of approximately $53 million, including financial advisory fees of approximately
$31 million, in connection with their proposed merger.
DRI and CNG believe that the estimated fees and expenses in this matter
bear a fair relation to the value of their combined company and the strategic
benefits to be achieved by the Merger, and further that the fees and expenses
are fair and reasonable in light of the complexity of the Merger. See Northeast
Utilities, Holding Co. Act Release No. 25548 (June 3, 1992), modified on other
grounds, Holding Co. Act Release No. 25550 (June 4, 1992) (noting that fees and
expenses must bear a fair relation to the value of the company to be acquired
and the benefits to be achieved in connection with the acquisition). Based on
the price of CNG stock on February 19, 1999, the Merger would be valued at
approximately $6.8 billion. The total estimated fees and expenses of $* million
represent approximately . * % of the value of the consideration to be paid to
shareholders of CNG, and are consistent with percentages previously approved by
the Commission. See, e.g., Entergy Corp., Holding Co. Act Release No. 25952
(Dec. 17, 1993) (fees and expenses represented approximately 1.7% of the value
of the consideration paid to the shareholders of Gulf States Utilities);
Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992)
(approximately 2% of the value of the assets to be acquired).
3. Section 10(b)(3).
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To be filed by amendment.
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Section 10(b)(3) requires the Commission to determine whether the
Transaction will unduly complicate the capital structure of the combined DRI-CNG
system or will be detrimental to the public interest, the interest of investors
or consumers or the proper functioning of the combined DRI-CNG system.
The continued existence of both DRI and CNG as registered holding companies
in the same system is somewhat unusual but is not inappropriate for the facts of
this situation. In the first instance, it is necessary to maintain CNG as a
separate corporate entity within the DRI-CNG system in order to realize
substantial tax benefits as well as to avoid substantial tax detriment to the
parties from the Transaction. First, by preserving the separate corporate
existence of CNG, DRI will preserve the approximately $3.5 billion basis in the
CNG stock which would otherwise be lost if CNG were merged directly into DRI.
The aggregate basis of CNG in its assets, including teh stock of its
subsidiaries, is only $500 million. Thus, DRI would have a basis in the CNG
subsidiaries of only $500 million as opposed to a basis of $3.5 billion in CNG
itself by continuing to preserve the separate corporate existence of CNG.
Intergroup distributions by CNG of certain of its subsidiaries would entitle DRI
to a basis increase in such subsidiaries based upon their proportionate value of
CNG. In other words, a portion of DRI's $3.5 billion basis in CNG could be
allocated to certain CNG subsidiaries if and when distributed by CNG to DRI. In
addition, distributions by CNG to DRI which were not out of earnings and profits
would not create any current or deferred tax until they exceeded $3.5 billion
whereas, such distributions in excess of $500 million could trigger deferred tax
liabilities if CNG were merged into DRI. Second, utilization of the structure
for the Merger as opposed to the structure under the Alternative Merger in which
CNG would merge into CNG permits CNG's outstanding debebtures to remain
outstanding and avoids the need to defease such debentures. Under the Indenture
Dated as of May 1, 1971 between CNG and Chase Manhattan Bank, a merger of CNG
into DRI would require that $442,875,000 principal amount of debentures be
defeased. The estimated additional cost of defeasing these debentures (rather
than simply repaying them in accordance with their terms) is approximately $10
million.
Thus, the benefits of implementing the structure contemplated by the Merger
rather than the Alternative Merger are substantial and outweigh any simplistic
interest in undue simplicity. Moreover, the Commission has equated the public
interest with the interest in a financially sound U.S. utility industry.
Certainly, realization of the tangible economic benefits of the Merger structure
contributes to the financial stability of the DRI-CNG system and outweighs any
historical preference for the Alternative Merger structure. Additionally,
holders of DRI and CNG securities will not be disadvantaged by the preferred
structure for the Merger. Holders of CNG debentures will be able to continue to
look to exactly the same mix of companies for repayment of outstanding CNG
securities as prior to the Merger. The interest of DRI and its security holders
will likewise not be impaired as securities issued prior to the Merger would not
have been issued on the basis that CNG was part of the DRI system and the
interests of investors purchasing securities issued thereafter will be protected
by the disclosure requirements under the other federal securities laws. Finally,
consumer interests are likewise not impaired as no change is being made to the
capital structures of any of the operating subsidiaries in the combined system
and each such operating subsidiary will continue to be regulated by relevant
regulators as prior to the Merger. The 1935 Act is not energy regulation per se.
Rather, the statute is intended "simply to provide
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a mechanism to create conditions under which effective federal and state
regulation will be possible."3
4. Section 10(c)(1).
Section 10(c)(1) prohibits the Commission from approving an acquisition for
which Commission approval is required under Section 9(a) if such acquisition is
unlawful under the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11.
a. Section 8 Analysis.
Section 8 prohibits a registered holding company from acquiring interests
in an electric utility company and a gas utility company serving substantially
the same territory in contravention of state law. The only state in which DRI
and CNG have overlapping electric and gas service territories is Virginia. The
combination of DRI's electric operations in Virginia with CNG's gas operations
in Virginia is expressly permitted under Virginia law and will be expressly
reviewed by the Virginia Commission. Thus, the Transaction neither violates
Section 8 of the 1935 Act nor is prohibited by Section 10(c)(2) of the 1935 Act.
b. Section 11 Analysis.
In pertinent part, Section 11(b)(1) of the 1935 Act provides:
To require . . . that each registered holding company, and each
subsidiary company thereof, shall take such take such action as the
Commission shall find necessary to limit the operations of the
holding-company system of which such company is a part to a single
integrated public-utility system, and to such other businesses as are
reasonably incidental, or economically necessary or appropriate to the
operations of such integrated public-utility system. . . . The
Commission may permit as reasonably incidental, or economically
necessary or appropriate to the operations of one or more integrated
public-utility systems the retention of an interest in any business
(other than the business of a public-utility company as such) which the
Commission shall find necessary or appropriate in the public interest
or for the protection of investors or consumers and not detrimental to
the proper functioning of such system or systems.
The Transaction raises a potential issue under Section 11 and Section
10(c)(1): Is the combination of DRI's electric business and CNG's gas business
permissible under a registered holding company?
The 1935 Act regulated gas utility operations of CNG will comprise a
relatively small part of the combined companies overall operations, (on a pro
forma basis for 1998, retail gas operations comprised 18.8% of the combined
company's net utility operating revenues) but are
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3 S. Rep. No. 621, 74th Cong., 1st Sess 11 (1935).
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nonetheless critical to positioning the combined companies as a competitor in
deregulating retail markets. In several recent decisions, the Commission has
stated explicitly that the 1935 Act does not prohibit combination electric and
gas registered holding companies. WPL Holdings, Inc., et al., Holding Co. Act
Release No. 35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric
Company v. Securities and Exchange Commission, (D.C. Cir. 1999) and New Century
Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1997).
Historically, the Commission considered the question of whether a
registered electric system could retain a separate gas system under a strict
standard that required a showing of loss of substantial economies before
retention would be permitted. New England Electric System, 41 S.E.C. 888 (1964).
In its affirmation of that decision, the United States Supreme Court declared
that a loss of substantial economies could be demonstrated by the inability of
the separate gas system to survive on a stand-alone basis. SEC v. New England
Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the
requirements of Section 11(b)(1) has been explicitly rejected by the Commission
in its most recent decisions under Sections 9(a) and 10 of the 1935 Act both
with respect to exempt holding companies, TUC Holding Company, Holding Co. Act
Release No. 35-26749 (Aug. 1, 1997) and Houston Industries Incorporated, Holding
Co. Act Release No. 35-26744 (July 24, 1977), and newly formed registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998) and New Century Energies, Inc., Holding Co. Act Release No.
35-26748 (Aug. 1, 1997).
In these recent decisions, the Commission acknowledged that as a result of
the transformation of utilities' status as franchised monopolies with captive
ratepayers to competitors and also as a result of the convergence of the
electric and gas industries that was then underway (and which continues today
and of which the Transaction is a prime example), the historical standards of
review had become outdated and that separated electric and gas companies might
be weaker competitors than they would be together in the same market. WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); TUC
Holding Company, Holding Co. Act Release No. 35-26749 (Aug. 1, 1997); New
Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1977); and
Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24,
1997). Importantly, the Courts have upheld the Commission's reinterpretation of
the requirements of Section 10(c)(1) and Section 11 as they apply to combination
electric and gas registered holding companies. Madison Gas and Electric Company
v. Securities and Exchange Commission, (D.C. Cir. 1999). Thus, newer
transactions, such as the Transaction, should be evaluated on the basis of new
Commission precedent and policy in light of changing industry standards and
should not be evaluated against criteria that have been repudiated by recent
Commission decisions.
The instant Transaction is in accord with the foregoing recent Commission
decisions approving combination electric and gas companies under a registered
holding company and also is consistent with, and furthers the policy, of
fostering the creation of competitive energy services companies as the energy
industry continues its evolution towards a more competitive market. One issue
remains, however. In two of the recent four cases approving combination
companies, the resulting holding company obtained exemption from the
registration requirements of the 1935 Act. There are numerous combination gas
and electric exempt holding companies operating in the
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United States today. In the other two cases, in which registered holding
companies were formed, the merger partners were already combination electric and
gas companies and the Commission was addressing the question of whether
additional systems could be retained rather than acquired. In the instant
situation, DRI, an electric company, is acquiring CNG, a gas company, and, thus,
the instant transaction is the first time the Commission is presented with the
question of whether a newly formed registered holding company can acquire an
additional system as part of the transaction in which it became a registered
holding company.
Applicants believe the Commission should approve the Transaction as a
matter of policy and as a matter of fairness and can approve the Transaction as
a matter of law. First, the Commission has already acknowledged that the
electric and gas industries are converging and that combination companies may be
more effective competitors in a given market. the Commission has recognized and
accepted the changing nature of the energy industry and, in particular, the fact
that the combination of electric and gas operations in a single company offers
that company a means to compete more effectively in the emerging energy services
business in which a few cents can make the difference between economic success
and economic failure. WPL Holdings, Inc., et al., Holding Co. Act Release No.
35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v.
Securities and Exchange Commission, (D.C. Cir. 1999). In the instant situation,
the lost economies that would follow from denial of approval for the Merger are
substantial, both quantitatively and qualitatively.
Second, the Commission has allowed exempt holding companies to acquire gas
utilities and thereby to become combination companies, See TUC Holding Company,
Holding Co. Act Release No. 35-2674 (Aug. 1, 1997) and Houston Industries
Incorporated, Holding Co. Act Release No. 35-26744 (July 24, 1997), and has
allowed newly formed registered holding companies to retain their combination
assets. See WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998) and New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug.
1, 1997). In addition, as stated by the Commission in NIPSCO Industries, Inc.,
Holding Co. Act Release No. 26975 (Feb. 10, 1999), the Commission stated that
Section 11(b)(1) applies to exempt "holding companies" by analogy. If there is
no basis for treating exempt holding companies and registered holding companies
differently under Section 11(b)(1), then there is no rational policy basis for
treating one group of registered holding companies differently from another
group of registered holding companies.
Finally, Section 10(c)(1) does not require that the Commission rigidly
enforce Section 11(b)(1) without consideration of the lost economies that would
result from divestiture of additional systems in considering acquisitions under
Section 9(a). As the Court of Appeals stated In Madison Gas and Electric Company
v. SEC, (D.C. Cir. 1999):
By its terms..., section 10(c)(1) does not require that new
acquisitions comply to the letter with section 11. In contrast to its
strict incorporation of section 8..., with respect to section 11
section 10(c)(1) prohibits approval of an acquisition only if it "is
detrimental to the carrying out of [its] provisions. The Commission
has consistently read this provision to import into section 10's
regime not only the
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integration requirement of 11(b)(1)'s main clause but also the
exception to the requirement in the ABC clauses.
In the instant situation, substantial economies would be lost by requiring the
combined company to divest the retail gas operations of CNG. In addition, a
substantial portion of the rationale for concluding the Merger is the
convergence of the electric and gas markets as the utility industry evolves
towards competition. DRI and CNG are seeking to create a convergence company
that will be an effective competitor. Limiting either DRI or CNG to a single
energy commodity would prevent each from realiznig their combined competitive
potential and is not required as a matter of law.
The Commission has adopted a new model of regulation under the 1935 Act
which permits convergence of energy services under a registered holding company
and which promotes competition among energy providers. The Transaction is
consistent with that policy. For all of the foregoing reasons, the Commission
should hold that the combination of electric and gas operations under a newly
formed registered holding company is lawful under the provisions of Section 8
and is not detrimental to the carrying out of the provisions of Section 11.
5. Section 10(c)(2).
Section 10(c)(2) requires the Commission to find that a proposed
transaction will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. For all of the
foregoing reasons, the Transaction meets the criteria of Section 10(c)(2). The
Transaction will produce both quantitative and qualitative economies and
efficiencies and will result in the creation of an economically integrated and
efficient energy company consistent with modern notions of "integration".
The Transaction will also produce long-term benefits. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the standards
of Section 10(c)(2) have been met. See American Electric Power Co., 46 S.E.C.
1299, 1320-1321 (1978). Further, the Commission has recognized that while some
potential benefits cannot be precisely estimated, nevertheless they too are
entitled to be considered: "[S]pecific dollar forecasts of future savings are
not necessarily required; a demonstrated potential for economies will suffice
even when these are not precisely quantifiable." Centerior Energy Corp., Holding
Co. Act Release No. 24073 (April 29, 1986) (citation omitted). See Energy East
Corporation, Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing
acquisition based on strategic benefits and potential but presently
unquantifiable saving
Finally, as discussed in detail above, a number of qualitative benefits
flow from the Transaction. As discussed above, the majority of the states in
which DRI and CNG operate as well as neighboring states have adopted retail
competition legislation. The creation of DRI as a competitive energy services
provider introduces into the regional marketplace a viable and effective
competitor.
6. Section 10(f).
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Section 10(f) prohibits the Commission from approving the Transaction
unless the Commission is satisfied that the Transaction will be undertaken in
compliance with applicable state laws. As described in Item 4 of this
Application-Declaration, the Transaction will be consummated in compliance with
the laws of each of the states in which DRI and CNG have retail operations.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that DRI and CNG
expect to obtain in connection with the Merger in addition to the approval of
the Commission under the 1935 Act.
Antitrust Considerations
Under the HSR Act, DRI and CNG cannot consummate the Merger until each has
submitted certain information to the Antitrust Division of the DOJ and the FTC.
Additionally, each company must satisfy specified HSR Act waiting period
requirements. The expiration or earlier termination of the HSR Act waiting
period will not prevent the DOJ or the FTC from challenging the Merger on
antitrust grounds.
AEA
DRI holds various licenses issued by the NRC to own and operate the North
Anna and Surry nuclear generating stations. Under the AEA and NRC regulations,
nuclear licensees must seek and obtain prior NRC consent for any changes that
would constitute a transfer of an NRC license, directly or indirectly, through
transfer of control of the license to any person. DRI does not believe that the
Merger will constitute a transfer of control of its NRC licenses or that the
merger will affect the basis for prior NRC decisions relating to its financial
qualifications as an NRC licensee. DRI will request confirmation that the NRC
concurs with its belief.
FPA
Section 203 of the FPA provides that no public utility may sell or
otherwise dispose of its jurisdictional facilities, directly or indirectly merge
or consolidate its facilities with those of any other person, or acquire any
security of any other public utility, without first having obtained
authorization from the FERC. Because CNG has subsidiary power marketers that are
considered to be "public utilities" and to own "jurisdictional facilities" under
the FPA. FERC's approval under Section 203 is required before DRI and CNG may
consummate the Merger. Section 203 provides that FERC is required to grant its
approval if the Merger is found to be "consistent with the public interest."
FERC has stated in its 1996 Utility Merger Policy Statement that, in
analyzing a merger under Section 203, it will evaluate the following criteria:
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o the effect of the merger on competition in wholesale electric power
markets, utilizing an initial screening approach derived from the
DOJ/FTC-Initial Merger Guidelines to determine if a merger will result in
an increase in an applicant's market power;
o the effect of the merger on the applicants' FERC jurisdictional
ratepayers; and
o the effect of the merger on state and federal regulation of the
applicants.
DRI's power-marketing affiliates are authorized by FERC to sell electric
power at wholesale in interstate commerce at market-based rates. CNG's power
marketing affiliates have similar authorizations from FERC. These
authorizations, which were obtained under Section 205 of the FPA, were
predicated in part on FERC's finding that the power-marketing affiliates of DRI
and CNG lack market power over the generation and transfer of electric energy
and, therefore, could not sell electric power at prices above competitive
levels. As a condition of the power marketer authorizations, the power marketing
affiliates of DRI and CNG are required to report any changes in status that
could result in a change in the facts FERC relied upon in approving market-based
rates. Pursuant to this requirement, the power-marketing affiliates of DRI and
CNG will file notifications of a "change in status" with FERC. These
notifications will inform FERC of the Merger Agreement and will advise FERC that
the power-marketing affiliates of both DRI and CNG would not deal with one
another except under specified certain circumstances during the pendency of the
Merger.
Pending FERC approval of the merger under Section 203 and related action
under Section 205, the authorizations under which the power-marketing affiliates
of both DRI and CNG engage in market-based sales are expected to remain
effective. The necessary filings will be made with FERC to allow DRI and CNG
power-marketing affiliates to continue to engage in wholesale power transactions
at market-based rates.
Virginia Commission
DRI's wholly owned subsidiary, Virginia Power, and CNG's wholly-owned
subsidiary, VNG, are subject to the jurisdiction of the Virginia State
Corporation Commission (the "Virginia Commission"). The Virginia Commission must
approve the acquisition of any Virginia public utility. The applicants must show
that the provision of adequate service at just and reasonable rates will not be
threatened or impaired as a result of the merger. DRI and CNG will seek Virginia
Commission approval of the merger consistent with these requirements.
North Carolina Commission
Virginia Power is subject to the jurisdiction of the North Carolina
Utilities Commission (the "North Carolina Commission"). The North Carolina
Commission must approve any merger or combination affecting any public utility,
whether made through acquisition or control by stock purchase or otherwise.
Under this authority, the North Carolina Commission has advised that it will
assert jurisdiction to approve the Merger. The North Carolina Commission must
give its
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approval if justified by the public convenience and necessity. DRI and CNG will
seek the approval of the North Carolina Commission consistent with these
requirements.
West Virginia Commission
CNG's wholly owned subsidiary, Hope, is subject to the jurisdiction of the
West Virginia Public Service Commission (the "West Virginia Commission"). No
person or corporation may acquire either directly or indirectly a majority of
the common stock of any public utility organized and doing business in West
Virginia without the approval of the West Virginia Commission. The West Virginia
Commission may approve such a transaction upon proper showing that the terms and
conditions are reasonable, that neither party to it is given an undue advantage
over the other, and that it does not adversely affect the public in West
Virginia. DRI and CNG will seek the approval of the West Virginia Commission
consistent with these requirements.
Pennsylvania Commission
CNG's wholly owned subsidiary, Peoples, is subject to the jurisdiction of
the Pennsylvania Public Utility Commission (the "Pennsylvania Commission"). The
issuance of a certificate of public convenience and necessity may be required.
The Pennsylvania Commission has advised that it will assert jurisdiction to
approve the Merger. The standard for approval is whether the transaction is
necessary and proper for the service, accommodation, convenience, or safety of
the public. This standard has been applied by the Pennsylvania Commission to
require that the companies demonstrate that the transaction will affirmatively
promote the service, accommodation, convenience or safety of the public in some
substantial way. Peoples and DRI will seek the approval of the Pennsylvania
Commission consistent with these requirements.
Ohio Commission
CNG's wholly owned subsidiary, East Ohio, is subject to the jurisdiction of
the Public Utilities Commission of the State of Ohio (the "Ohio Commission").
The Ohio Commission does not have statutory jurisdiction over the transaction,
but will be provided any relevant information for its review.
Affiliate Contracts and Arrangements
In connection with the Merger, DRI and CNG and their subsidiaries may need
to enter into or amend agreements related to the provision by affiliates of the
combined companies of various services, including management, supervisory,
construction, engineering, accounting, legal, financial or similar services. The
approval or non-opposition of certain federal and state regulatory commissions
is required with respect to the creation or amendment of certain inter-affiliate
agreements. DRI, CNG and their subsidiaries will file such agreements with the
appropriate federal and state regulatory commissions and seek such regulatory
approvals as may be required by applicable law.
Other Regulatory Matters
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DRI and its subsidiaries and CNG and its subsidiaries have obtained from
various regulatory authorities certain franchises, permits and licenses which
may need to be renewed, replaced or transferred in connection with the merger,
and approvals, consents or notifications may be required in connection with such
renewals, replacements or transfers.
In addition, such regulatory commissions regulate the rates charged to
utility customers within their jurisdictions. In approving rates, each state may
take into account other affects of, including possible savings resulting from,
the Merger.
Item 5. Procedure.
The Commission is respectfully requested to issue and publish, not later
than April 30, 1999, the requisite notice under Rule 23, a form of which is
attached hereto as Exhibit A, with respect to the filing of this
Application-Declaration, such notice to specify a date not later than May 31,
1999 by which comments may be entered and a date not later than June 1, 1999 as
the date after which an order of the Commission granting and permitting this
Application-Declaration to become effective may be entered by the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
Transaction. The Division of Investment Management 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.
A. Exhibits
A. Form of Notice
B-1 DRI Corporate Organization Chart. (to be filed by amendment)
B-2 CNG Corporate Organization Chart. (to be filed by amendment)
C-1 Joint Proxy and Registration Statement. (to be filed by
amendment)
C-2 Application to the FERC under the FPA. (to be filed by
amendment)
C-3 Submission to the Virginia Commission. (to be filed by
amendment)
C-4 Submission to the North Carolina Commission. (to be filed by
amendment)
C-5 Submission to the West Virginia Commission. (to be filed by
amendment)
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C-6 Submission to the Pennsylvania Commission. (to be filed by
amendment)
D-1 Opinion of Counsel - DRI. (to be filed by amendment)
D-2 Opinion of Counsel - CNG. (to be filed by amendment)
D-3 Past Tense Opinion of Counsel. (to be filed by amendment)
B. Financial Statements. (to be filed by amendment)
Item 7. Information as to Environmental Effects.
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 10(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Section 4321, et seq. The only federal actions related to the Transaction
pertain to the Commission's approval of this Application-Declaration under the
1935 Act and the Commission's clearance and declaration of the effectiveness of
the Joint Proxy and Registration Statement of DRI and CNG on Form S-4 pursuant
to the Securities Exchange Act of 1934 and the other approvals and actions
described in Item 4 of this Application-Declaration. Consummation of the
Transaction will not result in changes in the operations of DRI, CNG or any of
their respective subsidiaries that would have any impact on the environment. No
federal agency is preparing an environmental impact statement with respect to
this matter.
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SIGNATURE
Pursuant to the Public Utility Holding Company Act of 1935, each of the
undersigned companies has caused this Application-Declaration to be signed on
its behalf by the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC. CONSOLIDATED NATURAL GAS COMPANY
By: /s/ James F. Stutts By: /s/ Stephen E. Williams
Name: James F. Stutts Name: Stephen E. Williams
Title: Vice President and Title: Senior Vice President and
General Counsel General Counsel
Date: April 5, 1999 Date: April 5, 1999
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EXHIBIT A
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 1999
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)
In the Matter of )
)
Dominion Resources, Inc. )
120 Tredegar Street )
Richmond, VA 23219 )
)
and )
)
Consolidated Natural Gas Company )
CNG Tower, 625 Liberty Avenue )
Pittsburgh, PA 15222 )
)
(70 - ) )
- - - - - - - - - - - - - - - - - - - -- -
Dominion Resources, Inc., a Virginia corporation and currently a holding
company exempt from the registration requirements of the Public Utility Holding
Company Act of 1935 (the "Act") pursuant to Section 3(a)(1) thereof and Rule 2
thereunder ("DRI"), and Consolidated Natural Gas Company, a Delaware corporation
and a registered holding company under the Act ("CNG"), have entered into an
Agreement and Plan of Merger dated as of February 19, 1999, as amended and
restated as of March 31, 1999, by and between DRI and CNG (the "Merger
Agreement"). DRI and CNG have filed an application on Form U-1 under the Act
seeking approval of their merger (the "Merger") under Sections 9(a)(12) and 10
of the Act.
Pursuant to the Merger Agreement, a wholly owned subsidiary of DRI will
merge with and into CNG in a transaction in which CNG will be the surviving
corporation. As a result of the Merger and the other transactions contemplated
by the Merger Agreement (collectively, the "Transaction"), CNG will become a
direct subsidiary of DRI, CNG will remain a registered holding company and each
of CNG's four public utility subsidiaries as well as each of CNG's other direct
subsidiaries will become an indirect subsidiary of DRI. Alternatively, CNG will
merge (the "Alternative Merger") with and into DRI in a transaction in which DRI
will be the surviving corporation. If the Alternative Merger is consummated,
then as a result of such transaction and the other transactions contemplated by
the Merger Agreement (the "Alternative
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Transaction"), CNG will cease to exist and each of CNG's four public utility
subsidiaries as well as each of CNG's other direct subsidiaries will become
direct subsidiaries of DRI. Following completion of either the Merger or the
Alternative Merger (hereinafter each of the Merger and the Alternative Merger
are referred to as the "Merger" except where explicitly stated to the contrary
and each of the Transaction and the Alternative Transaction are referred to as
the "Transaction" except where explicitly stated to the contrary), DRI will
register as a holding company pursuant to Section 5 of the Act.
Prior to completion of the Merger, DRI and CNG will file one or more
additional applications-declarations under the Act with the Commission with
respect to the ongoing activities, non-utility businesses and other investments
of, and other matters pertaining to, the combined company after giving effect to
the Merger and the registration of DRI as a holding company.
DRI and CNG believe that their combination provides a unique opportunity
for DRI, CNG and their respective shareholders, customers and employees to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in the majority of states in
which DRI and CNG operate. The energy industry, including both the gas and
electricity segments of the business, is evolving from an industry characterized
by the presence of regulated natural monopolies confined in their operations to
prescribed geographical service territories to a dynamic, competitive industry
in which national and regional participants compete for the right to provide
energy service to retail customers who increasingly have a choice in their
energy supply needs. The result of these increasingly rapid changes wrought by
both legislative and administrative initiatives as well as by demands of the
marketplace, is a far reaching transformation of the US energy industry in which
energy production, transportation/transmission and distribution are reorganizing
along national and regional functional lines. The energy company of tomorrow
will, if it seeks to be an effective competitor, of necessity need to be bigger
and will need to be focused on the development and delivery of newly repackaged
energy products and services designed to meet the changing demands of the
marketplace.
DRI and CNG believe that, in the restructured and competitive energy
industry of tomorrow, the combined companies will be well-positioned to compete
with other national and regional industry participants, a competitive position
that neither DRI nor CNG, acting alone, would be able to achieve. The Merger
will provide DRI and CNG with the ability to integrate their complementary lines
of business: retail and wholesale natural gas and electricity sales, natural gas
exploration and production, international operations and new electric
generation. The Merger will also provide the combined companies with the lower
risk profile inherent in geographic and product diversification. In short, the
Merger will provide the combined companies with the operational and practical
ability to compete for the right to provide energy services to their combined
customer base of 4 million as well as, once the transition to retail competition
has been fully established, 18 million additional electric customers and 12
million additional gas customers in states already served. Moreover, few job
cuts are expected as a result of the Merger as there is not much redundancy
between the two companies.
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Pursuant to Sections 9(a)(2) and 10 of the Act, DRI and CNG hereby request
authorization and approval of the Commission for DRI to acquire, through the
Merger, all of the issued and outstanding common stock of CNG and, indirectly ,
all of the common stock of each of the four public utility subsidiaries of CNG;
namely, (i) Virginia Natural Gas, Inc., a Virginia corporation ("VNG"), (ii)
Hope Gas, Inc., a West Virginia corporation ("Hope"), (iii) The Peoples Natural
Gas Company, a Pennsylvania corporation ("Peoples") and (iv) The East Ohio Gas
Company, an Ohio corporation ("East Ohio"). Following completion of the Merger,
DRI will register as a holding company pursuant to Section 5 of the 1935 Act.
Prior to completion of the Merger, DRI and CNG will file one or more additional
applications-declarations under the Act with the Commission with respect to the
ongoing activities, non-utility businesses and other investments of, and other
matters pertaining to, the combined company after giving effect to the Merger
and the registration of DRI as a holding company.
DRI, a diversified utility holding company, has its principal office at 120
Tredegar Street, Richmond, Virginia 23219, telephone (804) 819-2000. DRI's
common stock is listed on the New York Stock Exchange. DRI's principal
subsidiary is Virginia Electric and Power Company ("Virginia Power"), a
regulated public utility engaged in the generation, transmission, distribution
and sale of electric energy. The primary service area of Virginia Power is in
Virginia and northeastern North Carolina. DRI's other major subsidiaries are
Dominion Capital, Inc. ("DCI"), a diversified financial services company, and
Dominion Energy, Inc.("DEI"), an independent power and natural gas subsidiary.
DRI was incorporated in 1983 as a Virginia corporation. DRI and its subsidiaries
had 11,033 full-time employees as of December 31, 1998. DRI is currently exempt
from registration as a holding company under the Act. DRI also owns and operates
a 365 Mw natural gas fired generating facility in the United Kingdom.
CNG is a Delaware corporation organized on July 21, 1942, and a public
utility holding company registered under the 1935 Act. CNG's common stock is
listed on the New York Stock Exchange. CNG is engaged solely in the business of
owning and holding all of the outstanding equity securities of nineteen directly
owned subsidiary companies. CNG and its subsidiaries are engaged in all phases
of the natural gas business:distribution, transmission, storage and exploration
and production.
The Application and any amendments thereto are available for public
inspection through the Commission's Office of Public Reference. Interested
persons wishing to comment or request a hearing should submit their views in
writing by May 31, 1999, to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on AES at the address specified above.
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 manner. After said date, the Application,
as filed or as amended, may be granted and/or permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
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