File No. 70-09477
As filed with the Securities and Exchange Commission
on October 15, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
-------------------------------
AMENDMENT NO. 4
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
-----------------------------------
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)
----------------------------
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)
-------------------------------
The Commission is also requested to send
copies of any communications in connection with
this matter to:
Gary W. Wolf, Esq.
Kevin J. Burke, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
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APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2), 10, 11 AND 13
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
RETENTION OF NON-UTILITY BUSINESSES,
FORMATION OF SERVICE COMPANY
AND
RELATED MATTERS
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Table of Contents
Page
Item 1. Description of Proposed Transaction...................................1
A. Introduction......................................................1
1. General Request...............................................3
2. Overview of the Transaction...................................3
B. Description of the Parties to the Transaction.....................5
1. DRI and its Subsidiaries......................................5
a. Virginia Power............................................5
b. DEI.......................................................5
c. DCI.......................................................6
2. CNG and its Subsidiaries......................................6
a. The Distribution Companies: VNG, Hope, Peoples and East
Ohio......................................................6
b. CNG Transmission Corporation..............................6
c. CNG Producing Company.....................................7
d. CNG Retail Services Corporation and CNG Products and
Services, Inc.............................................7
e. CNG International Corporation.............................7
C. Description of the Transaction....................................7
1. Background....................................................7
2. The Merger Agreement.........................................10
D. Management and Operations of DRI and CNG Following the Merger....12
Item 2. Fees, Commissions and Expenses.......................................12
Item 3. Applicable Statutory Provisions......................................13
A. Approval of the Merger...........................................14
1. Section 10(b)(1).............................................15
a. Interlocking Relationships................................15
b. Concentration of Control..................................15
2. Section 10(b)(2).............................................18
a. Fairness of Consideration.................................18
b. Reasonableness of Fees....................................19
3. Section 10(b)(3).............................................19
4. Section 10(c)(1).............................................20
a. Section 8 Analysis........................................21
b. Section 11 Analysis.......................................21
Retention of Non-Utility Businesses..................................22
5. Section 10(c)(2).............................................25
6. Section 10(f)................................................32
B. Establishment of Service Company and Approval of Service
Agreement........................................................33
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Item 4. Regulatory Approvals.................................................39
Item 5. Procedure............................................................43
Item 6. Exhibits and Financial Statements....................................44
B. Financial Statements.............................................46
Item 7. Information as to Environmental Effects..............................47
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APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2), 10, 11 AND 13
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
RETENTION OF NON-UTILITY BUSINESSES,
FORMATION OF SERVICE COMPANY
AND
RELATED MATTERS
Dominion Resources, Inc. and Consolidated Natural Gas Company hereby amend
and restate in its entirety their Application-Declaration in File No. 70-09477.
Item 1. Description of Proposed Transaction.
A. Introduction.
This Application-Declaration is submitted in connection with the proposed
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 Amended and Restated Agreement and Plan of Merger dated as of
May 11, 1999 (the "Merger Agreement"). After entering into an initial Agreement
and Plan of Merger dated as of February 19, 1999, as amended and restated as of
March 31, 1999, the Boards of Directors of DRI and CNG approved a revised
structure for their merger following CNG's receipt of an unsolicited offer from
a third party. The companies negotiated a revised merger agreement and entered
into the revised merger agreement as of May 11, 1999. In this Application, any
references to the Merger Agreement refer to the revised merger agreement entered
as of May 11, 1999 unless otherwise noted.
The Merger Agreement contemplates a two-step merger transaction. In the
first step, a wholly owned subsidiary of DRI ("SPV") will merge (the "First
Merger") with and into DRI in a transaction in which DRI will be the surviving
corporation. The First Merger does not require Commission approval under the
1935 Act. In the second step, CNG will either merge (the "Second Merger") (i)
with and into another wholly owned subsidiary of DRI ("CNG Acquisition") in a
transaction in which CNG Acquisition will be the surviving corporation (which is
the preferred structure for the Second Merger) or (ii) with and into DRI in a
transaction in which DRI will be the surviving corporation (the alternative
structure for the Second Merger). The Second Merger is the transaction for which
authority is sought hereunder. The First and the Second Merger are each
conditioned on the other occurring. The First Merger and the Second Merger are
herein together referred to as the "Merger" or the "Transaction". As a result of
the Merger and the other transactions contemplated by the Merger Agreement
(collectively, irrespective of
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the transaction structure actually implemented, the "Transaction"), CNG will
cease to exist and either CNG Acquisition, as the successor in interest to CNG,
will become a direct subsidiary of DRI or each of CNG's four public utility
subsidiaries will become direct subsidiaries of DRI. As a result of the Merger,
CNG's non-utility subsidiaries will each become direct or indirect subsidiaries
of CNG Acquisition or DRI, as the case may be. Following completion of the
Merger, irrespective of the transaction structure actually implemented, DRI will
register as a holding company pursuant to Section 5 of the 1935 Act.
DRI and CNG have filed a concurrent application-declaration (File No.
70-09517) under the 1935 Act with the Commission with respect to authorization
for financing arrangements in connection with the Merger and activities of 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 services 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. A more fulsome description of the
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Merger and its anticipated benefits is contained in the Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which is annexed as Exhibit
C-1 hereto.
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 Second Merger (including, indirectly, through CNG Acquisition or otherwise),
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.
DRI and CNG also hereby request Commission approval for (i) the retention by DRI
of the existing businesses, investments and non-utility activities of DRI and
CNG (ii) the designation of Dominion Resources Services, Inc., a Virginia
corporation ("DRI Services"), as a subsidiary service company of DRI under
Section 13(b) of the 1935 Act and (iii) the Service Agreement and the other
service arrangements described below to be entered into in accordance with
Section 13 of the Act and the rules promulgated thereunder.
2. Overview of the Transaction.
Pursuant to the Merger Agreement, in the preferred structure for the Second
Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition
with CNG Acquisition as the surviving company. This will result in all of CNG's
current rights, obligations, duties and liabilities being assumed by CNG
Acquisition as a matter of law. CNG Acquisition, as a wholly owned subsidiary of
DRI and as the successor to CNG, will become a registered holding company under
the 1935 Act. Alternatively, DRI and CNG may decide to merge CNG directly into
DRI. In that case, DRI will be the surviving entity. Under either alternative
transaction structure, the companies are sometimes referred to after the Merger
as the combined company.
In the Merger (which comprises both the First Merger and the Second
Merger), shareholders of both DRI and CNG will have the option to elect to
receive either cash or DRI common stock in return for each of their DRI or CNG
shares, as the case may be, subject to allocation and also subject to certain
limitations (discussed below) in order to ensure the desired tax treatment for
the Second Merger. Shareholders of both DRI and CNG may elect to exchange some
of their shares for cash and some for stock. Following the Merger, current DRI
shareholders will own approximately 65% of the combined company and current CNG
shareholders will own approximately 35% of the combined 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
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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
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 First Merger and the Second Merger each required approval by a majority
of all shares of DRI common stock represented at a duly called meeting of DRI's
shareholders at which a quorum was present and the Second Merger required
approval by holders of a majority of all outstanding shares of CNG common stock.
The vote of such shareholders was solicited pursuant to a Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which was authorized for
mailing 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. On June 30, 1999 the shareholders of DRI and CNG approved the
Transaction by the required votes at duly called meetings of the respective
companies. In addition, the Transaction requires (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 Federal 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/clearances/ reviews. 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.
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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 Energy, Inc. ("DEI"), an independent power and natural gas subsidiary,
and Dominion Capital, Inc. ("DCI"), a diversified financial services company.
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 E-4 is a corporate organization chart of DRI and its
subsidiaries.
a. Virginia Power.
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
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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 proven oil and natural gas reserves of approximately
1.2 trillion cubic feet of natural gas equivalent.
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 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 E-5 is a 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
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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.
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.
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A merger of DRI and CNG was announced on February 22, 1999. Following the
announcement of a merger transaction between DRI and CNG in February 1999, CNG
received an unsolicited offer from a third party. Thereafter, DRI and CNG
negotiated and entered into the Merger Agreement. The revised merger transaction
was announced on May 12, 1999. A more fulsome description of the Merger and its
anticipated benefits is contained in the Joint Proxy and Registration statement
on Form S-4 of DRI and CNG which is annexed as Exhibit C-1 hereto.
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 $28.0 billion as of March 31, 1999 and revenues of $8.8 billion
for the year ended December 31, 1998. DRI and CNG believe that the combined
company's 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
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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 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 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;
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o natural gas exploration and production activities;
o electric generation; and
o international gas-related and exempt operations.
The companies intend to integrate these complementary businesses, subject
to applicable state and federal regulatory requirements. The complementary
nature of these businesses will result in lower costs and in improved service.
These businesses will not only serve existing retail and wholesale customers,
but will reach out to new customers as a full service energy provider as
deregulation proceeds. Applicants expect to achieve enhanced revenues and net
income through increased efficiency in providing energy to customers, whether
gas or electric.
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, in the preferred structure for the Second
Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition, a
wholly owned subsidiary of DRI, with CNG Acquisition as the surviving company.
This will result in CNG Acquisition assuming all of the rights, duties,
obligations and liabilities of CNG as a matter of law and pursuant to the Merger
Agreement. CNG Acquisition will become a registered holding company following
completion of the Merger as will DRI. Alternatively, DRI and CNG may decide to
merge CNG directly into DRI. In that case, DRI will be the surviving entity and
will register as a holding company pursuant to Section 5 of the 1935 Act.
The Merger is structured as a two-step merger transaction. In the First
Merger, SVP, a wholly owned subsidiary of DRI, will be merged with and into DRI
with DRI being the surviving corporation. In the Second Merger, CNG will be
merged with and into CNG Acquisition with CNG Acquisition being the surviving
corporation. Alternatively, CNG will merge with and into DRI with DRI being the
surviving corporation. DRI shareholders have approved both the First Merger and
the Second Merger and CNG shareholders have approved the Second Merger.
In the Merger, shareholders of both DRI and CNG will have the option to
elect to receive either cash or DRI common stock in return for each of their DRI
or CNG shares, as the case may be, subject to allocation and also subject to
certain limitations (discussed below) in order to ensure the desired tax
treatment for the Second Merger. Shareholders of both DRI and CNG may elect to
exchange some of their shares for cash and some for stock. Following completion
of the Merger, current DRI shareholders will own approximately 65% of the
combined company and current CNG shareholders will own approximately 35% of the
combined company.
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Treatment of DRI Shareholders. In exchange for each share of DRI common
stock held, DRI shareholders will be given the option to receive either $43.00
in cash or one share of DRI common stock. In either case this option is subject
to the limitation that the aggregate amount of cash to be distributed to DRI
shareholders in the First Merger shall be equal to $1,251,055,526 (plus any cash
paid for fractional shares). DRI has the right to increase this amount to
$1,668,400,000 to more closely follow the actual elections of DRI shareholders
as long as the increase in the cash consideration does not affect the desired
tax treatment of the Second Merger. When completed, the First Merger will reduce
DRI shares outstanding so that the Second Merger is less dilutive to earnings
for DRI shares outstanding after the Merger.
Treatment of CNG Shareholders. In exchange for each share of CNG common
stock held, CNG shareholders will be given the option to receive either $66.60
in cash or shares of DRI common stock at an exchange ratio described below, plus
cash equal to 1.52 multiplied by the excess, if any, of $43.816 over the Average
Price (as defined below). In either case, this option is subject to proration so
that 38,159,060 shares of CNG common stock (including any fractional shares
exchanged for cash) will be converted into the right to receive cash in the
Second Merger. However, DRI may reallocate the cash and shares of DRI common
stock to be received by CNG shareholders to more closely follow the actual
elections of the CNG shareholders as long as the reallocation does not affect
the desired tax treatment of the Second Merger. The exchange ratio will be
$66.60 divided by the Average Price if that price is greater than or equal to
$43.816, and 1.52 if the average closing market price is less than $43.816. The
exchange ratio will vary depending on the average market price of DRI common
stock over a 20 consecutive day trading period ending on the tenth business day
before the closing (the "Average Price").
Allocations. As a result of the limitation described above and the tax
allocation provisions described below, the amount of cash and stock received by
shareholders may differ from their actual elections. If DRI common stock is
over-subscribed by the shareholders of either company, a shareholder of that
company who elected DRI common stock may receive part of his consideration in
cash. If cash is over-subscribed by the shareholders of either company, a
shareholder of that company who elected cash may receive part of his
consideration in the form of DRI common stock. DRI is required to reduce the
amount of cash delivered and increase the number of shares issued pursuant to
the Second Merger to the extent necessary to maintain the desired tax treatment
for the Second Merger.
Fractional Shares. Shareholders who hold certificated shares will receive
cash for any fractional share of DRI common stock received in the First Merger
or the Second Merger, as the case may be, based upon the market value of DRI
common stock on the date the First Merger and the Second Merger are completed.
However, any fractional shares held in certain of DRI's or CNG's stock plans may
be retained as fractional shares.
Closing Conditions. The Merger is subject to customary closing conditions,
including receipt of necessary regulatory approvals, including approval of the
Commission under the 1935 Act.
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Tax Consequences. Neither DRI nor CNG will recognize corporate level gain
or loss as a result of the First Merger or the Second Merger. Additionally,
neither shareholders of DRI nor shareholders of CNG will recognize gain or loss
for shares of DRI common stock they receive in connection with the First Merger
or the Second Merger, respectively. In general, however, CNG shareholders will
recognize taxable gain for any cash they receive in the Second Merger and DRI
shareholders will recognize taxable gain or loss, if any, for any cash they
receive in the First Merger.
Accounting Treatment. The First Merger will be treated as a reorganization
with no changes in the recorded amount of DRI's assets and liabilities. The
Second Merger will be accounted for under the purchase method of accounting.
Miscellaneous. As part of their approval of the Merger, DRI shareholders
approved an amendment to the DRI Articles of Incorporation to increase the
authorized shares of common stock of DRI from 300,000,000 to 500,000,000. This
amendment provides DRI with the shares it needs for issuance under the Merger
Agreement and to maintain a reserve of shares for general corporate purposes.
DRI common stock trades on the New York Stock Exchange under the symbol "D". DRI
will obtain approval from the New York Stock Exchange for listing of additional
shares of DRI common stock to be issued as a result of the Merger. If the Merger
is completed, the CNG common stock will be delisted from the New York Stock
Exchange.
D. Management and Operations of DRI and CNG Following the Merger.
Following completion of the Merger, DRI will be the direct parent company
to CNG Acquisition as the successor in interest 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 Acquisition will 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 7 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 a significant operating office 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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Fee, Commission or Expense Thousands
Commission filing fee relating to $2,710
Joint Proxy and Registration Statement
on Form S-4
Accountants' Fees 1,500
Legal Fees and Expenses 5,500
Shareholder Communication, NYSE
Listing Fee and Proxy Solicitation 2,205
Total Investment Bankers' Fees and Expenses 42,600
Lehman Brothers Inc.
Merrill Lynch & Co.
Morgan Stanley & Co. Incorporated
Consulting Fees related to human resource
issues, public relations, regulatory support,
and other matters relating to the Transaction 485
Expenses relating to integrating the merged
company and miscellaneous *
=======
Total $55,000
* Estimated costs of integrating the
merged companies have not been
fully quantified.
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 or CNG Acquisition
of common stock of CNG, VNG, Hope, Peoples and East
Ohio
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Section 11(b) Retention by DRI of the existing business,
investments and non-utility activities of DRI and
CNG
Section 13 and Rules 80-92 Designation of DRI Services as a
subsidiary service company and approval of the
Service Agreement.
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.
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 Section 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))
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- 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.
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 SEC 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 SEC 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 several of the states in which the regulated subsidiaries of DRI
and CNG operate and adjoining states are, through legislative or administrative
action, allowing retail competition in the electric
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and gas industries. Transition to retail electric competition has already begun
in Illinois, New Jersey and Pennsylvania and is slated to begin in Delaware
later in 1999, in Maryland in 2000, and in Virginia in 2002. Ohio has retail
competition legislation pending. Further, individual utilities are currently
conducting retail choice programs in New York and Michigan. With respect to the
gas industry, Georgia and New Jersey have passed legislation allowing gas
utilities to offer retail supply choice to all their customers. Additionally,
retail choice gas programs are ongoing in all or parts of New Jersey, Ohio,
Pennsylvania, Maryland and Virginia.
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 SEC 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 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
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, 1997); 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.
Size: The Merger will create the nation's fourth largest electric and
natural gas utility, serving nearly 4 million retail customers in 5 states. The
size of the combined company in relation to the sizes of all other companies in
the U.S. is, however, no more than a reflection of the fragmentation which
characterizes the U.S. utility industry today. This fragmentation is one of the
principal reasons for the current trend towards consolidation as companies seek
to become more competitive in the emerging deregulated marketplace for energy.
In the energy marketplace of tomorrow, the region in which a company operates
will comprise not only its
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historical service territory but also, at a minimum, the service territories of
its neighbors and its neighbors' neighbors: if a company can compete for the
retail customers of its neighbor, so can the company which is its neighbors'
neighbor. Thus, for purposes of Section 10(b)(1), DRI and CNG have delineated
the region in which they will operate to include: (i) the States in which the
regulated utility subsidiaries of DRI and CNG presently operate (which includes
Virginia, North Carolina, Ohio, Pennsylvania and West Virginia), plus (ii) all
States in which any utility operates if such utility is part of an integrated
electric utility system which has an actual electric interconnection with
Virginia Power (which includes Maryland, Delaware, New Jersey, the District of
Columbia, Indiana, Kentucky, Michigan, South Carolina and Tennessee in addition
to the States in which the DRI/CNG Companies presently operate) (the
"Neighboring States"), plus (iii) all States which are one wheel away from any
of the Neighboring States (which adds Alabama, Georgia, Mississippi, Illinois
and New York).
DRI and CNG submit that their analytical delineation of the region in which
the combined company will operate is sensible in an era of restructuring and
competition in which DRI-CNG's neighbors are also its competitors (i.e., both
DRI-CNG and its immediate neighbors will compete for each other's customers) and
in which DRI-CNG's neighbors' neighbors are also competitors (i.e., both DRI-CNG
and its neighbors' neighbors will compete for DRI-CNG's neighbors' customers).
Within its competitive region the combined company will have (without
giving effect to the contemplated divestiture of VNG discussed below in Item 4
of this Application-Declaration) approximately (i) 4 million retail electric and
gas customers, or 3.47% of total retail customers in the region, (ii)
$10,992,535,263 net utility plant, or 3.89% of total net utility plant in the
region, (iii) $6,475,463,395 of gross utility revenues, or 4.42% of gross
utility revenues in the region and (iv) $3,356,707,970 of net utility revenues,
or 3.74% of total net utility revenues in the region. (Additional statistical
analysis is contained in Exhibit E-3 annexed hereto.) The relative level of the
DRI-CNG presence in their competitive region is not so large as to create an
"excess of concentration and bigness" and, in fact, the statistical analysis
reveals an intensely competitive market. There are 122 combination electric and
gas utilities in the competitive region served by DRI-CNG.
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 have filed 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. Moreover, any anti-competitive effects of
the Merger in Virginia have been addressed in the order of the Virginia
Commission requiring divestiture of VNG.
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,
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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 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 consideration for the Second Merger 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 and reflect a
renegotiation of the terms and consideration by DRI and CNG following receipt by
CNG of an unsolicited proposal for an alternative business combination with
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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").
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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a third party. 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 Commission in Ohio Power Co., 44 SEC 340, 346
(1970), prices arrived at through arm's-length negotiations are particularly
persuasive evidence that Section 10(b)(2) is satisfied.
In addition, nationally recognized investment bankers for each of DRI and
CNG have reviewed extensive information concerning the companies and have
analyzed the merger consideration employing a variety of valuation
methodologies, and have opined that the merger consideration is fair from a
financial point of view, to DRI and to the holders of 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 $55.5 million in
fees, commissions and expenses in connection with the 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 a price for CNG stock of
$66.60, the Merger would be valued at approximately $6.381 billion. The total
estimated fees and expenses of $55.5 million represent approximately .8698% 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).
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3. Section 10(b)(3).
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 economic benefits achievable through the combination of natural gas
operations with electric power operations, such as those identified above in
section I(C)(1), serve the public interest through enabling suppliers to satisfy
the needs of consumers more efficiently. In Consolidated Natural Gas Co.,
Holding Co. Act Release No. 35-26512 (April 30, 1996), the Commission
acknowledged the nature of the market energy suppliers must prepare to satisfy
"fundamental changes in the energy industry are leading to an increasingly
competitive and integrated market, in which marketers deal in interchangeable
units of energy expressed in British thermal unit values, rather than natural
gas or electricity. To retain and attract wholesale and industrial customers,
utilities need to provide competitively priced power and related customer
services . . . . It now appears that the restructuring of the electricity
industry now underway will dramatically affect all United States energy markets
as a result of growing interdependence of natural gas transmission and electric
generation; and the interchangeability of different forms of energy,
particularly gas and electricity". The Merger is designed to position Applicants
to be responsive to these emerging market conditions and is therefore consistent
with the public interest.
The registration of both DRI and CNG Acquisition and, thereafter, their
continued existence as registered holding companies in the same system is
somewhat unusual but is not inappropriate for the facts of this situation and
the benefits of implementing the structure contemplated by the Merger rather
than the alternative structure for Merger are substantial and outweigh any undue
interest in simplicity for its own sake. 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,
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the statute is intended "simply to provide 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. DRI's
acquisition of CNG, which will result in DRI acquiring indirect control over VNG
and bring both VNG and Virginia Power under the common control of DRI, is not
prohibited by Virginia law.4 However, as described in greater detail in Item 4
below of this Application-Declaration, DRI and CNG have agreed with the VSCC
that, within one year following completion of the Merger, they will divest their
interest in VNG. Following such divestiture, the combined company will not have
overlapping electric and gas service territories in any state. Thus, the
Transaction does not present the Commission with any issues under Section 8 of
the 1935 Act.
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3 S. Rep. No. 621, 74th Cong., 1st Sess 11 (1935).
4 In some cases, Virginia law prohibits a public service corporation from
conducting more than one kind of public service business in the state.
Specifically, ss. 13.1-620(D) of the Code of Virginia provides that "[n]o
corporation shall be organized under this chapter for the purpose of conducting
in this Commonwealth more than one kind of public service business except that
the telephone and telegraph businesses or the water and sewer businesses may be
combined, but this provision shall not limit the powers of domestic corporations
existing on January 1, 1996". This provision would not be implicated by the
Transaction, however, for several reasons. First, neither DRI nor CNG is a
public service corporation, so their "combination", directly or indirectly would
not implicate the statute. Second, the public service businesses of the two
public service companies in question, Virginia Power and VNG, are not being
combined, in that DRI and CNG are not proposing that these companies be merged.
Third, if the statute could be construed to cover an indirect combination of
public service businesses through common control over Virginia Power and VNG,
both Virginia Power and VNG were domestic corporations existing on January 1,
1986 and are therefore grand-fathered under the statute. Thus, the Transaction
as proposed neither violates Section 8 of the 1935 Act nor is prohibited by
Section 10(c)(2) of the 1935 Act.
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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 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.
(i) Retention of Gas Utility System
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 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 SEC 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, 1997), and newly formed registered
holding companies.
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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 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. In fact, there are 122 such
combination electric and gas companies operating in the region in which the
combined company will operate. 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
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(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. (The companies have
commissioned a lost economies study from The Reed Consulting Group, a copy of
which is annexed hereto as Exhibit J-1, which measures the quantitative loss
associated with the forced divestiture of CNG's retail gas operations from the
other operations of the combined company.)
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 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 realizing 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
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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.
(ii) Retention of Non-Utility Businesses.
DRI is presently a holding company which is exempt from the registration
requirements of the 1935 Act. As an exempt holding company, DRI has been free to
invest in a variety of non-utility businesses and activities without the need to
obtain prior Commission approval under Section 9(a). DRI's diversification
program has been very successful and has resulted in tangible benefits to DRI's
shareholders. Most importantly, from the 1935 Act perspective, DRI's
diversification program has been conducted in compliance with applicable state
laws and regulations and in a manner designed to minimize any risk that any
losses incurred as a result of diversification could be borne by Virginia Power.
Virginia Power has made investments in discrete non-utility businesses with the
express approval of the VSCC and subject to conditions and limitations imposed
by the VSCC. Virginia Power supports the investment and financing needs of its
subsidiaries as part of Virginia Power's stand-alone financing arrangements. All
of DRI's other diversified businesses are held by separate subsidiaries of DRI
and are managed as independent stand-alone businesses receiving only minimal
indirect credit support from DRI; i.e., DRI provides financial support to DEI
and DCI which in turn support the operations of the DEI Companies and the DCI
Companies, respectively. Thus, DRI's diversified activities are conducted in the
manner approved by the Commission in National Utilities & Industries, 45 SEC 167
(1973), and Pacific Lighting Corporation, 45 SEC 152 (1973). Set forth below is
a brief description of the non-utility businesses and activities engaged in by
DRI subsidiaries. Reference is also made to Exhibit E-6 hereto, which contains
additional information concerning individual non-utility subsidiaries of DRI.
DEI. DEI is a holding company and is a direct subsidiary of DRI. DEI has
interests in various generation and small power production facilities in various
states of the United States all of which are QFs or EWGs under the 1935 Act and,
thus, are exempt under the 1935 Act. DEI also owns, through EWGs, interests in
gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize,
Bolivia and Peru. DEI, through its subsidiaries, is also involved in the
ownership, exploration and development of natural gas and oil reserves in
Western Canada, the Appalachian Basin, the Uinta Basin the Black Warrior Basin,
the onshore Gulf Coast region, the Illinois Basin, the Michigan Basin and the
San Juan Basin. As of March 31, 1999, DEI had proven reserves of approximately
1.2 trillion cubic feet of natural gas equivalent. DEI, through its
subsidiaries, is also involved in the wholesale aggregation, marketing and
trading of natural gas and storage capacity positions, on behalf of DEI and
third parties. DEI maintains its own credit facilities, with some limited
support from DRI, through which it finances the activities of its subsidiaries.
Certain subsidiaries of DEI also maintain their own credit facilities with
varying degrees of support from DEI. All of these financing arrangements would
have been permitted under Rule 52 had DRI been a registered holding company at
the time the same were entered into, provided the underlying investment had been
made in compliance with Section 9(a)(1) or Rule 58, as the case may be.
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DCI. DCI is a holding company and is a direct subsidiary of DRI. DCI,
through its subsidiaries, is a diversified financial services company with its
core operations being commercial finance, corporate finance and consumer
finance. Commercial finance comprises senior secured loans, unsecured or
subordinated debt or mezzanine investments, bridge loans and equity investments.
Senior secured loans have a first priority lien on all assets which includes,
but is not limited, to accounts receivable, inventory, real and personal
property, equipment, trademarks, and copyrights. Corporate finance activities
include underwriting and syndication of debt and equity instruments and debt and
equity securities, managing assets for third parties and broker-dealer
operations. Consumer finance comprises origination, purchase, securitization,
and servicing of mortgages. Other operations include investments in real estate,
a lease in a hydroelectric facility, venture capital and a portfolio of
preferred and equity securities. DCI maintains its own credit facilities, with
some support from DRI, through which it finances the activities of its
subsidiaries. Certain subsidiaries of DCI also maintain their own credit
facilities with varying degrees of support from DCI. All of these financing
arrangements would have been permitted under Rule 52 had DRI been a registered
holding company at the time the same were entered into, provided the underlying
investment had been made in compliance with Section 9(a)(1) or Rule 58, as the
case may be.
Virginia Power. Virginia Power through its Wholesale Power Group, is
engaged in the wholesale marketing and trading of electricity and natural gas,
on behalf of Virginia Power and third parties. Wholesale electricity and gas
marketing and trading activities, whether done by Virginia Power or one of the
DEI Companies, are regulated by the FERC in particular as to transactions with
affiliates. Virginia Power and its subsidiaries and DEI Companies involved in
these activities are required to comply with FERC approved codes of conduct.
Set forth below is a description of the other businesses of DRI by general
categories together with the basis including precedents on which the Commission
should find such businesses retainable under the Act.
Ownership of Qualifying Facilities and Exempt Wholesale Generators. DEI has
interests in various generation and small power production facilities in various
states in the United States all of which are QFs or EWGs under the 1935 Act and,
thus, are exempt under the 1935 Act. DEI also owns through EWGs interests in
gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize,
Bolivia and Peru. These facilities are also exempt under the 1935 Act as EWGs.
As described in further detail on Exhibit E-6 hereto, QFs in which DEI has an
interest include Caithness BLM Group LP, Caithness Navy II Group L.P., Luz Solar
Partners Ltd, VII, LP, Rumford Cogeneration Company, Ltd., Morgantown Energy
Associates, Middle Falls Limited Partnership, NYSD Limited Partnership, and
Sissonville Limited Partnership. EWGs in which DEI owns an interest include
Dominion Elwood Services Company, Inc., Dominion Energy Services Company, Inc.,
Belize Electric Company Limited, Kincaid Generation, LLC, Elwood Energy, LLC,
Empresa Electrica Corani, S.A., Central Termica Alto Valle, S.A., Dominion
Management Argentina, S.A., Hidroelectrica Cerros Colorados and EGENOR S.A.
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DRI owns, through various entities, Corby Power Limited, which in turn owns
all interest in a natural gas-fired generating facility in the United Kingdom.
Corby Power Limited has qualified as an EWG and, thus, is exempt under the 1935
Act.
The ownership of a QF is specifically authorized under Section 713 of the
Energy Policy Act of 1992 and Rule 58(b)(1) (viii) under the 1935 Act. The
ownership of EWGs is permitted under Section 32 of the Act. The Commission has
routinely permitted newly formed registered holding companies to retain their
pre-existing interests in QFs and EWGs. Conectiv, Inc., Holding Co. Act Release
No. 35-26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act
Release No. 35-26748 (August 1, 1997).
Oil and Gas Exploration and Development. DEI, through its subsidiaries is a
participant in oil and natural gas development programs in Canada, Louisiana,
Michigan, New Mexico, Pennsylvania, Texas, Utah, New Mexico, Indiana, Kentucky,
Virginia and West Virginia. DEI's oil and gas subsidiaries, which are described
in further detail on Exhibit E-3 hereto, include Wolverine Reserves, LLC,
Dominion Reserves-Indiana Inc., Dominion Reserves, Inc., Dominion Reserves-Utah,
Inc., Wolverine Environmental Production, Inc., Dominion Energy Canada Ltd.,
Dominion Midwest Energy, Inc., Wolverine Gas and Oil Company, Inc., Dominion
Appalachian Development Properties, LLC, Dominion Appalachian Development, Inc.,
Cypress Energy, Inc., Dominion Reserves Gulf Coast, Inc., Remington Energy,
Ltd., Remington Energy Partnership, and DEI Canada Holding Co., Inc. Through its
investment in Cambrian Capital Corporation, DCI holds net profits interests in
certain oil and gas properties.
The exploration of natural resources or the holding of rights to such
resources are activities of the kind routinely permitted to be retained in prior
Commission orders approving the mergers and creations of new registered holding
companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August
1, 1997); New England Energy Inc., Holding Co. Act Release No. 35-23988 (January
13, 1986).
Gas Activities. DEI owns interests in companies engaged in the
transportation and processing of natural gas and in the manufacture and sale of
equipment used in connection therewith. These subsidiaries, which are described
in greater detail on Exhibit E-3 hereto, include Niton Hub Services Company,
Dominion Gas Processing MI, Inc., Great Lakes Compression, Inc., Dominion Energy
Canada Ltd., Daval Industries Inc., GTG Pipeline Corporation, Dominion
Reserves-Indiana, Inc., Frederick HOF Limited Partnership, Wilderness Energy,
L.C. and Wilderness Energy Services Limited Partnership. These companies engage
in gas-related activities including operation of gas storage facilities, gas
processing, ownership and operation of gas pipelines, gathering and gas
compression.
The ownership of such businesses is specifically authorized under Rule
58(b)(1)(ix), and such businesses have routinely been permitted to be retained
in prior Commission orders approving mergers and creations of new registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998) (gas pipeline, gas gathering, dehydration
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& compression facilities); New Century Energies, Inc., Holding Co. Act Release
No. 35-26748 (August 1, 1997) (gas pipelines, storage facilities).
Energy Marketing and Brokering. DEI owns a number of subsidiaries engaged
in the marketing and brokering of gas and electric energy. These companies,
which are described in further detail on Exhibit E-6 hereto, include Elwood
Marketing, LLC, Phoenix Dominion Energy LLC and Carthage Energy Services, Inc.
Virginia Power is engaged in the marketing and brokering of gas and electric
energy. In addition, Virginia Power owns two subsidiaries which are engaged in
the marketing and brokering of gas. These companies, which are described in
further detail on Exhibit E-3 hereto, include Virginia Power Energy Marketing,
Inc. and Virginia Power Services Energy Corp.
The ownership of businesses engaged in the brokering and marketing of
energy commodities is specifically authorized under Rule 58(b)(1)(v), and
retention of such businesses has routinely been permitted in prior Commission
orders approving mergers and creations of new registered holding companies. WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv,
Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); New Century
Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). Moreover,
Virginia Power's investment in subsidiaries engaged in energy marketing and
trading has also been expressly approved by the VSCC.
Telecommunications. DRI, through Virginia Power, owns VPS
Telecommunications, Inc., which is engaged in providing telecommunications
services utilizing fiber optic line owned by Virginia Power. DRI, through DCI,
also owns a 50% interest in Stonehouse Communications, L.L.C. and, through DCI's
subsidiary, First Dominion Capital, LLC, owns a 10.6% interest in ConStar
International, Inc., and a 19.5% non-voting interest in Protocol Communications.
These entities are engaged in various telecommunications-related businesses as
further described on Exhibit E-3 hereto. Prior to completion of the Merger, each
DRI subsidiary involved in the telecommunications business will be qualified as
an "exempt telecommunications company" under Section 34 of the 1935 Act. The
ability of registered holding companies to acquire and retain interests in
"exempt telecommunications companies" is expressly permitted under Section 34
and retention of such businesses has been routinely permitted in prior
Commission orders approving mergers resulting in the creation of new registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February
25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748
(August 1, 1997).
Real Estate Activities. DCI owns a number of subsidiaries that are engaged
in the business of holding, managing and developing real estate, primarily for
investment purposes. DCI's investment real estate holding and related companies
are primarily held through its subsidiaries, Dominion Lands, Inc., Dominion Land
Management Company and Stanton Associates, and their respective direct and
indirect subsidiaries. These entities are described in further detail on Exhibit
E-6 hereto. DCI develops and manages real estate interests, specializing in
acquisitions of large residential developments as well as commercial and other
residential ventures. The Commission has allowed retention of real estate
operations created by exempt
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holding companies before becoming registered even though such operations were
not strictly related to utility operations. WPL Holdings, Inc., Holding Co. Act
Release No. 35-26856 (April 14, 1998); Conectiv, Inc., Holding Co. Act Release
No. 35-26832 (February 25, 1998); Ameren Corporation, Holding Co. Act Release
No. 35-26809 (December 30, 1997); New Century Energies, Inc., Holding Co. Act
Release No. 35-26748 (August 1, 1997). The Commission has also authorized real
estate investments where they benefitted utility operations. UNITIL Corp.,
Holding Co. Act Release No. 35-25524 (April 24, 1992), American Electric Power
Co., Holding Co. Act Release No. 35-21898 (January 27, 1981).
Energy Lending. DCI, through its subsidiary Dominion Venture Investments,
Inc., owns a 46% interest in Cambrian Capital Corporation and a 45% interest in
Cambrian Capital Partners L.P. These entities, together with their respective
subsidiaries, Triassic Energy Corporation and Triassic Energy Partners, L.P.,
are engaged in providing financing to small and mid-sized independent oil and
natural gas producers who are seeking to acquire or expand their property
holdings or to refinance existing operations. As noted above, in "Oil and Gas
Exploration and Development", the exploration of natural resources or the
holding of rights to such resources are activities of the kind routinely
permitted to be retained in prior Commission merger orders creating new
registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No.
35-26856 (April 14, 1998); New Century Energies, Inc., Holding Co. Act Release
No. 35-26748 (August 1, 1997); New England Energy Inc., Holding Co. Act Release
No. 35- 23988 (January 13, 1986). Because retention of ownership of independent
oil and natural gas producers is routinely permitted, DCI should likewise be
permitted to retain its businesses of providing financing to such entities.
Debt and Equity Financing to Commercial Businesses and Consumers. As
described in more detail above, DCI is a diversified financial services company
whose activities include commercial, corporate and consumer finance. In
connection with financing companies, DCI subsidiaries often acquire equity or
non-voting equity interests and warrants in the companies they are financing as
compensation for the related financing as well as, sometimes, on a stand-alone
basis. Obtaining such types of equity interests is a recognized and customary
practice for firms involved in similar lending businesses. DCI's primary
subsidiaries in these areas include First Source Financial, LLP, First Dominion
Capital, L.L.C. and Cambrian Capital L.P. These companies, together with DCI's
other subsidiaries engaged in these activities, are described in further detail
on Exhibit E-6 hereto.
The Commission has permitted other exempt holding companies, upon becoming
registered holding companies, to retain similar businesses in prior orders.
E.g., Ameren Corporation, Holding Co. Act Release No. 35-26809 (December 30,
1997) (venture capital fund, investment in national bank specializing in
minority business development lending and residential mortgage lending); WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998) (venture
capital fund). While the size of DRI's investment and the degree of its active
participation are admittedly greater than that of holding companies in prior
Commission precedents, DRI's acquisition and ownership of such businesses are
lawful under its current status as an exempt holding company and are larger
because they have been successful investments. The growth of these subsidiaries
which is attributable to the business success of the underlying
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businesses should not form the basis of a divestiture order. DRI has maintained
these businesses in subsidiaries separate from its regulated utility affiliates,
and will continue to do so. These subsidiaries do not engage in business with
DRI's regulated utility affiliates. Accordingly, given the protections DRI has
implemented and will continue to maintain in effect, together with the
likelihood of substantial harm to DRI's investors should DRI be required to
divest these businesses, DRI should be permitted to retain these businesses.
Other Miscellaneous Investments. DRI, through DCI, also holds minority
interests in a number of other businesses, none of which are public utilities
for purposes of the 1935 Act. Many of these investments were obtained in the
ordinary course in connection with DCI's commercial and corporate finance
operations, and many are not voting securities. The aggregate amount of such
investments made by DCI at March 31, 1999 was $176,000,000. Divestiture of these
de minimis portfolio investments would provide no benefit to any protected
interests under the 1935 Act, and would potentially cause harm to DRI's
investors. Accordingly, DRI should be permitted to retain these interests.
CNG. A full description of CNG's non-utility businesses is described above
in this Item 1, Section B.2. No issues are raised under the 1935 Act with
respect to the retention of these businesses by DRI as a registered holding
company as each of such businesses was in fact acquired by a registered holding
company in compliance with all applicable provisions of, and rules under, the
1935 Act.
DRI hereby requests Commission authorization, following completion of the
Merger and the registration of DRI as a holding company under Section 5 of the
1935 Act, to retain its interest in DEI and the other DEI Companies and to
retain its indirect interest in the non- utility subsidiaries of Virginia Power
and, through the Merger, to acquire and retain the interests of CNG in the
non-utility businesses of CNG.
DRI further requests that the Commission authorize DRI to retain its
interest in DCI and the other DCI Companies for a period of not less than 3
years following completion of the Merger and the registration of DRI as a
holding company under the 1935 Act and to reserve jurisdiction over the timing
and terms of any future disposition or divestiture of DCI. DRI further requests
that any order of the Commission under Section 11(b)(1) which requires DRI to
divest DRI's interest in DCI satisfy the requirements of Section 1081 of the
Internal Revenue Code to enable DRI to obtain the tax treatment provided for in
said Section 1081. DRI has previously stated its intention to dispose of its
interest in DCI, in part to obtain funds to repay indebtedness incurred to
finance the cash component of the consideration to be paid to DRI and CNG
shareholders in connection with the First Merger and the Second Merger,
respectively. However, neither the nature nor the timing of such disposition has
been determined and it would be to the detriment of DRI investors if DRI were to
be obliged to divest its interest in DCI in an untimely or uneconomic manner.
Pursuant to the last paragraph of Section 11(b)(1) of the 1935 Act, 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
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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". Section 9(a) of the 1935 Act was
designed, among other things, to prevent the acquisition of businesses that
would not meet the above test. In an effort to streamline its administration of
the 1935 Act and to provide guidance to registered holding company systems, the
Commission promulgated Rule 58 which provides an exemption from the provisions
of Section 9(a)(1) for, in the case of registered electric systems, acquisitions
of businesses of the types listed in subparagraph (b)(1) of the Rule provided
that the aggregate investment by such holding company in such businesses does
not exceed the greater of $50 million or 15% of consolidated capitalization.
While historically the Commission generally took a narrow view of what
business could be retained under the standards of Section 11(b), with the
promulgation of Rule 58, the Commission signaled a less narrow approach to the
issue. Similarly, in the recent numerous creations of registered holding
companies as a result of mergers, the Commission has continued to view the
retainability issue more broadly and has also recognized that it is appropriate
to judge the issue of retainability differently when businesses were lawfully
acquired prior to registration.5 In part the broader view of what is an
appropriate other business to retain is justified on the possible harm to
investors or consumers that could result from required divestiture, because the
evils Congress addressed in 1935 relative to non-utility businesses in utility
holding company systems no longer present the same potential for abuse as prior
to 1935 for a variety of reasons including: much greater stock market
discipline, stronger state regulatory supervision, much more rigorous accounting
standards and controls, the role played by rating agencies in monitoring utility
holding company systems and the changes in the whole utility industry which are
broadening the types of services offered by utilities to their customers today
versus what were offered only a few years ago. These reasons also support the
use of Rule 58 and the continuing broadening of permitted acquisitions of other
businesses outside of the Rule 58 safe harbor.
The language of Section 11 quoted above gives the Commission the authority
to go much beyond Rule 58 and the retentions allowed in the recent orders
establishing new registered holding company systems indicate that the
interpretation of such language is extremely broad. In the instant application,
there is no issue to be decided relative to CNG since it is currently a
registered holding company and therefore does not have any businesses that would
be considered unretainable "other businesses" under Section 11 of the Act. With
respect to DRI, in 1998, its franchised utility, Virginia Power, accounted for
$4,285 million of revenues while its two other principal subsidiaries, DEI and
DCI had revenues of $383 million and $409 million, respectively.
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5 "[T]he Commission reaches this conclusion [as to retainability of
non-utility businesses] in view of the fact that Applicants were not subject to
the restrictions that Section 11(b)(1) and related precedent of the Commission
place upon the nonutility activities of registered system companies". WPL
Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998). See also
Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998); New
Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997).
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In considering the non-utility businesses of DRI as described in this
Application-Declaration, the Commission should start with those that fit within
Rule 58, which constitute a majority of such businesses. Thereafter, the
Commission, in line with the Staff's Recommendation in The Regulation of
Public-Utility Holding Companies, June 1995, should consider as other businesses
retainable under the Section 11 language, those businesses that do not fall
strictly in one of the ten categories of investments set out in Rule 58 but are
of the type permitted by the Commission in orders since Rule 58 was promulgated
or are deemed to be energy related in the evolving concept of that term in a
rapidly changing industry. Finally, consistent with the view taken by the
Commission in recent merger approvals6 substantial weight should be given to the
fact that the businesses were created or acquired prior to registration and
therefore should be grand-fathered. To the extent that in any given case a DRI
business is not deemed to fit within any of the foregoing categories, the
Commission should defer consideration of the retainability of such business, and
reserve jurisdiction as it did in CINergy Corp, Holding Co. Act Release No.
26146 (October 21, 1994).
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 SEC 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, many 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
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6 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998).
See also Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998);
New Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997).
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competitive energy services provider introduces into the energy marketplace a
viable and effective competitor.
6. Section 10(f).
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.
B. Establishment of Service Company and Approval of Service Agreement.
As an exempt holding company, DRI currently provides a number of services
to its affiliates and subsidiaries. As a registered holding company, CNG has
established Consolidated Natural Gas Service Company, Inc. ("CNG Services") as a
service company pursuant to Section 13(b) of, and Rule 88 under, the 1935 Act.
CNG Services is a wholly-owned subsidiary of CNG. It was formed as a subsidiary
service company, pursuant to temporary authorization given CNG in Commission
order dated March 8, 1962, Holding Co. Act Release No. 35-14592. CNG Services'
authorization was made permanent by the Commission by order dated August 26,
1966, Holding Co. Act Release No. 35-15548. The basic form of service agreement,
including exhibits thereto which described the services offered and methods of
allocation of costs, was an exhibit to CNG's application-declaration seeking
authority for CNG Services and made effective by the Commission. Several
amendments to the service agreement exhibits have been approved by the
Commission pursuant to "60 day letter proceedings" since 1966.
As part of their business combination, DRI and CNG anticipate some
centralization of some of the service functions in the combined company but have
not yet completed their analysis of how best to accomplish this goal, a task
that is not probably capable of being completed until after the two companies
are in fact merged. Thus, in order to ensure the transition to a combined
company proceeds smoothly and in compliance with applicable laws and regulations
(as discussed below, the provision of intra-system services is also regulated by
the Virginia, North Carolina, West Virginia and Pennsylvania state commissions),
DRI and CNG propose, initially, to commence their combined operations with two
subsidiary service companies.
In that connection, prior to closing of the Merger, DRI will establish a
new direct subsidiary service company, DRI Services, which will assume from DRI
all of the service functions currently performed for affiliates by DRI and all
employees performing such functions will become employees of DRI Services. Upon
closing of the Merger, DRI Services and the other DRI affiliates will enter into
a new single systemwide Service Agreement with CNG, CNG Services and the other
subsidiaries of CNG which is modeled after the current Service Agreement in
effect for the CNG system. Thus, the combined company will operate with two
service companies and each DRI-CNG affiliate will have the opportunity to elect
to purchase the services specified from the menu of options contained in the
Service Agreement. The cost allocation
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formula will account for the possibility that two service company providers are
available. DRI and CNG believe that their approach to service company
arrangements provides them with the appropriate degree of flexibility to
integrate their operations in a manner consistent with applicable laws and
regulations.
Accordingly, DRI requests authorization to maintain subsequent to the
Merger DRI Services. Initially, DRI Services will issue 100 shares of common
stock, no par value, all of which will be subscribed to by DRI at a price of $1
per share.
Over time it is anticipated that the provision of services within the
combined DRI- CNG system will be rationalized. In the interim, however, DRI and
CNG seek authorization from the Commission to enter into the form of Service
Agreement annexed as Exhibit K-1 hereto which contemplates that the following
services will be offered to system companies:
1. Accounting. The Service Companies will offer advice and assistance to
system companies in accounting matters, including the development of accounting
practices, procedures and controls, the preparation and analysis of financial
reports, and the processing of certain accounts such as accounts payable,
payroll, customer and cash management.
2. Auditing. The Service Companies' internal auditing staff will offer to
audit, periodically, the accounting records and other records maintained by
system companies, coordinating their examination, where applicable, with that of
independent public accountants. Such personnel will report on their examination
and submit recommendations, as appropriate, on improving methods of internal
control and accounting procedures.
3. Legal and Regulatory. The Service Companies will offer advice and
assistance with respect to legal and regulatory issues as well as regulatory
compliance, including 1935 Act authorizations and compliance and regulatory
matters under other Federal and State laws. In addition, the Service Companies
will provide consulting, cleanup and other service activities as required to
ensure full compliance with applicable environmental statutes and regulations.
4. Information Technology, Electronic Transmission and Computer Services.
The Service Companies will offer to provide the organization and resources for
the operation of an information technology function including the operation of a
centralized data processing facility and the management of a telecommunications
network. This function includes the central processing of computerized
applications and support of individual applications in system companies. The
Service Companies will also develop, implement, and process those computerized
applications for system companies that can be economically best accomplished on
a centralized basis.
5. Software Pooling. The Service Companies will offer to accept from system
companies ownership of and rights to use, assign, license or sublicense all
software owned, acquired or developed by or for system companies which system
companies can and do transfer or assign to it. The Service Companies will
preserve and protect the rights to all such software
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to the extent reasonable and appropriate under the circumstances; to license
system companies, on a non-exclusive, no-charge or at-cost basis, to use all
software which the relevant Service Companies has the right to sell, license or
sublicense; and, at the relevant system companies' expense, to permit system
companies to enhance any such software and to license others to use all such
software and enhancements to the extent that the relevant Service Companies
shall have the legal right to so permit.
6. Employee Benefits/Pension Investment. The Service Companies will offer
to provide central accounting for employee benefit and pension plans of system
companies. The Service Companies will offer to advise and assist system
companies in the administration of such plans and will offer to prepare and
maintain records of employee and company accounts under the said plans, together
with such statistical data and reports as are pertinent to the plans.
7. Employee Relations. The Service Companies will offer to advise and
assist system companies in the formulation and administration of employee
relations policies and programs relating to the relevant system companies' labor
relations, personnel administration, training, wage and salary administration
and safety.
8. Operations. The Service Companies will offer to advise and assist system
companies in the study, planning, engineering and construction of energy plant
facilities of each system company and of the System as a whole, and will advise,
assist and manage the planning, engineering (including maps and records) and
construction operations of system companies electing this service. The Service
Companies will develop long-range operational programs for all the system
companies and will advise and assist each system company in the coordination of
such programs with the programs of the other system companies. The Service
Companies will also offer to perform meter management for system companies.
9. Executive and Administrative. The Service Companies will offer to advise
and assist system companies in the solution of major problems and in the
formulation and execution of the general plans and policies of system companies
electing this service. The Service Companies will advise and assist system
companies as to operations, the issuance of securities, the preparation of
filings arising out of or required by the various Federal and State securities,
business, public utilities and corporation laws, the selection of executive and
administrative personnel, the representation of system companies before
regulatory bodies, proposals for capital expenditures, budgets, financing,
acquisition and disposition of properties, expansion of business, rate
structures, public relationships and other related matters.
10. Business & Operations Services. The Service Companies will offer to
advise and assist system companies in all matters relating to operational
capacity and the preparation and coordination of operating studies. The Service
Companies will manage system companies' purchase, sale, movement, transfer and
accounting of volumes to ensure continued recovery of all prudently incurred
energy purchase costs through local jurisdictional cost recovery mechanisms. The
Service Companies will also compile and communicate information relevant to
system operation. Additionally, the Service Companies will offer to perform
general
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10/15/99 12:49 PM
<PAGE>
administrative support services, including travel services, aviation, fleet,
mail and facilities management.
11. Exploration and Development. The Service Companies will offer to advise
and assist system companies in all geological and exploration matters including
those relating to the discovery and maintenance of gas and oil reserves, the
acquisition and surrender of acreage, the selection of well locations and the
development of underground storage facilities.
12. Risk Management. The Service Companies will offer to advise and assist
system companies in securing requisite insurance, in the purchase and
administration of all property, casualty and marine insurance, in the settlement
of insured claims and in providing risk prevention advice.
13. Marketing. The Service Companies will offer to plan, formulate and
implement marketing programs, as well as provide associated marketing services
to assist system companies with improving customer satisfaction, load retention
and shaping, growth of throughput, energy conservation and efficiency. The
Service Companies will also offer to assist system companies in carrying out
policies and programs for the development of plant locations and of industrial,
commercial and wholesale markets and will assist with community redevelopment
and rehabilitation programs.
14. Medical. The Service Companies will offer to direct and administer all
medical and health activities of system companies, will provide systems of
physical examination for employment and other purposes and will direct and
administer programs for the prevention of sickness.
15. Corporate Planning. The Service Companies will offer to advise and
assist system companies in studying and planning in connection with operations,
budgets, economic forecasts, capital expenditures and special projects.
16. Purchasing. The Service Companies will offer to advise and assist
system companies in the purchase of materials, supplies and services, will
conduct purchase negotiations, prepare purchasing agreements and will administer
programs of material control.
17. Rates. The Service Companies will offer to advise and assist system
companies in the analysis of their rate structure in the formulation of rate
policies and in the negotiation of large contracts. The Service Companies will
also offer to advise and assist system companies in proceedings before
regulatory bodies involving the rates and operations of system companies and of
other competitors where such rates and operations directly or indirectly affect
system companies.
18. Research. The Service Companies will offer to investigate and conduct
research into problems relating to production, utilization, testing,
manufacture, transmission, storage and distribution of energy. The Service
Companies will keep abreast of and evaluate for system companies all research
developments and programs of significance affecting system
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companies and the energy industry, will conduct research and development in
promising areas and will advise and assist in the solution of technical problems
arising out of system companies' operations.
19. Tax. The Service Companies will offer to advise and assist system
companies in the preparation of Federal and other tax returns, and will
generally advise system companies as to any problems involving taxes including
the provision of due diligence in connection with acquisitions.
20. Corporate Secretary. The Service Companies will offer to provide all
necessary functions required of a publicly held corporation; coordinating
information and activities among shareholders, the transfer agent, and Board of
Directors; providing direct services to security holders; preparing and filing
required annual and interim reports to shareholders and the SEC; conducting the
annual meeting of shareholders and ensuring proper maintenance of corporate
records.
21. Investor Relations. The Service Companies will offer to provide fair
and accurate analysis of DRI and its operating subsidiaries and its outlook
within the financial community, enhancing DRI's position in the energy industry;
balancing and diversifying shareholder investment in DRI through a wide range of
activities; providing feedback to DRI and its operating subsidiaries regarding
investor concerns, trading and ownerships; holding periodic analysts meetings;
and providing various operating data as requested or required by investors.
The proposed form of Service Agreement, including the proposed cost
allocation methodology to be applied thereunder, is annexed hereto as Exhibit
K-1.
Following completion of the Merger, DRI anticipates that all services
provided to system companies by affiliates will be provided in accordance with
all applicable provisions of the 1935 Act and the rules and regulations of the
Commission promulgated thereunder. However, as of the date of this
Application-Declaration, Virginia Power has entered into a number of affiliate
transactions with system companies in compliance with Virginia law and the
express approval of the VSCC, which must approve all transactions between
affiliates involving a jurisdictional Virginia utility. These existing
arrangements do not fully comply with the Commission's "at-cost" rules. The
pricing of these affiliate transactions has been done in a manner consistent
with a 1986 settlement order issued by the VSCC following a much publicized and
controversial proceeding involving DRI and Virginia Power and are based on the
standard that goods or services provided to Virginia Power are priced at the
lower of cost or market whereas purchases of goods or services from Virginia
Power are priced at the higher of cost or market. The Virginia rules are
designed to insure that the regulated utility, Virginia Power, always benefits
from any contract entered into with an affiliate. Following completion of the
Merger, Virginia Power will not take any services from affiliates except in
compliance with all applicable provisions of the 1935 Act and the rules and
regulations of the Commission promulgated thereunder as well as all applicable
provisions of state law which apply to Virginia Power. However, DRI does request
an exemption from the "at-cost" rules (i) to permit Virginia Power to continue
to meet its obligations under existing arrangements which have been approved by
the Virginia Commission
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to provide services to "Exempt Non-Utility Affiliates" in accordance with the
terms of the 1986 settlement order and (ii) with respect to future service
arrangements under which Virginia Power would provide services to "Exempt
Non-Utility Affiliates" within the DRI-CNG system. The term "Exempt Non-Utility
Affiliates" as used in the preceding clauses (i) and (ii) means (1) FUCOs and
EWGs which do not derive any part of their income, directly or indirectly, from
the generation and sale of electric energy within the United States, (2) EWGs
which sell electricity at market-based rates that have been approved by the FERC
or the relevant state public utility commission, provided that the purchaser is
not an electric utility company affiliate of DRI, (3) QFs under PURPA which sell
electricity exclusively at rates negotiated at arm's-length to one or more
industrial or commercial customers purchasing electricity for their own use and
not for resale or to an electric utility company which is not a DRI affiliate at
the purchaser's "avoided costs" as determined under applicable regulation and
(4) EWGs and QFs under PURPA which sell electricity at rates based upon cost of
service, as approved by the FERC or any state utility commission having
jurisdiction, provided that the purchaser is not an electric utility company
affiliate of DRI (collectively, the "Exempt non-Utility Affiliates"). DRI also
requests an exemption from the "at-cost" rules with respect to other service
arrangements that might be entered into by Virginia Power with other non-utility
affiliates of DRI which are not "Exempt Non-Utility Affiliates" and pursuant to
which Virginia Power might provide services to such other non-utility
affiliates; however, DRI requests that the Commission reserve jurisdiction over
this request pending completion of the record.
In support of its request for such exemption from the "at-cost" rules, DRI
notes that the Commission has, in a number of cases, granted exemptions to the
"at-cost" rules in order to give effect to state regulatory commission orders or
settlement agreements pursuant to Section 13(b)'s authorization to grant
exceptions for transactions including "special or unusual circumstances".7 In
particular, in the recent order issued to Entergy, the Commission granted
authority for payment to regulated utilities for services rendered to
nonregulated businesses at the fully allocated cost of the service plus 5%, as
provided for in settlement agreements between Entergy and the Arkansas,
Louisiana, Mississippi state commissions and the commission of the City of New
Orleans. In its decision, the Commission stated that, while there was no
evidence to suggest that fully allocated costs would not adequately reimburse
the regulated utilities for the services they provide, it was appropriate to
give substantial weight to the views of New Orleans, the Arkansas Commission,
the Mississippi Commission and the Louisiana Commission in concluding the
provisions of the settlement agreements will protect retail ratepayers. The
Commission further stated that the grant of exemptive relief was consistent with
its precedent under Section 13(b) insofar as the provisions of the settlement
agreements were the ancillary steps needed to implement a "carefully crafted
settlement of a long and full-aired controversy". DRI's request for an exemption
from the "at-cost" rules limited to the provision of services by Virginia Power
to non-utility affiliates is designed to give effect to arrangements which the
Virginia
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7 See Entergy Corporation, Holding Co. Act Release No. 27040 (June 22,
1999); Entergy Corporation, Holding Co. Act Release No. 27039 (June 22, 1999);
Blackhawk Coal Co., Holding Co. Act Release No. 23834 (Sept. 20, 1985) and EUA
Cogenex Corp., Holding Co. Act Release No. 26373 (Sept. 14, 1995).
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Commission has approved as consistent with the interest of ratepayers in a
"fully aired" proceeding and is therefore consistent with existing precedent
under the Act.8
As stated above, following completion of the Merger, Virginia Power will
not take any services from affiliates except in compliance with all applicable
provisions of the 1935 Act and the rules and regulations of the Commission
promulgated thereunder as well as all applicable provisions of state law of
those states having jurisdiction over Virginia Power relating to such matters.
DRI's request for exemption from the "at-cost" rules with respect to existing
and future service arrangements under which Virginia Power provides services to
non-utility affiliates is designed to permit Virginia Power to perform such
service arrangements in compliance with state law (which mandates that Virginia
Power receive the higher of cost and market) for the benefit of ratepayers and
investors. No purpose is served under the 1935 Act in requiring Virginia Power
to perform such services at cost when cost is less than market.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that DRI and CNG
have obtained or 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 Second 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. Neither DRI nor CNG believes that the Second Merger will
violate Federal antitrust laws. If the Second Merger is not consummated within
12 months after the expiration or earlier termination of the HSR Act waiting
period, DRI and CNG must submit new information to the DOJ and the FTC, and new
HSR Act waiting period will begin.
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
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8 In its 1995 Report on The Regulation of Public-Utility Holdings
Companies, the Division of Investment Management specifically recommended that
the SEC work with other regulators to satisfy concerns over affiliate
transactions and respond flexibly and effectively in this area.
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the Merger will affect the basis for prior NRC decisions relating to its
financial qualifications as an NRC licensee. DRI has requested 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 Second 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:
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
Second 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 have been made with FERC to allow DRI and CNG
power-marketing affiliates to continue to engage in wholesale power transactions
at market-based rates.
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Virginia Commission
DRI's wholly owned subsidiary, Virginia Power, and CNG's wholly-owned
subsidiary, VNG, are subject to the jurisdiction of the VSCC. The VSCC 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 acquisition. On September 17, 1999,
the VSCC issued its order approving the merger.
The order of the VSCC requires that Virginia Power/DRI and VNG/CNG advise
the Commission of certain conditions contained in the VSCC order. Those
conditions are as follows:
Petitioners, Virginia Power and VNG9 shall have the following continuing
obligations:
(A) With respect to any contract that is subject to Section 12 or 13 of
the [1935 Act]:
(i) Neither Virginia Power, VNG, nor any other DRI affiliate subject
to [VSCC] regulation, shall enter into such contract without
first obtaining an order from [the VSCC] approving such action.
(ii) Any such contract shall contain language providing that neither
Virginia Power, VNG nor such affiliate shall have any obligation
under such contract except to the extent [the VSCC] has approved
such obligation.
(B) Neither Virginia Power nor VNG shall transfer, or commit to transfer,
to any affiliate or nonaffiliate, the control or ownership of any
asset or portion thereof used for the generation, transmission,
distribution or other provision of electric power and/or service or
gas supply and/or service to customers in Virginia, without first
obtaining all approvals from [the VSCC] that are required by state
law.
The VSCC order also contains a condition to the effect that the VSCC must
determine that "any orders of the [Commission] approving the Petitioners'
[Virginia Power and VNG] merger application are not inconsistent with" the order
of the VSCC. A copy of the VSCC order approving the merger is annexed hereto as
Exhibit D-2.2.
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
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9 All conditions will continue in force as to VNG only until such time as
its divestiture from the Petitioners is completed, except as otherwise required
by law.
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<PAGE>
control by stock purchase or otherwise. Under this authority, the North Carolina
Commission has advised that it will assert jurisdiction to approve DRI's
acquisition of CNG. The North Carolina Commission must give its approval if
justified by the public convenience and necessity. DRI has filed an application
seeking the approval of the North Carolina Commission consistent with these
requirements and has entered into a Stipulation with the Public Staff of the
North Carolina Commission as a result of which, on September 20, 1999, at a
hearing before the North Carolina Commission, the Public Staff stated its
support of the Merger as being in the public interest. DRI expects the North
Carolina Commission to act on the Merger shortly.
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. The West Virginia Commission granted its approval on July 27, 1999. A
copy of the order is annexed hereto as Exhibit D-4.2.
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 DRI's acquisition of CNG. 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. The Pennsylvania Commission granted its approval
on June 16, 1999. A copy of the order is annexed hereto as Exhibit D-5.2.
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 is being provided any relevant information for its review and use in
evaluating the impact of the transaction, if any, on retail customers in Ohio.
Annexed hereto as Exhibit D-6 is a letter from the Ohio Commission dated
September 2, 1999 stating that in light of agreements between the applicants and
the Ohio Commission, the Ohio Commission "is satisfied that the merger will not
adversely affect Ohio's interests".
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Affiliate Contracts and Arrangements
Following the Second Merger and registration of DRI as a holding company
under the 1935 Act, 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
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.
Regulatory commissions in states where DRI's and CNG's utilities operate
may intervene in the Federal regulatory proceedings. 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 October 15, 1999, the requisite notice under Rule 23, a form of which is
attached hereto as Exhibit I-1, with respect to the filing of this
Application-Declaration, such notice to specify a date not later than November
9, 1999 by which comments may be entered and a date not later than November 10,
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.
-43-
<PAGE>
Item 6. Exhibits and Financial Statements.
A. Exhibits
A-1 Articles of Incorporation of DRI as in effect on April 16,
1999. (Filed as Exhibit 3(i) to DRI's Form 10-Q for the
quarter ended March 31, 1999, File No. 1-8489 and
incorporated by reference herein)
A-2 By-Laws of DRI as in effect on April 16, 1999. (Filed as
Exhibit 3(ii) to DRI's Form 10-Q for the quarter ended March
31, 1999 and incorporated by reference herein)
A-3 Restated Certificate of Incorporation of CNG. (Filed as
Exhibit A-1 to Form U-1, File No. 70-7811 and incorporated
by reference herein)
A-3.1 Amendment, dated May 31, 1996, to Exhibit A-1. (Filed as
Exhibit 4(B) to the Registration Statement on Form S-3, File
No. 333-10869 and incorporated by reference herein)
A-4 By-laws of CNG, last amended May 19, 1996. (Filed as Exhibit
3B to Form 2158 for the year ended December 31, 1998, File
No. 1-3196 and incorporated by reference herein)
A-5 Articles of Incorporation of DRI New Sub I, Inc.
A-6 Bylaws of DRI New Sub I, Inc. (to be filed by amendment)
A-7 Certificate of Incorporation of DRI New Sub II, Inc.
A-8 Bylaws of DRI New Sub II, Inc. (to be filed by amendment)
B-1 Amended and Restated Agreement and Plan of Merger, dated as
of May 11, 1999 by and between DRI and CNG. (Included in
Exhibit C-1 hereto)
C-1 Registration Statement on Form S-4 of DRI for the
shareholders meeting to be held in connection with the
Merger. (Filed with the Commission on May 20, 1999, File No.
333-75669 and incorporated by reference herein)
C-2 Joint Proxy Statement/Prospectus of DRI and CNG for the
special meeting of shareholders to be held in connection
with the Merger. (Included in Exhibit C-1)
D-1.1 Application to the FERC under the FPA. (Previously filed)
D-1.2 Order of the FERC. (To be filed by amendment)
-44-
<PAGE>
D-2.1 Submission to the Virginia Commission. (Previously filed)
D-2.2 Order of the Virginia Commission. (Filed in paper format on
Form SE)
D-2.2A Amending Order of the Virginia Commission. (Filed in paper
format on Form SE)
D-3.1 Submission to the North Carolina Commission. (Previously
filed)
D-3.1A Stipulation Agreement filed with the North Carolina
Commission (Filed in paper format on Form SE)
D-3.2 Order of the North Carolina Commission. (To be filed by
amendment)
D-4.1 Submission to the West Virginia Commission. (Previously
filed)
D-4.2 Order of the West Virginia Commission. (Previously filed)
D-5.1 Submission to the Pennsylvania Commission. (Previously
filed)
D-5.2 Order of the Pennsylvania Commission. (Previously filed)
D-6 Letter of the Ohio Commission. (Filed in paper format on
Form SE)
E-1 Map of service territory of DRI. (Previously filed)
E-2 Map of service territory of CNG. (Previously filed)
E-3 Statistical Analysis of companies in the DRI-CNG region.
E-4 DRI Corporate Organization Chart. (Filed in paper format on
Form SE)
E-5 CNG Corporate Organization Chart. (Previously filed)
E-6 Description of Non-Utility Subsidiaries
F-1 Opinion of Counsel. (To be filed by amendment)
F-2 Past tense opinion of counsel. (To be filed by amendment)
G-1 Opinion of Lehman Brothers, Inc. (Included in Exhibit C-1)
G-2 Opinion of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. (Included in Exhibit C-1)
-45-
<PAGE>
H-1 Annual Report of DRI on Form 10-K for the year ended
December 31, 1998. (Filed with the Commission on March 1,
1999, File No. 1-8489 and incorporated by reference herein)
H-2 Annual Report of CNG on Form 10-K for the year ended
December 31, 1998. (Filed with the Commission on March 15,
1999, File No. 1-3196 and incorporated by reference herein)
H-3 Quarterly Report on Form 10-Q of DRI for the quarter ended
March 31, 1999. (Filed with the Commission on May 17, 1999,
File No. 1-8489 and incorporated by reference herein)
H-4 Quarterly Report on Form 10-Q of CNG for the quarter ended
March 31, 1999. (Filed with the Commission on May 14, 1999,
File No. 1-3196 and incorporated by reference herein)
H-5 Quarterly Report on Form 10-Q of DRI for the quarter ended
June 30, 1999. (Filed with the Commission on August, 1999,
File No. 8489 and incorporated by reference herein)
H-6 Quarterly Report on Form 10-Q of CNG for the quarter ended
June 30, 1999. (Filed with the Commission on August, 1999
File No. 1-3196 and incorporated by reference herein)
H-7 Form U-3A-2 of DRI for the year ended December 31, 1998.
(Filed with the Commission on February 26, 1999, File No.
69-278 and incorporated by reference herein)
I-1 Proposed Form of Notice
J-1 Lost Economies Study. (Previously filed)
K-1 Form of Service Agreement. (To be filed by amendment)
B. Financial Statements
FS-1 DRI Unaudited Pro Forma Condensed Consolidated Balance
Sheet. (Included in Exhibit C-1)
FS-2 DRI Unaudited Pro Forma Condensed Consolidated Statement of
Income. (Included in Exhibit C-1)
FS-3 Notes to DRI Unaudited Pro Forma Condensed Consolidated
Financial Statements. (Included in Exhibit C-1)
-46-
<PAGE>
FS-4 DRI Consolidated Balance Sheet as of December 31, 1998.
(Included in Exhibit H-1)
FS-5 DRI Consolidated Statement of Income for the twelve months
ended December 31, 1998. (Included in Exhibit H-1)
FS-6 CNG Consolidated Balance Sheet as of December 31, 1998.
(Included in Exhibit H-2)
FS-7 CNG Consolidated Statement of Income for the twelve months
ended December 31, 1998. (Included in Exhibit H-2)
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.
-47-
<PAGE>
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: October 15, 1999 Date: October 15, 1999
-48-
DRI NEW SUB I, INC.
ARTICLES OF INCORPORATION
September 14, 1999
<PAGE>
ARTICLE I
The name of the Corporation is DRI New Sub I, Inc.
ARTICLE II
The Corporation is organized to carry on any business not prohibited by law or
required to be specifically set forth in these Articles.
ARTICLE III
The Corporation shall have authority to issue 100 shares of Common Stock without
par value.
ARTICLE IV
The number of Directors shall be fixed by the Bylaws.
Each Director and Officer shall be indemnified by the Corporation against
liabilities, fines, penalties and claims imposed upon or asserted against him
(including amounts paid in settlement) by reason of having been such a Director
or Officer, whether or not then continuing so to be, and against all expenses
(including counsel fees) reasonably incurred by him in connection therewith. In
the event of any judgment against such Director or Officer or in the event of a
settlement, the indemnification shall be made only if the Corporation shall be
advised, in case none of the persons involved shall be or have been a Director
of the Corporation, by the Board of Directors, and otherwise by independent
counsel to be appointed by the Board of Directors, that in its or his opinion
such Director or Officer was not guilty of willful misconduct or a knowing
violation of the criminal law. If the determination is to be made by the Board
of Directors, it may rely, as to all questions of law, on the advice of
independent counsel. Every reference herein to Director or Officer shall include
every Director or Officer or former Director or Officer of the Corporation and
every person who may have served at its request as a Director or Officer of
another corporation in which the Corporation owns shares of stock or of which it
is a creditor or, in case of a non-stock corporation, to which the Corporation
contributed and, in all of such cases, his executors and administrators. The
right of indemnification hereby provided shall not be exclusive of any other
rights to which any Director or Officer may be entitled.
In every instance in which the Virginia Stock Corporation Act, as it exists on
the date hereof or may hereafter be amended, permits the limitation or
elimination of liability of directors or officers of a corporation to the
corporation or its shareholders, the directors and officers of this Corporation
shall not be liable to the Corporation or its shareholders.
<PAGE>
ARTICLE V
The address of the initial registered office of the Corporation, which is
located in the City of Richmond, Virginia, is c/o Dominion Resources, Inc., 100
Tredegar Street, 2nd Floor, P.O. Box 26532, Richmond, Virginia 23261. The
initial registered agent of the Corporation is James F. Stutts, whose business
office is identical with the registered office and who is a member of the
Virginia State Bar, and a resident of the Commonwealth of Virginia.
Incorporator:
/s/ Mark D. Westmoreland, Esq.
-2-
CERTIFICATE OF INCORPORATION
OF
DRI NEW SUB II, INC.
FIRST. The name of the corporation is DRI New Sub II, Inc.
SECOND. The address of the corporation's registered office in the State of
Delaware is Corporation Trust Center, 1209 Orange Street, in the City of
Wilmington, County of Newcastle. The name of its registered agent at such
address is The Corporation Trust Company.
THIRD. The nature of the business or objects or purposes to be transacted,
promoted or carried on by the Corporation are:
To engage in the business of a public utility holding company, and to
guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise
dispose of shares of the capital stock or other ownership interests of, or any
bonds, securities or evidence of indebtedness created by any other corporations
or other legal entities organized under the laws of this State or any other
state, country, nation or government, and while the owner thereof to exercise
all the rights, powers and privileges of ownership, including the right to vote
thereon; and
To carry on any other business not prohibited by law or required to be
specifically set forth in this Certificate of Incorporation; and
In general, to possess and exercise all the powers and privileges granted
by the General Corporation Law of Delaware or by any other law of Delaware or by
this Certificate of Incorporation together with any powers incidental thereto.
<PAGE>
The objects and purposes specified in the foregoing clauses shall, except
where otherwise expressed, be in nowise limited or restricted by reference to,
or inference from, the terms of any other clause in this Certificate of
Incorporation, but the objects and purposes specified in each of the foregoing
clauses of this article shall be regarded as independent objects and purposes.
FOURTH. The total number of shares which the corporation shall have
authority to issue is 100 shares of Common Stock without par value.
FIFTH. The name and mailing address of the incorporator is:
Mark D. Westmoreland, Esq.
McGuire, Woods, Battle & Boothe LLP
901 East Cary St.
Richmond, Virginia 23219-4057
SIXTH. The Board of Directors of the corporation is expressly authorized to
adopt, amend or repeal bylaws of the corporation but the stockholders may adopt
additional bylaws and may amend or repeal any bylaw whether adopted by them or
otherwise.
SEVENTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or
<PAGE>
of any receiver or receivers appointed for this corporation under the provisions
of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors
or class of creditors, and/or of the stockholders or class of stockholders of
this corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three-fourths in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all of the stockholders or class of stockholders, of this corporation, as the
case may be, and also on this corporation.
EIGHTH. No director of this corporation shall be liable to the corporation
or its stockholders for monetary damages for breach or breaches of fiduciary
duties as a director, provided that the provisions of this article shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of the law, (iii) under Section 174 of the Delaware General
Corporation Law, or (iv) for any transaction from which the director derived an
improper personal benefit.
<PAGE>
NINTH. Election of directors need not be by written ballot except and to
the extent provided in the bylaws of the corporation.
IN WITNESS WHEREOF, I have signed this certificate of incorporation this
14th day of September, 1999.
/s/ Mark D. Westmoreland
DRI/CNG COMPANIES RELATIVE REGIONAL SIZE ANALYSIS
Introduction
The attached statistical analysis has been prepared at the request of
the Staff of the Securities and Exchange Commission (the "SEC") with
responsibility for administering the Public Utility Holding Company Act of 1935
(the "1935 Act") in connection with their review of the merger of Dominion
Resources, Inc. and Consolidated Natural Gas Company and related transactions
under the 1935 Act, and for no other purpose. The assumptions, which are set
forth below, and which are reflected in the analysis with respect to the
characterization of the region in which the combined DRI/CNG Companies will
operate reflect SEC practice under the 1935 Act in analyzing other utility
merger transactions under the 1935 Act and are not intended to be utilized for
any other purpose.
Assumptions
1. The region in which the combined DRI/CNG Companies will operate has been
defined to include: (a) the States in which the regulated utility
subsidiaries of DRI and CNG presently operate (which includes Virginia,
North Carolina, Ohio, Pennsylvania and West Virginia) plus (b) all States
in which any utility operates if such utility is part of an integrated
electric utility system which has an actual electric interconnection with
Virginia Power (which includes Maryland, Delaware, Pennsylvania, New
Jersey, the District of Columbia, Indiana, Kentucky, Michigan, South
Carolina and Tennessee in addition to the States in which the DRI/CNG
Companies presently operate) (the "Neighboring States") plus (c) all States
which are one wheel away from any of the Neighboring States (which adds
Alabama, Georgia, Mississippi, Illinois and New York).
2. The regional definition is sensible in an era of restructuring and
competition in which DRI/CNG's neighbors are also its competitors (i.e.,
both DRI/CNG and its immediate neighbors will compete for each other's
customers) and in which DRI/CNG's neighbors' neighbors are also competitors
(i.e., both DRI/CNG and its neighbors' neighbors will compete for DRI/CNG's
neighbors' customers).
3. The aggregate relative size analysis does not reflect the possible
divestiture of Virginia Natural Gas as contemplated by the August 9, 1999
Stipulation with the Virginia State Corporation Commission Staff which
would have no effect on the size of the region (as Virginia would be
included within the region in any event) but would result in a decrease in
the relative size of the DRI/CNG Companies within the region.
<PAGE>
<TABLE>
<CAPTION>
ELECTRIC NO. GAS ELECTRIC GAS TOTAL GAS
RETAIL CUSTOMERS TRANS. LIN TRANS. SALES GAS SALES TRANSPORTED SALES
ELECTRIC GAS (MILES) MILES (MWH) (Mcf) (Mcf) (Mcf)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Dominion/CNG Companies:
Virginia Power 1,977,248 5,050 79,787,099
East Ohio Gas 1,187,844 1,305 192,178,022 116,114,372 308,292,394
Peoples Gas 269,620 5,510 39,690,461 37,818,257 77,508,718
Virginia Natural Gas 208,332 80 24,814,316 25,149,611 49,963,927
Hope Gas 119,719 23 15,207,807 15,557,205 30,765,012
Total Dominion/CNG Companies 1,977,248 1,785,515 5,050 6,919 79,787,099 271,890,606 194,639,445 466,530,051
Total Market Data 57,022,418 25,276,169 151,778 118,322 2,292,939,138 3,948,343,536 7,653,373,748 11,601,717,284
Dominion/CNG Market Share 3.47% 7.06% 3.33% 5.85% 3.48% 6.89% 2.54% 4.02%
</TABLE>
-1-
<PAGE>
<TABLE>
<CAPTION>
NET NET NET NET NET PEAK
UTILITY PLANT ELECTRIC GAS GROSS UTILITY UTILITY UTILITY GEN.
($) PLANT ($) PLANT ($) REV. ($) EXP. ($) REV. ($) CAP. (MW)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Dominion/CNG Companies:
Virginia Power 9,214,529,263 9,099,733,800 4,627,617,395 1,959,911,425 2,667,705,970 13,390
East Ohio Gas 848,269,000 0 848,269,000 1,200,493,000 800,695,000 399,798,000 0
Peoples Gas 453,007,000 0 45,300,700 329,329,000 184,174,000 145,155,000 0
Virginia Natural Gas 366,640,000 0 366,640,000 209,691,000 116,764,000 92,927,000 0
Hope Gas 110,090,000 0 110,090,000 108,333,000 57,211,000 51,122,000 0
Total Dominion/CNG Companies 10,992,535,263 9,099,733,800 1,370,299,700 6,475,463,395 3,118,755,425 3,356,707,970 13,390
Total Market Data 282,648,420,442 256,734,558,517 26,218,235,868 146,647,145,477 55,611,479,453 89,862,051,847 346,437
Dominion/CNG Market Share 3.89% 3.54% 5.23% 4.42% 5.61% 3.74% 3.87%
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
NET PEAK GAS SYSTEM NUMBER OF
GEN. LOAD CAPACITY COMBINATION
(MWh) (MW) (MCF/DAY) UTILITIES
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Dominion/CNG Companies:
Virginia Power 57,408,421 14,537
East Ohio Gas 0 0 849,982
Peoples Gas 0 0 235,720
Virginia Natural Gas 0 0 251,000
Hope Gas 0 0 92,200
Total Dominion/CNG Companies 57,408,421 14,537 1,428,902
Total Market Data 1,583,173,157 393,027 28,331,371 122
Dominion/CNG Market Share 3.63% 3.70% 5.04%
</TABLE>
-3-
DOMINION CAPITAL, INC. AND KEY SUBSIDIARIES
Dominion Capital, Inc. [identified as "Dominion Capital Holding" on
financials], a Virginia corporation ("DCI"), is a diversified financial services
holding company whose principal assets are financial services companies. DCI's
other holdings include land development and management subsidiaries and a
limited partnership interest in a Louisiana hydroelectric project, Vidalia
Hydroelectric.
DCI's largest subsidiary is Dominion Capital Financial, Inc., a Virginia
corporation ("DCFI"), which is a holding company for DCI's financial services
subsidiaries. DCFI's subsidiaries include (1) Dominion Mortgage Services, Inc.,
a Virginia corporation, which owns various subsidiaries that originate,
purchase, securitize and service residential home equity and mortgage loans; (2)
Virginia Financial Ventures, Inc., a Virginia corporation which holds an
interest in a national finance company that provides senior debt financing on a
cash flow or asset-based lending basis to middle-market companies needing funds
to expand, recapitalize or undertake buyouts; (3) Dominion Capital Ventures
Corporation, a Virginia corporation whose subsidiaries are engaged in an
integrated merchant banking and asset management business specializing in
originating, structuring and syndicating complete financial instruments and
solutions for middle-market companies for leveraged buyouts, recapitalizations,
acquisitions and growth, and in acquiring and managing positions in leveraged
senior debt and high yield transactions; (4) OptaCor Financial Services Company,
a Virginia corporation that originates and services unsecured loans primarily to
members of professional groups and organizations; (5) Dominion Venture
Investments, Inc., a Virginia corporation whose subsidiaries engage in the
financing of small and mid-sized independent oil and natural gas producers in
order to facilitate the acquisition, recapitalization, refinancing and
development of domestic onshore and offshore oil and gas properties; (6) Edgen,
Inc., a Delaware corporation whose subsidiaries own a planned waterfront
community in Texas and provide real estate brokerage services for such project;
(7) Dominion Land Management Company, a Virginia corporation whose subsidiaries
manage the development and sale of planned community real estate assets; (8)
Stanton Associates, Inc., a Virginia corporation whose subsidiaries own various
real estate assets including shopping centers and an air cargo facility; and (9)
Rincon Securities Inc., a New York corporation whose assets consist of a
high-grade preferred stock portfolio.
Vidalia Audit, Inc., a Virginia corporation, is a DCI subsidiary that acts
as the audit company for the Vidalia hydroelectric project on the Mississippi
River in Louisiana.
Louisiana Hydroelectric Capital Corporation, a Virginia corporation, is a
DCI subsidiary that acts as an investment company. Its only asset is a 9.93%
owner participation in the Sydney A. Murray Hydroelectric plant.
Dominion Lands, Inc., a Virginia corporation, is a DCI subsidiary whose
subsidiaries own and develop various residential real estate developments in
Virginia and North Carolina.
<PAGE>
- 2 -
DOMINION ENERGY, INC. AND KEY SUBSIDIARIES
Dominion Energy, Inc., a Virginia corporation ("DEI"), is an energy
services holding company. DEI's business is divided among three principal lines
of business: domestic power generation, foreign power generation, and oil and
gas exploration and development.
DEI subsidiaries engaged in domestic power generation include (1) Dominion
Cogen, Inc., a Virginia corporation that engages in cogeneration activities; (2)
Dominion Energy Services, Inc., a Virginia corporation which operates and
provides maintenance services for nonutility domestic power projects; (3)
Dominion Cogen NY, Inc., a Virginia corporation engaged in cogeneration projects
in the State of New York; (4) Dominion Cogen WV, Inc., a Virginia corporation
engaged in cogeneration projects in the State of West Virginia; (5) Dominion
Kincaid, Inc., a Virginia corporation whose subsidiary operates a 1,108 MW
coal-fired power plant in the State of Illinois; (6) Dominion Elwood, Inc., a
Delaware corporation that owns a 50% interest in an entity that owns a power
plant in the State of Illinois; and (7) Dominion Energy Construction Company, a
Virginia corporation that acts as general contractor for the Kincaid power
plant.
DEI subsidiaries engaged in foreign power generation include (1) Dominion
Generating S.A. ("DGSA"), an Argentine corporation engaged in electric power
generation in Argentina; (2) Dominion Management Argentina, S.A. ("DMASA"), an
Argentine corporation providing operation and maintenance services for electric
power production in Argentina; (3) Dominion Energy Central America, Inc.
("DECA"), a Belize corporation whose subsidiary engages in hydroelectric power
generation in Belize; (4) Inversiones Dominion Bolivia S.A. ("IDB"), a Bolivian
corporation that owns a 50% interest in an entity that engages in hydroelectric
power production in Bolivia; and (5) Dominion Holdings Peru S.A.C. ("DHP"), a
Peruvian corporation whose subsidiaries engage in hydroelectric power generation
in Peru.
DEI subsidiaries engaged in oil and gas activities include (1) Dominion
Reserves, Inc., a Virginia corporation whose subsidiaries engage in oil and gas
exploration and production primarily in the States of West Virginia and
Michigan; (2) Dominion Black Warrior Basin, Inc., an Alabama corporation engaged
in methane gas production; (3) Dominion Reserves-Utah, Inc., a Utah corporation
engaged in methane gas production in Utah; (4) Carthage Energy Services, Inc., a
Michigan corporation engaged in gas marketing; (5) Dominion Canada Holding
Company, Inc., a Canadian corporation whose subsidiaries engage in gas
exploration and production in Canada; and (6) Dominion San Juan, Inc., a
Virginia corporation whose subsidiary holds oil and gas investments.
EXHIBIT I-1
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 1999
- - - - - - - - - - - - - - - - - - -
)
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 - 09477) )
- - - - - - - - - - - - - - - - - - -
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
Amended and Restated Agreement and Plan of Merger dated as of May 11, 1999 (the
"Merger Agreement"). DRI and CNG have filed an application on Form U-1 under the
Act seeking approval of (i) their merger (the "Merger") under Sections 9(a)(2)
and 10 of the Act, (ii) their retention of their existing businesses,
investments and non-utility activities under Section 11 (b) and (iii) the
establishment of DRI Services, Inc. as a subsidiary service company under
Section 13 and the adoption of a new system-wide Service Agreement.
The Merger Agreement contemplates a two-step merger transaction. In the
first step, a wholly owned subsidiary of DRI ("SPV") will merge (the "First
Merger") with and into DRI in a transaction in which DRI will be the surviving
corporation. In the second step, CNG will either merge (the "Second Merger") (i)
with and into another wholly owned subsidiary of DRI ("CNG Acquisition") in a
transaction in which CNG Acquisition will be the surviving corporation (which is
the preferred structure for the Second Merger) or (ii) with and
<PAGE>
into DRI in a transaction in which DRI will be the surviving corporation (the
alternative structure for the Second Merger). The First Merger and the Second
Merger are herein together referred to as the "Merger" or the "Transaction". As
a result of the Merger and the other transactions contemplated by the Merger
Agreement (collectively, irrespective of the transaction structure actually
implemented, the "Transaction"), CNG will cease to exist and either CNG
Acquisition, as the successor in interest to CNG, will become a direct
subsidiary of DRI or each of CNG's four public utility subsidiaries will become
direct subsidiaries of DRI. As a result of the Merger, CNG's non-utility
subsidiaries will each become direct or indirect subsidiaries of CNG Acquisition
or DRI, as the case may be. Following completion of the Merger, irrespective of
the transaction structure actually implemented, DRI and CNG Acquisition, if
applicable, will register as a holding company pursuant to Section 5 of the 1935
Act.
DRI and CNG have filed a concurrent application-declaration (File No. 70-
09517) seeking authorization for financing arrangements in connection with the
Merger and activities of 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 services 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 U.S. 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
<PAGE>
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.
Pursuant to Sections 9(a)(2) and 10 of the Act, DRI and CNG request
authorization and approval of the Commission for DRI to acquire, through the
Merger (including, indirectly, through CNG Acquisition or otherwise), 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, (ii) Hope Gas, Inc., a West
Virginia corporation, (iii) The Peoples Natural Gas Company, a Pennsylvania
corporation, and (iv) The East Ohio Gas Company, an Ohio corporation. Following
completion of the Merger, DRI will register as a holding company pursuant to
Section 5 of the 1935 Act.
Pursuant to Section 11(b) of the Act, DRI and CNG request authorization and
approval of the Commission for DRI and CNG to retain their existing businesses,
investments and non-utility activities. Pursuant to Section 13 of the Act, DRI
and CNG request authorization and approval of the Commission to form DRI
Services, Inc., a Delaware corporation, which initially will have 100 shares of
common stock, no par value, all of which will be subscribed to by DRI at a price
of $1 per share, as a subsidiary service company and for DRI Services, Inc. and
other affiliates in the combined DRI-CNG system to enter into a new systemwide
Service Agreement. DRI and CNG will also request authorization and approval of
the Commission, (i) an exemption from Section 13(b) of the Act with respect to
certain services provided by Virginia Electric and Power Company ("Virginia
Power"), DRI's electric utility subsidiary, and its subsidiaries pursuant to a
settlement agreement with state regulators and (ii) grandfathering of certain
existing investments for purposes of Rules 53 and 58 promulgated under the Act.
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 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 Energy, Inc., an independent power
and natural gas subsidiary, and Dominion Capital, Inc., a diversified financial
services company. 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
<PAGE>
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.
