File No. 70-09477
As filed with the Securities and Exchange Commission
on June 1, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
--------------------------------------
AMENDMENT NO. 1
TO
APPLICATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
----------------------------------------------------
Dominion Resources, Inc. Consolidated Natural Gas Company
120 Tredegar Street CNG Tower, 625 Liberty Avenue
Richmond, VA 23219 Pittsburgh, PA 15222
(Name of company filing this statement and
address of principal executive offices)
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None Consolidated Natural Gas Company
(Name of top registered holding company
parent of each applicant or declarant)
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James F. Stutts Stephen E. Williams
Vice President and Senior Vice President and
General Counsel General Counsel
Dominion Resources, Inc. Consolidated Natural Gas
120 Tredegar Street Company
Richmond, VA 23219 CNG Tower, 625 Liberty Avenue
Pittsburgh, PA 15222
(Name and address of agent for service)
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The Commission is also requested to send copies
of any communications in connection with this matter to:
Gary W. Wolf, Esq.
Kevin J. Burke, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
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APPLICATION
UNDER
SECTIONS 9(a)(2) and 10
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY
AND
RELATED MATTERS
Table of Contents
Item 1. Description of Proposed Transaction.................................5
A. Introduction........................................................5
1. General Request.................................................7
2. Overview of the Transaction.....................................7
B. Description of the Parties to the Transaction.......................9
1. DRI and its Subsidiaries........................................9
a. Virginia Power..............................................9
b. DEI.........................................................9
c. DCI........................................................10
2. CNG and its Subsidiaries.......................................10
a. The Distribution Companies: VNG, Hope, Peoples and East
Ohio.......................................................10
b. CNG Transmission Corporation...............................10
c. CNG Producing Company......................................11
d. CNG Retail Services Corporation and CNG Products and
Services, Inc..............................................11
e. CNG International Corporation..............................11
C. Description of the Transaction.....................................11
1. Background.....................................................11
2. The Merger Agreement...........................................14
D. Management and Operations of DRI and CNG Following the Merger......16
Item 2. Fees, Commissions and Expenses.....................................16
Item 3. Applicable Statutory Provisions....................................17
A. Approval of the Merger.............................................18
1. Section 10(b)(1)...............................................19
a. Interlocking Relationships.................................19
b. Concentration of Control...................................19
2. Section 10(b)(2)...............................................22
a. Fairness of Consideration..................................22
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b. Reasonableness of Fees.....................................22
3. Section 10(b)(3)...............................................23
4. Section 10(c)(1)...............................................24
a. Section 8 Analysis.........................................24
b. Section 11 Analysis........................................25
5. Section 10(c)(2)...............................................27
6. Section 10(f)..................................................28
Item 4. Regulatory Approvals...............................................28
Item 5. Procedure..........................................................32
Item 6. Exhibits and Financial Statements..................................32
B. Financial Statements.......................................34
Item 7. Information as to Environmental Effects............................35
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APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2) and 10
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
AND
RELATED MATTERS
Dominion Resources, Inc. and Consolidated Natural Gas Company hereby amend
and restate in its entirety their Application 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 the 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 or (ii)
with and into DRI in a transaction in which DRI will be the surviving
corporation. 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
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
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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.
Prior to completion of the Merger, DRI and CNG will file one or more
additional applications-declarations under the 1935 Act with the Commission with
respect to the financing arrangements, ongoing activities, non-utility
businesses and other investments of, and other matters pertaining to, the
combined company after giving effect to the Merger and the registration of DRI
as a holding company.
DRI and CNG believe that their combination provides a unique opportunity
for DRI, CNG and their respective shareholders, customers and employees to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in the majority of states in
which DRI and CNG operate. The energy industry, including both the gas and
electricity segments of the business, is evolving from an industry characterized
by the presence of regulated natural monopolies confined in their operations to
prescribed geographical service territories to a dynamic, competitive industry
in which national and regional participants compete for the right to provide
energy 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 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.
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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.
Prior to completion of the Merger, DRI and CNG will file one or more additional
applications-declarations under the 1935 Act with the Commission with respect to
the financing arrangements, ongoing activities, non-utility businesses and other
investments of, and other matters pertaining to, the combined company after
giving effect to the Merger and the registration of DRI as a holding company.
2. Overview of the Transaction.
Pursuant to the Merger Agreement, in 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 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:
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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 require 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 is present and the Second Merger requires
approval by holders of a majority of all outstanding shares of CNG common stock.
The vote of such shareholders has been 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. Shareholders of DRI and CNG are each scheduled to meet to consider the
Transaction on June 30, 1999. In addition, the Transaction will require (i)
clearance by the Department of Justice ("DOJ") and the Federal Trade Commission
("FTC") under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), (ii)
approval of the Federal Energy Regulatory Commission ("FERC") under the Federal
Power Act ("FPA"), (iii) approval of the Nuclear Regulatory Commission ("NRC")
under the Atomic Energy Act of 1954 ("AEA"), (iv) approval of the Federal
Communications Commission ("FCC") under the 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 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 must approve both the First Merger and
the Second Merger and CNG shareholders must approve the Second Merger as a
condition to either merger closing.
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
are being asked to approve 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 will provide 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
the 1935 Act or Rule is or 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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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 Sections 9(a)(2) of the 1935 Act
because DRI (which already owns 100% of the common stock of Virginia Power, a
"public utility company" within the meaning of Section 2(a)(5) of the 1935 Act)
will, by virtue of the Merger, also acquire 100% of the outstanding common stock
of each of VNG, Hope, Peoples and East Ohio, each of which is also a "public
utility company" within the meaning of Section 2(a)(5) of the 1935 Act. The
criteria the Commission must consider in evaluating any acquisition for which
approval under Section 9(a)(2) is required are set forth in Section 10 of the
1935 Act. As set forth more fully below, the Transaction complies with all of
the applicable provisions of Section 10. Thus,
- The Transaction will not tend towards interlocking relations or the
concentration of control of public utility companies of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers (Section 10(b)(1))
- The consideration to be paid in the Transaction is fair and reasonable
(Section 10(b)(2))
- The Transaction will not result in an unduly complicated capital
structure for the DRI-CNG combined system and will not be detrimental
to the public interest or the interest of investors or consumers or to
the proper functioning of the DRI-CNG system (Section 10(b)(3))
- The Transaction is not unlawful under the provisions of Section 8 and
is not detrimental to the carrying out of the provisions of Section 11
(Section 10(c)(1))
- The Transaction will serve the public interest by tending towards the
economical and efficient development of an integrated public utility
system (Section 10(c)(2))
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- 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 S.E.C. 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700 (1968). As discussed
below, the Merger will not create a "huge, complex, and irrational system," but
rather will result in a new registered holding company with the capability of
offering integrated energy services to its combined customer base of 4 million
in a competitive region that is, in fact, much larger.
In evaluating the size of the combined enterprise, it is critical to
recognize that 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 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
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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 S.E.C. 1299, 1309. More recent pronouncements of the
Commission confirm that size is not determinative. Thus, in Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the Commission stated
flatly that a "determination of whether to prohibit enlargement of a system by
acquisition is to be made on the 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 US is, however, no more than a reflection of the fragmentation which
characterizes the US 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 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. Pro forma statistical analysis as at the end
of 1998 reveals that the combined company will not be so large as to dominate
the region in which it will operate. As set forth in the chart annexed hereto as
Exhibit E-3, on a pro forma basis as at the end of 1998,
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<PAGE>
the combined company would account for 3.74% of the net utility revenues in the
region comprising the 5 states in which the combined company will operate as
well as the states/systems which have electric utilities which are
interconnected with Virginia Power and their respective interconnected
neighbors.
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.
In addition, the competitive impact of the Merger will be fully considered
by the FERC pursuant to Section 203 of the Federal Power Act in its review of
the Merger. As explained more fully in the FERC application, a copy of which is
attached hereto as Exhibit C-2, the Merger will not have an adverse effect on
competition. With the exception of a small area in Virginia, the retail
operations of DRI and CNG do not overlap. Moreover, as discussed above, the
Virginia legislature has adopted legislation which will permit other energy
providers to compete directly with Virginia Power for customers in Virginia
commencing in 2002. Finally, in the past, the Commission has largely relied on,
or "watchfully deferred" to the determination of these other regulators./1/ In
at least three recent cases, interveners have challenged the Commission's policy
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.
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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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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 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 S.E.C. 340, 346 (1970),
prices arrived at through arm's- length negotiations are particularly persuasive
evidence that Section 10(b)(2) is satisfied.
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
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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).
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
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the same mix of companies for repayment of outstanding CNG securities as prior
to the Merger. The interest of DRI and its security holders will likewise not be
impaired as securities issued prior to the Merger would not have been issued on
the basis that CNG was part of the DRI system and the interests of investors
purchasing securities issued thereafter will be protected by the disclosure
requirements under the other federal securities laws. Finally, consumer
interests are likewise not impaired as no change is being made to the capital
structures of any of the operating subsidiaries in the combined system and each
such operating subsidiary will continue to be regulated by relevant regulators
as prior to the Merger. The 1935 Act is not energy regulation per se. Rather,
the statute is intended "simply to provide 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 but must be approved by the Virginia State
Corporation Commission. 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
neither violates Section 8 of the 1935 Act nor is prohibited by Section 10(c)(2)
of the 1935 Act.
- ----------
3 S. Rep. No. 621, 74th Cong., 1st Sess 11 (1935).
- ----------
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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.
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 S.E.C. 888 (1964).
In its affirmation of that decision, the United States Supreme Court declared
that a loss of substantial economies could be demonstrated by the inability of
the separate gas system to survive on a stand-alone basis. SEC v. New England
Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the
requirements of Section 11(b)(1) has been explicitly rejected by the Commission
in its most recent decisions under Sections 9(a) and 10 of the 1935 Act both
with respect to exempt holding companies, TUC Holding Company, Holding Co. Act
Release No. 35-26749 (Aug. 1, 1997) and Houston Industries Incorporated, Holding
Co. Act Release No. 35-26744 (July 24, 1997), and newly formed registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998) and New Century Energies, Inc., Holding Co. Act Release No.
35-26748 (Aug. 1, 1997).
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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. The Commission has recognized and
accepted the changing nature of the energy industry and, in particular, the fact
that the combination of electric and gas operations in a single company offers
that company a means to compete more effectively in the emerging energy services
business in which a few cents can make the difference between economic success
and economic failure. WPL Holdings, Inc., et al., Holding Co. Act Release No.
35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v.
Securities and Exchange Commission, (D.C. Cir. 1999). In the instant situation,
the lost economies that would follow from denial of approval for the Merger are
substantial, both quantitatively and qualitatively.
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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 competition among energy providers. The Transaction is
consistent with that policy. For all of the foregoing reasons, the Commission
should hold that the combination of electric and gas operations under a newly
formed registered holding company is lawful under the provisions of Section 8
and is not detrimental to the carrying out of the provisions of Section 11.
5. Section 10(c)(2).
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Section 10(c)(2) requires the Commission to find that a proposed
transaction will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. For all of the
foregoing reasons, the Transaction meets the criteria of Section 10(c)(2). The
Transaction will produce both quantitative and qualitative economies and
efficiencies and will result in the creation of an economically integrated and
efficient energy company consistent with modern notions of "integration".
The Transaction will also produce long-term benefits. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are properly considered in determining whether the standards
of Section 10(c)(2) have been met. See American Electric Power Co., 46 S.E.C.
1299, 1320-1321 (1978). Further, the Commission has recognized that while some
potential benefits cannot be precisely estimated, nevertheless they too are
entitled to be considered: "[S]pecific dollar forecasts of future savings are
not necessarily required; a demonstrated potential for economies will suffice
even when these are not precisely quantifiable." Centerior Energy Corp., Holding
Co. Act Release No. 24073 (April 29, 1986) (citation omitted). See Energy East
Corporation, Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing
acquisition based on strategic benefits and potential but presently
unquantifiable saving).
Finally, as discussed in detail above, a number of qualitative benefits
flow from the Transaction. As discussed above, 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 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.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that DRI and CNG
expect to obtain in connection with the Merger in addition to the approval of
the Commission under the 1935 Act.
Antitrust Considerations
Under the HSR Act, DRI and CNG cannot consummate the 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
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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 the
Merger will affect the basis for prior NRC decisions relating to its financial
qualifications as an NRC licensee. DRI will request confirmation that the NRC
concurs with its belief.
FPA
Section 203 of the FPA provides that no public utility may sell or
otherwise dispose of its jurisdictional facilities, directly or indirectly merge
or consolidate its facilities with those of any other person, or acquire any
security of any other public utility, without first having obtained
authorization from the FERC. Because CNG has subsidiary power marketers that are
considered to be "public utilities" and to own "jurisdictional facilities" under
the FPA, FERC's approval under Section 203 is required before DRI and CNG may
consummate the Merger. Section 203 provides that FERC is required to grant its
approval if the 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
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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 will be made with FERC to allow DRI and CNG
power-marketing affiliates to continue to engage in wholesale power transactions
at market-based rates.
Virginia Commission
DRI's wholly owned subsidiary, Virginia Power, and CNG's wholly-owned
subsidiary, VNG, are subject to the jurisdiction of the Virginia State
Corporation Commission (the "Virginia Commission"). The Virginia Commission must
approve the acquisition of any Virginia public utility. The applicants must show
that the provision of adequate service at just and reasonable rates will not be
threatened or impaired as a result of the acquisition. DRI and CNG have filed an
application seeking Virginia Commission approval of the merger consistent with
these requirements.
North Carolina Commission
Virginia Power is subject to the jurisdiction of the North Carolina
Utilities Commission (the "North Carolina Commission"). The North Carolina
Commission must approve any merger or combination affecting any public utility,
whether made through acquisition or control by stock purchase or otherwise.
Under this authority, the North Carolina Commission has advised that it will
assert jurisdiction to approve DRI's acquisition of CNG. The North Carolina
Commission must give its approval if justified by the public convenience and
necessity. DRI and CNG have filed an application seeking the approval of the
North Carolina Commission consistent with these requirements.
West Virginia Commission
CNG's wholly owned subsidiary, Hope, is subject to the jurisdiction of the
West Virginia Public Service Commission (the "West Virginia Commission"). No
person or corporation may acquire either directly or indirectly a majority of
the common stock of any public utility organized and doing business in West
Virginia without the approval of the West Virginia Commission. The West Virginia
Commission may approve such a transaction upon proper showing that the terms and
conditions are reasonable, that neither party to it is given an undue advantage
over the other, and that it does not adversely affect the public in West
Virginia. DRI and CNG have filed an application seeking the approval of the West
Virginia Commission consistent with these requirements.
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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. Peoples and DRI have filed an application
seeking the approval of the Pennsylvania Commission consistent with these
requirements.
Ohio Commission
CNG's wholly owned subsidiary, East Ohio, is subject to the jurisdiction of
the Public Utilities Commission of the State of Ohio (the "Ohio Commission").
The Ohio Commission does not have statutory jurisdiction over the transaction,
but 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.
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.
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Item 5. Procedure.
The Commission is respectfully requested to issue and publish, not later
than June 30, 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 July 31,
1999 by which comments may be entered and a date not later than August 1, 1999
as the date after which an order of the Commission granting and permitting this
Application-Declaration to become effective may be entered by the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements.
A. Exhibits
A-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)
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)
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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. (To be filed by
amendment)
D-1.2 Order of the FERC. (To be filed by amendment)
D-2.1 Submission to the Virginia Commission. (To be filed by
amendment)
D-2.2 Order of the Virginia Commission. (To be filed by amendment)
D-3.1 Submission to the North Carolina Commission. (To be filed by
amendment)
D-3.2 Order of the North Carolina Commission. (To be filed by
amendment)
D-4.1 Submission to the West Virginia Commission. (To be filed by
amendment)
D-4.2 Order of the West Virginia Commission. (To be filed by
amendment)
D-5.1 Submission to the Pennsylvania Commission. (To be filed by
amendment)
D-5.2 Order of the Pennsylvania Commission. (To be filed by amendment)
E-1 Map of service territory of DRI. (Filed in paper format on Form
SE)
E-2 Map of service territory of CNG. (Filed in paper format on Form
SE)
E-3 Statistical Analysis of companies in the DRI-CNG region. (To be
filed by amendment)
E-4 DRI Corporate Organization Chart. (To be filed by amendment)
E-5 CNG Corporate Organization Chart. (To be filed by amendment)
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)
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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-6 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. (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)
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)
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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.
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SIGNATURE
Pursuant to the Public Utility Holding Company Act of 1935, each of the
undersigned companies has caused this Application-Declaration to be signed on
its behalf by the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC. CONSOLIDATED NATURAL GAS COMPANY
By: /s/ James F. Stutts By: /s/ Stephen E. Williams
-------------------------- ----------------------------
Name: James F. Stutts Name: Stephen E. Williams
Title: Vice President and Title: Senior Vice President
General Counsel and General Counsel
Date: June 1, 1999 Date: June 1, 1999
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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 their merger (the "Merger") under Sections 9(a)(2) and
10 of the Act.
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 or (ii)
with and into DRI in a transaction in which DRI will be the surviving
corporation. 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
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"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.
Prior to completion of the Merger, DRI and CNG will file one or more
additional applications-declarations under the Act with the Commission with
respect to the financing arrangements, ongoing activities, non-utility
businesses and other investments of, and other matters pertaining to, the
combined company after giving effect to the Merger and the registration of DRI
as a holding company and, if applicable, the registration of CNG Acquisition.
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.
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Pursuant to Sections 9(a)(2) and 10 of the Act, DRI and CNG hereby request
authorization and approval of the Commission for DRI to acquire, through the
Merger (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.
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., 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 outstanding equity securities of nineteen directly
owned subsidiary companies. CNG and its subsidiaries are engaged in all phases
of the natural gas business: distribution, transmission, storage and exploration
and production.
The Application and any amendments thereto are available for public
inspection through the Commission's Office of Public Reference. Interested
persons wishing to comment or request a hearing should submit their views in
writing by May 31, 1999, to the Secretary, Securities and Exchange Commission,
Washington, D.C. 20549, and serve a copy on AES at the address specified above.
Proof of service (by affidavit or, in case of an attorney at law, by
certificate) should be filed with the request. Any request for hearing shall
identify specifically the issues of fact or law that are disputed. A person who
so requests will be notified of any hearing, if ordered, and will receive a copy
of any notice or order issued in the manner. After said date, the Application,
as filed or as amended, may be granted and/or permitted to become effective.
For the Commission, by the Division of Investment Management, pursuant to
delegated authority.
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