File No. 70-09477
As filed with the Securities and Exchange Commission
on December 15, 1999
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
-------------------------------
AMENDMENT NO. 5
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
-----------------------------------
Dominion Resources, Inc. Consolidated Natural Gas
120 Tredegar Street Company
Richmond, VA 23219 CNG Tower, 625 Liberty Avenue
Pittsburgh, PA 15222
(Name of company filing this statement and
address of principal executive offices)
------------------------------
None Consolidated Natural Gas
Company
(Name of top registered holding company
parent of each applicant or declarant)
----------------------------
James F. Stutts Stephen E. Williams
Vice President and Senior Vice President and
General Counsel General Counsel
Dominion Resources, Inc. Consolidated Natural Gas
120 Tredegar Street Company
Richmond, VA 23219 CNG Tower, 625 Liberty Avenue
Pittsburgh, PA 15222
(Name and address of agent for service)
-------------------------------
The Commission is also requested to send
copies of any communications in connection with
this matter to:
Gary W. Wolf, Esq.
Kevin J. Burke, Esq.
Cahill Gordon & Reindel
80 Pine Street
New York, NY 10005
<PAGE>
APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2), 10, 11 AND 13
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
RETENTION OF NON-UTILITY BUSINESSES,
FORMATION OF SERVICE COMPANY
AND
RELATED MATTERS
<PAGE>
Table of Contents
Page
Item 1. Description of Proposed Transaction...................................1
A. Introduction......................................................1
1. General Request...............................................3
2. Overview of the Transaction...................................3
B. Description of the Parties to the Transaction.....................5
1. DRI and its Subsidiaries......................................5
a. Virginia Power............................................6
b. DEI.......................................................6
c. DCI.......................................................7
2. CNG and its Subsidiaries......................................7
a. The Distribution Companies: VNG, Hope, Peoples and East
Ohio......................................................7
b. CNG Transmission Corporation..............................8
c. CNG Producing Company.....................................8
d. CNG Retail Services Corporation and CNG Products and
Services, Inc.............................................8
e. CNG International Corporation.............................8
C. Description of the Transaction....................................8
1. Background....................................................8
2. The Merger Agreement.........................................11
D. Management and Operations of DRI and CNG Following the Merger....13
Item 2. Fees, Commissions and Expenses.......................................14
Item 3. Applicable Statutory Provisions......................................14
A. Approval of the Merger...........................................15
1. Section 10(b)(1).............................................16
a. Interlocking Relationships...............................16
b. Concentration of Control.................................16
2. Section 10(b)(2).............................................19
a. Fairness of Consideration................................20
b. Reasonableness of Fees...................................20
3. Section 10(b)(3).............................................21
4. Section 10(c)(1).............................................23
a. Section 8 Analysis.......................................23
b. Section 11 Analysis......................................24
5. Section 10(c)(2).............................................38
6. Section 10(f)................................................39
B. Establishment of Service Company and Approval of Service
Agreement........................................................39
Item 4. Regulatory Approvals.................................................54
-i-
<PAGE>
Item 5. Procedure............................................................59
Item 6. Exhibits and Financial Statements....................................60
A. Exhibits.........................................................60
B. Financial Statements.............................................63
Item 7. Information as to Environmental Effects..............................64
-ii-
<PAGE>
APPLICATION-DECLARATION
UNDER
SECTIONS 9(a)(2), 10, 11 AND 13
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
ACQUISITION OF REGISTERED HOLDING COMPANY,
RETENTION OF NON-UTILITY BUSINESSES,
FORMATION OF SERVICE COMPANY
AND
RELATED MATTERS
Dominion Resources, Inc. and Consolidated Natural Gas Company hereby amend
and restate in its entirety their Application-Declaration in File No. 70-09477.
Item 1. Description of Proposed Transaction.
A. Introduction.
This Application-Declaration is submitted in connection with the proposed
merger of Dominion Resources, Inc., a Virginia corporation and currently a
holding company exempt from the registration requirements of the Public Utility
Holding Company Act of 1935 (the "1935 Act") pursuant to Section 3(a)(1) thereof
and Rule 2 thereunder ("DRI"), and Consolidated Natural Gas Company, a Delaware
corporation and a registered holding company under the 1935 Act ("CNG"),
pursuant to the Amended and Restated Agreement and Plan of Merger dated as of
May 11, 1999 (the "Merger Agreement"). After entering into an initial Agreement
and Plan of Merger dated as of February 19, 1999, as amended and restated as of
March 31, 1999, the Boards of Directors of DRI and CNG approved a revised
structure for their merger following CNG's receipt of an unsolicited offer from
a third party. The companies negotiated a revised merger agreement and entered
into the revised merger agreement as of May 11, 1999. In this Application, any
references to the Merger Agreement refer to the revised merger agreement entered
as of May 11, 1999 unless otherwise noted.
The Merger Agreement contemplates a two-step merger transaction. In the
first step, a wholly owned subsidiary of DRI ("SPV") will merge (the "First
Merger") with and into DRI in a transaction in which DRI will be the surviving
corporation. The First Merger does not require Commission approval under the
1935 Act. In the second step, CNG will either merge (the "Second Merger") (i)
with and into another wholly owned subsidiary of DRI ("CNG Acquisition") in a
transaction in which CNG Acquisition will be the surviving corporation (which is
the preferred structure for the Second Merger) or (ii) with and into DRI in a
transaction in which DRI will be the surviving corporation (the alternative
structure for the Second Merger). The Second Merger is the transaction for which
authority is sought hereunder. The First and the Second Merger are each
conditioned on the other occurring. The First Merger and the Second Merger are
herein together referred to as the "Merger" or the "Transaction". As a result of
the Merger and the other transactions contemplated by the Merger Agreement
(collectively, irrespective of
<PAGE>
the transaction structure actually implemented, the "Transaction"), CNG will
cease to exist and either CNG Acquisition, as the successor in interest to CNG,
will become a direct subsidiary of DRI or each of CNG's four public utility
subsidiaries will become direct subsidiaries of DRI. As a result of the Merger,
CNG's non-utility subsidiaries will each become direct or indirect subsidiaries
of CNG Acquisition or DRI, as the case may be. Following completion of the
Merger, irrespective of the transaction structure actually implemented, DRI will
register as a holding company pursuant to Section 5 of the 1935 Act.
DRI and CNG have filed a concurrent application-declaration (File No.
70-09517) under the 1935 Act with the Commission with respect to authorization
for financing arrangements in connection with the Merger and activities of the
combined company after giving effect to the Merger and the registration of DRI
as a holding company.
DRI and CNG believe that their combination provides a unique opportunity
for DRI, CNG and their respective shareholders, customers and employees to
participate in the formation of a competitive energy services provider in the
rapidly evolving energy services business and to share in the benefits of
industry restructuring which is already occurring in the majority of states in
which DRI and CNG operate. The energy industry, including both the gas and
electricity segments of the business, is evolving from an industry characterized
by the presence of regulated natural monopolies confined in their operations to
prescribed geographical service territories to a dynamic, competitive industry
in which national and regional participants compete for the right to provide
energy services to retail customers who increasingly have a choice in their
energy supply needs. The result of these increasingly rapid changes wrought by
both legislative and administrative initiatives as well as by demands of the
marketplace, is a far reaching transformation of the US energy industry in which
energy production, transportation/transmission and distribution are reorganizing
along national and regional functional lines. The energy company of tomorrow
will, if it seeks to be an effective competitor, of necessity need to be bigger
and will need to be focused on the development and delivery of newly repackaged
energy products and services designed to meet the changing demands of the
marketplace.
DRI and CNG believe that, in the restructured and competitive energy
industry of tomorrow, the combined companies will be well-positioned to compete
with other national and regional industry participants, a competitive position
that neither DRI nor CNG, acting alone, would be able to achieve. The Merger
will provide DRI and CNG with the ability to integrate their complementary lines
of business: retail and wholesale natural gas and electricity sales, natural gas
exploration and production, international operations and new electric
generation. The Merger will also provide the combined companies with the lower
risk profile inherent in geographic and product diversification. In short, the
Merger will provide the combined companies with the operational and practical
ability to compete for the right to provide energy services to their combined
customer base of 4 million as well as, once the transition to retail competition
has been fully established, 18 million additional electric customers and 12
million additional gas customers in states already served. Moreover, few job
cuts are expected as a result of the Merger as there is not much redundancy
between the two companies. A more fulsome description of the
-2-
<PAGE>
Merger and its anticipated benefits is contained in the Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which is annexed as Exhibit
C-1 hereto.
1. General Request.
Pursuant to Sections 9(a)(2) and 10 of the 1935 Act, DRI and CNG hereby
request authorization and approval of the Commission for DRI to acquire, through
the Second Merger (including, indirectly, through CNG Acquisition or otherwise),
all of the issued and outstanding common stock of CNG and, indirectly , all of
the common stock of each of the four public utility subsidiaries of CNG; namely,
(i) Virginia Natural Gas, Inc., a Virginia corporation ("VNG"), (ii) Hope Gas,
Inc., a West Virginia corporation ("Hope"), (iii) The Peoples Natural Gas
Company, a Pennsylvania corporation ("Peoples") and (iv) The East Ohio Gas
Company, an Ohio corporation ("East Ohio"). Following completion of the Merger,
DRI will register as a holding company pursuant to Section 5 of the 1935 Act.
DRI and CNG also hereby request Commission approval for (i) the retention by DRI
of the existing businesses, investments and non-utility activities of DRI and
CNG (ii) the designation of Dominion Resources Services, Inc., a Virginia
corporation ("DRI Services"), as a subsidiary service company of DRI under
Section 13(b) of the 1935 Act and (iii) the Service Agreement and the other
service arrangements described below to be entered into in accordance with
Section 13 of the Act and the rules promulgated thereunder.
2. Overview of the Transaction.
Pursuant to the Merger Agreement, in the preferred structure for the Second
Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition
with CNG Acquisition as the surviving company. This will result in all of CNG's
current rights, obligations, duties and liabilities being assumed by CNG
Acquisition as a matter of law. CNG Acquisition, as a wholly owned subsidiary of
DRI and as the successor to CNG, will become a registered holding company under
the 1935 Act. Alternatively, DRI and CNG may decide to merge CNG directly into
DRI. In that case, DRI will be the surviving entity. Under either alternative
transaction structure, the companies are sometimes referred to after the Merger
as the combined company.
In the Merger (which comprises both the First Merger and the Second
Merger), shareholders of both DRI and CNG will have the option to elect to
receive either cash or DRI common stock in return for each of their DRI or CNG
shares, as the case may be, subject to allocation and also subject to certain
limitations (discussed below) in order to ensure the desired tax treatment for
the Second Merger. Shareholders of both DRI and CNG may elect to exchange some
of their shares for cash and some for stock. Following the Merger, current DRI
shareholders will own approximately 65% of the combined company and current CNG
shareholders will own approximately 35% of the combined company. The aggregate
purchase price to be paid by DRI for the outstanding shares of CNG's common
stock is approximately $6.4 billion. As noted above, this amount will be paid in
a combination of cash and DRI stock. The aggregate amount of financing required
for DRI to pay the cash consideration to both DRI and CNG shareholders in
connection with both the First Merger and the Second Merger is approximately
$4.5 billion.
-3-
<PAGE>
As discussed in more detail below, the Merger will produce substantial
benefits to the public interest and the interests of investors and consumers in
the states in which the combined company will operate. The Merger will create a
combined electric and natural gas system with the ability to compete effectively
for the nearly four million retail customers in five states presently served by
the combined company as well as by other retail customers in the region. The
majority of the states in which the combined company will operate as well as
adjacent states have adopted energy restructuring legislation. In the emerging
competitive environment, DRI and CNG believe that their combination into a
regional energy provider will enable them to:
o give the combined company the scale, scope and skills necessary to be
successful in the competitive energy marketplace, allowing the
combined company to offer a broad line of energy products as the gas
and electric industries continue to converge;
o create a platform for growth in a region that is rapidly deregulating
and is the source of approximately 40 percent of the nation's demand
for energy, allowing the combined company to market its portfolio of
energy products to a broad customer base;
o establish a company with combined gas storage, transportation and
electric power production capability concentrated in the Northeast and
Mid-Atlantic region; and
o enable the combined company to realize cost savings from elimination
of duplicate corporate and administrative programs, greater
efficiencies in operations and business processes and streamlined
purchasing practices.
The First Merger and the Second Merger each required approval by a majority
of all shares of DRI common stock represented at a duly called meeting of DRI's
shareholders at which a quorum was present and the Second Merger required
approval by holders of a majority of all outstanding shares of CNG common stock.
The vote of such shareholders was solicited pursuant to a Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which was authorized for
mailing by the Commission under the Securities Act of 1933 and the Securities
Exchange Act of 1934, with respect to DRI, and under the 1935 Act, with respect
to CNG. On June 30, 1999 the shareholders of DRI and CNG approved the
Transaction by the required votes at duly called meetings of the respective
companies. In addition, the Transaction requires (i) clearance by the Department
of Justice ("DOJ") and the Federal Trade Commission ("FTC") under the
Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), (ii) approval of the
Federal Energy Regulatory Commission ("FERC") under the Federal Power Act
("FPA"), (iii) concurrence 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.
-4-
<PAGE>
In order to permit timely consummation of the Transaction and the realization of
the substantial opportunities the Transaction is expected to produce, DRI and
CNG request that the Commission's review of this Application-Declaration
commence and proceed as expeditiously as possible.
B. Description of the Parties to the Transaction.
1. DRI and its Subsidiaries.
DRI, a diversified utility holding company, has its principal office at 120
Tredegar Street, Richmond, Virginia 23219, telephone (804) 819-2000. DRI's
common stock is listed on the New York Stock Exchange. DRI's principal
subsidiary is Virginia Electric and Power Company ("Virginia Power"), a
regulated public utility engaged in the generation, transmission, distribution
and sale of electric energy. The primary service area of Virginia Power is in
Virginia and northeastern North Carolina. DRI's other major subsidiaries are
Dominion 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.
At and as of September 30, 1999, DRI and its consolidated subsidiaries had
total assets of $18.415 billion (based on the unaudited balance sheet of DRI and
its consolidated subsidiaries as at such date). At and as of September 30, 1999,
CNG and its consolidated subsidiaries had total assets of $6.379 billion (based
on the unaudited balance sheet of CNG and its consolidated subsidiaries as at
such date). On a pro forma basis after giving effect to the Merger and required
accounting adjustments, DRI, as the parent of the combined consolidated DRI-CNG
systems would have had total assets of $29.059 billion at September 30, 1999.
Additional financial information the combined DRI-CNG system is discussed infra.
Table A below sets for the unaudited pro forma combined net operating revenues
and assets of DRI and certain of its subsidiary companies for the twelve months
ended and as of September 30, 1999.
Table A
(in millions)
<TABLE>
<CAPTION>
Holding Co. Net
Virginia of Intercompany Total DRI CNG
Power DEI DCI Eliminations (as reported) (as reported)
<S> <C> <C> <C> <C> <C> <C>
Net $2,802 $436 $423 $ -- $3,660 $1,802
Operating
Revenues
Total Assets 11,855 2,724 3,589 247 18,415 6,379
</TABLE>
-5-
<PAGE>
Pro Forma Pro Forma
Adjustments Combined
Net Operating $ -- $5,462
Revenues
Total Assets 4,265 29,059
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. Virginia Power has three direct wholly owned
subsidiaries: Virginia Power Fuel Corporation, which is engaged in acquiring raw
materials for the fabrication of nuclear fuel to be used at the North Anna and
Surry power stations; VPS Communications, Inc., which is engaged in providing
telecommunications services using faber optic lines owned by Virginia Power and
Virginia Power Services, Inc., which serves as a holding company for marketing
and consulting businesses. Virginia Power Services, Inc. itself has three wholly
owned subsidiaries: Virginia Power Services Energy Corp, which is engaged in
fuel procurement for Virginia Power; Virginia Power Energy Marketing, Inc., an
energy marketer and broker who acts as agent for Virginia Power and also
provides services to third parties; and Virginia Power Nuclear Services Co.,
which is engaged in the nuclear consulting services business.
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 in Central
Illinois; two geothermal projects and one solar project in California;
-6-
<PAGE>
three small hydroelectric projects in New York; a waste coal-fueled project in
West Virginia and a waste wood- and coal-fueled project in Maine. International
power projects include one hydroelectric and one gas-fired project in Argentina,
two hydroelectric projects in Bolivia, a run-of-river hydroelectric project in
Belize and two hydroelectric projects and six diesel oil-fueled projects in
Peru. Dominion has recently announced the sale of its holdings in Belize and
Peru to a subsidiary of Duke Energy Corporation. 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. Following
consummation of the Merger, DRI will have approximately $1.39 billion invested
in DEI.
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. As stated above and discussed in further detail below, at and as
of September 30, 1999, CNG and its consolidated subsidiaries had total assets of
$6.379 billion (based on the unaudited balance sheet of CNG and its consolidated
subsidiaries as at such date).
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;
-7-
<PAGE>
and Clarksburg and Parkersburg in West Virginia. At December 31, 1998, CNG
served at retail approximately two million residential, commercial and
industrial gas sales and transportation customers.
b. CNG Transmission Corporation.
CNG Transmission Corporation operates a regional interstate pipeline system
and provides gas transportation and storage services to each of CNG's public
utility subsidiaries and to non-affiliated utilities, end-users and others in
the Midwest, the Mid-Atlantic states and the Northeast. Through its wholly owned
subsidiary, CNG Iroquois, Inc., CNG Transmission Corporation holds a 16 percent
general partnership interest in the Iroquois Gas Transmission System, L.P., that
owns and operates an interstate natural gas pipeline extending from the Canada-
United States border near Iroquois, Ontario, to Long Island, New York. The
Iroquois pipeline transports Canadian gas to utility and power generation
customers in metropolitan New York and New England.
c. CNG Producing Company.
CNG Producing Company is CNG's exploration and production subsidiary. Its
activities are conducted primarily in the Gulf of Mexico, the southern and
western United States, the Appalachian region, and in Canada.
d. CNG Retail Services Corporation and CNG Products and
Services, Inc.
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.
-8-
<PAGE>
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.
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,
-9-
<PAGE>
Michigan and Indiana. The reference to the State of Maine designates the
northeast end of this region. Virginia and North Carolina represents the
southern boundary of this region. This area is the source of approximately
40 percent of the nation's demand for energy.
DRI and CNG believe that the Merger will give the combined company the
platform it needs for growth in a region that is rapidly deregulating,
allowing the company to market its portfolio of energy products to a broad
customer base. In the states where the companies already have operations,
there are an estimated 16 million power customers not currently serviced by
Virginia Power. There are an estimated 8 million additional natural gas
customers not currently served by CNG. Millions of prospective customers
live in adjoining states. The companies intend to seek out these
prospective customers.
DRI has most of its electric power assets in several of the region's
states and has gas reserves located within, or transportable to, the
region. The Merger gives it a strong platform for growth, allowing it to
more rapidly and effectively compete in the emerging electric retail
competition markets in states where CNG currently has facilities.
Pennsylvania and Ohio, especially, have strong policies encouraging new
competition. For CNG, the Merger gives it a broader platform in Virginia
and North Carolina, the primary service area of DRI's principal subsidiary,
Virginia Power.
o Efficient and Well Located Assets
DRI and CNG combined will have storage, transportation and electric
power production capability concentrated in the Northeast and Mid-Atlantic
region.
The combined company will have an energy portfolio of more than 20,000
megawatts of domestic power generation, 2.9 trillion cubic feet equivalent
in natural gas and oil reserves producing nearly 300 billion cubic feet
equivalent annually. It will operate a major interstate gas pipeline system
and the largest natural gas storage system in North America with almost 900
Bcfe of storage. The combined company will rank as the eleventh largest
independent 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:
-10-
<PAGE>
o retail natural gas and electricity sales;
o electric and gas distribution;
o wholesale natural gas and electricity sales;
o interstate gas transportation;
o natural gas exploration and production activities;
o electric generation; and
o international gas-related and exempt operations.
The companies intend to integrate these complementary businesses, subject
to applicable state and federal regulatory requirements. The complementary
nature of these businesses will result in lower costs and in improved service.
These businesses will not only serve existing retail and wholesale customers,
but will reach out to new customers as a full service energy provider as
deregulation proceeds. Applicants expect to achieve enhanced revenues and net
income through increased efficiency in providing energy to customers, whether
gas or electric.
In addition, the Merger will enable the combined company to realize cost
savings from elimination of duplicate corporate and administrative programs,
greater efficiencies in operations and business processes, and streamlined
purchasing practices.
2. The Merger Agreement.
Pursuant to the Merger Agreement, in the preferred structure for the Second
Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition, a
wholly owned subsidiary of DRI, with CNG Acquisition as the surviving company.
This will result in CNG Acquisition assuming all of the rights, duties,
obligations and liabilities of CNG as a matter of law and pursuant to the Merger
Agreement. CNG Acquisition will become a registered holding company following
completion of the Merger as will DRI. Alternatively, DRI and CNG may decide to
merge CNG directly into DRI. In that case, DRI will be the surviving entity and
will register as a holding company pursuant to Section 5 of the 1935 Act.
The Merger is structured as a two-step merger transaction. In the First
Merger, SVP, a wholly owned subsidiary of DRI, will be merged with and into DRI
with DRI being the surviving corporation. In the Second Merger, CNG will be
merged with and into CNG Acquisition with CNG Acquisition being the surviving
corporation. Alternatively, CNG will merge with and into DRI with DRI being the
surviving corporation. DRI shareholders have approved both the First Merger and
the Second Merger and CNG shareholders have approved the Second Merger.
-11-
<PAGE>
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.
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
-12-
<PAGE>
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.
Tax Consequences. Neither DRI nor CNG will recognize corporate level gain
or loss as a result of the First Merger or the Second Merger. Additionally,
neither shareholders of DRI nor shareholders of CNG will recognize gain or loss
for shares of DRI common stock they receive in connection with the First Merger
or the Second Merger, respectively. In general, however, CNG shareholders will
recognize taxable gain for any cash they receive in the Second Merger and DRI
shareholders will recognize taxable gain or loss, if any, for any cash they
receive in the First Merger.
Accounting Treatment. The First Merger will be treated as a reorganization
with no changes in the recorded amount of DRI's assets and liabilities. The
Second Merger will be accounted for under the purchase method of accounting.
Miscellaneous. As part of their approval of the Merger, DRI shareholders
approved an amendment to the DRI Articles of Incorporation to increase the
authorized shares of common stock of DRI from 300,000,000 to 500,000,000. This
amendment provides DRI with the shares it needs for issuance under the Merger
Agreement and to maintain a reserve of shares for general corporate purposes.
DRI common stock trades on the New York Stock Exchange under the symbol "D". DRI
will obtain approval from the New York Stock Exchange for listing of additional
shares of DRI common stock to be issued as a result of the Merger. If the Merger
is completed, the CNG common stock will be delisted from the New York Stock
Exchange.
D. Management and Operations of DRI and CNG Following the Merger.
Following completion of the Merger, DRI will be the direct parent company
to CNG Acquisition as the successor in interest to CNG or, if the Alternative
Merger is implemented, the direct parent company to VNG, Hope, Peoples and East
Ohio, and will register as a holding company under Section 5 of the 1935 Act.
CNG Acquisition will be a registered holding company under the 1935 Act. Thos.
E. Capps will be the President and Chief Executive Officer of DRI after the
Merger, and George A. Davidson, Jr. will serve as Chairman of the Board of
Directors until his previously announced retirement on August 1, 2000, at which
time Mr. Capps will reassume his position as Chairman. The Board of Directors of
DRI will have 17 members, 10 of whom will be designated by DRI and 7 of whom
will be designated by CNG. DRI will continue to use the name Dominion Resources
and be headquartered in Richmond, Virginia. The combined company will continue
to maintain a significant operating office in Pittsburgh, Pennsylvania.
-13-
<PAGE>
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:
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:
-14-
<PAGE>
Section of/Rule under Transactions to which such Section or Rule is or
the 1935 Act may be applicable
Sections 8, 9(a)(2), 10 Acquisition by DRI or CNG Acquisition
of common stock of CNG, VNG, Hope, Peoples and East
Ohio
Section 11(b) Retention by DRI of the existing business,
investments and non-utility activities of DRI and
CNG
Section 13 and Rules 80-92 Designation of DRI Services as a
subsidiary service company and approval of the
Service Agreement and other service arrangements.
To the extent that other Sections of the 1935 Act or the Commission's Rules
thereunder are deemed applicable to the Transaction, such Sections and Rules
should be considered to be set forth in this Item 3.
A. Approval of the Merger.
In pertinent part, Section 9(a) provides that:
Unless the acquisition has been approved by the Commission under
section 10, it shall be unlawful... for any person... to acquire,
directly or indirectly, any security of any public utility company, if
such person is an affiliate, under clause (A) of paragraph (11) of
subsection (a) of section 2, of such company and of any other public
utility or holding company, or will by virtue of such acquisition
become such an affiliate.
For purposes of Section 9(a)(2), an "affiliate" of a specified company is any
person that, directly or indirectly, owns, controls or holds with power to vote
5% or more of the voting securities of such specified company. The Merger
requires approval of the Commission under Section 9(a)(2) of the 1935 Act
because DRI (which already owns 100% of the common stock of Virginia Power, a
"public utility company" within the meaning of Section 2(a)(5) of the 1935 Act)
will, by virtue of the Merger, also acquire 100% of the outstanding common stock
of each of VNG, Hope, Peoples and East Ohio, each of which is also a "public
utility company" within the meaning of Section 2(a)(5) of the 1935 Act. The
criteria the Commission must consider in evaluating any acquisition for which
approval under Section 9(a)(2) is required are set forth in Section 10 of the
1935 Act. As set forth more fully below, the Transaction complies with all of
the applicable provisions of Section 10. Thus,
- The Transaction will not tend towards interlocking relations or the
concentration of control of public utility companies of a kind or to
an extent detrimental to the public interest or the interest of
investors or consumers (Section 10(b)(1))
-15-
<PAGE>
- The consideration to be paid in the Transaction is fair and reasonable
(Section 10(b)(2))
- The Transaction will not result in an unduly complicated capital
structure for the DRI-CNG combined system and will not be detrimental
to the public interest or the interest of investors or consumers or to
the proper functioning of the DRI-CNG system (Section 10(b)(3))
- The Transaction is not unlawful under the provisions of Section 8 and
is not detrimental to the carrying out of the provisions of Section 11
(Section 10(c)(1))
- The Transaction will serve the public interest by tending towards the
economical and efficient development of an integrated public utility
system (Section 10(c)(2))
- The Transaction will be consummated in accordance with and will comply
with all applicable state laws (Section 10(f))
1. Section 10(b)(1).
a. Interlocking Relationships.
Section 10(b)(1) was primarily aimed at preventing business combinations
unrelated to operational and economic synergies and was never intended to
prohibit mergers that otherwise were sensible and permissible under the 1935 Act
because, by its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom., City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The Merger Agreement provides for the Board of Directors of DRI to
comprise representatives from both the existing boards of DRI and CNG. This is
necessary to integrate fully the two companies and will, therefore, be in the
public interest and the interests of investors and consumers by facilitating the
management of DRI-CNG as an integrated and economically efficient energy
services company. In the context of ongoing industry restructuring, the forging
of such relations is necessary to the creation and efficient management of an
integrated energy services provider and, therefore, is not prohibited by Section
10(b)(1).
b. Concentration of Control.
Section 10(b)(1) is intended to avoid "an excess of concentration and
bigness" while preserving the "opportunities for economies of scale, the
elimination of duplicate facilities and activities, the sharing of production
capacity and reserves and generally more efficient operations" afforded by the
coordination of local utilities into an integrated system. American Electric
Power Co., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility
acquisitions, the Commission must determine whether the acquisition will create
"the type of structures and combinations at which the Act was specifically
directed". Vermont Yankee Nuclear Corp., 43
-16-
<PAGE>
SEC 693, 700 (1968). As discussed below, the Merger will not create a "huge,
complex, and irrational system," but rather will result in a new registered
holding company with the capability of offering integrated energy services to
its combined customer base of 4 million in a competitive region that is, in
fact, much larger.
In evaluating the size of the combined enterprise, it is critical to
recognize that several of the states in which the regulated subsidiaries of DRI
and CNG operate and adjoining states are, through legislative or administrative
action, allowing retail competition in the electric and gas industries.
Transition to retail electric competition has already begun in Illinois, New
Jersey and Pennsylvania and is slated to begin in Delaware later in 1999, in
Maryland in 2000, and in Virginia in 2002. Ohio has retail competition
legislation pending. Further, individual utilities are currently conducting
retail choice programs in New York and Michigan. With respect to the gas
industry, Georgia and New Jersey have passed legislation allowing gas utilities
to offer retail supply choice to all their customers. Additionally, retail
choice gas programs are ongoing in all or parts of New Jersey, Ohio,
Pennsylvania, Maryland and Virginia.
Efficiencies and Economies: The Commission has rejected a mechanical size
analysis under Section 10(b)(1) in favor of assessing the size of the resulting
system with reference to the efficiencies and economies that can be achieved
through the integration and coordination of utility operations. American
Electric Power Co., 46 SEC 1299, 1309. More recent pronouncements of the
Commission confirm that size is not determinative. Thus, in Centerior Energy
Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the Commission stated
flatly that a "determination of whether to prohibit enlargement of a system by
acquisition is to be made on the basis of all the circumstances, not on the
basis of size alone". See also Entergy Corporation, Holding Co. Act Release No.
25952 (December 17, 1993). In addition, the Division of Investment Management
recommended in its 1995 Report on The Regulation of Public-Utility Holding
Companies (the "1995 Report") that the Commission approach its analysis of
merger and acquisition transactions in a flexible manner with emphasis on
whether the underlying transaction creates an entity subject to effective
regulation and is beneficial for shareholders and consumers as opposed to
focusing on rigid, mechanical tests. 1995 Report at 73-4.
By virtue of the Transaction and, in particular, its convergence nature,
DRI and CNG will be in a position to realize substantial opportunities to become
an effective competitor in a rapidly deregulating and increasingly competitive
energy market that neither, acting alone, would be in a position to achieve. The
combination of DRI and CNG offers the same type of synergies and efficiencies
that were sought and are now being realized by the applicants (both exempt and
registered) in TUC Holding Company, Holding Co. Act Release No. 35-26749 (Aug.
1, 1997); Houston Industries Incorporated, Holding Co. Act Release No. 35-26744
(July 24, 1997); WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April
14, 1998); and New Century Energies, Inc., Holding Co. Act Release No. No.
35-26748 (Aug. 1, 1997). Moreover, the retail operations of DRI-CNG will
continue, as prior to the Merger, to be fully subject to the jurisdiction of
state regulators in the states in which such operations are conducted. Thus, the
Transaction, by virtue of the fact that DRI will register as a holding company
upon completion of the Transaction, will in fact increase the regulation to
which DRI and CNG are presently subject rather than provide a means for evading
regulation.
-17-
<PAGE>
Size: The Merger will create the nation's fourth largest electric and
natural gas utility, serving nearly 4 million retail customers in 5 states. The
size of the combined company in relation to the sizes of all other companies in
the U.S. is, however, no more than a reflection of the fragmentation which
characterizes the U.S. utility industry today. This fragmentation is one of the
principal reasons for the current trend towards consolidation as companies seek
to become more competitive in the emerging deregulated marketplace for energy.
In the energy marketplace of tomorrow, the region in which a company operates
will comprise not only its historical service territory but also, at a minimum,
the service territories of its neighbors and its neighbors' neighbors: if a
company can compete for the retail customers of its neighbor, so can the company
which is its neighbors' neighbor. Thus, for purposes of Section 10(b)(1), DRI
and CNG have delineated the region in which they will operate to include: (i)
the States in which the regulated utility subsidiaries of DRI and CNG presently
operate (which includes Virginia, North Carolina, Ohio, Pennsylvania and West
Virginia), plus (ii) all States in which any utility operates if such utility is
part of an integrated electric utility system which has an actual electric
interconnection with Virginia Power (which includes Maryland, Delaware, New
Jersey, the District of Columbia, Indiana, Kentucky, Michigan, South Carolina
and Tennessee in addition to the States in which the DRI/CNG Companies presently
operate) (the "Neighboring States"), plus (iii) all States which are one wheel
away from any of the Neighboring States (which adds Alabama, Georgia,
Mississippi, Illinois and New York).
DRI and CNG submit that their analytical delineation of the region in which
the combined company will operate is sensible in an era of restructuring and
competition in which DRI-CNG's neighbors are also its competitors (i.e., both
DRI-CNG and its immediate neighbors will compete for each other's customers) and
in which DRI-CNG's neighbors' neighbors are also competitors (i.e., both DRI-CNG
and its neighbors' neighbors will compete for DRI-CNG's neighbors' customers).
Within its competitive region the combined company will have (without
giving effect to the contemplated divestiture of VNG discussed below in Item 4
of this Application-Declaration) approximately (i) 4 million retail electric and
gas customers, or 3.47% of total retail customers in the region, (ii)
$10,992,535,263 net utility plant, or 3.89% of total net utility plant in the
region, (iii) $6,475,463,395 of gross utility revenues, or 4.42% of gross
utility revenues in the region and (iv) $3,356,707,970 of net utility revenues,
or 3.74% of total net utility revenues in the region. (Additional statistical
analysis is contained in Exhibit E-3 annexed hereto.) The relative level of the
DRI-CNG presence in their competitive region is not so large as to create an
"excess of concentration and bigness" and, in fact, the statistical analysis
reveals an intensely competitive market. There are 122 combination electric and
gas utilities in the competitive region served by DRI-CNG.
Competitive Effects: In Northeast Utilities, Holding Co. Act Release No.
25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an
acquisition must be considered in light of the fact that public utilities are
regulated monopolies and that federal and state administrative agencies regulate
the rates charged consumers". DRI and CNG have filed Notification and Report
Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the
Merger on competition in the relevant market and it is a condition to the
-18-
<PAGE>
consummation of the Merger that the applicable waiting periods under the HSR Act
shall have expired or been terminated. Moreover, any anti-competitive effects of
the Merger in Virginia have been addressed in the order of the Virginia State
Corporation Commission (the "VSCC") requiring divestiture of VNG.
In addition, the competitive impact of the Merger has been 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.
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.
- --------
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).
-19-
<PAGE>
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 SEC 340, 346 (1970), prices
arrived at through arm's-length negotiations are particularly persuasive
evidence that Section 10(b)(2) is satisfied.
In addition, nationally recognized investment bankers for each of DRI and
CNG have reviewed extensive information concerning the companies and have
analyzed the merger consideration employing a variety of valuation
methodologies, and have opined that the merger consideration is fair from a
financial point of view, to DRI and to the holders of CNG common stock. The
investment bankers opinions are attached as Exhibits to the Joint Proxy and
Registration Statement on Form S-4 of DRI and CNG which is attached hereto as
Exhibit C-1 and are described in such Joint Proxy and Registration Statement.
The assistance of independent consultants in setting consideration has been
recognized by the Commission as evidence that the requirements of Section
10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Holding Co. Act
Release No. 245709 (February 12, 1988).
b. Reasonableness of Fees.
DRI and CNG believe that the overall fees, commissions and expenses
incurred and to be incurred in connection with the Merger are reasonable and
fair in light of the size and complexity of the merger relative to other
transactions and the anticipated benefits of the Merger to the public, investors
and consumers; that they are consistent with recent precedent; and that they
meet the standards of Section 10(b)(2).
As set forth in Item 2 of this Application-Declaration, DRI and CNG
together expect to incur a combined total of approximately $55.5 million in
fees, commissions and expenses in connection with the Merger. DRI and CNG
believe that the estimated fees and expenses in this matter bear a fair relation
to the value of their combined company and the strategic benefits to be achieved
by the Merger, and further that the fees and expenses are fair and reasonable in
light of the complexity of the Merger. See Northeast Utilities, Holding Co. Act
Release No. 25548 (June 3, 1992), modified on other grounds, Holding Co. Act
Release No. 25550 (June 4, 1992) (noting that fees and expenses must bear a fair
relation to the value of the company to be acquired and the benefits to be
achieved in connection with the acquisition). Based on a price for CNG stock of
$66.60, the Merger would be valued at approximately $6.381 billion. The total
estimated fees and expenses of $55.5 million represent approximately .8698% of
the
-20-
<PAGE>
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 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
-21-
<PAGE>
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
Moreover, the incurrence of approximately $4.5 billion of short-term
indebtedness by DRI in order to finance the cash consideration to be paid in
connection with the Merger does not result in an unduly complicated capital
structure for the resulting combined DRI-CNG system. Acquisition financing of
the type proposed to be undertaken by DRI is expressly permitted by Section
7(c)(2)(A) of the 1935 Act. It can hardly be suggested that the issuance of
securities by a registered holding company in compliance with Section 7 of the
1935 Act was intended by Congress to result in a capital structure of undue
complexity as proscribed by Section 10(b)(3) of the 1935 Act. As discussed in
detail in DRI's and CNG's Application-Declaration in File No. 70- 09517 (which
is hereby incorporated by reference herein), following completion of the Merger,
DRI, as the registered holding company parent of the combined DRI-CNG system
proposes to refinance the short-term indebtedness incurred in connection with
the Merger with the proceeds of asset sales and new equity, convertible and
long-term debt securities. The refinancing is intended, within a reasonable time
frame following completion of the Merger, to put in place a stronger capital
structure for the combined DRI-CNG system which provides for the combined system
with better financing resources and access to the capital markets.
In addition, as described in detail in DRI's and CNG's
Application-Declaration in File No. 70-09517 with respect to system financing
authority, both Virginia Power and the CNG system will be largely financed on a
stand-alone basis and DRI has committed that each of Virginia Power and each of
CNG's operating public utility subsidiaries will maintain at least 30% common
equity in their respective capital structures (but in the case of VNG, only for
so long as VNG remains part of the DRI-CNG system). DRI has also committed to
maintain at least 30% common equity in its consolidated capital structure.4
These constraints, the constraints imposed by rating agencies and the capital
markets generally as well as constraints imposed by state regulators will serve
as limits on DRI's ability to issue securities on, in the words of Section 1(b)
of the 1935 Act, "the basis of fictitious or unsound asset values having no fair
relation to the sums invested in or the earning capacity of the properties" or
on "the basis of paper profits from
- --------
3 S. Rep. No. 621, 74th Cong., 1st Sess 11 (1935).
4 Appendix B hereto contains the unaudited pro forma combined consolidated
balance sheet of DRI and its subsidiary companies showing the reported condition
of DRI as at September 30, 1999 for the twelve month period then ended, the
reported condition for CNG as at September 30, 1999 for the twelve month period
then ended, the pro forma adjustments necessary to account for the Merger and
the pro forma balance sheet for the combined company as at September 30, 1999
for the same period. Appendix C hereto illustrates that on a pro forma basis as
at September 30, 1999, DRI would, after giving effect to the Merger have 33%
common equity in its consolidated capital structure and that each public utility
subsidiary of the combined company would have in excess of 30% common equity in
its capital structure. The information contained in these Appendices is
summarized in Table No. 1 above.
-22-
<PAGE>
intercompany transactions, or in anticipation of excessive revenues from
subsidiary public utility companies". In fact, the issuance of securities at the
DRI level in support of the Merger shields Virginia Power.
Table No. 1 below sets forth a summary of the historical capital structures
of DRI and CNG as at September 30, 1999, and the pro forma consolidated capital
structure of DRI, as the parent holding company of the combined DRI-CNG system,
as at September 30, 1999.
Table No. 1
DRI and CNG Historical Capital Structures
(Dollar amounts in millions) (as reported) (unaudited)
<TABLE>
<CAPTION>
DRI % of Total CNG % of Total
<S> <C> <C> <C> <C>
Common Equity $5,005 35.0% $2,353 50.1%
Preferred Securities 894 6.2% ----- 0.0%
Debt (inc. short term) 8,406 58.8% 2,344 49.9%
Total: $14,305 100.0% $4,697 100.0%
</TABLE>
DRI Pro Forma Consolidated Capital Structure
(Dollar amounts in millions) (unaudited)
Amount % of Total
Common Equity $7,608 33.0%
Preferred Securities 894 3.9%
Debt (inc1. short term) 8,406 63.1%
Total: $23,039 100.0%
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
-23-
<PAGE>
of DRI, is not prohibited by Virginia law.5 However, as described in greater
detail in Item 4 below of this Application-Declaration, DRI and CNG have agreed
with the VSCC that, within one year following completion of the Merger, they
will divest their interest in VNG. Following such divestiture, the combined
company will not have overlapping electric and gas service territories in any
state. Thus, the Transaction does not present the Commission with any issues
under Section 8 of the 1935 Act.
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.
- --------
5 In some cases, Virginia law prohibits a public service corporation from
conducting more than one kind of public service business in the state.
Specifically, ss. 13.1-620(D) of the Code of Virginia provides that "[n]o
corporation shall be organized under this chapter for the purpose of conducting
in this Commonwealth more than one kind of public service business except that
the telephone and telegraph businesses or the water and sewer businesses may be
combined, but this provision shall not limit the powers of domestic corporations
existing on January 1, 1996". This provision would not be implicated by the
Transaction, however, for several reasons. First, neither DRI nor CNG is a
public service corporation, so their "combination", directly or indirectly would
not implicate the statute. Second, the public service businesses of the two
public service companies in question, Virginia Power and VNG, are not being
combined, in that DRI and CNG are not proposing that these companies be merged.
Third, if the statute could be construed to cover an indirect combination of
public service businesses through common control over Virginia Power and VNG,
both Virginia Power and VNG were domestic corporations existing on January 1,
1986 and are therefore grand-fathered under the statute. Thus, the Transaction
as proposed neither violates Section 8 of the 1935 Act nor is prohibited by
Section 10(c)(2) of the 1935 Act.
-24-
<PAGE>
(i) Retention of Gas Utility System
The Transaction raises a potential issue under Section 11 and Section
10(c)(1): Is the combination of DRI's electric business and CNG's gas business
permissible under a registered holding company?
The 1935 Act regulated gas utility operations of CNG will comprise a
relatively small part of the combined companies overall operations (on a pro
forma basis for 1998, retail gas operations comprised 18.8% of the combined
company's net utility operating revenues), but are nonetheless critical to
positioning the combined companies as a competitor in deregulating retail
markets. In several recent decisions, the Commission has stated explicitly that
the 1935 Act does not prohibit combination electric and gas registered holding
companies. WPL Holdings, Inc., et al., Holding Co. Act Release No. 35-26856
(April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v. Securities
and Exchange Commission (D.C. Cir. 1999), and New Century Energies, Inc.,
Holding Co. Act Release No. 35-26748 (Aug. 1, 1997).
Historically, the Commission considered the question of whether a
registered electric system could retain a separate gas system under a strict
standard that required a showing of loss of substantial economies before
retention would be permitted. New England Electric System, 41 SEC 888 (1964). In
its affirmation of that decision, the United States Supreme Court declared that
a loss of substantial economies could be demonstrated by the inability of the
separate gas system to survive on a stand-alone basis. SEC v. New England
Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the
requirements of Section 11(b)(1) has been explicitly rejected by the Commission
in its most recent decisions under Sections 9(a) and 10 of the 1935 Act both
with respect to exempt holding companies, TUC Holding Company, Holding Co. Act
Release No. 35-26749 (Aug. 1, 1997) and Houston Industries Incorporated, Holding
Co. Act Release No. 35-26744 (July 24, 1997), and newly formed registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998) and New Century Energies, Inc., Holding Co. Act Release No.
35-26748 (Aug. 1, 1997).
In these recent decisions, the Commission acknowledged that as a result of
the transformation of utilities' status as franchised monopolies with captive
ratepayers to competitors and also as a result of the convergence of the
electric and gas industries that was then underway (and which continues today
and of which the Transaction is a prime example), the historical standards of
review had become outdated and that separated electric and gas companies might
be weaker competitors than they would be together in the same market. WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); TUC
Holding Company, Holding Co. Act Release No. 35-26749 (Aug. 1, 1997); New
Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1977); and
Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24,
1997). Importantly, the Courts have upheld the Commission's reinterpretation of
the requirements of Section 10(c)(1) and Section 11 as they apply to combination
electric and gas registered holding companies. Madison Gas and Electric Company
v. Securities and Exchange Commission (D.C. Cir. 1999). Thus, newer
transactions, such as the Transaction, should be evaluated on the basis of new
Commission precedent and policy in light of changing
-25-
<PAGE>
industry standards and should not be evaluated against criteria that have been
repudiated by recent Commission decisions.
The instant Transaction is in accord with the foregoing recent Commission
decisions approving combination electric and gas companies under a registered
holding company and also is consistent with, and furthers the policy, of
fostering the creation of competitive energy services companies as the energy
industry continues its evolution towards a more competitive market. One issue
remains, however. In two of the recent four cases approving combination
companies, the resulting holding company obtained exemption from the
registration requirements of the 1935 Act. There are numerous combination gas
and electric exempt holding companies operating in the United States today. In
the other two cases, in which registered holding companies were formed, the
merger partners were already combination electric and gas companies and the
Commission was addressing the question of whether additional systems could be
retained rather than acquired. In the instant situation, DRI, an electric
company, is acquiring CNG, a gas company, and, thus, the instant transaction is
the first time the Commission is presented with the question of whether a newly
formed registered holding company can acquire an additional system as part of
the transaction in which it became a registered holding company.
Applicants believe the Commission should approve the Transaction as a
matter of policy and as a matter of fairness and can approve the Transaction as
a matter of law. First, the Commission has already acknowledged that the
electric and gas industries are converging and that combination companies may be
more effective competitors in a given market. In fact, there are 122 such
combination electric and gas companies operating in the region in which the
combined company will operate. The Commission has recognized and accepted the
changing nature of the energy industry and, in particular, the fact that the
combination of electric and gas operations in a single company offers that
company a means to compete more effectively in the emerging energy services
business in which a few cents can make the difference between economic success
and economic failure. WPL Holdings, Inc., et al., Holding Co. Act Release No.
35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v.
Securities and Exchange Commission (D.C. Cir. 1999). In the instant situation,
the lost economies that would follow from denial of approval for the Merger are
substantial, both quantitatively and qualitatively. The companies have
commissioned a lost economies study from The Reed Consulting Group, a copy of
which is annexed hereto as Exhibit J-1 (the "Reed Study"), which measures the
quantitative loss associated with the forced divestiture of CNG's retail gas
operations from the other operations of the combined company.
The Reed Study indicates that a divestiture of the four operating utilities
of CNG into four separate stand-alone companies would result in increased
operating expenses primarily due to higher labor and overhead costs for the four
stand-alone companies.6 The total annual
- --------
6 The Reed Study is based on a number of assumptions, including the
assumption that CNG's four regulated natural gas distribution businesses, East
Ohio, Peoples, Hope and VNG will be divested as separate stand-alone local
distribution companies. Once divested, these entities would operate as
independent, publicly held, regulated companies. They would have all necessary
management personnel, along with facilities, equipment, materials and supplies,
etc. required to operate as stand-alone utilities. See the Reed Study attached
as Exhibit J-1 for a discussion of the reasoning behind these assumptions.
-26-
<PAGE>
impact of lost economies for all four companies is stated to be $61.3 million.
Cumulative incremental staffing requirements include 700 full-time management
and staff positions. While some of this staff could be drawn from CNG's existing
subsidiary service company provider, the estimated total incremental labor costs
are still expected to be $31.7 million annually. The estimated effects on each
company are shown in Table No. 2 below.
Table No. 2
Annual Effects of Lost Economies on Shareholders
($000's)
<TABLE>
<CAPTION>
East Ohio Gas Peoples Virginia Hope Gas Inc.
Natural Gas Natural Gas
<S> <C> <C> <C> <C>
Total Lost Economies $20,908,144 $15,715,120 $13,176,747 $11,540,096
Lost Economies as a
percent of
Total Revenues 2.052% 5.190% 6.942% 11.509%
Net Revenues 4.737% 8.500% 13.669% 21.384%
Total Expenses 2.290% 6.579% 8.190% 12.721%
Non-Gas Expenses 6.231% 12.994% 19.525% 25.984%
Gross Income 19.76% 24.58% 45.58% 120.80%
Net Income 36.61% 43.37% 105.30% 252.52%
In absence of rate
relief
Estimated return 5.1977% 7.1758% 1.7230% -2.9188%
on rate base
Estimated return 4.8723% 6.0761% 1.0591% -2.5556%
on net plant
</TABLE>
In Table No. 2 above, lost economies represent the additional costs,
excluding income taxes, for each subsidiary to operate as a stand-alone company.
Total revenues reflect the gas operating revenues for each operating company as
reported in CNG's Form U5S Annual Report for the 12 months ended December 31,
1998. Net Revenues refer to total revenues less purchased gas expenses. Total
expenses include all purchased gas and gas withdrawn from storage, operation and
maintenance expenses, depreciation, and taxes other than income taxes.
-27-
<PAGE>
Non-gas expenses refer to total expenses less purchased gas expenses. Gross
Income is the difference between Total Revenues and Total Expenses; it excludes
income taxes. Net Income is equal to Gross Income less Income Taxes. Rate base
refers to the market capitalization at December 31, 1998.
From the customer perspective, divestiture of CNG's operating subsidiaries
is also likely to be disadvantageous. The Reed Study states that it is a
reasonable expectation that each company would be allowed to recover the
increased costs of stand-alone operations, including related income taxes
through a rate increase. In this case, the projected effect on the gas customers
of each subsidiary is as follows:
Table No. 3
Annual Effects of Lost Economies on Customers
($000's)
<TABLE>
<CAPTION>
East Ohio Gas Peoples Virginia Hope Gas Inc.
Natural Gas Natural Gas
<S> <C> <C> <C> <C>
Rate Revenue
Pre-Spin-Off $1,018,979 $302,806 $189,803 $100,271
Post-Spin-Off $1,080,697 $326,957 $221,631 $121,370
Dollar Increase $61,718 $24,151 $31,828 $21,099
Percent 6.057% 7.976% 16.769% 21.042%
Increase
</TABLE>
The Reed Study concludes that the economies that CNG realizes from
consolidated administration and management of its gas operations provide
significant benefits to customers and shareholders. The centralized management
provided by CNG allows the CNG operating subsidiaries to realize economies of
scale in the procurement of equipment, gas supplies and various technical and
administrative services. Spinning off CNG's gas distribution subsidiaries into
stand-alone companies would likely result in substantial cost increases and
significant earnings decreases absent regulatory rate relief. Without rate
adjustments, the spin-off would have significant negative impacts on
shareholders and make ownership of shares in the stand-alone operating companies
unattractive.
The rationale for the conclusion in the Reed Study relies on a number of
analytical factors. These analytical factors are summarized as follows:
The pass-through of the increased costs from divestiture would likely
lead to significant rate increases with no corresponding increase in the
level and quality of services received by the operating subsidiaries'
customers. The estimated rate increases for each company range from 6 to 21
percent. These increases would make each stand-alone company less
competitive at a time when competition in the energy industry is rapidly
increasing due to state and federal restructuring efforts in both the
electric and gas industries.
-28-
<PAGE>
The potential by-pass of local distribution systems by interstate
pipelines or alternate fuels is a threat faced by the CNG operating
subsidiaries. Peoples direct competition from other local distribution
companies to provide distribution service in certain portions of its
service territory in western Pennsylvania. Pennsylvania has also become one
of the first states in the nation to deregulate electric generation and to
allow retail customers to select their choice of electricity supplier.
Unnecessarily higher costs will make it difficult for these stand-alone
companies to compete against other fuels, pipeline bypass, and, in certain
cases, other local operating companies.
As a result of federal restructuring and refocus on competition in the
gas industry, there is an increased interest in the unbundling of local
distribution company services and allowing more customers to select
alternative natural gas suppliers. Peoples and East Ohio have already
expanded their natural gas transportation services available to retail
customers. Pennsylvania passed legislation in June 1999 requiring all
natural gas customers to have a choice in their natural gas supplier. The
increases discussed here may make both bundled and unbundled services less
competitive.
Finally, in an era of rapid consolidation of electric and gas
providers into large energy service companies, a regulated utility which
either offers only one energy product or has a narrow geographic focus
faces a competitive disadvantage to larger companies which offer a variety
of products and services over a larger service area. In fact, for this
reason, many smaller retail gas companies have been merged into larger,
more diverse energy service companies during the last few years7. Such
mergers allow local distribution companies to enhance revenues through
cross-selling opportunities and market expansion and to take advantage of
operating synergies created by corporate consolidation. Thus, in the case
of an operating subsidiary spin-off, the CNG operating subsidiaries would
likely be highly sought after merger partners. The operating companies'
separation from CNG would arguably result in a need to be acquired by a
larger or more diversified energy company in order to remain financially
stable and competitive in the long-run. Thus, any mandated spin-off of the
CNG operating subsidiaries would, in the short run, result in increased
costs and, in the long run, likely result in the reacquisition of the CNG
operating subsidiaries by a larger company in order to recapture the
synergies lost in the original spin-off.
- --------
7 In the last six months, there have been a number of gas LDC mergers that
demonstrate this pattern:
o Wisconsin Energy Corp.'s acquisition of WICOR Inc., announced June 28,
1999.
o Eastern Enterprises' acquisition of Colonial Gas, announced October 19,
1998, and Energy North, announced July 15, 1999.
o Energy East's acquisitions of Connecticut Energy Corp, announced April 23,
1999, CMP Group, announced June 15, 1999, and CTG Resources, announced June
30, 1999,
o Northeast Utilities reacquisition of Yankee Energy System, announced June
15, 1999.
o Indiana Energy Inc. and Sigcorp Inc.'s merger to form Vectren Corp,
announced June 14, 1999.
-29-
<PAGE>
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.
-30-
<PAGE>
(ii) Retention of Non-Utility Businesses.
DRI is presently a holding company which is exempt from the registration
requirements of the 1935 Act. As an exempt holding company, DRI has been free to
invest in a variety of non-utility businesses and activities without the need to
obtain prior Commission approval under Section 9(a). DRI's diversification
program has been very successful and has resulted in tangible benefits to DRI's
shareholders. Most importantly, from the 1935 Act perspective, DRI's
diversification program has been conducted in compliance with applicable state
laws and regulations and in a manner designed to minimize any risk that any
losses incurred as a result of diversification could be borne by Virginia Power.
Virginia Power has made investments in discrete non-utility businesses with the
express approval of the VSCC and subject to conditions and limitations imposed
by the VSCC. Virginia Power supports the investment and financing needs of its
subsidiaries as part of Virginia Power's stand-alone financing arrangements,
except that one of Virginia Power's subsidiaries, Virginia Power Energy
Marketing, Inc., also receives credit support from DRI in the form of a $200
million guarantee in connection with gas hedging/purchasing. All of DRI's other
diversified businesses are held by separate subsidiaries of DRI and are managed
as independent stand-alone businesses receiving only minimal indirect credit
support from DRI; i.e., DRI provides financial support to DEI and DCI which in
turn support the operations of the DEI Companies and the DCI Companies,
respectively. Thus, DRI's diversified activities are conducted in the manner
approved by the Commission in National Utilities & Industries, 45 SEC 167
(1973), and Pacific Lighting Corporation, 45 SEC 152 (1973). Set forth below is
a brief description of the non-utility businesses and activities engaged in by
DRI subsidiaries. Reference is also made to Exhibit E-6 hereto, which contains
additional information concerning individual non-utility subsidiaries of DRI,
and Appendix A hereto, which provides additional information concerning the
non-utility businesses of DRI and the legal rationale for their retention by DRI
following registration of DRI as a holding company.
DEI. DEI is a holding company and is a direct subsidiary of DRI. DEI has
interests in various generation and small power production facilities in various
states of the United States all of which are QFs or EWGs under the 1935 Act and,
thus, are exempt under the 1935 Act. DEI also owns, through EWGs, interests in
gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize,
Bolivia and Peru. Dominion has recently announced the sale of its holdings in
Belize and Peru to a subsidiary of Duke Energy Corporation. DEI, through its
subsidiaries, is also involved in the ownership, exploration and development of
natural gas and oil reserves in Western Canada, the Appalachian Basin, the Uinta
Basin the Black Warrior Basin, the onshore Gulf Coast region, the Illinois
Basin, the Michigan Basin and the San Juan Basin. As of March 31, 1999, DEI had
proven reserves of approximately 1.2 trillion cubic feet of natural gas
equivalent. DEI, through its subsidiaries, is also involved in the wholesale
aggregation, marketing and trading of natural gas and storage capacity
positions, on behalf of DEI and third parties. DEI maintains its own credit
facilities, with some limited support from DRI, through which it finances the
activities of its subsidiaries. Certain subsidiaries of DEI also maintain their
own credit facilities with varying degrees of support from DEI. All of these
financing arrangements would have been permitted under Rule 52 had DRI been a
registered holding company at the time the same were entered into, provided the
underlying investment had been made in compliance with Section 9(a)(1) or Rule
58, as the case may be.
-31-
<PAGE>
DCI. DCI is a holding company and is a direct subsidiary of DRI. DCI,
through its subsidiaries, is a diversified financial services company with its
core operations being commercial finance, corporate finance and consumer
finance. Commercial finance comprises senior secured loans, unsecured or
subordinated debt or mezzanine investments, bridge loans and equity investments.
Senior secured loans have a first priority lien on all assets which includes,
but is not limited, to accounts receivable, inventory, real and personal
property, equipment, trademarks, and copyrights. Corporate finance activities
include underwriting and syndication of debt and equity instruments and debt and
equity securities, managing assets for third parties and broker-dealer
operations. Consumer finance comprises origination, purchase, securitization,
and servicing of mortgages. Other operations include investments in real estate,
a lease in a hydroelectric facility, venture capital and a portfolio of
preferred and equity securities. DCI maintains its own credit facilities, with
some support from DRI, through which it finances the activities of its
subsidiaries. Certain subsidiaries of DCI also maintain their own credit
facilities with varying degrees of support from DCI. All of these financing
arrangements would have been permitted under Rule 52 had DRI been a registered
holding company at the time the same were entered into, provided the underlying
investment had been made in compliance with Section 9(a)(1) or Rule 58, as the
case may be. DCI does not engage in transactions with other DRI system companies
as part of DCI's business, although the DCI Companies do receive credit support
from DRI. Except with respect to the transfer of the Vidalia Project to DEI
discussed in Appendix A attached hereto, following consummation of the Merger,
DCI will not engage in transactions with other DRI system companies except for
the financing arrangements with DRI described in the Application-Declaration in
File No. 70-9517 and the service company arrangements approved by the Commission
described in this Application-Declaration.
Virginia Power. Virginia Power through its Wholesale Power Group, is
engaged in the wholesale marketing and trading of electricity and natural gas,
on behalf of Virginia Power and third parties. Wholesale electricity and gas
marketing and trading activities, whether done by Virginia Power or one of the
DEI Companies, are regulated by the FERC in particular as to transactions with
affiliates. Virginia Power and its subsidiaries and DEI Companies involved in
these activities are required to comply with FERC approved codes of conduct.
Set forth below is a description of the other businesses of DRI by general
categories together with the basis including precedents on which the Commission
should find such businesses retainable under the Act. Reference is made to
Appendix A hereto, which supplements the analysis contained herein.
Ownership of Qualifying Facilities and Exempt Wholesale Generators. DEI has
interests in various generation and small power production facilities in various
states in the United States all of which are QFs or EWGs under the 1935 Act and,
thus, are exempt under the 1935 Act. DEI also owns through EWGs interests in
gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize,
Bolivia and Peru. These facilities are also exempt under the 1935 Act as EWGs.
Dominion has recently announced the sale of its holdings in Belize and Peru to a
subsidiary of Duke Energy Corporation. As described in further detail on Exhibit
E-6 hereto, QFs in which DEI has an interest include Caithness BLM Group LP,
Caithness Navy II Group L.P., Luz Solar Partners Ltd., VII, LP, Rumford
Cogeneration Company, Ltd., Morgantown Energy
-32-
<PAGE>
Associates, Middle Falls Limited Partnership, NYSD Limited Partnership, and
Sissonville Limited Partnership. EWGs in which DEI owns an interest include
Dominion Elwood Services Company, Inc., Dominion Energy Services Company, Inc.,
Belize Electric Company Limited, Kincaid Generation, LLC, Elwood Energy, LLC,
Empresa Electrica Corani, S.A., Central Termica Alto Valle, S.A., Dominion
Management Argentina, S.A., Hidroelectrica Cerros Colorados and
EGENOR S.A.
DRI owns, through various entities, Corby Power Limited, which in turn owns
all interest in a natural gas-fired generating facility in the United Kingdom.
Corby Power Limited has qualified as an EWG and, thus, is exempt under the 1935
Act.
The ownership of a QF is specifically authorized under Section 713 of the
Energy Policy Act of 1992 and Rule 58(b)(1) (viii) under the 1935 Act. The
ownership of EWGs is permitted under Section 32 of the Act. The Commission has
routinely permitted newly formed registered holding companies to retain their
pre-existing interests in QFs and EWGs. Conectiv, Inc., Holding Co. Act Release
No. 35-26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act
Release No. 35-26748 (August 1, 1997).
Oil and Gas Exploration and Development. DEI, through its subsidiaries is a
participant in oil and natural gas development programs in Canada, Louisiana,
Michigan, New Mexico, Pennsylvania, Texas, Utah, New Mexico, Indiana, Kentucky,
Virginia and West Virginia. DEI's oil and gas subsidiaries, which are described
in further detail on Exhibit E-3 hereto, include Wolverine Reserves, LLC,
Dominion Reserves-Indiana Inc., Dominion Reserves, Inc., Dominion Reserves-Utah,
Inc., Wolverine Environmental Production, Inc., Dominion Energy Canada Ltd.,
Dominion Midwest Energy, Inc., Wolverine Gas and Oil Company, Inc., Dominion
Appalachian Development Properties, LLC, Dominion Appalachian Development, Inc.,
Cypress Energy, Inc., Dominion Reserves Gulf Coast, Inc., Remington Energy,
Ltd., Remington Energy Partnership, and DEI Canada Holding Co., Inc. Through its
investment in Cambrian Capital Corporation, DCI holds net profits interests in
certain oil and gas properties.
The exploration of natural resources or the holding of rights to such
resources are activities of the kind routinely permitted to be retained in prior
Commission orders approving the mergers and creations of new registered holding
companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August
1, 1997); New England Energy Inc., Holding Co. Act Release No. 35-23988 (January
13, 1986).
Gas Activities. DEI owns interests in companies engaged in the
transportation and processing of natural gas and in the manufacture and sale of
equipment used in connection therewith. These subsidiaries, which are described
in greater detail on Exhibit E-3 hereto, include Niton Hub Services Company,
Dominion Gas Processing MI, Inc., Great Lakes Compression, Inc., Dominion Energy
Canada Ltd., Daval Industries Inc., GTG Pipeline Corporation, Dominion
Reserves-Indiana, Inc., Frederick HOF Limited Partnership, Wilderness Energy,
L.C. and Wilderness Energy Services Limited Partnership. These companies engage
in gas-related activities
-33-
<PAGE>
including operation of gas storage facilities, gas processing, ownership and
operation of gas pipelines, gathering and gas compression.
The ownership of such businesses is specifically authorized under Rule
58(b)(1)(ix), and such businesses have routinely been permitted to be retained
in prior Commission orders approving mergers and creations of new registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998) (gas pipeline, gas gathering, dehydration & compression
facilities); New Century Energies, Inc., Holding Co. Act Release No. 35-26748
(August 1, 1997) (gas pipelines, storage facilities).
Energy Marketing and Brokering. DEI owns a number of subsidiaries engaged
in the marketing and brokering of gas and electric energy. These companies,
which are described in further detail on Exhibit E-6 hereto, include Elwood
Marketing, LLC, Phoenix Dominion Energy LLC and Carthage Energy Services, Inc.
Virginia Power is engaged in the marketing and brokering of gas and electric
energy. In addition, Virginia Power owns two subsidiaries which are engaged in
the marketing and brokering of gas. These companies, which are described in
further detail on Exhibit E-3 hereto, include Virginia Power Energy Marketing,
Inc. and Virginia Power Services Energy Corp.
The ownership of businesses engaged in the brokering and marketing of
energy commodities is specifically authorized under Rule 58(b)(1)(v), and
retention of such businesses has routinely been permitted in prior Commission
orders approving mergers and creations of new registered holding companies. WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv,
Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); New Century
Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). Moreover,
Virginia Power's investment in subsidiaries engaged in energy marketing and
trading has also been expressly approved by the VSCC.
Telecommunications. DRI, through Virginia Power, owns VPS
Telecommunications, Inc., which is engaged in providing telecommunications
services utilizing fiber optic line owned by Virginia Power. DRI, through DCI,
also owns a 50% interest in Stonehouse Communications, L.L.C. and, through DCI's
subsidiary, First Dominion Capital, LLC, owns a 10.6% interest in ConStar
International, Inc., and a 19.5% non-voting interest in Protocol Communications.
These entities are engaged in various telecommunications-related businesses as
further described on Exhibit E-3 hereto. Prior to completion of the Merger, each
DRI subsidiary involved in the telecommunications business will be qualified as
an "exempt telecommunications company" under Section 34 of the 1935 Act. The
ability of registered holding companies to acquire and retain interests in
"exempt telecommunications companies" is expressly permitted under Section 34
and retention of such businesses has been routinely permitted in prior
Commission orders approving mergers resulting in the creation of new registered
holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856
(April 14, 1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February
25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748
(August 1, 1997).
-34-
<PAGE>
Real Estate Activities. DCI owns a number of subsidiaries that are engaged
in the business of holding, managing and developing real estate, primarily for
investment purposes. DCI's investment real estate holding and related companies
are primarily held through its subsidiaries, Dominion Lands, Inc., Dominion Land
Management Company and Stanton Associates, and their respective direct and
indirect subsidiaries. These entities are described in further detail on Exhibit
E-6 hereto. DCI develops and manages real estate interests, specializing in
acquisitions of large residential developments as well as commercial and other
residential ventures. The Commission has allowed retention of real estate
operations created by exempt holding companies before becoming registered even
though such operations were not strictly related to utility operations. WPL
Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv,
Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); Ameren
Corporation, Holding Co. Act Release No. 35-26809 (December 30, 1997); New
Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997).
The Commission has also authorized real estate investments where they benefitted
utility operations. UNITIL Corp., Holding Co. Act Release No. 35-25524 (April
24, 1992), American Electric Power Co., Holding Co. Act Release No. 35-21898
(January 27, 1981).
Energy Lending. DCI, through its subsidiary Dominion Venture Investments,
Inc., owns a 46% interest in Cambrian Capital Corporation and a 45% interest in
Cambrian Capital Partners L.P. These entities, together with their respective
subsidiaries, Triassic Energy Corporation and Triassic Energy Partners, L.P.,
are engaged in providing financing to small and mid-sized independent oil and
natural gas producers who are seeking to acquire or expand their property
holdings or to refinance existing operations. As noted above, in "Oil and Gas
Exploration and Development", the exploration of natural resources or the
holding of rights to such resources are activities of the kind routinely
permitted to be retained in prior Commission merger orders creating new
registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No.
35-26856 (April 14, 1998); New Century Energies, Inc., Holding Co. Act Release
No. 35-26748 (August 1, 1997); New England Energy Inc., Holding Co. Act Release
No. 35- 23988 (January 13, 1986). Because retention of ownership of independent
oil and natural gas producers is routinely permitted, DCI should likewise be
permitted to retain its businesses of providing financing to such entities.
Debt and Equity Financing to Commercial Businesses and Consumers. As
described in more detail above, DCI is a diversified financial services company
whose activities include commercial, corporate and consumer finance. In
connection with financing companies, DCI subsidiaries often acquire equity or
non-voting equity interests and warrants in the companies they are financing as
compensation for the related financing as well as, sometimes, on a stand-alone
basis. Obtaining such types of equity interests is a recognized and customary
practice for firms involved in similar lending businesses. DCI's primary
subsidiaries in these areas include First Source Financial, LLP, First Dominion
Capital, L.L.C. and Cambrian Capital L.P. These companies, together with DCI's
other subsidiaries engaged in these activities, are described in further detail
on Exhibit E-6 hereto.
The Commission has permitted other exempt holding companies, upon becoming
registered holding companies, to retain similar businesses in prior orders.
E.g., Ameren
-35-
<PAGE>
Corporation, Holding Co. Act Release No. 35-26809 (December 30, 1997) (venture
capital fund, investment in national bank specializing in minority business
development lending and residential mortgage lending); WPL Holdings, Inc.,
Holding Co. Act Release No. 35-26856 (April 14, 1998) (venture capital fund).
While the size of DRI's investment and the degree of its active participation
are admittedly greater than that of holding companies in prior Commission
precedents, DRI's acquisition and ownership of such businesses are lawful under
its current status as an exempt holding company and are larger because they have
been successful investments. The growth of these subsidiaries which is
attributable to the business success of the underlying businesses should not
form the basis of a divestiture order. DRI has maintained these businesses in
subsidiaries separate from its regulated utility affiliates, and will continue
to do so. These subsidiaries do not engage in business with DRI's regulated
utility affiliates. Accordingly, given the protections DRI has implemented and
will continue to maintain in effect, together with the likelihood of substantial
harm to DRI's investors should DRI be required to divest these businesses, DRI
should be permitted to retain these businesses.
Other Miscellaneous Investments. DRI, through DCI, also holds minority
interests in a number of other businesses, none of which are public utilities
for purposes of the 1935 Act. Many of these investments were obtained in the
ordinary course in connection with DCI's commercial and corporate finance
operations, and many are not voting securities. The aggregate amount of such
investments made by DCI at March 31, 1999 was $176,000,000. Divestiture of these
de minimis portfolio investments would provide no benefit to any protected
interests under the 1935 Act, and would potentially cause harm to DRI's
investors. Accordingly, DRI should be permitted to retain these interests.
CNG. A full description of CNG's non-utility businesses is described above
in this Item 1, Section B.2. No issues are raised under the 1935 Act with
respect to the retention of these businesses by DRI as a registered holding
company as each of such businesses was in fact acquired by a registered holding
company in compliance with all applicable provisions of, and rules under, the
1935 Act.
DRI hereby requests Commission authorization, following completion of the
Merger and the registration of DRI as a holding company under Section 5 of the
1935 Act, to retain its interest in DEI and the other DEI Companies and to
retain its indirect interest in the non- utility subsidiaries of Virginia Power
and, through the Merger, to acquire and retain the interests of CNG in the
non-utility businesses of CNG.
DRI further requests that the Commission authorize DRI to retain its
interest in DCI and the other DCI Companies for a period of not less than 3
years following completion of the Merger and the registration of DRI as a
holding company under the 1935 Act and to reserve jurisdiction over the timing
and terms of any future disposition or divestiture of DCI. DRI further requests
that any order of the Commission under Section 11(b)(1) which requires DRI to
divest DRI's interest in DCI satisfy the requirements of Section 1081 of the
Internal Revenue Code to enable DRI to obtain the tax treatment provided for in
said Section 1081. DRI has previously stated its intention to dispose of its
interest in DCI, in part to obtain funds to repay indebtedness incurred to
finance the cash component of the consideration to be paid to DRI and CNG
-36-
<PAGE>
shareholders in connection with the First Merger and the Second Merger,
respectively. However, neither the nature nor the timing of such disposition has
been determined and it would be to the detriment of DRI investors if DRI were to
be obliged to divest its interest in DCI in an untimely or uneconomic manner.
Pursuant to the last paragraph of Section 11(b)(1) of the 1935 Act, the
"Commission may permit as reasonably incidental, or economically necessary or
appropriate to the operations of one or more integrated public utility systems
the retention of an interest in any business (other than the business of a
public utility company as such) which the Commission shall find necessary or
appropriate in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning of such system or
systems". Section 9(a) of the 1935 Act was designed, among other things, to
prevent the acquisition of businesses that would not meet the above test. In an
effort to streamline its administration of the 1935 Act and to provide guidance
to registered holding company systems, the Commission promulgated Rule 58 which
provides an exemption from the provisions of Section 9(a)(1) for, in the case of
registered electric systems, acquisitions of businesses of the types listed in
subparagraph (b)(1) of the Rule provided that the aggregate investment by such
holding company in such businesses does not exceed the greater of $50 million or
15% of consolidated capitalization.
While historically the Commission generally took a narrow view of what
business could be retained under the standards of Section 11(b), with the
promulgation of Rule 58, the Commission signaled a less narrow approach to the
issue. Similarly, in the recent numerous creations of registered holding
companies as a result of mergers, the Commission has continued to view the
retainability issue more broadly and has also recognized that it is appropriate
to judge the issue of retainability differently when businesses were lawfully
acquired prior to registration.8 In part the broader view of what is an
appropriate other business to retain is justified on the possible harm to
investors or consumers that could result from required divestiture, because the
evils Congress addressed in 1935 relative to non-utility businesses in utility
holding company systems no longer present the same potential for abuse as prior
to 1935 for a variety of reasons including: much greater stock market
discipline, stronger state regulatory supervision, much more rigorous accounting
standards and controls, the role played by rating agencies in monitoring utility
holding company systems and the changes in the whole utility industry which are
broadening the types of services offered by utilities to their customers today
versus what were offered only a few years ago. These reasons also support the
use of Rule 58 and the continuing broadening of permitted acquisitions of other
businesses outside of the Rule 58 safe harbor.
- --------
8 "[T]he Commission reaches this conclusion [as to retainability of
non-utility businesses] in view of the fact that Applicants were not subject to
the restrictions that Section 11(b)(1) and related precedent of the Commission
place upon the nonutility activities of registered system companies". WPL
Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998). See also
Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998); New
Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997).
-37-
<PAGE>
The language of Section 11 quoted above gives the Commission the authority
to go much beyond Rule 58 and the retentions allowed in the recent orders
establishing new registered holding company systems indicate that the
interpretation of such language is extremely broad. In the instant application,
there is no issue to be decided relative to CNG since it is currently a
registered holding company and therefore does not have any businesses that would
be considered unretainable "other businesses" under Section 11 of the Act. With
respect to DRI, in 1998, its franchised utility, Virginia Power, accounted for
$4,285 million of revenues while its two other principal subsidiaries, DEI and
DCI had revenues of $383 million and $409 million, respectively.
In considering the non-utility businesses of DRI as described in this
Application-Declaration, the Commission should start with those that fit within
Rule 58, which constitute a majority of such businesses. Thereafter, the
Commission, in line with the Staff's Recommendation in The Regulation of
Public-Utility Holding Companies, June 1995, should consider as other businesses
retainable under the Section 11 language, those businesses that do not fall
strictly in one of the ten categories of investments set out in Rule 58 but are
of the type permitted by the Commission in orders since Rule 58 was promulgated
or are deemed to be energy related in the evolving concept of that term in a
rapidly changing industry. Finally, consistent with the view taken by the
Commission in recent merger approvals9 substantial weight should be given to the
fact that the businesses were created or acquired prior to registration and
therefore should be grand-fathered. To the extent that in any given case a DRI
business is not deemed to fit within any of the foregoing categories, the
Commission should defer consideration of the retainability of such business, and
reserve jurisdiction as it did in CINergy Corp, Holding Co. Act Release No.
26146 (October 21, 1994).
5. Section 10(c)(2).
Section 10(c)(2) requires the Commission to find that a proposed
transaction will serve the public interest by tending towards the economical and
efficient development of an integrated public utility system. For all of the
foregoing reasons, the Transaction meets the criteria of Section 10(c)(2). The
Transaction will produce both quantitative and qualitative economies and
efficiencies and will result in the creation of an economically integrated and
efficient energy company consistent with modern notions of "integration".
DRI and CNG have estimated the nominal dollar amount of savings due to cost
reductions over the ten year period following closing of the Merger to be
approximately $700 million. Approximately $450 million of these anticipated cost
reduction synergies are anticipated to be derived from corporate and operations
labor cost savings, corporate and administrative programs cost savings and
non-fuel purchasing economies savings. The remaining approximately $250 million
of anticipated cost reduction synergies are anticipated to be derived from E&P
production cost savings and gas supply cost savings. Although some of the
anticipated economies
- --------
9 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998).
See also Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998);
New Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997).
-38-
<PAGE>
and efficiencies will be fully realizable only in the longer term, they are
properly considered in determining whether the standards of Section 10(c)(2)
have been met. See American Electric Power Co., 46 SEC 1299, 1320-1321 (1978).
Further, the Commission has recognized that while some potential benefits cannot
be precisely estimated, nevertheless they too are entitled to be considered:
"[S]pecific dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable". Centerior Energy Corp., Holding Co. Act Release No.
24073 (April 29, 1986) (citation omitted). See Energy East Corporation, Holding
Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on
strategic benefits and potential but presently unquantifiable saving).
In addition, the Transaction will produce a number of non-quantifiable
long-term strategic benefits. As discussed above, many of the states in which
DRI and CNG operate as well as neighboring states have adopted retail
competition legislation. As the Commission stated in New Century Energies, Inc,,
Holding Co. Act Release No. 35-26748 (Aug. 1, 1997), "The Commission has
previously taken notice of developments that have occurred in the gas and
electric industries in recent years, and has interpreted the Act and analyzed
proposed transactions in light of these changed and changing circumstances...
The gas and electric industries are converging, and, in these circumstances,
separation of gas and electric businesses may cause the separated entities to be
weaker competitors than they would be together...competition is increasing." 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.
B. Establishment of Service Company and Approval of Service Agreement.
DRI believes that the combination of two holding company systems with
existing services arrangements can best be achieved over time, giving each
system a chance to transition to new arrangements and providing the combined
system with an opportunity to determine the most efficient manner of
centralization based on experience. In addition, the combined system will, at
least temporarily, operate under regulatory constraints previously imposed on
DRI as an exempt holding company. As a result, DRI is currently requesting
authorization from the Commission for approval of certain interim measures
relating to service arrangements within the combined DRI-CNG system, discussed
more fully below, to assist in this transition period. As noted below, DRI
intends to establish an arrangement for the system-wide provision of services
that conforms to traditional Commission precedent with respect to both the
number of service companies within the combined DRI-CNG system and traditional
pricing terms under the Commission's "at-cost" rules within a reasonable time
after the consummation of the Merger.
-39-
<PAGE>
As an exempt holding company, DRI currently provides a number of services
to its affiliates and subsidiaries. As a registered holding company, CNG has
established Consolidated Natural Gas Service Company, Inc. ("CNG Services") as a
service company pursuant to Section 13(b) of, and Rule 88 under, the 1935 Act.
CNG Services is a wholly-owned subsidiary of CNG. It was formed as a subsidiary
service company, pursuant to temporary authorization given CNG in Commission
order dated March 8, 1962, Holding Co. Act Release No. 35-14592. CNG Services'
authorization was made permanent by the Commission by order dated August 26,
1966, Holding Co. Act Release No. 35-15548. The basic form of service agreement,
including exhibits thereto which described the services offered and methods of
allocation of costs, was an exhibit to CNG's application-declaration seeking
authority for CNG Services and made effective by the Commission. Several
amendments to the service agreement exhibits have been approved by the
Commission pursuant to "60 day letter proceedings" since 1966.
As part of their business combination, DRI and CNG anticipate a
rationalization and centralization of the combined company's service functions
but have not yet completed their analysis of how best to accomplish this goal, a
task that is not probably capable of being completed until after the two
companies are in fact merged. Thus, in order to ensure the transition to a
combined company proceeds smoothly and in compliance with applicable laws and
regulations (as discussed below, the provision of intra-system services is also
regulated by the Virginia, North Carolina, West Virginia and Pennsylvania state
commissions), DRI and CNG propose, initially, to commence their combined
operations with two subsidiary service companies and with additional support
from other system companies as more fully described below.
In that connection, prior to closing of the Merger, DRI will establish a
new direct subsidiary service company, DRI Services, which will assume from DRI
all of the service functions currently performed for affiliates by DRI and all
current employees of DRI performing such functions will become employees of DRI
Services. Upon closing of the Merger, DRI Services and the other DRI affiliates
will enter into a new single systemwide Service Agreement with CNG, CNG Services
and the other subsidiaries of CNG which is closely modeled after the current
Service Agreement in effect for the CNG system (both as to the nature of the
services provided and as to the cost allocation methodology therefor). Thus,
initially the combined company will operate with two service companies and each
DRI-CNG affiliate will have the opportunity to elect to purchase the services
specified from the menu of options contained in the Service Agreement. The cost
allocation formula will account for the possibility that two service company
providers are available.
In addition, for an initial period of time, DRI Services will subcontract
for certain of the services that it will provide to system companies from
Virginia Power. Historically, Virginia Power has provided a number of services
to DRI system companies in compliance with and as required by orders of the
VSCC. Unlike the contemplated transfer of employees and service functions from
DRI to DRI Services which can be accomplished prior to closing of the Merger, it
is neither possible nor practical for DRI to reallocate all of the necessary
employees and resources of Virginia Power necessary to the provision of such
services to DRI Services by such time. Therefore, DRI also requests
authorization for Virginia Power and DRI Services to
-40-
<PAGE>
enter into the Virginia Power Support Agreement pursuant to which Virginia Power
will continue to provide the same types of services that it has historically
provided to DRI system companies to DRI Services which will in turn provide such
services to system companies under the Service Agreement. The Virginia Power
Support Agreement is closely modeled after the Service Agreement and uses the
same cost allocation methodology. The Service Agreement and the Virginia Power
Support Agreement will replace certain existing agreements between DRI system
companies pursuant to which Virginia Power has historically provided services to
DRI system companies. Finally, DRI is proposing an Ancillary Service Agreement
pursuant to which individual system companies which are subject to VSCC
jurisdiction can contract with other individual system companies for specific
services. The Ancillary Service Agreement also contains a cost allocation
methodology based on the methodology in the Service Agreement. Establishing the
Virginia Power Support Agreement and the Ancillary Service Agreement as the
contractual framework under which these services may be performed ensures DRI
and CNG and their subsidiaries timely ability to access system resources for
special situations in compliance with Commission rules and regulations as well
as Virginia law and VSCC rules, regulations and orders which require, among
other things, that the VSCC approve in advance all contracts between VSCC
jurisdictional utilities and affiliates. The memorialization of these
arrangements in writing will also facilitate regulatory review of the underlying
transactions.
The number of separate service company providers and service contracts
initially proposed for the combined DRI-CNG system is somewhat unusual for a
registered system. It is, however, a practical and efficient interim means for
DRI and CNG to implement their transition to a centralized and unified system in
compliance with applicable law, including Virginia law which requires that the
VSCC provide prior approval to any transaction involving affiliates of a VSCC
jurisdictional utility, while still having the flexibility to run their
business. DRI and CNG have already begun the process of analyzing their combined
service needs and anticipate that immediately following completion of the Merger
they will manage the provision of services to system companies in a centralized
manner in order to avoid duplication of effort and to achieve the cost reduction
efficiencies anticipated to be achieved from the Merger. Following completion of
the Merger, DRI and CNG will also commence the transition to a single
centralized service provider which will, in time, result in the performance of
all routine service functions to system companies by a single system-wide
service provider. DRI and CNG commit to effect this centralization by no later
than March 31, 2001. As a corporate matter this result will ultimately be
achieved by either the merger of DRI Services and CNG Services or the
dissolution of one of such entities and the transfer to the surviving service
company of the support functions which may initially be performed by Virginia
Power under the Virginia Power Support Agreement. The sole anticipated
exceptions to the centralization of the service functions described above and
the timing within which centralization is expected to be achieved will be with
respect to (i) customer accounting which will continue to be performed
separately for electric and gas companies for a longer period of time due to the
incompatibility of the existing systems and the need to develop a new system to
replace the two existing systems and (ii) incidental and occasional services.
Thus, DRI is currently requesting that the Commission authorize (i) the
form of Service Agreement annexed as Exhibit K-1.1 hereto, (ii) the form of
Virginia Power Support Agreement annexed as Exhibit K-1.2 hereto and (iii) the
form of Ancillary Service Agreement
-41-
<PAGE>
annexed as Exhibit K-1.3 hereto, as bases for the relevant service providers to
comply with Section 13 of the Act. DRI is also currently requesting
authorization to maintain subsequent to the Merger DRI Services. Initially, DRI
Services will issue 100 shares of common stock, no par value, all of which will
be subscribed to by DRI at a price of $1 per share. Following the completion of
DRI's analysis as to the best means for rationalizing and centralizing the
provision of services within the system and on or before February 1, 2001, DRI
will submit a revised Service Agreement to the Commission for a supplemental
order approving such agreement. This revised Service Agreement will reflect the
consolidation of most services in a single service provider, together with any
requested amendments and modifications designed to reflect the efficiencies and
administrative synergies developed during the interim period of rationalization.
DRI has not yet determined whether, following such consolidation, it will be
necessary to maintain either or both of the Virginia Power Support Agreement or
the Ancillary Agreement. Any revisions to these two agreements will also be
reflected in the subsequent request to be filed by DRI on or before February 1,
2001.
The Service Agreement contemplates that the following services will be
offered to system companies:
1. Accounting. The Service Companies will offer advice and assistance to
system companies in accounting matters, including the development of accounting
practices, procedures and controls, the maintenance of the ledger and related
subsidiary systems, the preparation and analysis of financial reports, and the
processing of certain accounts such as accounts payable, payroll, customer and
cash management.
2. Auditing. The Service Companies' internal auditing staff will offer to
audit, periodically, the accounting records and other records maintained by
system companies, coordinating their examination, where applicable, with that of
independent public accountants. Such personnel will report on their examination
and submit recommendations, as appropriate, on improving methods of internal
control and accounting procedures.
3. Legal and Regulatory. The Service Companies will offer advice and
assistance with respect to legal and regulatory issues as well as regulatory
compliance, including 1935 Act authorizations and compliance and regulatory
matters under other Federal and State laws.
4. Environmental Compliance. The Service Companies will provide consulting,
cleanup and other service activities as required to ensure full compliance with
applicable environmental statutes and regulations.
5. Information Technology, Electronic Transmission and Computer Services.
The Service Companies will offer to provide the organization and resources for
the operation of an information technology function including the development,
implementation and operation of a centralized data processing facility and the
management of a telecommunications network. This function includes the central
processing of computerized applications and support of individual applications
in system companies. The Service Companies will also develop, implement, and
-42-
<PAGE>
process those computerized applications for system companies that can be
economically best accomplished on a centralized basis.
6. Software Pooling. The Service Companies will offer to accept from system
companies ownership of and rights to use, assign, license or sublicense all
software owned, acquired or developed by or for system companies which system
companies can and do transfer or assign to it. The Service Companies will
preserve and protect the rights to all such software to the extent reasonable
and appropriate under the circumstances; to license system companies, on a
non-exclusive, no-charge or at-cost basis, to use all software which the
relevant Service Companies has the right to sell, license or sublicense; and, at
the relevant system companies' expense, to permit system companies to enhance
any such software and to license others to use all such software and
enhancements to the extent that the relevant Service Companies shall have the
legal right to so permit.
7. Employee Benefits/Pension Investment. The Service Companies will offer
to provide central accounting for employee benefit and pension plans of system
companies. The Service Companies will offer to advise and assist system
companies in the administration of such plans and will offer to prepare and
maintain records of employee and company accounts under the said plans, together
with such statistical data and reports as are pertinent to the plans.
8. Employee Relations. The Service Companies will offer to advise and
assist system companies in the formulation and administration of employee
relations policies and programs relating to the relevant system companies' labor
relations, personnel administration, training, wage and salary administration
and safety.
9. Operations. The Service Companies will offer to advise and assist system
companies in the study, planning, engineering and construction of energy plant
facilities of each system company and of the System as a whole, and will advise,
assist and manage the planning, engineering (including maps and records) and
construction operations of system companies electing this service. The Service
Companies will develop long-range operational programs for all the system
companies and will advise and assist each system company in the coordination of
such programs with the programs of the other system companies. The Service
Companies may also offer to perform meter management for system companies.
10. Executive and Administrative. The Service Companies will offer to
advise and assist system companies in the solution of major problems and in the
formulation and execution of the general plans and policies of system companies
electing this service. The Service Companies will advise and assist system
companies as to operations, the issuance of securities, the preparation of
filings arising out of or required by the various Federal and State securities,
business, public utilities and corporation laws, the selection of executive and
administrative personnel, the representation of system companies before
regulatory bodies, proposals for capital expenditures, budgets, financing,
acquisition and disposition of properties, expansion of business, rate
structures, public relationships and other related matters.
-43-
<PAGE>
11. Business & Operations Services. The Service Companies will offer to
advise and assist system companies in all matters relating to operational
capacity and the preparation and coordination of operating studies. The Service
Companies will manage system companies' purchase, sale, movement, transfer and
accounting of volumes to ensure continued recovery of all prudently incurred
energy purchase costs through local jurisdictional cost recovery mechanisms. The
Service Companies will also compile and communicate information relevant to
system operation. Additionally, the Service Companies will offer to perform
general business and operations support services, including business, plant and
facilities operation, maintenance and management, travel, aviation, fleet and
mail services.
12. Exploration and Development. The Service Companies will offer to advise
and assist system companies in all geological and exploration matters including
the acquisition and surrender of acreage, and the development of underground
storage facilities.
13. Risk Management. The Service Companies will offer to advise and assist
system companies in securing requisite insurance, in the purchase and
administration of all property, casualty and marine insurance, in the settlement
of insured claims and in providing risk prevention advice.
14. Marketing. The Service Companies will offer to plan, formulate and
implement marketing programs, as well as provide associated marketing services
to assist system companies with improving customer satisfaction, load retention
and shaping, growth of energy sales and deliveries, energy conservation and
efficiency. The Service Companies will also offer to assist system companies in
carrying out policies and programs for the development of plant locations and of
industrial, commercial and wholesale markets and will assist with community
redevelopment and rehabilitation programs.
15. Medical. The Service Companies will offer to direct and administer all
medical and health activities of system companies, will provide systems of
physical examination for employment and other purposes and will direct and
administer programs for the prevention of sickness.
16. Corporate Planning. The Service Companies will offer to advise and
assist system companies in studying and planning in connection with operations,
budgets, economic forecasts, capital expenditures and special projects.
17. Purchasing. The Service Companies will offer to advise and assist
system companies in the purchase of real and personal property, materials,
supplies and services, will conduct purchase negotiations, prepare purchasing
agreements and will administer programs of material control.
18. Rates. The Service Companies will offer to advise and assist system
companies in the analysis of their rate structure in the formulation of rate
policies and in the negotiation of large contracts. The Service Companies will
also offer to advise and assist system companies in proceedings before
regulatory bodies involving the rates and operations of system
-44-
<PAGE>
companies and of other competitors where such rates and operations directly or
indirectly affect system companies.
19. Research. The Service Companies will offer to investigate and conduct
research into problems relating to production, utilization, testing,
manufacture, transmission, storage and distribution of energy. The Service
Companies will keep abreast of and evaluate for system companies all research
developments and programs of significance affecting system companies and the
energy industry, will conduct research and development in promising areas and
will advise and assist in the solution of technical problems arising out of
system companies' operations.
20. Tax. The Service Companies will offer to advise and assist system
companies in the preparation of Federal and other tax returns, and will
generally advise system companies as to any problems involving taxes including
the provision of due diligence in connection with acquisitions.
21. Corporate Secretary. The Service Companies will offer to provide all
necessary functions required of a publicly held corporation; coordinating
information and activities among shareholders, the transfer agent, and Board of
Directors; providing direct services to security holders; preparing and filing
required annual and interim reports to shareholders and the SEC; conducting the
annual meeting of shareholders and ensuring proper maintenance of corporate
records.
22. Investor Relations. The Service Companies will offer to provide fair
and accurate analysis of DRI and its operating subsidiaries and its outlook
within the financial community, enhancing DRI's position in the energy industry;
balancing and diversifying shareholder investment in DRI through a wide range of
activities; providing feedback to DRI and its operating subsidiaries regarding
investor concerns, trading and ownerships; holding periodic analysts meetings;
and providing various operating data as requested or required by investors.
23. Customer Service. The Service Companies will provide services and
systems dedicated to customer service, including billing, remittance, credit,
collections, customer relations, call centers, energy conservation support and
metering.
24. Energy Marketing. The Service Companies will provide services and
systems dedicated to energy marketing, including marketing and trading of gas
and electric power, energy price risk management, and development of marketing
and sales programs in physical and financial markets.
25. Treasury/Finance. The Service Companies will provide services related
to managing all administrative activities associated with financing, including
management of capital structure; cash, credit and risk management activities;
investment and commercial banking relationships; oversight of decommissioning
trust funds and general financing activities.
-45-
<PAGE>
26. External Affairs. The Service Companies will provide services in
support of corporate strategies for managing relationships with federal, state
and local governments, agencies and legislative bodies. The Service Companies
will formulate and assist with public relations and communications programs and
administration of corporate contribution and community affairs programs.
The Virginia Power Support Agreement contemplates that Virginia Power may
provide the following services to DRI Services:
1. Accounting. Virginia Power will provide advice and assistance in
accounting matters, including the development of accounting practices,
procedures and controls, the maintenance of the general ledger and related
systems, the preparation and analysis of financial statement reports, and the
processing of certain accounts payable, payroll, customer and cash management
transactions.
2. Auditing. Virginia Power audit staff will periodically audit accounting
records and other records and coordinate audit examinations where applicable,
with that of independent public accountants. The audit staff will report on
their examination and submit recommendations, as appropriate, on improving
methods of internal control and accounting procedures.
3. Legal and Regulatory. Virginia Power will provide advice and assistance
with respect to legal and regulatory issues as well as regulatory compliance
under Federal and State laws.
4. Information Technology, Electronic Transmission and Computer Services.
Virginia Power will assist with the operation of an information technology
function including the development, implementation and operation of a
centralized data processing facility and the management of a telecommunications
network. This function includes the central processing of computerized
applications and support of individual applications. It will also provide
computer resource/network availability, including enterprise telecommunications
infrastructure, mainframe and distributed computing hardware, operating systems,
business systems and applications, internet, intranet and mail environments,
software licenses and maintenance agreements.
5. Employee Benefits/Pension Investment. Virginia Power will advise and
assist in the administration of employee benefit and pension plans and prepare
and maintain records of employee and company accounts under the said plans,
together with such statistical data and reports as are pertinent to the plans.
6. Employee Relations. Virginia Power will advise and assist in the
formulation and administration of employee relations policies and programs
relating to labor relations, personnel administration, training, wage and salary
administration and safety.
7. Operations. Virginia Power will advise and assist in the study,
planning, engineering and construction of energy plant facilities. Virginia
Power will assist in the
-46-
<PAGE>
development of long-range operational programs and will offer management,
consulting and advisory/technical services with respect to the physical
operation of energy plant facilities and the purchase, sale and transfer of
affiliated companies.
8. Executive and Administrative. Virginia Power will advise and assist in
the solution of major problems and in the formulation and execution of general
plans and policies. Virginia Power will advise and assist as to operations, the
issuance of securities, the preparation of filings arising out of or required by
the various Federal and State securities, business, public utilities and
corporation laws. Virginia Power will advise as to the selection of executive
and administrative personnel, representation before regulatory bodies, proposals
for capital expenditures, budgets, financings, acquisition and disposition of
properties, expansion of business, rate structures, public relationships and
other related matters.
9. Business and Operations Services. Virginia Power will advise and assist
in all matters relating to operational capacity and the preparation and
coordination of operating studies. Virginia Power will provide assistance with
management of the purchase, sale, movement, transfer and accounting of volumes
to ensure continued recovery of all prudently incurred energy purchase costs
through local jurisdictional cost recovery mechanisms. Virginia Power will
compile and communicate information relevant to operations and will perform
general business and operations support services, including travel services,
fleet, mail, plant and facilities operation, maintenance and management.
10. Exploration and Development. Virginia Power will advise and assist in
geological and exploration matters including the acquisition and surrender of
acreage and the development of underground storage facilities.
11. Risk Management. Virginia Power will provide risk management services
such as the securing of requisite insurance, the purchase and administration of
property, casualty and marine insurance, the settlement of insured claims and
the provision of risk prevention advice.
12. Marketing. Virginia Power will assist in the planning, formulation and
implementation of marketing programs, as well as provide associated marketing
services to assist with improving customer satisfaction, load retention and
shaping, growth of energy sales and deliveries, energy conservation and
efficiency. Virginia Power will assist in carrying out policies and programs for
the development of plant locations and of industrial, commercial and wholesale
markets and assist with community redevelopment and rehabilitation programs.
13. Budgeting and Planning. Virginia Power will advise and assist in
studying and planning in connection with operations, budgets, economic
forecasts, rate structures, capital expenditures and special projects.
14. Purchasing. Virginia Power will advise and assist in the purchase of
materials, supplies and services and the preparation and negotiation of
purchasing agreements.
-47-
<PAGE>
15. Rates. Virginia Power will advise and assist in the analysis of rate
structures, the formulation of rate policies and the negotiation of large
contracts. Virginia Power will also provide consulting in connection with
proceedings before regulatory bodies involving rates and operations.
16. Research. Virginia Power will Investigate and conduct research into
problems relating to production utilization, testing, manufacture, transmission,
storage and distribution of energy. Virginia Power will evaluate and conduct
research and development in promising areas and advise and assist in the
solution of technical problems arising out of operations.
17. Tax. Virginia Power will advise and assist in the preparation of
separate and consolidated tax returns (Federal and State), interpretations of
tax laws, administration of tax audits, payment of taxes and related matters.
18. Environmental Compliance. Virginia Power will provide consulting and
related services to ensure full compliance with applicable environmental
statutes and regulations.
19. Customer Service. Virginia Power will provide services and systems
dedicated to customer service, including billing, remittance, credit,
collections, customer relations, call centers, energy conservation support and
metering.
20. Energy Marketing. Virginia Power will provide services and systems
dedicated to energy marketing, including marketing and trading of gas and
electric power, energy price risk management, and development of marketing and
sales programs in physical and financial markets.
21. Treasury/Finance. Virginia Power will provide services related to
managing all administrative activities associated with financing, including
management of capital structure; cash, credit and risk management activities;
investment and commercial banking relationships; oversight of decommissioning
trust funds and general financing activities.
22. Office Space and Equipment. Virginia Power will assist in the leasing
of land, buildings, furnishings and equipment, including computer hardware and
software and transportation equipment.
23. External Affairs. Virginia Power will provide services in support of
corporate strategies for managing relationships with federal, state and local
governments, agencies and legislative bodies. Virginia Power will formulate and
assist with public relations and communications programs and administration of
corporate contribution and community affairs programs.
Under the Ancillary Service Agreement in which the company receiving
services (the "Receiving Company") and the company providing services (the
"Providing Company") are
-48-
<PAGE>
either a direct or indirect subsidiary of DRI, the Providing Company may provide
the following services:
1. Accounting, Treasury and Finance. The Providing Company may provide
advice and assistance to the Receiving Company in accounting, treasury and
finance matters, including the development of accounting practices, procedures
and controls (including the maintenance of the general ledger and related
subsidiary systems), the preparation and analysis of financial reports, and the
processing of certain accounts such as accounts payable, payroll, customer and
cash management.
2. Legal and Regulatory. The Providing Company may provide advice and
assistance with respect to legal and regulatory issues as well as regulatory
compliance, including 1935 Act authorizations and compliance and regulatory
matters under other Federal and State laws.
3. Information Technology, Electronic Transmission and Computer Services.
The Providing Company may provide the organization and resources for the
operation of an information technology function including the operation of a
data processing facility and the management of a telecommunications network. The
Providing Company may also develop, implement and process computerized
applications for the Receiving Company.
4. Software. The Providing Company may license the Receiving Company, on a
non-exclusive, no-charge or at-cost basis, to use all software which Providing
Company has the right to sell, license or sub-license; and, at the Receiving
Company's expense, permit the Receiving Company to enhance any such software and
license others to use all such software and enhancements to the extent that
Providing Company shall have the legal right to so permit.
5. Operations. The Providing Company may advise and assist the Receiving
Company in the study, planning, engineering and construction of its energy plant
facilities, advise and assist in matters related to gas control and advise,
assist and manage the planning, engineering (including maps and records) and
construction operations of the Receiving Company. The Providing Company may also
develop long-range operational programs for the Receiving Company and advise and
assist the Receiving Company in the coordination of such programs with the
programs of the other DRI subsidiaries.
6. Executive and Administrative. The Providing Company may advise and
assist the Receiving Company in the solution of major problems and in the
formulation and execution of the general plans and policies of the Receiving
Company. The Providing Company may also advise and assist the Receiving Company
as to operations, the issuance of securities, the preparation of filings arising
out of or required by the various Federal and State securities, business, public
utilities and corporation laws, the selection of executive and administrative
personnel, the representation of the Receiving Company before regulatory bodies,
proposals for capital expenditures, budgets, financing, acquisition and
disposition of properties, expansion of business, rate structures, public
relationships and other related matters.
-49-
<PAGE>
7. Business and Operations Services. The Providing Company may advise and
assist the Receiving Company in all matters relating to operational capacity and
the preparation and coordination of operating studies. The Providing Company may
manage the Receiving Company's purchase, sale, movement, transfer and accounting
of volumes to ensure continued recovery of all prudently incurred energy
purchase costs through local jurisdictional cost recovery mechanisms. The
Providing Company may compile and communicate information relevant to system
operation. The Providing Company may also perform general business and
operations support services, including business, plant and facilities operation,
maintenance and management, and travel, aviation, fleet and mail services.
8. Exploration and Development. The Providing Company may advise and assist
the Receiving Company in all geological and exploration matters including the
acquisition and surrender of acreage and the development of underground storage
facilities.
9. Marketing. The Providing Company may plan, formulate and implement
marketing programs (other than energy marketing), as well as provide associated
marketing services to assist the Receiving Company with improving customer
satisfaction, load retention and shaping, growth of energy sales and deliveries,
energy conservation and efficiency. The Providing Company may assist the
Receiving Company in carrying out policies and programs for the development of
plant locations and of industrial, commercial and wholesale markets and assist
with community redevelopment and rehabilitation programs.
10. Corporate Planning. The Providing Company may advise and assist the
Receiving Company in studying and planning in connection with operations,
budgets, economic forecasts, capital expenditures and special projects.
11. Purchasing. The Providing Company may advise and assist the Receiving
Company in the purchase of materials, supplies and services, conduct purchase
negotiations, prepare purchasing agreements and administer programs of material
control.
12. Rates. The Providing Company may advise and assist the Receiving
Company in the analysis of its rate structure in the formulation of rate
policies and in the negotiation of large contracts. The Providing Company may
advise and assist the Receiving Company in proceedings before regulatory bodies
involving the rates and operations of the Receiving Company and of other
competitors where such rates and operations directly or indirectly affect the
Receiving Company.
13. Research. The Providing Company may investigate and conduct research
into problems relating to production, utilization, testing, manufacture,
transmission, storage and distribution of energy. The Providing Company may keep
abreast of and evaluate for the Receiving Company all research developments and
programs of significance affecting the Receiving Company and the energy
industry, conduct research and development in promising areas and advise and
assist in the solution of technical problems arising out of the Receiving
Company's operations.
-50-
<PAGE>
14. Tax. The Providing Company may advise and assist the Receiving Company
in the preparation of Federal and other tax returns, and generally advise the
Receiving Company as to any problems involving taxes including the provision of
due diligence in connection with acquisitions.
15. Environmental Compliance. The Providing Company may provide consulting,
cleanup, and other activities as required by Receiving Company to ensure full
compliance with applicable environmental statutes and regulations.
16. Customer Services. The Providing Company may provide services and
systems dedicated to customer service, including billing, remittance, credit,
collections, customer relations, call centers, energy conservation support and
metering.
17. Energy Marketing. The Providing Company may provide services and
systems dedicated to energy marketing, including marketing and trading of gas
and electric power, and energy price risk management and development of
marketing and sales programs in physical and financial markets.
18. External Affairs. The Providing Company may provide services in support
of corporate strategies for managing relationships with federal, state and local
governments, agencies and legislative bodies. The Providing Company may
formulate and assist with public relations and communications programs and
administration of corporate contribution and community affairs programs.
Following completion of the Merger, DRI anticipates that all services
provided to system companies by affiliates will be provided in accordance with
all applicable provisions of the 1935 Act and the rules and regulations of the
Commission promulgated thereunder. However, as of the date of this
Application-Declaration, Virginia Power has entered into a number of affiliate
transactions with system companies in compliance with Virginia law and the
express approval of the VSCC, which must approve all transactions between
affiliates involving a jurisdictional Virginia utility. These existing
arrangements are also in compliance with the requirements of state law in the
states with jurisdiction over Virginia Power's operations. However, the stated
pricing terms of these existing arrangements do not fully comply with the
Commission's "at-cost" rules. The pricing of these affiliate transactions has
been done in a manner consistent with a 1986 settlement order issued by the VSCC
following a much publicized and controversial proceeding involving DRI and
Virginia Power and are based on the standard that goods or services provided to
Virginia Power are priced at the lower of cost or market whereas purchases of
goods or services from Virginia Power are priced at the higher of cost or
market. The Virginia rules are designed to insure that the regulated utility,
Virginia Power, always benefits from any contract entered into with an
affiliate. Following completion of the Merger, Virginia Power will not take any
services from affiliates except in compliance with all applicable provisions of
the 1935 Act and the rules and regulations of the Commission promulgated
thereunder as well as all applicable provisions of state law which apply to
Virginia Power. However, DRI does request a temporary three-month exemption from
the "at-cost" rules to permit Virginia Power to continue to meet its obligations
under certain existing contracts and arrangements in effect as of
-51-
<PAGE>
the date hereof and which have been approved by the VSCC, pending their intended
replacement by the Service Agreement and the Virginia Power Support Agreement as
soon as the same are approved or otherwise permitted by the VSCC and the North
Carolina Utilities Commission (the "North Carolina Commission"), the West
Virginia Public Service Commission (the "West Virginia Commission") and the
Pennsylvania Utility Commission (the "Pennsylvania Commission"). DRI and CNG and
their relevant affiliates have already filed applications for the approval of
the Service Agreement, the Virginia Power Support Agreement and the Ancillary
Service Agreement with the state commissions of Virginia, North Carolina, West
Virginia and Pennsylvania and expect such approvals to be obtained within three
months of the Closing of the Merger. In any event, DRI and CNG commit that no
later than the end of the three-month period of temporary exemption from the
"at-cost" rates herein requested, no DRI-CNG affiliate will take or provide any
service from an affiliate in contravention of the Commission's rules under the
Act applicable to such transaction.
Specifically, DRI seeks to Commission approval to continue to meet its
obligations under each of the following agreements and arrangements: (x) the
Cost Allocation and Services Agreement dated July 1, 1986 between DRI and
Virginia Power, (y) the Intercompany Transportation Agreement dated October 29,
1993 between DRI and Virginia Power and (z) arrangements with respect to
Insurance Services and Employee Benefit Services provided by Virginia Power to
DRI and DRI's unregulated subsidiaries. This temporary exemption is intended to
function as a transitional measure as DRI moves from exempt holding company to
registered holding company status.
In further support of its request for a temporary exemption from the
"at-cost" rules for service arrangements between Virginia Power and affiliates
that are not "Exempt Non-Utility Affiliates", DRI notes that the Commission has,
in a number of cases, granted exemptions to the "at-cost" rules in order to give
effect to state regulatory commission orders or settlement agreements pursuant
to Section 13(b)'s authorization to grant exceptions for transactions including
"special or unusual circumstances".10 In particular, in the recent order issued
to Entergy, the Commission granted authority for payment to regulated utilities
for services rendered to nonregulated businesses at the fully allocated cost of
the service plus 5%, as provided for in settlement agreements between Entergy
and the Arkansas, Louisiana, Mississippi state commissions and the commission of
the City of New Orleans. In its decision, the Commission stated that, while
there was no evidence to suggest that fully allocated costs would not adequately
reimburse the regulated utilities for the services they provide, it was
appropriate to give substantial weight to the views of New Orleans, the Arkansas
Commission, the Mississippi Commission and the Louisiana Commission in
concluding the provisions of the settlement agreements will protect retail
ratepayers. The Commission further stated that the grant of exemptive relief was
consistent with its precedent under Section 13(b) insofar as the provisions of
the settlement agreements were
- --------
10 See Entergy Corporation, Holding Co. Act Release No. 27040 (June 22,
1999); Entergy Corporation, Holding Co. Act Release No. 27039 (June 22, 1999);
Blackhawk Coal Co., Holding Co. Act Release No. 23834 (Sept. 20, 1985) and EUA
Cogenex Corp., Holding Co. Act Release No. 26373 (Sept. 14, 1995).
-52-
<PAGE>
the ancillary steps needed to implement a "carefully crafted settlement of a
long and full-aired controversy". DRI's request for an exemption from the
"at-cost" rules limited to the provision of services by Virginia Power to
non-utility affiliates is, like the multi-state Entergy settlement, designed to
give effect to existing arrangements which the VSCC has approved as consistent
with the interest of ratepayers in a "fully aired" proceeding and is therefore
consistent with existing precedent under the Act.11 Moreover, no purpose is
served under the 1935 Act in requiring Virginia Power to perform such services
at cost under the limited circumstances and for the limited duration herein
requested, particularly in view of the companies' commitment to make whole any
company for any excess payment made to Virginia Power during such three-month
period and the companies' further commitment to abide by the Commission's rules
in all respects by a date certain of no later than the end of such three-month
period.
DRI also requests an exemption from the "at cost" rules (i) to permit
Virginia Power to continue to meet its obligations under existing arrangements
which have been approved by the relevant state regulatory authorities to provide
services to "Exempt Non-Utility Affiliates" in accordance with the terms of the
1986 settlement order and (ii) with respect to future service arrangements under
which Virginia Power would provide services to "Exempt Non-Utility Affiliates"
within the DRI-CNG system. The term "Exempt Non-Utility Affiliates" as used in
the preceding clauses (i) and (ii) means (1) FUCOs and EWGs which do not derive
any part of their income, directly or indirectly, from the generation and sale
of electric energy within the United States, (2) EWGs which sell electricity at
market-based rates that have been approved by the FERC or the relevant state
public utility commission, provided that the purchaser is not an electric
utility company affiliate of DRI, (3) QFs under PURPA which sell electricity
exclusively at rates negotiated at arm's-length to one or more industrial or
commercial customers purchasing electricity for their own use and not for resale
or to an electric utility company which is not a DRI affiliate at the
purchaser's "avoided costs" as determined under applicable regulation and (4)
EWGs and QFs under PURPA which sell electricity at rates based upon cost of
service, as approved by the FERC or any state utility commission having
jurisdiction, provided that the purchaser is not an electric utility company
affiliate of DRI (collectively, the "Exempt Non-Utility Affiliates"). This
exemption request is consistent with a number of orders issued by the
Commission.12
Finally, DRI requests an exemption from the "at-cost" rules with respect to
other service arrangements that might be entered into by Virginia Power with
other non-utility affiliates of DRI which are not "Exempt Non-Utility
Affiliates" and pursuant to which Virginia Power
- --------
11 In its 1995 Report on The Regulation of Public-Utility Holdings
Companies, the Division of Investment Management specifically recommended that
the SEC work with other regulators to satisfy concerns over affiliate
transactions and respond flexibly and effectively in this area.
12 See Interstate Energy Corporation, Holding Co. Act Release No. 27069
(Aug. 26, 1999); Ameren Corp, Holding Co. Act Release No. 27053 (July 23, 1999);
Entergy Corporation, Holding Co. Act Release No. 27039 (June 22, 1999); New
Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997).
-53-
<PAGE>
might provide services to such other non-utility affiliates; however, DRI
requests that the Commission reserve jurisdiction over this request pending
completion of the record.
Item 4. Regulatory Approvals.
Set forth below is a summary of the regulatory approvals that DRI and CNG
have obtained or expect to obtain in connection with the Merger in addition to
the approval of the Commission under the 1935 Act.
Antitrust Considerations
Under the HSR Act, DRI and CNG cannot consummate the Second Merger until
each has submitted certain information to the Antitrust Division of the DOJ and
the FTC. Additionally, each company must satisfy specified HSR Act waiting
period requirements. On November 5, 1999, the FTC accepted a proposed Consent
Agreement with DRI and CNG. Such Consent Agreement was thereafter published for
comment by the FTC for a period of 30 days. The public comment period expires on
December 7, 1999, and thereafter the FTC will decide whether to issue a final
approval of the Consent Agreement. A copy of the Consent Agreement is annexed
hereto as Exhibit D.
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. By letter dated December 7, 1999, the NRC
expressed concurrence with such 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:
-54-
<PAGE>
o the effect of the merger on competition in wholesale electric power
markets, utilizing an initial screening approach derived from the
DOJ/FTC-Initial Merger Guidelines to determine if a merger will result
in an increase in an applicant's market power;
o the effect of the merger on the applicants' FERC jurisdictional
ratepayers; and
o the effect of the merger on state and federal regulation of the
applicants.
DRI's power-marketing affiliates are authorized by FERC to sell electric
power at wholesale in interstate commerce at market-based rates. CNG's power
marketing affiliates have similar authorizations from FERC. These
authorizations, which were obtained under Section 205 of the FPA, were
predicated in part on FERC's finding that the power-marketing affiliates of DRI
and CNG lack market power over the generation and transfer of electric energy
and, therefore, could not sell electric power at prices above competitive
levels. As a condition of the power marketer authorizations, the power marketing
affiliates of DRI and CNG are required to report any changes in status that
could result in a change in the facts FERC relied upon in approving market-based
rates. Pursuant to this requirement, the power-marketing affiliates of DRI and
CNG will file notifications of a "change in status" with FERC. These
notifications will inform FERC of the Merger Agreement and will advise FERC that
the power-marketing affiliates of both DRI and CNG would not deal with one
another except under specified certain circumstances during the pendency of the
Second Merger.
The FERC approved the Merger on November 10, 1999. A copy of the FERC Order
is annexed hereto as Exhibit D-1.2. The related compliance filing by the parties
is annexed hereto as Exhibit D-1.2.1. The necessary filings have been made with
FERC to allow DRI and CNG power-marketing affiliates to continue to engage in
wholesale power transactions at market-based rates.
VSCC
DRI's wholly owned subsidiary, Virginia Power, and CNG's wholly-owned
subsidiary, VNG, are subject to the jurisdiction of the VSCC. The VSCC must
approve the acquisition of any Virginia public utility. The applicants must show
that the provision of adequate service at just and reasonable rates will not be
threatened or impaired as a result of the acquisition. On September 17, 1999,
the VSCC issued its order approving the merger.
The order of the VSCC requires that Virginia Power/DRI and VNG/CNG advise
the Commission of certain conditions contained in the VSCC order. Those
conditions are as follows:
-55-
<PAGE>
Petitioners, Virginia Power and VNG13 shall have the following continuing
obligations:
(A) With respect to any contract that is subject to Section 12 or 13 of
the [1935 Act]:
(i) Neither Virginia Power, VNG, nor any other DRI affiliate subject
to [VSCC] regulation, shall enter into such contract without
first obtaining an order from [the VSCC] approving such action.
(ii) Any such contract shall contain language providing that neither
Virginia Power, VNG nor such affiliate shall have any obligation
under such contract except to the extent [the VSCC] has approved
such obligation.
(B) Neither Virginia Power nor VNG shall transfer, or commit to transfer,
to any affiliate or nonaffiliate, the control or ownership of any
asset or portion thereof used for the generation, transmission,
distribution or other provision of electric power and/or service or
gas supply and/or service to customers in Virginia, without first
obtaining all approvals from [the VSCC] that are required by state
law.
The VSCC order also contains a condition to the effect that the VSCC must
determine that "any orders of the [Commission] approving the Petitioners'
[Virginia Power and VNG] merger application are not inconsistent with" the order
of the VSCC. A copy of the VSCC order approving the merger is annexed hereto as
Exhibit D-2.2.
North Carolina Commission
Virginia Power is subject to the jurisdiction of the North Carolina
Commission as it operates in North Carolina under the name North Carolina Power.
The North Carolina Commission must approve any merger or combination affecting
any public utility. On October 18, 1999, the North Carolina Commission issued
its order approving the Merger. A copy of the order of the North Carolina
Commission approving the Merger is annexed hereto as Exhibit D-3.2.
The order of the North Carolina Commission requires that North Carolina
Power/DRI advise the Commission of certain conditions and make certain requests
of the Commission contained in the North Carolina Commission order. These
conditions and requests are as follows:
- --------
13 All conditions will continue in force as to VNG only until such time as
its divestiture from the Petitioners is completed, except as otherwise required
by law.
-56-
<PAGE>
Petitioner, North Carolina Power shall have the following obligations:
(A) With respect to any transaction that is subject to Section 13 of the 1935
Act, the following procedures shall apply:
(1) North Carolina Power shall not engage in any such transaction without
first obtaining from the North Carolina Commission such authority as
is required under North Carolina law in connection with the acceptance
of the contract that memorializes such a transaction and the
authorization of the payment of compensation or fees pursuant thereto.
Proposed contracts must first be submitted to the Public Staff for
informal review at least ten days before filing with the North
Carolina Commission.
(2) Any such contract shall provide that North Carolina Power
(a) may not make or incur a charge under any such contract except in
accordance with North Carolina law and the rules, regulations and
orders of the North Carolina Commission promulgated thereunder;
and
(b) may not seek to reflect in rates any cost incurred or revenue
level earned under an agreement subject to the 1935 Act to the
extent disallowed by the North Carolina Commission.
(3) The Commission shall have found that such contract is not inconsistent
with the Act except that no such finding by the Commission shall be
required if no Commission approval of such contract is required under
the Act.
(4) Neither North Carolina Power, DRI, or any Affiliate thereof shall
assert in any forum that the Act in any way preempts the North
Carolina Commission from reviewing the reasonableness of any
commitment entered into by North Carolina Power and from disallowing
costs of or imputing revenues to North Carolina Power. Should any
other entity so assert, North Carolina Power, DRI, or an Affiliate
shall not support any such assertion and shall, upon learning of such
assertion, so advise and consult with the North Carolina Commission
and Public Staff regarding such assertion.
(B) DRI and CNG request the Commission to include the following language in any
order issued approving DRI's acquisition of CNG:
Approval of this application in no way precludes the North Carolina
Commission from scrutinizing and disallowing charges incurred or made or
allowing or imputing a different level of such charges when setting rates
for services rendered to customers of Affiliate public utilities.
-57-
<PAGE>
(C) With respect to the voluntary transfer by North Carolina Power to
non-public Utility Operations, and Affiliate, and/or a non-Affiliate, of
the control or ownership of any asset or portion thereof used for the
transmission, distribution, generation or other provision of electric power
and/or service to customers in North Carolina:
(1) DRI and North Carolina Power shall not commit to or carry out such a
transfer except in accordance with North Carolina law and the rules,
regulations and orders of the North Carolina Commission promulgated
thereunder; and
(2) North Carolina Power may not reflect in rates the value of any such
transfer subject to the Act except as allowed by the North Carolina
Commission.
(D) DRI and CNG request that the Commission include the following in its
approval order:
The Commission further finds that its approval of this acquisition or
future financing arrangements does not preclude the North Carolina
Commission or other regulatory authority from setting rates based on the
assumption of a capital structure, a corporate structure, debt costs or
equity costs that varies from the structure(s) or cost(s) approved in the
North Carolina Commission order.
The North Carolina Commission order also contains a condition that, in any
filing with the Commission in connection with asset transfers involving North
Carolina Power, approval of such application does not preclude the North
Carolina Commission from scrutinizing and establishing the value of the asset
transfer for purposes of determining the rates for services rendered to North
Carolina Power's customers.
West Virginia Commission
CNG's wholly owned subsidiary, Hope, is subject to the jurisdiction of the
West Virginia Commission. No person or corporation may acquire either directly
or indirectly a majority of the common stock of any public utility organized and
doing business in West Virginia without the approval of the West Virginia
Commission. The West Virginia Commission may approve such a transaction upon
proper showing that the terms and conditions are reasonable, that neither party
to it is given an undue advantage over the other, and that it does not adversely
affect the public in West Virginia. The West Virginia Commission granted its
approval on July 27, 1999. A copy of the order is annexed hereto as Exhibit
D-4.2.
Pennsylvania Commission
CNG's wholly owned subsidiary, Peoples, is subject to the jurisdiction of
the Pennsylvania 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
-58-
<PAGE>
transaction will affirmatively promote the service, accommodation, convenience
or safety of the public in some substantial way. The Pennsylvania Commission
granted its approval on June 16, 1999. A copy of the order is annexed hereto as
Exhibit D-5.2.
Ohio Commission
CNG's wholly owned subsidiary, East Ohio, is subject to the jurisdiction of
the Public Utilities Commission of the State of Ohio (the "Ohio Commission").
The Ohio Commission does not have statutory jurisdiction over the transaction,
but is being provided any relevant information for its review and use in
evaluating the impact of the transaction, if any, on retail customers in Ohio.
Annexed hereto as Exhibit D-6 is a letter from the Ohio Commission dated
September 2, 1999 stating that in light of agreements between the applicants and
the Ohio Commission, the Ohio Commission "is satisfied that the merger will not
adversely affect Ohio's interests".
Affiliate Contracts and Arrangements
Following the Second Merger and registration of DRI as a holding company
under the 1935 Act, DRI and CNG and their subsidiaries may need to enter into or
amend agreements related to the provision by affiliates of the combined
companies of various services, including management, supervisory, construction,
engineering, accounting, legal, financial or similar services. The approval or
non-opposition of certain federal and state regulatory commissions is required
with respect to the creation or amendment of certain inter-affiliate agreements.
DRI, CNG and their subsidiaries will file such agreements with the appropriate
federal and state regulatory commissions and seek such regulatory approvals as
may be required by applicable law.
Other Regulatory Matters
DRI and its subsidiaries and CNG and its subsidiaries have obtained from
various regulatory authorities certain franchises, permits and licenses which
may need to be renewed, replaced or transferred in connection with the Merger,
and approvals, consents or notifications may be required in connection with such
renewals, replacements or transfers.
Regulatory commissions in states where DRI's and CNG's utilities operate
may intervene in the Federal regulatory proceedings. In addition, such
regulatory commissions regulate the rates charged to utility customers within
their jurisdictions. In approving rates, each state may take into account other
affects of, including possible savings resulting from, the Merger.
Item 5. Procedure.
The Commission has issued and published the requisite notice under Rule 23
and the time specified for comment therein has lapsed. The Commission is
respectfully requested to issue an order of the Commission granting and
permitting this Application-Declaration to become effective as soon as
practicable.
-59-
<PAGE>
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)
A-5 Articles of Incorporation of DRI New Sub I, Inc.(Previously
filed)
A-6 Bylaws of DRI New Sub I, Inc.
A-7 Certificate of Incorporation of DRI New Sub II, Inc. (Previously
filed)
A-8 Bylaws of DRI New Sub II, Inc.
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)
-60-
<PAGE>
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)
C-3 Application-Declaration on Form U-1 filed by DRI and CNG seeking
certain financing authority. (File No. 70-09517 and incorporated
by reference herein)
D Consent Agreement with FTC. (Filed in paper format on Form SE)
D-1.1 Application to the FERC under the FPA. (Previously filed)
D-1.2 Order of the FERC. (Filed in paper format on Form SE)
D-1.2.1 Compliance Filing with the FERC. (Filed in paper format on Form
SE)
D-2.1 Submission to the Virginia Commission. (Previously filed)
D-2.2 Order of the Virginia Commission. (Previously filed)
D-2.2A Amending Order of the Virginia Commission. (Previously filed)
D-3.1 Submission to the North Carolina Commission. (Previously filed)
D-3.1A Stipulation Agreement filed with the North Carolina Commission.
(Previously filed)
D-3.2 Order of the North Carolina Commission. (Filed in paper format on
Form SE)
D-4.1 Submission to the West Virginia Commission. (Previously filed)
D-4.2 Order of the West Virginia Commission. (Previously filed)
D-5.1 Submission to the Pennsylvania Commission. (Previously filed)
D-5.2 Order of the Pennsylvania Commission. (Previously filed)
D-6 Letter of the Ohio Commission. (Previously filed)
E-1 Map of service territory of DRI. (Previously filed)
E-2 Map of service territory of CNG. (Previously filed)
E-3 Statistical Analysis of companies in the DRI-CNG region.
(Previously filed)
-61-
<PAGE>
E-4 DRI Corporate Organization Chart. (Previously filed)
E-5 CNG Corporate Organization Chart. (Previously filed)
E-6 Description of Non-Utility Subsidiaries. (Previously filed)
F-1 Opinion of Counsel.
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)
H-1 Annual Report of DRI on Form 10-K for the year ended December 31,
1998. (Filed with the Commission on March 1, 1999, File No.
1-8489 and incorporated by reference herein)
H-2 Annual Report of CNG on Form 10-K for the year ended December 31,
1998. (Filed with the Commission on March 15, 1999, File No.
1-3196 and incorporated by reference herein)
H-3 Quarterly Report on Form 10-Q of DRI for the quarter ended March
31, 1999. (Filed with the Commission on May 17, 1999, File No.
1-8489 and incorporated by reference herein)
H-4 Quarterly Report on Form 10-Q of CNG for the quarter ended March
31, 1999. (Filed with the Commission on May 14, 1999, File No.
1-3196 and incorporated by reference herein)
H-5 Quarterly Report on Form 10-Q of DRI for the quarter ended June
30, 1999. (Filed with the Commission on August, 1999, File No.
8489 and incorporated by reference herein)
H-6 Quarterly Report on Form 10-Q of CNG for the quarter ended June
30, 1999. (Filed with the Commission on August, 1999 File No.
1-3196 and incorporated by reference herein)
H-7 Form U-3A-2 of DRI for the year ended December 31, 1998. (Filed
with the Commission on February 26, 1999, File No. 69-278 and
incorporated by reference herein)
I-1 Proposed Form of Notice. (Previously filed)
-62-
<PAGE>
J-1 Lost Economies Study. (Previously filed)
K-1.1 Form of Service Agreement.
K-1.2 Form of Virginia Power Support Agreement.
K-1.3 Form of Ancillary Service Agreement.
K-2.1 Cost Allocation and Services Agreement dated July 1, 1986 between
DRI and Virginia Power. (Filed in paper format on Form SE)
K-2.2 Intercompany Transportation Agreement dated October 23, 1993
between DRI and Virginia Power. (Filed in paper format on Form
SE)
K-2.3 Summary of Insurance Services Arrangements provided by Virginia
Power. (Filed in paper format on Form SE)
K-2.4 Summary of Employee Benefit Services Arrangements provided by
Virginia Power. (Filed in paper format on Form SE)
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)
FS-7 CNG Consolidated Statement of Income for the twelve months ended
December 31, 1998. (Included in Exhibit H-2)
-63-
<PAGE>
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.
-64-
<PAGE>
SIGNATURE
Pursuant to the Public Utility Holding Company Act of 1935, each of the
undersigned companies has caused this Application-Declaration to be signed on
its behalf by the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC. CONSOLIDATED NATURAL GAS COMPANY
By: /s/James F. Stutts By: /s/ Stephen E. Willams
Name: James F. Stutts Name: Stephen E. Williams
Title: Vice President and Title: Senior Vice President and
General Counsel General Counsel
Date: December 15, 1999 Date: December 15, 1999
-65-
<PAGE>
APPENDIX A
Dominion Resources, Inc.
Dominion Resources, Inc. ("DRI") has three direct subsidiaries that are
engaged in nonutility businesses: Dominion Capital, Inc. ("DCI"), Dominion
Energy, Inc. ("DEI") and Dominion U.K. Holding, Inc. ("Dominion UK"). In
addition, DRI's public utility subsidiary, Virginia Electric and Power Company
("Virginia Power") owns subsidiaries that are engaged in certain non-utility
operations. Capitalized terms used herein and not otherwise defined shall have
the meaning given in DRI's Application-Declaration on Form U-1 (File No.
70-09477).
1. DCI
DCI is a direct subsidiary of DRI and is a holding company for a variety of
non-utility businesses. DCI, through its subsidiaries, is a diversified
financial services company with its core operations being commercial finance,
corporate finance and consumer finance. Following the Merger, DCI and each of
its subsidiaries will be divested by DRI (although the timing and terms of such
divestiture remain uncertain) except that DRI will retain the owner-lessor
interest held by DCI in a hydroelectric facility in Vidalia, Louisiana that is
leased to Catalyst Old River Hydroelectric Limited Partnership. The Commission
has routinely permitted registered holding companies to retain subsidiaries that
own and lease properties to the holding company and/or its affiliates.1
2. DEI and Dominion UK - Exempt Wholesale Generators
DEI is also a direct subsidiary of DRI and is a holding company for a
variety of energy-related non-utility businesses. DEI has interests in
generation facilities in various states of the United States which are Exempt
Wholesale Generators ("EWGs") under the 1935 Act.2 The subsidiaries owned by DEI
that are EWGs, or special purpose entities designed to facilitate and hold
equity interests in EWGs, are: Dominion Elwood Services Company, Inc., Dominion
Energy Services Company, Inc., Dominion Kincaid, Inc., Kincaid Generation, LLC.,
Dominion Cogen Inc., Dominion Elwood, Inc., Elwood Energy, LLC, Inversiones
Dominion Bolivia S.A., Empresa Electrica Corani, S.A., Dominion Generating,
S.A., A.V. Holding S.A., Dominion Energy Company, ULC, Patagonia Holding, S.A.,
Central Termica Alto Valle, S.A.,
- --------
1 UNITIL Corp., Holding Co. Act Release No. 35-25524 (Apr. 24, 1992)
(subsidiary that had acquired real estate to support the system's utility
operations deemed to be retainable under the standards of Section 11(b)(1)).
2 Section 32(a) of the 1935 Act defines "Exempt wholesale generator" as
"any person determined by the Federal Energy Regulatory Commission to be engaged
directly, or indirectly through one or more affiliates as defined in Section
2(a)(11)(B), and exclusively in the business of owning or operating, or both
owning and operating all or part of one or more eligible facilities and selling
electric energy at wholesale." Section 32(h)(1) thereinafter provides that
"Section 11 of this Act shall not prohibit the ownership of an interest in the
business of one or more exempt wholesale generators by a registered holding
company (regardless of where facilities owned or operated by such exempt
wholesale generators are located), and such ownership by a registered holding
company shall be deemed consistent with the operation of an integrated public
utility system."
A-1
<PAGE>
Hidroelectrica Cerros Colorados, Dominion Management Argentina, S.A., DEI Cayman
Holding Company, Dominion Energy Holding Cayman LDC, Dominion Energy
Interamerican Holding LDC, DEI Holding Cayman Company Limited, DEI Interamerican
Holding Company Limited, Inversiones Dominion Panama S.A., Dominion do Brasil
Ltda. and DOMA. Furthermore, DRI's direct subsidiary Dominion UK owns all
interest in an EWG in the United Kingdom, Corby Power Limited, through two
special purpose subsidiaries, DR Corby Limited and East Midlands Electricity
Generation (Corby) Limited. The ownership of such EWG's is consistent with the
general principles of an integrated public utility system under Section 11 of
the 1935 Act, and is expressly permitted under Section 32 of the 1935 Act. The
Commission has routinely permitted newly formed registered holding companies to
retain their pre-existing interests in EWGs.3 Dominion has recently completed
the sale of its holdings in Belize and Peru to a subsidiary of Duke Energy
Corporation.
3. DEI - Qualifying Facilities
DEI also has interests in several small power production facilities in
various states in the United States that are Qualifying Facilities ("QFs") under
the 1935 Act and, thus, are exempt under the 1935 Act. The subsidiaries owned by
DEI that are QFs, or special purpose entities designed to facilitate or hold
equity interests in QFs, include: Caithness BLM Group LP, Caithness Navy II
Group L.P., Luz Solar Partners Ltd., VII, LP, Rumford Cogeneration Company,
Ltd., Dominion Cogen WV, Inc., Morgantown Energy Associates, Dominion Cogen NY,
Inc. Middle Falls Limited Partnership, NYSD Limited Partnership and Sissonville
Limited Partnership. The ownership of such QFs is consistent with the general
principles of an integrated public utility system and is expressly permitted
under Rule 58(b)(2)(viii) of the Act.4 The Commission has routinely permitted
newly formed registered holding companies to retain their pre-existing interests
in QFs.5
4. DEI - Oil and Gas Exploration and Development
DEI, through its subsidiaries is a participant in oil and natural gas
development programs in Canada, Louisiana, Michigan, New Mexico, Pennsylvania,
Texas, Utah, New Mexico, Indiana, Kentucky, Virginia and West Virginia. DEI's
subsidiaries that participate in, hold equity interests in or facilitate oil and
gas development include: Great Lakes Energy Development, Inc., Wolverine
Reserves, LLC, Dominion Reserves-Indiana, Inc., Dominion
- --------
3 Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998);
New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1,
1997).
4 Rule 58 under the 1935 Act permits a registered holding company to retain
securities of an "energy-related company" if the aggregate investment in all
such companies does not exceed "(i) $50 million; or (ii) 15 percent of the
consolidated capitalization of such registered holding company . . . ." Rule
58(b)(viii) includes a "qualifying facility", as defined under the Public
Utility Regulatory Policies Act of 1978, as an "energy-related company" for
purposes of Rule 58.
5 Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25,1998);
New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1,
1997).
A-2
<PAGE>
Reserves, Inc., Dominion Reserves-Utah, Inc., Wolverine Environmental
Production, Inc., Dominion Energy Canada Ltd., Dominion Midwest Energy, Inc.,
Dominion Appalachian Development Properties, LLC, Dominion Appalachian
Development, Inc, Cypress Energy, Inc., Remington Energy, Ltd., Remington
Holdings, Ltd., Remington Energy Partnership, Dominion Storage, Inc., Niton US,
Inc. and DEI Canada Holding Company., Inc.. The exploration of natural resources
or the holding of rights to such resources by these subsidiaries are activities
of the kind routinely permitted to be retained in prior Commission orders
approving the mergers and creations of new registered holding companies.6
Furthermore, companies that are organized to "engage primarily in the
exploration, development, production, manufacture, storage, transportation or
supply of natural or synthetic gas" are expressly exempt from all provisions of
the 1935 Act under Rule 16(a)(2) thereof.
5. DEI - Gas Activities
DEI owns interests in companies engaged in the transportation and
processing of natural gas and in the manufacture and sale of equipment used in
connection therewith. DEI's subsidiaries that engage in or facilitate gas
activities include: Niton US, Inc. Niton Hub Services Company, Dominion
Reserves, Dominion Gas Processing MI, Inc., Great Lakes Compression, Inc.,
Dominion Storage, Inc. DEI Canada Holding Company, Inc., Dominion Energy Canada
Ltd., Daval Industries Inc., GTG Pipeline Corporation, Dominion Reserves -
Indiana, Inc., Frederick HOF Limited Partnership, Wilderness Energy, L.C. and
Wilderness Energy Services Limited Partnership. The ownership of such businesses
is specifically authorized under Rule 58 (b)(1)(ix)7, and such businesses have
routinely been permitted to be retained in prior Commission orders approving
mergers and creations of new registered holding companies.8 The Applicants
request that the Commission reserve jurisdiction over DRI's retention of those
of its subsidiaries engaged in manufacturing equipment used in the natural gas
business.
6. DEI and Virginia Power - Energy Marketing and Brokering
DEI owns a number of subsidiaries engaged in the marketing and brokering of
gas and electric energy. The entities owned by DEI that engage in, or hold
interests in companies that engage in, such marketing and brokering activity
are: Dominion Elwood Marketing, Inc., Elwood Marketing, LLC, Phoenix Dominion
Energy LLC and Carthage Energy Services, Inc.. Furthermore, Virginia Power owns
two subsidiaries which are engaged in the marketing and
- --------
6 WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August
1, 1997); New England Energy Inc., Holding Co. Act Release No. 35-23988 (January
13, 1986).
7 Rule 58(b)(1)(ix) also includes in the definition of a retainable
"energy-related company" a company that derives substantially all its revenues
from "the ownership, operation and servicing of fuel procurement,
transportation, handling and storage facilities, scrubbers, and resource
recovery and waste water treatment facilities."
8 WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998)
(gas pipeline, gas gathering, dehydration and compression facilities); New
Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997)
(gas pipelines, storage facilities).
A-3
<PAGE>
brokering of gas, Virginia Power Energy Marketing, Inc. and Virginia Power
Services Energy Corp.. The ownership of energy marketing and brokering business
such as those owned by DEI and Virginia Power is specifically authorized under
Rule 58(b)(1)(v), and retention of such businesses has routinely been permitted
in prior Commission orders approving mergers and creations of new registered
holding companies.9 The VSCC has also approved Virginia Power's investment in
Virginia Power Energy Marketing, Inc. and Virginia Power Services Energy Corp.
7. Virginia Power - Telecommunications
DRI, through Virginia Power, owns VPS Telecommunications, which is engaged
in providing telecommunications services utilizing fiber optic line owned by
Virginia Power. Prior to completion of the Merger, VPS Telecommunications will
qualify as an "exempt telecommunications company" under Section 34 of the 1935
Act. Registered holding companies are expressly permitted to acquire and retain
interests in "exempt telecommunications companies" under Section 34 of the 1935
Act. Furthermore, retention of such telecommunications companies has routinely
been permitted in prior Commission orders approving mergers resulting in the
creation of new registered holding companies.10
- --------
9 WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998);
New Century Energies, Inc., Holding Co. Act Release No. 35- 26748 (August 1,
1997).
10 WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14,
1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998);
New Century Energies, Inc., Holding Co. Act Release No. 35- 26748 (August 1,
1997).
A-4
<PAGE>
APPENDIX B
<TABLE>
<CAPTION>
DOMINION RESOURCES, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED CONSOLIDATED BALANCE SHEET
September 30, 1999
(in millions)
DR CNG Pro Forma Pro Forma
(As Reported) (As Reported) Adjustments Combined
------------------ -------------------- --------------- ----------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $357 $114 471
Accounts receivable, net 1,095 348 1,443
Materials and supplies
Plant and general 146 26 172
Fossil fuel 104 104
Gas stored 138 138
Mortgage loans in warehouse 313 313
Commodity contract assets 352 352
Other 262 318 0 580
------------------ -------------------- --------------- ----------------
2,629 944 - 3,573
------------------ -------------------- --------------- ----------------
INVESTMENTS
Loans receivable, net 1,999 1,999
Other investments 2,155 349 2,504
------------------ -------------------- --------------- ----------------
4,154 349 - 4,503
------------------ -------------------- --------------- ----------------
PROPERTY, PLANT AND EQUIPMENT
------------------ -------------------- --------------- ----------------
Net utility and other plant 10,086 3,075 - 13,160
------------------ -------------------- --------------- ----------------
Net exploration and production properties 924 1,491 600 (D2) 3,015
------------------ -------------------- --------------- ----------------
Acquisition adjustment 3,665 (D1) 3,665
------------------ -------------------- --------------- ----------------
11,010 4,566 4,265 19,840
------------------ -------------------- --------------- ----------------
DEFERRED CHARGES AND OTHER ASSETS
Goodwill 150 150
Regulatory assets 224 0 224
Other 248 520 769
------------------ -------------------- --------------- ----------------
622 520 - 1,143
------------------ -------------------- --------------- ----------------
TOTAL ASSETS $18,415 $6,379 4,265 $29,059
================== ==================== =============== ================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DOMINION RESOURCES, INC. AND SUBSIDIARY COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
September 30, 1999
(in millions)
DRI CNG Pro Forma Pro Forma
As Reported As Reported Adjustments Combined
------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Securities due within one year $639 $21 660
Short-term debt 910 560 $3,787 (A) 5,257
Accounts payable 815 312 1,127
Commodity contract liabilities 328 328
Accrued taxes 232 41 273
Other 422 255 677
------------- -------------- ------------- ------------
3,346 1,189 3,787 8,322
------------- -------------- ------------- ------------
LONG-TERM DEBT 6,857 1,763 8,620
------------- -------------- ------------- ------------
DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes 1,634 818 228 (D3) 2,680
Investment tax credits 151 23 174
Other 231 233 464
------------- -------------- ------------- ------------
2,016 1,074 228 3,318
------------- -------------- ------------- ------------
Total liabilities 12,219 4,026 4,015 20,260
------------- -------------- ------------- ------------
MINORITY INTEREST 297 297
------------- -------------- ------------- ------------
OBLIGATED MANDITORILY REDEEMABLE PREFERRED
SECURITIES OF SUBSIDIARY TRUSTS
385 385
------------- -------------- ------------- ------------
PREFERRED STOCK:
Subject to mandatory redemption - 0
------------- -------------- ------------- ------------
Not subject to mandatory redemption 509 509
------------- -------------- ------------- ------------
COMMON SHAREHOLDERS' EQUITY
Common stock 3,779 264 2,339 (B,C, E) 6,382
Retained earnings 1,245 1,523 (1,523) (E) 1,245
Accumulated other comprehensive income (35) (1) 1 (E) (35)
Other paid in capital 16 567 (567) (E) 16
------------- -------------- ------------- ------------
5,005 2,353 250 7,608
------------- -------------- ------------- ------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $18,415 $6,379 $4,265 $29,059
============= ============== ============= ============
</TABLE>
<PAGE>
TOTAL SHORT TERM DEBT ISSUED SCHEDULE A
9/30/99 in millions
CNG share cash out $2,556,066,761 2,556 Sch.B
DRI stock buy back $1,231,192,415 1,231 Sch.C
----------------- -----------------
Total Short Term Debt Issued $3,787,259,177 $3,787
================= =================
<PAGE>
ACQUISITION OF CNG SHARES SCHEDULE B
9/30/1999
---------------
CNG shares outstanding 95,948,452
times exchange ratio 0.912
---------------
Pro forma shares 87,504,988
===============
times share value $39.96
---------------
Value of CNG shares converted $3,834,100,142
===============
in millions 3,834
CNG shares outstanding 95,948,452
Times cash out 26.64
---------------
Total cash out $2,556,066,761
===============
in millions 2,556
Total 6,390
<PAGE>
CASH REQUIREMENTS FOR DRI STOCK BUYBACK SCHEDULE C
DRI Stock Repurchase
9/30/99
DRI shares outstanding 190,882,545
times 15% 15%
times share price $43
---------------
Cash required $1,231,192,415
===============
in millions 1,231
<PAGE>
APPENDIX C
Dominion Resources/ CNG Merger Pro Forma
<TABLE>
<CAPTION>
DRI CNG
As Reported % of Total As Reported % of Total Proforma % of Total
----------- ---------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital structure at 9/30/99
Debt (Inc. Short Term) $ 8,406 58.8% $ 2,344 49.9% 14,537 63.1%
Preferred Securities 894 6.2% - 0.0% 894 3.9%
Mandatory Convertibles - 0.0% - 0.0% - 0.0%
Common Equity 5,005 35.0% 2,353 50.1% 7,608 33.0%
----------- ---------- ----------- ---------- -------- ----------
Total 14,305 100.0% 4,697 100.0% 23,039 100.0%
=========== ========== =========== ========== ======== ==========
</TABLE>
<PAGE>
VIRGINIA POWER
CAPITALIZATION AT SEPTEMBER 30, 1999
(dollar amounts in $000's)
<TABLE>
<S> <C>
Preferred securities of subsidiary trust $135,000
Preferred stock not subject to mandatory redemption. 509,014
Common stock 2,737,407
Other paid in capital 16,887
Retained earnings 1,059,386
------------------
4,457,694
------------------
Long-term debt 3,486,701
------------------
7,944,395
------------------
Debt ratio 43.9%
Excludes: current maturities on LTD & Preferred Stock 377,419
short term debt 257,627
capital leases - noncurrent 30,490
capital leases - current 9,931
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CNG
System Trans- East
Capitalization at September 30, 1999 Consolidated Parent Corporate mission Ohio Peoples VNG
- -------------------------------------- ------------ ---------- --------- ---------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Common stock $263,858 $263,858 $10 $601,000 $237,968 $183,535 $148,697
Capital in excess of par value 567,329 527,364 - 2,254 19,975 - 57,603
Retained earnings 1,523,280 1,527,427 - 116,545 170,919 60,455 (5,974)
Treasury stock, at cost (1,206) (1,206) - - - - -
------------ ---------- --------- ---------- -------- -------- ---------
Common stockholders' equity 2,353,261 2,317,443 10 719,799 428,862 243,990 200,326
------------ ---------- --------- ---------- -------- -------- ---------
*Long-term debt
Long-term notes payable to
Parent Company - - 3,672 343,252 245,700 132,605 79,000
Other 1,763,015 1,763,015 - - - - -
------------ ---------- --------- ---------- -------- -------- ---------
Total long-term debt 1,763,015 1,763,015 3,672 343,252 245,700 132,605 79,000
------------ ---------- --------- ---------- -------- -------- ---------
============ ========== ========= ========== ======== ======== =========
Total capitalization $4,116,276 $4,080,458 $3,682 $1,063,051 $674,562 $376,595 $279,326
============ ========== ========= ========== ======== ======== =========
Debt ratio 42.8% 43.2% 99.7% 32.3% 36.4% 35.2% 28.3%
*Excludes: commercial paper 560,338 - - - - - -
Current maturities on LTD 21,375 - 240 2,077 690 511 -
System money pool - (948,261) 118,627 33,251 260,957 66,711 69,424
Products & Field Main Pass Main Pass CNG Power CNG
Capitalization at September 30, 1999 Services Services Gas Oil Retail Services Internat'l
- -------------------------------------- ------------ ---------- --------- ---------- -------- -------- ---------
Common stock $3,990 $13,670 $- $- $6,000 $15,520 $238,550
Capital in excess of par value - - 10 10 - - -
Retained earnings (2,431) 10,789 2,927 3,160 (9,908) (18,187) (11,779)
Treasury stock, at cost - - - - - - -
------------ ---------- --------- ---------- -------- -------- ---------
Common stockholders' equity 1,559 24,459 2,937 3,170 (3,908) (2,667) 226,771
------------ ---------- --------- ---------- -------- -------- ---------
*Long-term debt
Long-term notes payable to
Parent Company - - - - - - 15,000
Other - - - - - - -
------------ ---------- --------- ---------- -------- -------- ---------
Total long-term debt - - - - - - 15,000
------------ ---------- --------- ---------- -------- -------- ---------
============ ========== ========= ========== ======== ======== =========
Total capitalization $1,559 $24,459 $2,937 $3,170 $(3,908) $(2,667) $241,771
============ ========== ========= ========== ======== ======== =========
Debt ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 6.2%
*Excludes: commercial paper - - - - - - -
current maturities on LTD - - - - - - -
system money pool - 10,792 25,594 12,775 20,085 2,261 12,133
<PAGE>
CNG CNG
Capitalization at September 30, 1999 Hope Producing Power
- -------------------------------------- ------- --------- --------
Common stock $40,900 $326,000 $22,460
Capital in excess of par value - - -
Retained earnings 10,233 220,285 15,981
Treasury stock, at cost - - -
------- --------- --------
Common stockholders' equity 51,133 546,285 38,441
------- --------- --------
*Long-term debt
Long-term notes payable to
Parent Company 33,204 324,675 -
Other - - -
------- --------- --------
Total long-term debt 33,204 324,675 -
------- --------- --------
======= ========= ========
Total capitalization $84,337 $870,960 $38,441
======= ========= ========
Debt ratio 39.4% 37.3% 0.0%
*Excludes: commercial paper - - -
Current maturities on LTD 224 4,450 -
System money pool 35,935 318,890 (34,405)
Capitalization at September 30, 1999 LNG Research Coal Financial
- -------------------------------------- ------- --------- -------- --------
Common stock $1,000 $15,580 $22,360 $50
Capital in excess of par value - - - -
Retained earnings 96 (15,501) (15,548) (14)
Treasury stock, at cost - - - -
------- --------- -------- --------
Common stockholders' equity 1,096 79 6,812 36
------- --------- -------- --------
*Long-term debt
Long-term notes payable to
Parent Company - - - -
Other - - - -
------- --------- -------- --------
Total long-term debt - - - -
------- --------- -------- --------
======= ========= ======== ========
Total capitalization $1,096 $79 $6,812 $36
======= ========= ======== ========
Debt ratio 0.0% 0.0% 0.0% 0.0%
*Excludes: commercial paper - - - -
current maturities on LTD - - - -
system money pool (1,068) (40) (3,661) -
</TABLE>
DRI NEW SUB I, INC.
BYLAWS
EFFECTIVE SEPTEMBER 27, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 Place and Time of Meetings...........................................1
1.2 Presiding Officer; Secretary ........................................1
1.3 Annual Meeting.......................................................1
1.4 Special Meetings.....................................................1
1.5 Record Dates.........................................................1
1.6 Notice of Meetings...................................................2
1.7 Waiver of Notice; Attendance at Meeting..............................2
1.8 Quorum and Voting Requirements.......................................3
1.9 Action Without Meeting...............................................3
1.10 Inspectors of Election ..............................................3
ARTICLE II
DIRECTORS
2.1 General Powers.......................................................4
2.2 Number, Term and Election............................................4
2.3 Removal; Vacancies...................................................4
2.4 Annual and Regular Meetings..........................................4
2.5 Special Meetings.....................................................5
2.6 Notice of Meetings...................................................5
2.7 Waiver of Notice; Attendance at Meeting..............................5
2.8 Quorum; Voting.......................................................5
2.9 Telephonic Meetings..................................................6
2.10 Action Without Meeting...............................................6
2.11 Compensation.........................................................6
ARTICLE III
OFFICERS
3.1 Officers.............................................................6
3.2 Election; Term.......................................................6
3.3 Removal of Officers..................................................6
3.4 Duties of Officers...................................................7
-i-
<PAGE>
ARTICLE IV
SHARE CERTIFICATES
4.1 Entitlement...........................................................7
4.2 Authorization to Issue................................................7
4.3 Transfer of Shares....................................................7
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Voting of Shares Held.................................................7
5.2 Corporate Seal........................................................8
5.3 Fiscal Year...........................................................8
5.4 Amendments............................................................8
-ii-
<PAGE>
DRI NEW SUB I, INC.
A Virginia Corporation
BYLAWS
Effective September 27, 1999
ARTICLE I
MEETINGS OF SHAREHOLDERS
1.1 Place and Time of Meetings. Meetings of shareholders shall be held at
such place, either within or without the Commonwealth of Virginia, and at such
time as may be provided in the notice of the meeting and approved by the
Chairman of the Board of Directors (the "Chairman"), the President or the Board
of Directors.
1.2 Presiding Officer; Secretary. The Chairman shall preside over all
meetings of the shareholders. If he or she is not present, or if there is none
in office, the President or a Vice President shall preside, or, if none be
present, a Chairman shall be elected by the meeting. The Secretary of the
Company shall act as secretary of all the meetings, if present. If he or she is
not present, the Chairman shall appoint a secretary of the meeting.
1.3 Annual Meeting. The annual meeting of shareholders shall be held on the
second Friday in May of each year or on such date as may be designated by
resolution of the Board of Directors from time to time for the purpose of
electing directors and conducting such other business as may properly come
before the meeting.
1.4 Special Meetings. Special meetings of the shareholders may be called by
the Chairman, the President or the Board of Directors and shall be called by the
Secretary upon demand of shareholders as required by law. Only business within
the purpose or purposes described in the notice for a special meeting of
shareholders may be conducted at the meeting.
1.5 Record Dates. The record date for determining shareholders entitled to
demand a special meeting is the date the first shareholder signs the demand that
the meeting be held.
<PAGE>
Except as is provided in the preceding paragraph the Board of Directors may
fix, in advance, a record date to make a determination of shareholders for any
purpose, such date to be not more than 70 days before the meeting or action
requiring a determination of shareholders. If no such record date is set for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or for the determination of shareholders entitled to receive
payment of a dividend, then the record date shall be the close of business on
the day before the date on which the first notice is given or the date on which
the resolution of the Board of Directors declaring such dividend is adopted, as
the case may be.
When a determination of shareholders entitled to notice of or to vote at
any meeting of shareholders has been made, such determination shall be effective
for any adjournment of the meeting unless the Board of Directors fixes a new
record date, which it shall do if the meeting is adjourned to a date more than
120 days after the date fixed for the original meeting.
1.6 Notice of Meetings. Written notice stating the place, day and hour of
each meeting of shareholders and, in case of a special meeting, the purpose or
purposes for which the meeting is called shall be given not less than 10 nor
more than 60 days before the date of the meeting (except when a different time
is required in these Bylaws or by law) either personally or by mail, electronic
mail, telecopy facsimile or other form of wire or wireless communication, or by
private courier to each shareholder of record entitled to vote at such meeting
and to such nonvoting shareholders as may be required by law. If mailed, such
notice shall be deemed to be effective when deposited in first class United
States mail with postage thereon prepaid and addressed to the shareholder at his
or her address as it appears on the share transfer books of the Company. If
given in any other manner, such notice shall be deemed to be effective (i) when
given personally or by telephone, (ii) when sent by electronic mail, telecopy
facsimile or other form of wire or wireless communication or (iii) when given to
a private courier to be delivered.
If a meeting is adjourned to a different date, time or place, notice need
not be given if the new date, time or place is announced at the meeting before
adjournment. However, if a new record date for an adjourned meeting is fixed,
notice of the adjourned meeting shall be given to shareholders as of the new
record date unless a court provides otherwise.
1.7 Waiver of Notice; Attendance at Meeting. A shareholder may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time of the meeting that is the subject of such notice. The
waiver shall be in writing, be signed by the shareholder entitled to the notice
and be delivered to the Secretary for inclusion in the minutes or filing with
the corporate records.
<PAGE>
A shareholder's attendance at a meeting (i) waives objection to lack of
notice or defective notice of the meeting unless the shareholder, at the
beginning of the meeting, objects to holding the meeting or transacting business
at the meeting and (ii) waives objection to consideration of a particular matter
at the meeting that is not within the purpose or purposes described in the
meeting notice unless the shareholder objects to considering the matter when it
is presented.
1.8 Quorum and Voting Requirements. Unless otherwise required by law, a
majority of the votes entitled to be cast on a matter constitutes a quorum for
action on that matter. Once a share is represented for any purpose at a meeting,
it is deemed present for quorum purposes for the remainder of the meeting and
for any adjournment of that meeting unless a new record date is or shall be set
for that adjourned meeting. If a quorum exists, action on a matter, other than
the election of directors, is approved if the votes cast favoring the action
exceed the votes cast opposing the action unless a greater or different number
of affirmative votes is required by law or the Articles of Incorporation or
these Bylaws. Directors shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present. Less than a quorum may adjourn a meeting.
1.9 Action Without Meeting. Action required or permitted to be taken at a
meeting of the shareholders may be taken without a meeting and without action by
the Board of Directors if the action is taken by all the shareholders entitled
to vote on the action. The action shall be evidenced by one or more written
consents describing the action taken, signed by all the shareholders entitled to
vote on the action and delivered to the Secretary for inclusion in the minutes
or filing with the corporate records. Action taken by unanimous consent shall be
effective according to its terms when all consents are in the possession of the
Company unless the consent specifies a different effective date, in which event
the action taken shall be effective as of the date specified therein provided
that the consent states the date of execution by each shareholder. A shareholder
may withdraw a consent only by delivering a written notice of withdrawal to the
Company prior to the time that all consents are in the possession of the
Company.
If not otherwise fixed pursuant to the provisions of Section 1.5, the
record date for determining shareholders entitled to take action without a
meeting is the date the first shareholder signs the consent described in the
preceding paragraph.
1.10 Inspectors of Election. The Chairman of the meeting may appoint one or
more inspectors of election to determine the qualifications of voters, the
validity of proxies and the results of ballots.
<PAGE>
ARTICLE II
DIRECTORS
2.1 General Powers. The Company shall have a Board of Directors. All
corporate powers shall be exercised by or under the authority of, and the
business and affairs of the Company managed under the direction of, its Board of
Directors, subject to any limitation set forth in the Articles of Incorporation,
and so far as this delegation of authority is not inconsistent with the laws of
the Commonwealth of Virginia, with the Articles of Incorporation or with these
Bylaws.
2.2 Number, Term and Election. The number of directors of the Company may
be fixed or changed from time to time by resolution of the Board of Directors
but shall not be less than one (1) nor more than ten (10) directors. A decrease
in the number of directors shall not shorten the term of any incumbent director.
Each director shall hold office until his or her death, resignation, retirement
or removal or until his or her successor is elected.
2.3 Removal; Vacancies. The shareholders may remove one or more directors,
with or without cause, if the number of votes cast for such removal constitutes
a majority of the votes entitled to be cast at an election of directors. A
director may be removed by the shareholders only at a meeting called for the
purpose of removing him or her and the meeting notice must state that the
purpose, or one of the purposes of the meeting, is removal of the director.
A vacancy on the Board of Directors, including a vacancy resulting from the
removal of a director or an increase in the number of directors, may be filled
by (i) the shareholders, (ii) the Board of Directors or (iii) the affirmative
vote of a majority of the remaining directors though less than a quorum of the
Board of Directors and may, in the case of a resignation that will become
effective at a specified later date, be filled before the vacancy occurs, but
the new director may not take office until the vacancy occurs.
2.4 Annual and Regular Meetings. An annual meeting of the Board of
Directors, which shall be considered a regular meeting, shall be held
immediately following each annual meeting of shareholders for the purpose of
electing officers and carrying on such other business as may properly come
before the meeting. The Board of Directors may also adopt a schedule of
additional meetings which shall be considered regular meetings. Regular meetings
shall be held at such times and at such places, within or without the
Commonwealth of Virginia, as the Chairman, the President or the Board of
Directors shall designate from time to time. If no place is designated, regular
meetings shall be held at the principal office of the Company.
<PAGE>
2.5 Special Meetings. Special meetings of the Board of Directors may be
called by the Chairman, the President or a majority of the directors of the
Company and shall be held at such times and at such places, within or without
the Commonwealth of Virginia, as the person or persons calling the meetings
shall designate. If no such place is designated in the notice of a meeting, it
shall be held at the principal office of the Company.
2.6 Notice of Meetings. No notice need be given of regular meetings of the
Board of Directors.
Notices of special meetings of the Board of Directors shall be given to
each director in person or delivered to his or her residence or business address
(or such other place as he may have directed in writing) not less than
twenty-four (24) hours before the meeting by mail, electronic mail, messenger,
telecopy facsimile or other means of written communication or by telephoning
such notice to him or her. Any such notice shall be given by the Secretary, the
directors or the officer calling the meeting and shall set forth the time and
place of the meeting and state the purpose for which it is called.
2.7 Waiver of Notice; Attendance at Meeting. A director may waive any
notice required by law, the Articles of Incorporation or these Bylaws before or
after the date and time stated in the notice and such waiver shall be equivalent
to the giving of such notice. Except as provided in the next paragraph of this
section, the waiver shall be in writing, signed by the director entitled to the
notice and filed with the minutes or corporate records.
A director's attendance at or participation in a meeting waives any
required notice to him or her of the meeting unless the director, at the
beginning of the meeting or promptly upon his or her arrival, objects to holding
the meeting or transacting business at the meeting and does not thereafter vote
for or assent to action taken at the meeting.
2.8 Quorum; Voting. A majority of the number of directors fixed in
accordance with these Bylaws shall constitute a quorum for the transaction of
business at a meeting of the Board of Directors. If a quorum is present when a
vote is taken, the affirmative vote of a majority of the directors present is
the act of the Board of Directors except as otherwise provided by law, the
Articles of Incorporation or these Bylaws. A director who is present at a
meeting of the Board of Directors or a committee of the Board of Directors when
corporate action is taken is deemed to have assented to the action taken unless
(i) he or she objects, at the beginning of the meeting or promptly upon his or
her arrival, to holding it or transacting specified business at the meeting or
(ii) he or she votes against or abstains from the action taken.
<PAGE>
2.9 Telephonic Meetings. The Board of Directors may permit any or all
directors to participate in a regular or special meeting by or conduct the
meeting through the use of any means of communication by which all directors
participating may simultaneously hear each other during the meeting. A director
participating in a meeting by this means is deemed to be present in person at
the meeting.
2.10 Action Without Meeting. Action required or permitted to be taken at a
meeting of the Board of Directors may be taken without a meeting if the action
is taken by all members of the Board. The action shall be evidenced by one or
more written consents stating the action taken, signed by each director either
before or after the action is taken and included in the minutes or filed with
the corporate records. Action taken under this section shall be effective when
the last director signs the consent unless the consent specifies a different
effective date, in which event the action taken is effective as of the date
specified therein, provided the consent states the date of execution by each
director.
2.11 Compensation. The Board of Directors may fix the compensation of
directors and may provide for the payment of all expenses incurred by them in
attending meetings of the Board of Directors.
ARTICLE III
OFFICERS
3.1 Officers. The officers of the Company shall be a President and a
Secretary and, in the discretion of the Board of Directors, a Chairman of the
Board of Directors, one or more Vice-Presidents, a Treasurer and such other
officers as may be deemed necessary or advisable to carry on the business of the
Company. Any two or more offices may be held by the same person unless otherwise
required by law. The Board of Directors may designate the Chief Executive
Officer.
3.2 Election; Term. Officers shall be elected at the annual meeting of the
Board of Directors and may be elected at such other time or times as the Board
of Directors shall determine. They shall hold office, unless removed, until the
next annual meeting of the Board of Directors or until their successors are
elected. Any officer may resign at any time upon written notice to the Board of
Directors and such resignation shall be effective when notice is delivered
unless the notice specifies a later effective date. Vacancies among the officers
shall be filled by a vote of the Board of Directors.
3.3 Removal of Officers. The Board of Directors may remove any officer at
any time, with or without cause.
<PAGE>
3.4 Duties of Officers. The President and the other officers shall have
such powers and duties as generally pertain to their respective offices as well
as such powers and duties as may be delegated to them from time to time by the
Board of Directors.
ARTICLE IV
SHARE CERTIFICATES
4.1 Entitlement. Every shareholder shall be entitled to a certificate or
certificates for shares of record owned by him or her in such form as may be
prescribed by the Board of Directors. Such certificates shall be signed by the
President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary.
4.2 Authorization to Issue. Notwithstanding the foregoing, the Board of
Directors may authorize the issue of some or all of the shares of any or all of
its classes or series without certificates. Within a reasonable time after the
issue or transfer of shares without certificates, the Company shall send the
shareholder a written statement of the information required on certificates by
the Virginia Stock Corporation Act or other applicable law.
4.3 Transfer of Shares. Shares may be transferred by delivery of the
certificate accompanied either by an assignment in writing on the back of the
certificate or by a written power of attorney to sell, assign and transfer the
same on the books of the Company, signed by the person appearing from the
certificate to be the owner of the shares represented thereby, and shall be
transferable on the books of the Company upon surrender thereof so assigned or
endorsed. The person registered on the books of the Company as the owner of any
shares shall be entitled exclusively, as the owner of such shares, to receive
dividends and to vote in respect thereof.
ARTICLE V
MISCELLANEOUS PROVISIONS
5.1 Voting of Shares Held. Unless the Board of Directors shall otherwise
provide, the Chairman of the Board of Directors, the President, any Vice
President, or the Secretary may from time to time appoint one or more
attorneys-in-fact or agents of the Company, in the name and on behalf of the
Company, to cast the votes that the Company may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities of which may be held by the Company, at the meeting of the holders of
any such other corporation, or to consent in writing to any action by any such
other corporation, and may instruct the person or persons so appointed as to the
manner of casting such votes or giving such consent, and may
<PAGE>
execute or cause to be executed on behalf of the Company such written proxies,
consents, waivers of other instruments as he or she may deem necessary or
proper; or either the Chairman of the Board of Directors, the President or the
Secretary may himself or herself attend any meeting of the shareholders of any
such other corporation and thereat vote or exercise any or all other powers of
the Company as the shareholder of such other corporation.
5.2 Corporate Seal. In the discretion of the officers, the Company may have
a corporate seal. If created, the corporate seal of the Company shall consist of
a flat-faced circular die, of which there may be any number of counterparts, on
which there shall be engraved the word "Seal" and the name of the Company.
5.3 Fiscal Year. The fiscal year of the Company shall be determined in the
discretion of the Board of Directors, but in the absence of any such
determination it shall be the calendar year.
5.4 Amendments. These Bylaws may be amended or repealed, and new Bylaws may
be made at any regular or special meeting of the Board of Directors. Bylaws made
by the Board of Directors may be repealed or changed and new Bylaws may be made
by the shareholders, and the shareholders may prescribe that any Bylaw made by
them shall not be altered, amended or repealed by the Board of Directors.
DRI NEW SUB II, INC.
BYLAWS
EFFECTIVE SEPTEMBER 27, 1999
<PAGE>
TABLE OF CONTENTS
ARTICLE I
STOCKHOLDERS...................................................................1
1.1 Annual Meetings........................................................1
1.2 Special Meetings.......................................................1
1.3 Notice of Meetings.....................................................1
1.4 Adjournments...........................................................1
1.5 Quorum.................................................................1
1.6 Organization...........................................................2
1.7 Voting; Proxies........................................................2
1.8 Fixing Date for Determination of Stockholders of Record................3
1.9 List of Stockholders Entitled to Vote..................................4
1.10 Consent of Stockholders in Lieu of Meeting............................4
ARTICLE II
BOARD OF DIRECTORS.............................................................5
2.1 Functions and Compensation.............................................5
2.2 Number; Qualifications.................................................5
2.3 Election; Resignation; Removal; Vacancies..............................5
2.4 Regular Meetings.......................................................5
2.5 Special Meetings.......................................................5
2.6 Telephonic Meetings Permitted..........................................5
2.7 Quorum; Vote Required for Action.......................................5
2.8 Organization...........................................................6
2.9 Action by Directors Without a Meeting..................................6
ARTICLE III
OFFICERS.......................................................................6
3.1 Executive Officers; Election; Qualifications...........................6
3.2 Term of Office; Resignation; Removal; Vacancies........................6
3.3 Powers and Duties of Executive Officers................................6
3.4 Compensation...........................................................6
ARTICLE IV
STOCK..........................................................................7
4.1 Certificates...........................................................7
4.2 Transfer of Stock......................................................7
4.3 Lost, Stolen or Destroyed Stock Certificates; Issuance of
New Certificates.......................................................7
ARTICLE V
MISCELLANEOUS..................................................................7
5.1 Fiscal Year............................................................7
5.2 Seal...................................................................7
5.3 Waiver of Notice of Meetings of Stockholders, Directors
and Committees.........................................................7
5.4 Interested Directors; Quorum...........................................8
5.5 Form of Records........................................................8
5.6 Amendment of Bylaws....................................................8
<PAGE>
ARTICLE I
STOCKHOLDERS
1.1 Annual Meetings. An annual meeting of the stockholders shall be held
for the election of directors on the third Tuesday in May of each year or on
such other date and at such time and place, either within or without the State
of Delaware, as may be designated by resolution of the Board of Directors from
time to time. Any other proper business may be transacted at the annual meeting.
1.2 Special Meetings. Special meetings of stockholders for any purpose or
purposes may be called at any time by the Chairman of the Board, if any, the
President or the Board of Directors. Such special meetings shall be held at such
date, time and place either within or without the State of Delaware as may be
stated in the notice of the meeting.
1.3 Notice of Meetings. Whenever stockholders are required or permitted to
take any action at a meeting, a written notice of the meeting shall be given
which shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. Unless
otherwise provided by law, the written notice of any meeting shall be given not
less than ten nor more than sixty days before the date of the meeting to each
stockholder entitled to vote at such meeting. If mailed, such notice shall be
deemed to be given when deposited in the mail, postage prepaid, directed to the
stockholder at his address as it appears on the records of the Company.
1.4 Adjournments. Any meeting of stockholders, annual or special, may
adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Company may transact any business which might have been
transacted at the original meeting. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting.
1.5 Quorum. At each meeting of stockholders, except where otherwise
provided by law or the Certificate of Incorporation or these Bylaws, the holders
of a majority of the outstanding shares of stock entitled to vote at the
meeting, present in person or by proxy, shall constitute a quorum. For purposes
of the foregoing, two or more classes or series of stock shall be considered a
single class if the holders thereof are entitled to vote together as a single
class at the meeting. In the absence of a quorum, the stockholders so present
may, by majority vote, adjourn the meeting from time to time in the manner
provided in Section 1.4 of these Bylaws until a quorum shall attend. Shares of
its own stock belonging to the Company or to another corporation, if a majority
of the shares entitled to vote in the election of directors of such other
corporation is held, directly or indirectly, by the Company, shall neither be
entitled to vote nor be counted for quorum purposes; provided, however, that the
foregoing shall not limit the right of any corporation to vote stock, including
but not limited to its own stock, held by it in a fiduciary capacity.
<PAGE>
1.6 Organization. Meetings of stockholders shall be presided over by the
Chairman of the Board, if any, or in his absence by the President, or in his
absence by a Vice President, or in the absence of the foregoing persons by a
chairman designated by the Board of Directors, or in the absence of such
designation, by a chairman chosen at the meeting. The Secretary shall act as
secretary of the meeting, but in his absence the chairman of the meeting may
appoint any person to act as secretary of the meeting.
1.7 Voting; Proxies. (a) Unless otherwise provided in the Certificate of
Incorporation, each stockholder entitled to vote at any meeting of stockholders
shall be entitled to one vote for each share of stock held by him which has
voting power upon the matter in question.
(b) Each stockholder entitled to vote at a meeting of stockholders or to
express consent or dissent to corporate action in writing without a meeting may
authorize another person or persons to act for him by proxy, but no such proxy
shall be voted or acted upon after three years from its date, unless the proxy
provides for a longer period.
(c) Without limiting the manner in which a stockholder may authorize
another person or persons to act for him as proxy pursuant to this subsection
(b) of this Section, the following shall constitute a valid means by which a
stockholder may grant such authority:
(1) A stockholder may execute a writing authorizing another person or
persons to act for him as proxy. Execution may be accomplished by the
stockholder or his authorized officer, director, employee or agent signing
such writing or causing his or her signature to be affixed to such writing
by any reasonable means including, but not limited to, by facsimile
signature.
(2) A stockholder may authorize another person or persons to act for
him as proxy by transmitting or authorizing the transmission of a telegram,
cablegram or other means of electronic transmission to the person who will
be the holder of the proxy or to a proxy solicitation firm, proxy support
service organization or like agent duly authorized by the person who will
be the holder of the proxy to receive such transmission, provided that any
such telegram, cablegram or other means of electronic transmission must
either set forth or be submitted with information from which it can be
determined that the telegram, cablegram, or other electronic transmission
was authorized by the stockholder. If it is determined that such telegrams,
cablegrams or other electronic transmissions are valid, the inspectors or,
if there are no inspectors, such other persons making that determination
shall specify the information upon which they relied.
(d) Any copy, facsimile, telecommunication or other reliable reproduction
of the writing or transmission created pursuant to this subsection (c) of this
Section, may be submitted or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile,
telecommunication or other reproduction shall be a complete reproduction of the
entire original writing or transmission.
<PAGE>
(e) A duly executed proxy shall be irrevocable if it states that it is
irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A proxy may be made
irrevocable regardless of whether the interest with which it is coupled is an
interest in the stock itself or an interest in the Company generally. A
stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the Company. Voting at meetings of stockholders need not be by written ballot
and need not be conducted by inspectors unless the holders of a majority of the
outstanding shares of all classes of stock entitled to vote thereon present in
person or by proxy at such meeting shall so determine. At all meetings of
stockholders for the election of directors, a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law or by the Certificate of Incorporation or these
Bylaws, be decided by the vote of the holders of a majority of the outstanding
shares of stock entitled to vote thereon present in person or by proxy at the
meeting, provided that (except as otherwise required by law or by the
Certificate of Incorporation) the Board of Directors may require a larger vote
upon any election or question.
1.8 Fixing Date for Determination of Stockholders of Record.
(a) Notice and Voting Rights: In order that the Company may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors, and which record date shall
not be more than sixty nor less than ten days before the date of such meeting.
If no record date is fixed by the Board of Directors, the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meeting is held. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
(b) Consents: In order that the Company may determine the stockholders
entitled to consent to corporate action in writing without a meeting, the Board
of Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the Board of
Directors, and which date shall not be more than ten days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors. If no record date has been fixed by the Board of Directors, the
record date for determining stockholders entitled to consent to corporate action
in writing without a meeting, when no prior action by the Board of Directors is
required by law, the Certificate of Incorporation or these Bylaws, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the Company by delivery to its registered
office, principal place of business, or an officer or agent of the Company
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Company's registered office shall be by hand or
by certified mail, return receipt requested. If no record date has been fixed by
the Board of Directors and prior action by the Board of Directors is required by
<PAGE>
law, the Certificate of Incorporation or these Bylaws, the record date for
determining stockholders entitled to consent to corporate action in writing
without a meeting shall be at the close of business on the day on which the
Board of Directors adopts the resolution taking such prior action.
(c) Other Lawful Action: In order that the Company may determine the
stockholders entitled to receive payment of any dividend or other distribution
or allotment of any rights or the stockholders entitled to exercise any rights
in respect of any change, conversion or exchange of stock, or for the purpose of
any other lawful action, the Board of Directors may fix a record date, which
record date shall not precede the date upon which the resolution fixing the
record date is adopted, and which record date shall be not more than sixty days
prior to such action. If no record date is fixed, the record date for
determining stockholders for any such purpose shall be at the close of business
on the day on which the Board of Directors adopts the resolution relating
thereto.
1.9 List of Stockholders Entitled to Vote. The Secretary shall prepare and
make, at least ten days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at the meeting, arranged in alphabetical
order, and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the time and place of the meeting during the whole time thereof, and may be
inspected by any stockholder who is present.
1.10 Consent of Stockholders in Lieu of Meeting. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
to be taken at any annual or special meeting of the stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing, setting forth the action so taken, shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted. The consent or
consents shall be delivered to the Company by delivery to its registered office,
principal place of business, or an officer or agent of the Company having
custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Company's registered office shall be by hand or
by certified or registered mail, return receipt requested. Every written consent
shall bear the date of signature of each stockholder who signs the consent and
no written consent shall be effective to take the corporate action referred to
therein unless, within sixty days of the earliest dated consent delivered in the
manner required by law, to the Company, written consents signed by a sufficient
number of holders to take action are delivered to the Company in the manner
indicated above. Prompt notice of the taking of the corporate action without a
meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
<PAGE>
ARTICLE II
BOARD OF DIRECTORS
2.1 Functions and Compensation. The business and affairs of the Company
shall be managed by or under the direction of the Board of Directors of the
Company. The Board of Directors shall have the authority to fix the compensation
of the members thereof.
2.2 Number; Qualifications. The Board of Directors shall consist of one or
more members, the number thereof to be determined from time to time by
resolution of the Board of Directors. Directors need not be stockholders.
2.3 Election; Resignation; Removal; Vacancies. The Board of Directors shall
initially consist of the persons elected as such by the incorporator. At the
first annual meeting of stockholders and at each annual meeting thereafter, the
stockholders shall elect Directors to replace those Directors whose terms then
expire. Any Director may resign at any time upon written notice to the Company.
Stockholders may remove Directors with or without cause by vote of a majority of
the shares then entitled to vote at an election of directors. Any vacancy
occurring in the Board of Directors for any cause may be filled by a majority of
the remaining members of the Board of Directors, although such majority is less
than a quorum, or by a plurality of the votes cast at a meeting of stockholders,
and each Director so elected shall hold office until the expiration of the term
of office of the Director whom he has replaced.
2.4 Regular Meetings. Regular meetings of the Board of Directors may be
held at such places within or without the State of Delaware and at such times as
the Board of Directors may from time to time determine, and if so determined
notices thereof need not be given.
2.5 Special Meetings. Special meetings of the Board of Directors may be
held at any time or place within or without the State of Delaware whenever
called by the Chairman of the Board, the President, any Vice President, the
Secretary, or by a plurality of directors in office. Reasonable notice thereof
shall be given by the person or persons calling the meeting, not later than the
second day before the date of the special meeting.
2.6 Telephonic Meetings Permitted. Members of the Board of Directors may
participate in a meeting by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to this
Section 2.6 shall constitute presence in person at such meeting.
2.7 Quorum; Vote Required for Action. At all meetings of the Board of
Directors a majority of the entire Board shall constitute a quorum for the
transaction of business. Except in cases in which the Certificate of
Incorporation or these Bylaws otherwise provide, the vote of a majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors.
2.8 Organization. Meetings of the Board of Directors shall be presided over
by the Chairman of the Board, if any, or in his or her absence by the President,
or in his or her absence by a chairman chosen at the meeting. The Secretary
shall act as secretary of the meeting, but in his or her absence the chairman of
the meeting may appoint any person to act as secretary of the meeting.
<PAGE>
2.9 Action by Directors Without a Meeting. Unless otherwise restricted by
the Certificate of Incorporation or these Bylaws, any action required or
permitted to be taken at any meeting of the Board of Directors may be taken
without a meeting if all members of the Board consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board.
ARTICLE III
OFFICERS
3.1 Executive Officers; Election; Qualifications. As soon as practicable
after the annual meeting of stockholders in each year the Board of Directors
shall elect a President and Secretary, and it may, if it so determines, elect a
Chairman of the Board. The Board of Directors may also elect one or more Vice
Presidents, one or more Assistant Vice Presidents, one or more Assistant
Secretaries, a Treasurer and one or more Assistant Treasurers and may give any
of them such further designations or alternate titles as it considers desirable.
Any number of offices may be held by the same person.
3.2 Term of Office; Resignation; Removal; Vacancies. Except as otherwise
provided in the resolution of the Board of Directors electing any officer, each
such officer shall hold office until the first meeting of the Board of Directors
after the annual meeting of stockholders next succeeding this election, and
until his successor is elected and qualified or until his earlier resignation or
removal. Any officer may resign at any time upon written notice to the Company.
The Board of Directors may remove any officer with or without cause at any time,
but such removal shall be without prejudice to the contractual rights of such
officer, if any, with the Company. Any vacancy occurring in any office of the
Company by death, resignation, removal or otherwise may be filled for the
unexpired portion of the term by the Board of Directors at any regular or
special meeting.
3.3 Powers and Duties of Executive Officers. The officers of the Company
shall have such powers and duties in the management of the Company as may be
prescribed by the Board of Directors and, to the extent not so provided, as
generally pertain to their respective offices, subject to the control of the
Board of Directors. The Secretary shall have the duty to record the proceedings
of the meetings of the stockholders, the Board of Directors in a book to be kept
for that purpose. The Board of Directors may require any officer, agent or
employee to give security for the faithful performance of his duties.
3.4 Compensation. The Board of Directors shall fix the compensation of the
Chairman of the Board and of the President and shall fix, or authorize the
Chairman of the Board or the President to fix, the compensation of any or all
others. The Board of Directors may vote compensation to any director for
attendance at meetings or for any special services.
<PAGE>
ARTICLE IV
STOCK
4.1 Certificates. Every holder of stock shall be entitled to have a
certificate signed by or in the name of the Company by the Chairman of the Board
of Directors, if any, or the President or a Vice President, and by the Treasurer
or an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
Company, certifying the number of shares owned by him in the Company. Any of or
all the signatures on the certificate may be a facsimile. In case any officer,
transfer agent, or registrar who has signed or whose facsimile signature has
been placed upon a certificate shall have ceased to be such officer, transfer
agent, or registrar before such certificate is issued, it may be issued by the
Company with the same effect as if he were such officer, transfer agent, or
registrar at the date of issue.
4.2 Transfer of Stock. Upon surrender to the Company or the transfer agent
of the Company of a certificate for shares endorsed or accompanied by a written
assignment signed by the holder of record or by his duly authorized
attorney-in-fact, it shall be the duty of the Company, or its duly appointed
transfer agent, to issue a new certificate to the person entitled thereto,
cancel the old certificate and record the transaction upon its books.
4.3 Lost, Stolen or Destroyed Stock Certificates; Issuance of New
Certificates. The Company may issue a new certificate of stock in the place of
any certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the Company may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the Company a bond
sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE V
MISCELLANEOUS
5.1 Fiscal Year. The fiscal year of the Company shall be determined by
resolution of the Board of Directors.
5.2 Seal. The Corporate seal shall have the name of the Company inscribed
thereon and shall be in such form as may be approved from time to time by the
Board of Directors.
5.3 Waiver of Notice of Meetings of Stockholders, Directors and Committees.
Any written waiver of notice, signed by the person entitled to notice, whether
before or after the time stated therein, shall be deemed equivalent to notice.
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or
<PAGE>
convened. Neither the business to be transacted at, nor the purpose of any
regular or special meeting of the stockholders or directors need be specified in
any written waiver of notice.
5.4 Interested Directors; Quorum. No contract or transaction between the
Company and one or more of its directors or officers, or between the Company and
any other corporation, partnership, association, or other organization in which
one or more of its directors or officers are directors or officers, or have a
financial interest, shall be void or voidable solely for this reason, or solely
because the director or officer is present at or participates in the meeting of
the Board which authorizes the contract or transaction, or solely because his or
their votes are counted for such purpose, if: (1) the material facts as to his
relationship or interest and as to the contract or transaction are disclosed or
are known to the Board of Directors, and the Board in good faith authorized the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) the contract or
transaction is fair as to the Company as of the time it is authorized, approved
or ratified, by the Board of Directors or the stockholders. Common or interested
directors may be counted in determining the presence of a quorum at a meeting of
the Board of Directors or of a committee which authorizes the contract or
transaction.
5.5 Form of Records. Any records maintained by the Company in the regular
course of its business, including its stock ledger, books of account, and minute
books, may be kept on, or be in the form of, punch cards, magnetic tape,
photographs, microphotographs, or any other information storage device, provided
that the records so kept can be converted into clearly legible form within a
reasonable time. The Company shall so convert any records so kept upon the
request of any person entitled to inspect the same.
5.6 Amendment of Bylaws. These Bylaws may be altered or repealed, and new
bylaws made, by the Board of Directors, but the stockholders may make additional
bylaws and may alter and repeal any bylaws whether adopted by them or otherwise.
December 13, 1999
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Dominion Resources, Inc. and Consolidated Natural Gas Company
(File No. 70-09477)
Ladies and Gentlemen:
This opinion is furnished to the Securities and Exchange Commission
(the"Commission") in connection with the filing with the Commission of the
Application-Declaration on Form U-1 (File 70-09477) (the "Application") of
Dominion Resources, Inc. ("DRI") and Consolidated Natural Gas Company ("CNG")
under the Public Utility Holding Company Act of 1935, as amended (the "Act").
The Application requests that the Commission issue an order authorizing the
merger (the "Merger") between DRI and CNG pursuant to which DRI will acquire all
of the issued and outstanding shares of common stock of CNG, which, in turn owns
all of the outstanding shares of common stock of four gas utility companies (as
defined in section 2(a)(4) of the Act) namely, Virginia Natural Gas, Inc., a
Virginia corporation ("VNG"), Hope Gas, Inc., a West Virginia corporation
("Hope"), The Peoples Natural Gas Company, a Pennsylvania corporation
("Peoples"), and The East Ohio Gas Company, an Ohio corporation ("East Ohio").
We have acted as counsel to DRI in connection with the filing of the
Application.
In connection with this opinion, we have examined originals or copies
certified or otherwise identified to our satisfaction of such corporate records
of DRI and CNG, certificates of public officials, certificates of officers and
representatives of DRI and CNG, and other documents as we have deemed necessary
in order to render the opinions hereinafter set forth.
In such examination, we have assumed the genuineness of all signatures, the
authenticity of all documents submitted to us as originals and the conformity to
authentic original documents of all documents submitted to us as copies. As to
any facts material to our opinion, we have, when relevant facts were not
independently established, relied upon the aforesaid agreements, instruments,
certificates and documents.
The opinions expressed below with respect to the Merger described in the
Application are subject to the following further assumptions and conditions:
a. The Merger shall have been duly authorized and approved, to the extent
required by the governing corporate documents and applicable state laws, by the
Board of Directors of DRI and the Board of Directors of CNG and the shareholders
of DRI and the shareholders of CNG.
b. All required approvals, authorizations, consents, certificates, rulings
and orders of, and all filings and registrations with, all applicable federal
and state commissions and regulatory authorities with respect to the Merger
shall have been obtained or made, as the case may be, and shall have become
final and unconditional in all respects and shall remain in effect (including
the approval and authorization of the Commission under the Act) and the Merger
shall have been accomplished in accordance with all such approvals,
authorizations, consents, certificates, orders, filings and,
c. The Commission shall have duly entered an appropriate order with respect
to the Merger as described in the Application granting and permitting the
Application to become effective under the Act and the rules and regulations.
d. The registration statement on Form S-4 (no. 333-75669) filed with the
Commission on May 20, 1999 with respect to the shares of DRI common stock to be
issued in connection with the Merger shall remain effective pursuant to the
Securities Act of 1933, as amended; no stop order shall have been entered with
respect thereto; and the issuance of shares of DRI common stock in connection
with the Merger shall have been consummated in compliance with the Securities
Act of 1933, as amended, and the rules and regulations thereunder.
e. The solicitation of proxies from the shareholders of CNG with respect to
the Merger was conducted in accordance with the Act, and the rules and
regulations thereunder.
f. The consent decree with the Federal Trade Commission dated November 5,
1999 under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
and the rules and regulations thereunder has become effective and the Federal
Trade Commission has taken no further action.
g. The appropriate certificate of merger shall have been duly and validly
filed with the Secretary of State of the State of Delaware, and such other
corporate formalities as are required by the laws of the State of Delaware for
the consummation of the Merger shall have been taken; and such merger shall have
become effective in accordance with the laws of the State of Delaware.
h. The parties shall have obtained all consents, waivers and releases, if
any, required for the Merger under all applicable governing corporate documents,
contracts, agreements, debt instruments, indentures, franchises, licenses and
permits.
Based on the foregoing, and subject to the assumptions and conditions set
forth herein, we are of the opinion that when the Commission has taken the
action requested in the Application:
1. All state laws applicable to the proposed Merger will have been
complied with; however, we express no opinion as to the need to comply
with state blue sky laws.
2. DRI is a corporation validly organized, duly existing and in good
standing in the Commonwealth of Virginia.
3. The shares of DRI common stock to be issued in connection with the
Merger will be validly issued, fully paid and nonassessable, and the
holders thereof will be entitled to the rights and privileges
appertaining thereto set forth in the restated Articles of
Incorporation of DRI.
4. DRI may legally acquire the shares of common stock of CNG.
5. The consummation of the Merger will not violate the legal rights of
the holders of any securities issued by DRI.
We are members of the State Bar of New York and we express no opinion as to
the laws of any jurisdiction other than the Act under the federal laws of the
United States. In rendering the foregoing opinion, as to all matters governed by
the laws of the States of Virginia, West Virginia, Pennsylvania, Ohio and North
Carolina, we have relied, without independent inquiry, solely upon the opinions
of local counsel.
We hereby consent to the use of this opinion as an exhibit to the
Application.
Very truly yours,
/s/ LeBoeuf, Lamb, Greene & MacRae, L.L.P.
DRI Services Agreement
This DRI Services Agreement (this "Agreement") is entered into as of the
____ day of __________, 1999, by and between [insert name of subsidiary], a
__________ corporation (the "Company"), DOMINION RESOURCES SERVICES, INC., a
Virginia corporation, ("DRI Services"), and CONSOLIDATED NATURAL GAS SERVICE
COMPANY, INC., a Delaware corporation ("CNG Services"). DRI Services and CNG
Services are sometimes referred to herein as a "Service Company" and,
collectively, as the "Service Companies".
WHEREAS, each of the Company, DRI Services and CNG Services is a direct or
indirect wholly owned subsidiary of Dominion Resources, Inc. ("DRI");
WHEREAS, each of the Service Companies has been formed for the purpose of
providing administrative, management and other services to DRI and its
subsidiaries ("System Companies"); and
WHEREAS, the Company believes that it is in the interest of the Company to
provide for an arrangement whereby the Company may, from time to time and at the
option of the Company, agree to purchase such administrative, management and
other services from either one or both of the Service Companies;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
I. SERVICES OFFERED. Exhibit I hereto lists and describes all of the
services that are available from either of the Service Companies. Each of the
Service Companies hereby offers to supply those services to Company and to other
subsidiaries of DRI. Such services are and will be provided to the Company only
at the request of the Company.
II. SERVICES SELECTED.
A. Initial Selection of Services. Exhibit II lists the services Company
hereby agrees to receive from DRI Services. Exhibit III lists the services
Company hereby agrees to receive from CNG Services.
B. Annual Selection of Services. Each Service Company shall send an annual
service proposal form to the Company on or about December 1 listing services
proposed for the coming calendar year. By December 31, the Company shall notify
each Service Company of the services it has elected to receive from that Service
Company during the following calendar year.
1
<PAGE>
III. PERSONNEL. The Service Companies will provide services by utilizing
the services of such executives, accountants, financial advisers, technical
advisers, attorneys, engineers, geologists and other persons as have the
necessary qualifications.
If necessary, the Service Companies, after consultation with the Company,
may also arrange for the services of nonaffiliated experts, consultants and
attorneys in connection with the performance of any of the services supplied
under this Agreement.
IV. COMPENSATION AND ALLOCATION. As and to the extent required by law, the
Service Companies will provide such services at cost. Exhibit IV hereof contains
rules for determining and allocating costs for DRI Services and CNG Services.
V. TERMINATION AND MODIFICATION.
A. Modification of Services. The Company may modify its selection of
services at any time during the calendar year by giving the relevant Service
Company written notice of the additional services it wishes to receive, and/or
the services it no longer wishes to receive, from the Service Company. The
requested modification in services shall take effect on the first day of the
first calendar month beginning at least thirty (30) days after the Company sent
written notice to the Service Company.
B. Modification of Other Terms and Conditions. No other amendment, change
or modification of this Agreement shall be valid, unless made in writing and
signed by all parties hereto.
C. Termination of this Agreement. The Company may terminate this Agreement
as to either or both of the Service Companies by providing sixty (60) days
advance written notice of such termination to the applicable Service Company or
Companies. Either Service Company may terminate this Agreement as to the Company
by providing sixty (60) days advance written notice of such termination to the
Company. The parties expressly agree that termination of this Agreement by the
Company as to one of the Service Companies shall not constitute a termination of
this Agreement with respect to the other Service Company and that termination of
this Agreement by either Service Company shall not affect the obligations of the
other Service Company hereunder to the Company.
This Agreement is subject to termination or modification at any time to the
extent its performance may conflict with the provisions of the Public Utility
Holding Company Act of 1935, as amended ("1935 Act), or with any rule,
regulation or order of the Securities and Exchange Commission ("SEC") adopted
before or after the making of this Agreement. This Agreement shall be subject to
the approval of any state commission or other state regulatory body whose
approval is, by the laws of said state, a legal prerequisite to the execution
and delivery or the performance of this Agreement.
2
<PAGE>
VI. NOTICE. Where written notice is required by this Agreement, said notice
shall be deemed given when mailed by United States registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
a. To the Company:
--------------------
--------------------
--------------------
--------------------
b. To DRI Services:
--------------------
--------------------
--------------------
--------------------
c. To CNG Services:
--------------------
--------------------
--------------------
--------------------
VII. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the respective states of incorporation of the
Service Companies, without regard to their respective conflict of laws
provisions.
VIII. ENTIRE AGREEMENT. This Agreement, together with its exhibits,
constitutes the entire understanding and agreement of the parties with respect
to its subject matter, and effective upon the execution of this Agreement by the
respective parties hereof and thereto, any and all prior agreements,
understandings or representations with respect to this subject matter (except
for completion of obligations of CNG Services and Consolidated Natural Gas
Company ("CNG") and its subsidiaries arising before the merger of DRI and CNG
became effective) are hereby terminated and canceled in their entirety and are
of no further force or effect.
IX. WAIVER. No waiver by any party hereto of a breach of any provision of
this Agreement shall constitute a waiver of any preceding or succeeding breach
of the same or any other provision hereof.
X. ASSIGNMENT. This Agreement shall inure to the benefit of and shall be
binding upon the parties and their respective successors and assigns. No
assignment of this Agreement
3
<PAGE>
or any party's rights, interests or obligations hereunder may be made without
the other party's consent, which shall not be unreasonably withheld, delayed or
conditioned.
XI. SEVERABILITY. If any provision or provisions of this Agreement shall be
held to be invalid, illegal, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
XII. EFFECTIVE DATE. This Agreement is effective as to DRI and its
subsidiaries, including DRI Services, as of January 1, 2000 and is effective as
to Consolidated Natural Gas Company ("CNG") and its subsidiaries, including CNG
Services, as of the closing of the proposed merger between DRI and CNG.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above mentioned.
Attest: By Company:
- --------------------------------- ---------------------------------
---------------------------------
Attest: By DRI Services:
- --------------------------------- ---------------------------------
---------------------------------
Attest: By CNG Services:
- --------------------------------- ---------------------------------
---------------------------------
<PAGE>
EXHIBIT I
DESCRIPTION OF SERVICES OFFERED BY EACH
SERVICE COMPANY UNDER THIS AND SIMILAR SERVICE CONTRACTS
1. Accounting. Provide advice and assistance to System Companies in
accounting matters, including the development of accounting practices,
procedures and controls, the maintenance of the general ledger and related
subsidiary systems, the preparation and analysis of financial reports, and the
processing of certain accounts such as accounts payable, payroll, customer and
cash management.
2. Auditing. Periodically audit the accounting records and other records
maintained by System Companies and coordinating their examination, where
applicable, with that of independent public accountants. The audit staff will
report on their examination and submit recommendations, as appropriate, on
improving methods of internal control and accounting procedures.
3. Legal and Regulatory. Provide advice and assistance with respect to
legal and regulatory issues as well as regulatory compliance, including 1935 Act
authorizations and compliance and regulatory matters under other Federal and
State laws.
4. Information Technology, Electronic Transmission and Computer Services.
Provide the organization and resources for the operation of an information
technology function including the development, implementation and operation of a
centralized data processing facility and the management of a telecommunications
network. This function includes the central processing of computerized
applications and support of individual applications in System Companies.
Develop, implement, and process those computerized applications for System
Companies that can be economically best accomplished on a centralized basis.
5. Software Pooling. Accept from System Companies ownership of and rights
to use, assign, license or sub-license all software owned, acquired or developed
by or for System Companies which System Companies can and do transfer or assign
to it. Preserve and protect the rights to all such software to the extent
reasonable and appropriate under the circumstances; license System Companies, on
a non-exclusive, no-charge or at-cost basis, to use all software which the
relevant Service Company has the right to sell, license or sub-license; and, at
the relevant System Companies' expense, permit System Companies to enhance any
such software and license others to use all such software and enhancements to
the extent that the relevant Service Companies shall have the legal right to so
permit.
<PAGE>
6. Employee Benefits/Pension Investment. Provide central accounting for
employee benefit and pension plans of System Companies. Advise and assist System
Companies in the administration of such plans and prepare and maintain records
of employee and company accounts under the said plans, together with such
statistical data and reports as are pertinent to the plans.
7. Employee Relations. Advise and assist System Companies in the
formulation and administration of employee relations policies and programs
relating to the relevant System Companies' labor relations, personnel
administration, training, wage and salary administration and safety.
8. Operations. Advise and assist System Companies in the study, planning,
engineering and construction of energy plant facilities of each System Company
and of the System as a whole, and advise, assist and manage the planning,
engineering (including maps and records) and construction operations of System
Companies. Develop long-range operational programs for all the System Companies
and advise and assist each such System Company in the coordination of such
programs with the programs of the other System Companies.
9. Executive and Administrative. Advise and assist System Companies in the
solution of major problems and in the formulation and execution of the general
plans and policies of System Companies. Advise and assist System Companies as to
operations, the issuance of securities, the preparation of filings arising out
of or required by the various Federal and State securities, business, public
utilities and corporation laws, the selection of executive and administrative
personnel, the representation of System Companies before regulatory bodies,
proposals for capital expenditures, budgets, financing, acquisition and
disposition of properties, expansion of business, rate structures, public
relationships and other related matters.
10. Business and Operations Services. Advise and assist System Companies in
all matters relating to operational capacity and the preparation and
coordination of operating studies. Manage System Companies' purchase, sale,
movement, transfer and accounting of volumes to ensure continued recovery of all
prudently incurred energy purchase costs through local jurisdictional cost
recovery mechanisms. Compile and communicate information relevant to system
operation. Perform general business and operations support services, including
business, plant and facilities operation, maintenance and management, travel,
aviation, fleet and mail services.
11. Exploration and Development. Advise and assist System Companies in all
geological and exploration matters including the acquisition and surrender of
acreage and the development of underground storage facilities.
12. Risk Management. Advise and assist System Companies in securing
requisite insurance, in the purchase and administration of all property,
casualty and marine insurance, in the settlement of insured claims and in
providing risk prevention advice.
2
<PAGE>
13. Marketing. Plan, formulate and implement marketing programs, as well as
provide associated marketing services to assist System Companies with improving
customer satisfaction, load retention and shaping, growth of energy sales and
deliveries, energy conservation and efficiency. Assist System Companies in
carrying out policies and programs for the development of plant locations and of
industrial, commercial and wholesale markets and assist with community
redevelopment and rehabilitation programs.
14. Medical. Direct and administer all medical and health activities of
System Companies. Provide systems of physical examination for employment and
other purposes and direct and administer programs for the prevention of
sickness.
15. Corporate Planning. Advise and assist System Companies in studying and
planning in connection with operations, budgets, economic forecasts, capital
expenditures and special projects.
16. Procurement. Advise and assist System Companies in the procurement of
real and personal property, materials, supplies and services, conduct purchase
negotiations, prepare procurement agreements and administer programs of material
control.
17. Rates. Advise and assist System Companies in the analysis of their rate
structure in the formulation of rate policies and in the negotiation of large
contracts. Advise and assist System Companies in proceedings before regulatory
bodies involving the rates and operations of System Companies and of other
competitors where such rates and operations directly or indirectly affect System
Companies.
18. Research. Investigate and conduct research into problems relating to
production, utilization, testing, manufacture, transmission, storage and
distribution of energy. Keep abreast of and evaluate for System Companies all
research developments and programs of significance affecting System Companies
and the energy industry, conduct research and development in promising areas and
advise and assist in the solution of technical problems arising out of System
Companies' operations.
19. Tax. Advise and assist System Companies in the preparation of Federal
and other tax returns, and generally advise System Companies as to any problems
involving taxes including the provision of due diligence in connection with
acquisitions.
20. Corporate Secretary. Provide all necessary functions required of a
publicly held corporation; coordinating information and activities among
shareholders, the transfer agent, and Board of Directors; providing direct
services to security holders; preparing and filing required annual and interim
reports to shareholders and the SEC; conducting the annual meeting of
shareholders and ensuring proper maintenance of corporate records.
21. Investor Relations. Provide fair and accurate analysis of DRI and its
operating subsidiaries and its outlook within the financial community, enhancing
DRI's
3
<PAGE>
position in the energy industry; balancing and diversifying shareholder
investment in DRI through a wide range of activities; providing feedback to DRI
and its operating subsidiaries regarding investor concerns, trading and
ownerships; holding periodic analysts meetings; and providing various operating
data as requested or required by investors.
22. Environmental Compliance. Provide consulting, cleanup, and other
activities as required by System Companies to ensure full compliance with
applicable environmental statutes and regulations.
23. Customer Services. Provide services and systems dedicated to customer
service, including billing, remittance, credit, collections, customer relations,
call centers, energy conservation support and metering.
24. Energy Marketing. Provide services and systems dedicated to energy
marketing, including marketing and trading of gas and electric power, and energy
price risk management and development of marketing and sales programs in
physical and financial markets.
25. Treasury/Finance. Provide services related to managing all
administrative activities associated with financing, including management of
capital structure; cash, credit and risk management activities; investment and
commercial banking relationships; oversight of decommissioning trust funds and
general financing activities.
26. External Affairs. Provide services in support of corporation strategies
for managing relationships with federal, state and local governments, agencies
and legislative bodies. Formulate and assist with public relations and
communications programs and administration of corporate contribution and
community affairs programs.
4
<PAGE>
EXHIBIT II
SERVICES THE COMPANY AGREES TO RECEIVE FROM DRI SERVICES
SERVICE YES NO
1. Accounting _____ _____
2. Auditing _____ _____
3. Legal and Regulatory _____ _____
4. Information Technology, Electronic Transmission
and Computer Services _____ _____
5. Software Pooling _____ _____
6. Employee Benefits/Pension Investment _____ _____
7. Employee Relations _____ _____
8. Operations _____ _____
9. Executive and Administrative _____ _____
10. Business and Operations Services _____ _____
11. Exploration and Development _____ _____
12. Risk Management _____ _____
13. Marketing _____ _____
14. Medical _____ _____
15. Corporate Planning _____ _____
16. Procurement _____ _____
17. Rates _____ _____
18. Research _____ _____
19. Tax _____ _____
20. Corporate Secretary _____ _____
21. Investor Relations _____ _____
22. Environmental Compliance _____ _____
23. Customer Services _____ _____
24. Energy Marketing _____ _____
25. Treasury/Finance _____ _____
26. External Affairs _____ _____
<PAGE>
EXHIBIT III
SERVICES THE COMPANY AGREES TO RECEIVE FROM CNG SERVICES
SERVICE YES NO
1. Accounting _____ _____
2. Auditing _____ _____
3. Legal and Regulatory _____ _____
4. Information Technology, Electronic Transmission
and Computer Services _____ _____
5. Software Pooling _____ _____
6. Employee Benefits/Pension Investment _____ _____
7. Employee Relations _____ _____
8. Operations _____ _____
9. Executive and Administrative _____ _____
10. Business and Operations Services _____ _____
11. Exploration and Development _____ _____
12. Risk Management _____ _____
13. Marketing _____ _____
14. Medical _____ _____
15. Corporate Planning _____ _____
16. Procurement _____ _____
17. Rates _____ _____
18. Research _____ _____
19. Tax _____ _____
20. Corporate Secretary _____ _____
21. Investor Relations _____ _____
22. Environmental Compliance _____ _____
23. Customer Services _____ _____
24. Energy Marketing _____ _____
25. Treasury/Finance _____ _____
26. Public Affairs _____ _____
<PAGE>
EXHIBIT IV
METHODS OF ALLOCATION FOR CNG SERVICES AND DRI SERVICES
CNG Services and DRI Services shall allocate costs independently. Each Service
Company shall allocate costs among companies receiving service from it under
this and similar service contracts using the following methods:
I. The costs of rendering service by the Service Company will include all
costs of doing business including interest on debt but excluding a return
for the use of equity capital for which no charge will be made to System
Companies.
II. A. The Service Company will maintain a separate record of the expenses of
each department. The expenses of each department will include:
1. those expenses that are directly attributable to such department,
and
2. an appropriate portion of those office and housekeeping expenses
that are not directly attributable to a department but which are
necessary to the operation of such department.
B. Expenses of the department will include salaries and wages of
employees, rent and utilities, materials and supplies, depreciation,
and all other expenses attributable to the department. The expenses of
a department will not include:
1. those incremental out-of-pocket expenses that are incurred for
the direct benefit and convenience of an individual company or
group of companies,
2. Service Company overhead expenses, including expenses of the
corporate secretary's department that are attributable to
maintaining the corporate existence of the Service Company, and
all other incidental overhead expenses including those auditing
fees, internal auditing department expenses and accounting
department expenses attributable to the Service Company.
C. The Service Company will establish annual budgets for controlling the
expenses of each department and for determining estimated costs to be
included in interim monthly billing.
III. A. Employees in each department will be divided into two groups:
<PAGE>
1. Group A will include those employees rendering service to System
Companies, and
2. Group B will include those office and general service employees,
such as secretaries, file clerks and administrative assistants,
who generally assist employees in Group A or render other
housekeeping services and who are not engaged directly in
rendering service to each Company or a group of companies.
B. Expenses set forth in Section II. above will be separated to show:
1. salaries and wages of Group A employees, and
2. all other expenses of the department.
C. There will be attributed to each dollar of a Group A employee's salary
or wage, that percentage of all other expenses of his department (as
defined in B above), that his salary or wage is to the total Group A
salaries and wages of that department.
D. Group A employees in each department will maintain a record of the
time they are employed in rendering service to each company or group
of companies. An hourly rate will be determined by dividing the total
expense attributable to a Group A employee as determined under
subsection C above by the productive hours reported by such employee.
IV. The charge to the Company for a particular service will be determined by
multiplying the hours reported by Group A employees in rendering such
service to each Company by the hourly rates applicable to such employees.
When such employees render service to a group of companies, the charge to
each Company will be determined by multiplying the hours attributable to
the Company under the allocation formulas set forth in Section IX of this
Exhibit by the hourly rates applicable to such employees.
V. To the extent appropriate and practical, the foregoing computations of
hourly rates and charges may be determined for groups of employees within
reasonable salary range limits.
VI. Those expenses of the Service Company that are not included in the annual
expense of a department under Section II. above will be charged to System
Companies receiving service as follows:
A. Incremental out-of-pocket costs incurred for the direct benefit and
convenience of a company or group of companies will be charged
directly to such company or group of companies. Such costs incurred
for a group of companies will be allocated on the basis of an
appropriate formula.
2
<PAGE>
B. Service Company overhead expenses referred to in Section II. above
will be charged to the Company in the proportion that the charges made
to the Company for costs, other than those set forth in this Section
VI., are to the total of such charges to all companies receiving
service.
VII. Notwithstanding the foregoing basis of determining cost allocations for
billing purposes, cost allocations for certain services involving machine
operations and production units will be determined on an appropriate basis
established by the Service Company relating to the direct use of machine
equipment or production units.
VIII.Monthly bills will be issued for the services rendered to the Company on
an actual or estimated basis. Estimates will normally be predicated on
service department budgets and estimated productive hours of employees for
the year. At the end of each year, estimated figures will be revised to
reflect actual experience during such year and adjustments will be made in
amounts billed to give effect to such revision.
IX. When Group A employees render services to a group of companies, the
following formulas shall be used to allocate the time of such employees to
the individual companies receiving such service:
A. The Service Department or Function formulas to be used when employees
render services to all companies participating in such service, for
the services indicated are set forth below. When necessary during the
period 1999-2002, the allocation formulas described below will be
calculated (in part or in whole) using data based on services
performed for System Companies by Dominion Resources, Inc., prior to
the merger of Dominion Resources, Inc. and Consolidated Natural Gas
Company.
Service Department Basis of Allocation
or Function
Employee Benefits/ The number of employee and annuitant accounts
as of the Pension Investments preceding
December 31st.
Human Resources The number of employees as of the preceding
December 31st.
Corporate Planning:
- Capital Budgets Total investment in plant recorded at
preceding December 31st.
- Operating &
Maintenance Budgets Total operating expenses, excluding purchased
gas expense, purchased power expense
(including fuel expenses), other purchased
products and royalties, for the preceding
year ended December 31st.
3
<PAGE>
Service Department Basis of Allocation
or Function
Business and Operations Energy sale and deliveries for the preceding
Services year ended December 31st.
Risk Management Insurance premiums for the preceding year
ended December 31st.
Rates Total regulated company operating expenses,
excluding purchased gas expense, purchased
power expense (including fuel expense), other
purchased products and royalties, for the
preceding year ended December 31st.
Research Gross revenues from the sale of natural gas
(including intercompany sales) and
electricity, recorded during the preceding
year ended December 31st.
Tax The sum of the total income and total
deductions as reported for Federal Income Tax
purposes on the last return filed.
Corporate Secretary/ The weighted average of the previous three
Investor Relations years of total Service Company billings for
the prior years ended December 31st.
Customer Services For metering, the number of gas or electric
meters for the preceding year ended December
31st; otherwise the number of customers for
the preceding year ended December 31st.
System Services Group:
Information Technology:
LDC/EDC Computer Applications Number of residential and commercial
customers at the end of the preceding year
ended December 31st.
Other Computer Applications Number of users or usage of specific computer
systems at the end of the preceding year
ended December 31st.
4
<PAGE>
Service Department Basis of Allocation
or Function
Network Computer Applications Number of network devices at the end of the
preceding year ended December 31st.
Telecommunications Applications Number of telecommunications units
at the end of the preceding year ended
December 31st.
Facility Services:
Building Services Square footage of office space as of the
preceding year ended December 31st.
Processing Services:
Payroll Number of employees on the previous December
31st or the number of payroll payments
generated during the previous year ending
December 31st.
Cash Management & Number of customer payments processed during
Customer Payment Processing the preceding year ended December 31st.
Accounts Payable Processing Number of accounts payable documents
processed during the preceding year ended
December 31st.
Fleet Administration Number of vehicles at December 31st.
Purchasing Dollar value of contract purchases for the
preceding year ended December 31st.
Regulated Business Support Group:
Engineering Services:
General Services Gas pipeline and/or electric supply line
footage as of the preceding year ended
December 31st.
Transmission and Storage
Services Total investment in storage and transmission
plant as of the preceding year ended
December 31st.
Gas Supply: Gas volumes purchased for each affiliate
for the preceding year ended December 31st.
Electricity Supply: Electricity load purchased for each affiliate
for the preceding year ended December 31st.
5
<PAGE>
Service Department Basis of Allocation
or Function
Marketing
Shared Projects Annual marketing plan budget for the current
year of allocation.
Other Indirect Costs Total marketing direct and shared project
costs billed to each System Company for the
preceding year ended December 31st.
Material Management Material inventory assets as of the
preceding year ended December 31st.
System Accounting:
Financial Accounting and
Reporting Number of financial related transactions,
records and reports generated, and account
code combinations for the preceding year
ended December 31st.
Regulated Fixed Assets Regulated companies fixed assets added,
retired or transferred during the preceding
year ended December 31st.
B. Company Group Formulas to be used in the absence of a service
department or function formula or when service rendered by employees
is for a different group of companies than those companies regularly
participating in such service:
Company Group Basis of Allocation
All companies (includes all Total operating expenses, excluding purchased
System Companies except gas expense, purchased power expense
Service Company) (including fuel expense), other purchased
products and royalties, for the preceding
year ended December 31st.
All retail companies Volume of gas and quantity of electricity
sold at retail during the preceding year
ended December 31st (converted to dollar
value).
All wholesale companies Gross revenues from sales for resale recorded
during the preceding year ended December
31st.
6
<PAGE>
All companies having Gross investment in transmission plant
transmission lines recorded at preceding December 31st.
All production companies Production plant budget for the current year
of allocation.
Appalachian production Gross investment in Appalachian production
companies plant recorded at preceding December 31st.
All storage companies Gross investment in storage plant, excluding
non-current inventory, recorded at preceding
December 31st.
All Companies/ The weighted average of the previous three
Shareholder Activities years of Service Company billings.
All unregulated companies Total unregulated companies' operating
expenses, excluding purchased gas expense,
purchased power expense (including fuel
expense), other purchased products and
royalties, for the preceding year ending
December 31st.
All regulated companies Total regulated companies' operating
expenses, excluding purchased gas expense,
purchased power expense (including fuel
expense), other purchased products and
royalties, for the preceding year ended
December 31st.
C. If the use of a basis of allocation would result in an inequity
because of a change in operations or organization, then the Service
Company may adjust the basis to effect an equitable distribution.
7
VIRGINIA POWER SUPPORT AGREEMENT
THIS AGREEMENT is entered into as of the ____ day of ____, 1999, by and
between Virginia Electric and Power Company, a Virginia public service company
("Virginia Power") and Dominion Resources Services, Inc., a Virginia corporation
("DRI Services").
WHEREAS, Virginia Power is an electric utility engaged in the sale of
electric service at retail within its service territories in Virginia and North
Carolina and at wholesale within those territories and elsewhere in the United
States;
WHEREAS, DRI Services is a wholly owned subsidiary of Dominion Resources,
Inc. ("DRI") which was formed in anticipation of DRI becoming a registered
utility holding company under the Public Utility Holding Company Act of 1935
("PUHCA");
WHEREAS, under PUHCA, DRI will be prohibited from providing services to its
subsidiaries and affiliates and, upon approval of the form Service Agreement
under which DRI Services and Consolidated Natural Gas Service Company, Inc. will
provide services to their affiliates, sought contemporaneously herewith, all of
the services currently offered by DRI to its subsidiaries will be offered
through DRI Services (including those services currently offered by DRI to
Virginia Power under the Cost Allocation and Service Agreement approved by the
Virginia State Corporation Commission in Case No. PUE830060 (the "CASA"));
WHEREAS, under the CASA and certain other existing agreements which have
been approved by the Virginia State Corporation Commission (the "Commission"),
Virginia Power currently provides services to DRI and/or DRI's subsidiaries (the
"Pre-Approved Services");
WHEREAS, as a result of DRI becoming a registered holding company, it will
no longer be desirable or efficient for Virginia Power to continue to provide
the Pre-Approved Services directly to DRI;
WHEREAS, Virginia Power now desires to provide certain services to DRI
Services, and DRI Services wishes to receive such services from Virginia Power,
in an effort to promote efficiencies and effectively utilize Virginia Power
resources and expertise; and
WHEREAS, DRI Services is an "affiliated interest" of Virginia Power within
the meaning of the Utility Affiliates Act, Chapter 4 of Title 56 of the Code of
Virginia, and therefore contracts and arrangements for the furnishing of
services by Virginia Power to DRI Services are subject to approval of the
Commission;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties agree as follows:
<PAGE>
1. General Services to be Provided by Virginia Power. Exhibit A hereto
lists and describes all of the services that may be provided by Virginia Power
to DRI Services for the benefit of DRI Services and/or the existing or future
subsidiaries or affiliates of DRI. Such services are and will be provided to DRI
Services only on the mutual agreement of Virginia Power and DRI Services and in
accordance with the terms and conditions set forth herein.
2. Compensation and Allocation. Virginia Power and DRI Services recognize
the importance of DRI Services paying the appropriate compensation for the
services provided hereunder, so that there is no subsidization of either party
by the other. To that end, Virginia Power will maintain accurate records of its
operations that will enable it to determine the costs of the services that it
provides to DRI Services, and those books and records will be open to
examination by any state or federal commission having jurisdiction over
arrangements and services to be furnished, and the staffs of those commissions.
DRI Services will compensate Virginia Power for the services provided hereunder
by payment of the costs incurred to provide those services. Exhibit B hereto
contains rules for determining and allocating costs for services provided to DRI
Services by Virginia Power.
3. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the Commonwealth of Virginia, without regard to
their conflicts of law provisions.
4. Entire Agreement. This Agreement, together with its exhibits,
constitutes the entire understanding and agreement of the parties with respect
to its subject matter, and effective upon the execution of this Agreement by the
respective parties hereof, any and all prior agreements, understanding, or
representations with respect to this subject matter are hereby terminated and
cancelled in their entirety.
5. Waiver. No waiver by any party hereto of a breach of any provision of
this Agreement shall constitute a waiver of any preceding or succeeding breach
of the same or any other provision hereof.
6. Non-Exclusive Rights and Obligations. Nothing herein shall be construed
to require DRI Services to obtain any of the services enumerated herein from
Virginia Power, nor to require Virginia Power to provide any of such services to
DRI Services.
7. Effective Date and Term. This Agreement shall become effective when it
has been approved by the Commission and executed by the parties, and it shall
continue in effect until terminated by either Virginia Power or DRI Services
giving the other sixty (60) days advance written notice of termination.
This Agreement is subject to termination or modification at any time to the
extent its performance may conflict with the provisions of PUHCA, as amended or
with any rule, regulation or order of the Securities and Exchange Commission
adopted before or after the making of this Agreement. This Agreement shall be
subject to the approval of any state
2
<PAGE>
commission or other state regulatory body whose approval is, by the laws of such
state, a legal prerequisite to the execution and delivery or the performance of
this Agreement.
8. Severability. If any provision or provisions of this Agreement shall be
held to be invalid, illegal or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of this ____day of ____, 1999.
Attest: By Virginia Electric and Power Company:
----------------------------------------
- ------------ ----------------------------------------
Attest: By Dominion Resources Services, Inc.:
----------------------------------------
- ------------ ----------------------------------------
3
<PAGE>
EXHIBIT A
DESCRIPTION OF APPROVED SERVICES TO BE OFFERED BY VIRGINIA ELECTRIC AND POWER
COMPANY TO DOMINION RESOURCES SERVICES, INC. UNDER THE AFFILIATE SERVICES
AGREEMENT
1. Accounting. Provide advice and assistance in accounting matters, including
the development of accounting practices, procedures and controls, the
maintenance of the general ledger and related systems, the preparation and
analysis of financial statement reports, and the processing of certain accounts
payable, payroll, customer and cash management transactions.
2. Auditing. Periodically audit accounting records and other records and
coordinating audit examinations where applicable, with that of independent
public accountants. The audit staff will report on their examination and submit
recommendations, as appropriate, on improving methods of internal control and
accounting procedures.
3. Legal and Regulatory. Provide advice and assistance with respect to legal and
regulatory issues as well as regulatory compliance under Federal and State laws.
4. Information Technology, Electronic Transmission and Computer Services. Assist
with the operation of an information technology function including the
development, implementation and operation of a centralized data processing
facility and the management of a telecommunications network. This function
includes the central processing of computerized applications and support of
individual applications. Provide computer resource/network availability,
including enterprise telecommunications infrastructure, mainframe and
distributed computing hardware, operating systems, business systems and
applications, internet, intranet and mail environments, software licenses and
maintenance agreements.
5. Employee Benefits/Pension Investment. Advise and assist in the administration
of employee benefit and pension plans and prepare and maintain records of
employee and company accounts under the said plans, together with such
statistical data and reports as are pertinent to the plans.
6. Employee Relations. Advise and assist in the formulation and administration
of employee relations policies and programs relating to labor relations,
personnel administration, training, wage and salary administration and safety.
7. Operations. Advise and assist in the study, planning, engineering and
construction of energy plant facilities. Assist in the development of long-range
operational programs. Offer management, consulting and advisory/technical
services with respect to the physical operation of energy plant facilities and
the purchase, sale and transfer of affiliated companies.
4
<PAGE>
8. Executive and Administrative. Advise and assist in the solution of major
problems and in the formulation and execution of general plans and policies.
Advise and assist as to operations, the issuance of securities, the preparation
of filings arising out of or required by the various Federal and State
securities, business, public utilities and corporation laws. The selection of
executive and administrative personnel, representation before regulatory bodies,
proposals for capital expenditures, budgets, financings, acquisition and
disposition of properties, expansion of business, rate structures, public
relationships and other related matters.
9. Business and Operations Services. Advise and assist in all matters relating
to operational capacity and the preparation and coordination of operating
studies. Provide assistance with management of the purchase, sale, movement,
transfer and accounting of volumes to ensure continued recovery of all prudently
incurred energy purchase costs through local jurisdictional cost recovery
mechanisms. Compile and communicate information relevant to operations. Perform
general business and operations support services, including travel services,
fleet, mail, plant and facilities operation, maintenance and management.
10. Exploration and Development. Advise and assist in geological and exploration
matters including the acquisition and surrender of acreage and the development
of underground storage facilities.
11. Risk Management. Risk management services such as the securing of requisite
insurance, the purchase and administration of property, casualty and marine
insurance, the settlement of insured claims and the provision of risk prevention
advice.
12. Marketing. Assist in the planning, formulation and implementation of
marketing programs, as well as provide associated marketing services to assist
with improving customer satisfaction, load retention and shaping, growth of
energy sales and deliveries, energy conservation and efficiency. Assist in
carrying out policies and programs for the development of plant locations and of
industrial, commercial and wholesale markets and assist with community
redevelopment and rehabilitation programs.
13. Budgeting and Planning. Advise and assist in studying and planning in
connection with operations, budgets, economic forecasts, rate structures,
capital expenditures and special projects.
14. Purchasing. Advise and assist in the purchase of materials, supplies and
services and the preparation and negotiation of purchasing agreements.
15. Rates. Advise and assist in the analysis of rate structures, the formulation
of rate policies and the negotiation of large contracts. Provide consulting in
connection with proceedings before regulatory bodies involving rates and
operations.
16. Research. Investigate and conduct research into problems relating to
production utilization, testing, manufacture, transmission, storage and
distribution of energy. Evaluate and conduct research and development in
promising areas and advise and assist in the solution of technical problems
arising out of operations.
5
<PAGE>
17. Tax. Advise and assist in the preparation of separate and consolidated tax
returns (Federal and State), interpretations of tax laws, administration of tax
audits, payment of taxes and related matters.
18. Environmental Compliance. Provide consulting and related services to ensure
full compliance with applicable environmental statutes and regulations.
19. Customer Service. Provision of services and systems dedicated to customer
service, including billing, remittance, credit, collections, customer relations,
call centers, energy conservation support and metering.
20. Energy Marketing. Provide services and systems dedicated to energy
marketing, including marketing and trading of gas and electric power, energy
price risk management, and development of marketing and sales programs in
physical and financial markets.
21. Treasury/Finance. Provide services related to managing all administrative
activities associated with financing, including management of capital structure;
cash, credit and risk management activities; investment and commercial banking
relationships; oversight of decommissioning trust funds and general financing
activities.
22. Office Space and Equipment. Leasing of land, buildings, furnishings and
equipment, including computer hardware and software and transportation
equipment.
23. External Affairs. Provide services in support of corporate strategies for
managing relationships with federal, state and local governments, agencies and
legislative bodies. Formulate and assist with public relations and
communications programs and administration of corporate contribution and
community affairs programs.
6
<PAGE>
EXHIBIT B
METHODS OF ALLOCATION FOR VIRGINIA POWER
Virginia Power shall allocate costs independently to DRI Services using the
following methods:
I. The costs of rendering service by Virginia Power will include all costs of
doing business including interest on debt but excluding a return for the
use of equity capital for which no charge will be made to DRI Services.
II. A. Virginia Power will maintain a separate record of the expenses of each
department. The expenses of each department will include:
1. those expenses that are directly attributable to such department,
and
2. an appropriate portion of those office and housekeeping expenses
that are not directly attributable to a department but which are
necessary to the operation of such department.
B. Expenses of the department will include salaries and wages of
employees, rent and utilities, materials and supplies, depreciation,
and all other expenses attributable to the department. The expenses of
a department will not include:
1. those incremental out-of-pocket expenses that are incurred for
the direct benefit and convenience of an individual company or
group of companies,
2. Virginia Power overhead expenses, including expenses of the
corporate secretary's department that are attributable to
maintaining the corporate existence of Virginia Power, and all
other incidental overhead expenses including those auditing fees,
internal auditing department expenses and accounting department
expenses attributable to Virginia Power.
C. Virginia Power will establish annual budgets for controlling the
expenses of each department and for determining estimated costs to be
included in interim monthly billing.
III. A. Employees in each department will be divided into two groups:
1. Group A will include those employees who may render service to
DRI Services, and
7
<PAGE>
2. Group B will include those office and general service employees,
such as secretaries, file clerks and administrative assistants,
who generally assist employees in Group A or render other
housekeeping services and who are not engaged directly in
rendering service to DRI Services.
B. Expenses set forth in Section II. above will be separated to show:
1. salaries and wages of Group A employees, and
2. all other expenses of the department.
C. There will be attributed to each dollar of a Group A employee's salary
or wage, that percentage of all other expenses of his department (as
defined in B above), that his salary or wage is to the total Group A
salaries and wages of that department.
D. Group A employees in each department will maintain a record of the
time they are employed in rendering service to DRI Services. An hourly
rate will be determined by dividing the total expense attributable to
a Group A employee as determined under subsection C above by the
productive hours reported by such employee.
IV. The charge to DRI Services for a particular service will be determined by
multiplying the hours reported by Group A employees in rendering such
service to DRI Services by the hourly rates applicable to such employees.
V. To the extent appropriate and practical, the foregoing computations of
hourly rates and charges may be determined for groups of employees within
reasonable salary range limits.
VI. Those expenses of Virginia Power that are not included in the annual
expense of a department under Section II. above will be charged to DRI
Services as follows:
A. Incremental out-of-pocket costs incurred for the direct benefit and
convenience of DRI Services will be charged directly to such company.
B. Virginia Power overhead expenses referred to in Section II. above will
be charged to DRI Services in the proportion that the charges made to
DRI Services for costs, other than those set forth in this Section VI,
are to the total of all department costs as defined in Section II.
VII. Notwithstanding the foregoing basis of determining cost allocations for
billing purposes, cost allocations for certain services involving machine
operations and
8
<PAGE>
production units will be determined on an appropriate basis established by
Virginia Power relating to the direct use of machine equipment or
production units.
VIII.Monthly bills will be issued for the services rendered to DRI Services on
an actual or estimated basis. Estimates will normally be predicated on
service department budgets and estimated productive hours of employees for
the year. At the end of each year, estimated figures will be revised to
reflect actual experience during such year and adjustments will be made in
amounts billed to give effect to such revision.
IX. If the use of a basis of allocation would result in an inequity because of
a change in operations or organization, then Virginia Power may adjust the
basis to effect an equitable distribution.
Ancillary Services Agreement
This Ancillary Service Agreement (this "Agreement") is entered into as of
the ____ day of __________, 1999, by and between ___________________, a
__________ corporation (the "Receiving Company"), and
__________________________, a _____________ corporation (the "Providing
Company").
WHEREAS, each of the Receiving Company and the Providing Company is a
direct or indirect subsidiary of Dominion Resources, Inc. ("DRI");
WHEREAS, each of the Receiving Company and the Providing Company believes
that it is in the interest of the Receiving Company to provide for an
arrangement whereby the Receiving Company may, from time to time and at the
option of the Receiving Company, agree to purchase administrative, management
and other operating services from the Providing Company;
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto, intending to be legally bound, hereby
agree as follows:
I. SERVICES OFFERED. Exhibit I hereto lists and describes all of the
services that are available from the Providing Company. The Providing Company
hereby offers to supply those services to the Receiving Company. Such services
are and will be provided to the Receiving Company only at the request of the
Receiving Company.
II. SERVICES SELECTED.
A. Initial Selection of Services. Exhibit II lists the services the
Receiving Company hereby agrees to receive from the Providing Company.
B. Annual Selection of Services. The Providing Company shall send an annual
service proposal form to the Receiving Company on or about December 1 listing
services proposed for the coming calendar year. By December 31, the Receiving
Company shall notify Providing Company of the services it has elected to receive
from the Providing Company during the following calendar year.
III. PERSONNEL. The Providing Company will provide services by utilizing
the services of such executives, accountants, financial advisers, technical
advisers, attorneys, engineers, geologists, operating personnel and other
persons as have the necessary qualifications.
IV. COMPENSATION AND ALLOCATION. As and to the extent required by law, the
Providing Company will provide such services at cost. Exhibit III hereof
contains rules for determining and allocating costs for the Providing Company.
Exhibit III contemplates that the
<PAGE>
Providing Company may be providing the same services to more than one Receiving
Company under separate Ancillary Services Agreements.
V. TERMINATION AND MODIFICATION.
A. Modification of Services. The Receiving Company may modify its selection
of services at any time during the calendar year by giving the Providing Company
written notice of the additional services it wishes to receive, and/or the
services it no longer wishes to receive, from the Providing Company. The
requested modification in services shall take effect on the first day of the
first calendar month beginning at least fifteen (15) days after the Receiving
Company sent written notice to the Providing Company.
B. Modification of Other Terms and Conditions. No other amendment, change
or modification of this Agreement shall be valid, unless made in writing and
signed by the parties hereto.
C. Termination of this Agreement. The Receiving Company may terminate this
Agreement as to the Providing Company by providing sixty (60) days advance
written notice of such termination to the Providing Company. The Providing
Company may terminate this Agreement as to the Receiving Company by providing
sixty (60) days advance written notice of such termination to the Receiving
Company. Termination of any separate Ancillary Services Agreement by either
party to the instant Agreement shall not affect the obligations of the Parties
pursuant to the instant Agreement unless the parties modify the instant
Agreement pursuant to Paragraph V.A and/or paragraph V.B.
This Agreement is subject to termination or modification at any time to the
extent its performance may conflict with the provisions of the Public Utility
Holding Company Act of 1935, as amended ("1935 Act"), or with any rule,
regulation or order of the Securities and Exchange Commission ("SEC") adopted
before or after the making of this Agreement. This Agreement shall be subject to
the approval of any state commission or other state regulatory body whose
approval is, by the laws of said state, a legal prerequisite to the execution
and delivery or the performance of this Agreement.
VI. NOTICE. Where written notice is required by this Agreement, said notice
shall be deemed given when mailed by United States registered or certified mail,
postage prepaid, return receipt requested, addressed as follows:
a. To the Receiving Company:
--------------------
--------------------
--------------------
--------------------
2
<PAGE>
b. To the Providing Company:
--------------------
--------------------
--------------------
--------------------
VII. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the state of incorporation of the Providing Company,
without regard to its conflict of laws provisions.
VIII. ENTIRE AGREEMENT. This Agreement, together with its exhibits,
constitutes the entire understanding and agreement of the parties with respect
to its subject matter, and effective upon the execution of this Agreement by the
respective parties hereof and thereto, any and all prior agreements,
understandings or representations with respect to this subject matter (except
for completion of obligations of the parties to each other arising before the
effective date of this Agreement) are hereby terminated and canceled in their
entirety and are of no further force or effect.
IX. WAIVER. No waiver by any party hereto of a breach of any provision of
this Agreement shall constitute a waiver of any preceding or succeeding breach
of the same or any other provision hereof.
X. ASSIGNMENT. This Agreement shall inure to the benefit of and shall be
binding upon the parties and their respective successors and assigns. No
assignment of this Agreement or any party's rights, interests or obligations
hereunder may be made without the other party's consent, which shall not be
unreasonably withheld, delayed or conditioned.
XI. SEVERABILITY. If any provision or provisions of this Agreement shall be
held to be invalid, illegal, or unenforceable, the validity, legality, and
enforceability of the remaining provisions shall in no way be affected or
impaired thereby.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above mentioned.
<PAGE>
By Receiving Company:
--------------------------------
--------------------------------
Attest:
- -----------------------------
By Providing Company:
--------------------------------
--------------------------------
Attest:
- -------------------------------
<PAGE>
EXHIBIT I
DESCRIPTION OF SERVICES OFFERED BY PROVIDING COMPANY
UNDER THIS ANCILLARY SERVICES AGREEMENT
1. Accounting, Treasury and Finance. Provide advice and assistance to
Receiving Company in accounting, treasury and finance matters, including the
development of accounting practices, procedures and controls (including the
maintenance of the general ledger and related subsidiary systems), the
preparation and analysis of financial reports, and the processing of certain
accounts such as accounts payable, payroll, customer and cash management.
2. Legal and Regulatory. Provide advice and assistance with respect to
legal and regulatory issues as well as regulatory compliance, including 1935 Act
authorizations and compliance and regulatory matters under other Federal and
State laws.
3. Information Technology, Electronic Transmission and Computer Services.
Provide the organization and resources for the operation of an information
technology function including the operation of a data processing facility and
the management of a telecommunications network. Develop, implement and process
computerized applications for Receiving Company.
4. Software. License Receiving Company, on a non-exclusive, no-charge or
at-cost basis, to use all software which Providing Company has the right to
sell, license or sub-license; and, at Receiving Company's expense, permit
Receiving Company to enhance any such software and license others to use all
such software and enhancements to the extent that Providing Company shall have
the legal right to so permit.
5. Operations. Advise and assist Receiving Company in the study, planning,
engineering and construction of its energy plant facilities, advise and assist
in matters related to gas control and advise, assist and manage the planning,
engineering (including maps and records) and construction operations of
Receiving Company. Develop long-range operational programs for Receiving Company
and advise and assist Receiving Company in the coordination of such programs
with the programs of the other DRI subsidiaries.
6. Executive and Administrative. Advise and assist Receiving Company in the
solution of major problems and in the formulation and execution of the general
plans and policies of Receiving Company. Advise and assist Receiving Company as
to operations, the issuance of securities, the preparation of filings arising
out of or required by the various Federal and State securities, business, public
utilities and corporation laws, the selection of executive and administrative
personnel, the representation of Receiving Company before
<PAGE>
regulatory bodies, proposals for capital expenditures, budgets, financing,
acquisition and disposition of properties, expansion of business, rate
structures, public relationships and other related matters.
7. Business and Operations Services. Advise and assist Receiving Company in
all matters relating to operational capacity and the preparation and
coordination of operating studies. Manage Receiving Company's purchase, sale,
movement, transfer and accounting of volumes to ensure continued recovery of all
prudently incurred energy purchase costs through local jurisdictional cost
recovery mechanisms. Compile and communicate information relevant to system
operation. Perform general business and operations support services, including
business, plant and facilities operation, maintenance and management, and
travel, aviation, fleet and mail services.
8. Exploration and Development. Advise and assist Receiving Company in all
geological and exploration matters including the acquisition and surrender of
acreage and the development of underground storage facilities.
9. Marketing. Plan, formulate and implement marketing programs (other than
energy marketing), as well as provide associated marketing services to assist
Receiving Company with improving customer satisfaction, load retention and
shaping, growth of energy sales and deliveries, energy conservation and
efficiency. Assist Receiving Company in carrying out policies and programs for
the development of plant locations and of industrial, commercial and wholesale
markets and assist with community redevelopment and rehabilitation programs.
10. Corporate Planning. Advise and assist Receiving Company in studying and
planning in connection with operations, budgets, economic forecasts, capital
expenditures and special projects.
11. Purchasing. Advise and assist Receiving Company in the purchase of
materials, supplies and services, conduct purchase negotiations, prepare
purchasing agreements and administer programs of material control.
12. Rates. Advise and assist Receiving Company in the analysis of its rate
structure in the formulation of rate policies and in the negotiation of large
contracts. Advise and assist Receiving Company in proceedings before regulatory
bodies involving the rates and operations of Receiving Company and of other
competitors where such rates and operations directly or indirectly affect
Receiving Company.
13. Research. Investigate and conduct research into problems relating to
production, utilization, testing, manufacture, transmission, storage and
distribution of energy. Keep abreast of and evaluate for Receiving Company all
research developments and programs of significance affecting Receiving Company
and the energy industry, conduct research and development in promising areas and
advise and assist in the solution of technical problems arising out of Receiving
Company's operations.
2
<PAGE>
14. Tax. Advise and assist Receiving Company in the preparation of Federal
and other tax returns, and generally advise Receiving Company as to any problems
involving taxes including the provision of due diligence in connection with
acquisitions.
15. Environmental Compliance. Provide consulting, cleanup, and other
activities as required by Receiving Company to ensure full compliance with
applicable environmental statutes and regulations.
16. Customer Services. Provide services and systems dedicated to customer
service, including billing, remittance, credit, collections, customer relations,
call centers, energy conservation support and metering.
17. Energy Marketing. Provide services and systems dedicated to energy
marketing, including marketing and trading of gas and electric power, and energy
price risk management and development of marketing and sales programs in
physical and financial markets.
18. External Affairs. Provide services in support of corporate strategies
for managing relationships with federal, state and local governments, agencies
and legislative bodies. Formulate and assist with public relations and
communications programs and administration of corporate contribution and
community affairs programs.
3
<PAGE>
EXHIBIT II
SERVICES RECEIVING COMPANY AGREES TO RECEIVE FROM
PROVIDING COMPANY
SERVICE YES NO
1. Accounting, Treasury and Finance _____ _____
2. Legal and Regulatory _____ _____
3. Information Technology, Electronic Transmission
and Computer Services _____ _____
4. Software Pooling _____ _____
5. Operations _____ _____
6. Executive and Administrative _____ _____
7. Business and Operations Services _____ _____
8. Exploration and Development _____ _____
9. Marketing _____ _____
10. Corporate Planning _____ _____
11. Purchasing _____ _____
12. Rates _____ _____
13. Research _____ _____
14. Tax _____ _____
15. Environmental Compliance _____ _____
16. Customer Services _____ _____
17. Energy Marketing _____ _____
18. External Affairs _____ _____
<PAGE>
8
EXHIBIT III
METHODS OF ALLOCATION FOR PROVIDING COMPANY
Providing Company shall allocate costs independently to Receiving Company, or,
as the case may be, among companies receiving service from it under this and
similar Ancillary Service Agreements using the following methods:
I. The costs of rendering service by Providing Company will include all costs
of doing business including interest on debt but excluding a return for the
use of equity capital for which no charge will be made to Receiving
Company.
II. A. Providing Company will maintain a separate record of the expenses of
each department. The expenses of each department will include:
1. those expenses that are directly attributable to such department,
and
2. an appropriate portion of those office and housekeeping expenses
that are not directly attributable to a department but which are
necessary to the operation of such department.
B. Expenses of the department will include salaries and wages of
employees, rent and utilities, materials and supplies, depreciation,
and all other expenses attributable to the department. The expenses of
a department will not include:
1. those incremental out-of-pocket expenses that are incurred for
the direct benefit and convenience of an individual company or
group of companies,
2. Providing Company overhead expenses, including expenses of the
corporate secretary's department that are attributable to
maintaining the corporate existence of Providing Company, and all
other incidental overhead expenses including those auditing fees,
internal auditing department expenses and accounting department
expenses attributable to Providing Company.
C. Providing Company will establish annual budgets for controlling the
expenses of each department and for determining estimated costs.
III. A. Employees in each department will be divided into two groups:
<PAGE>
1. Group A will include those employees rendering service to
Receiving Company, and
2. Group B will include those office and general service employees,
such as secretaries, file clerks and administrative assistants,
who generally assist employees in Group A or render other
housekeeping services and who are not engaged directly in
rendering service to Receiving Company or a group of Receiving
Companies.
B. Expenses set forth in Section II. above will be separated to show:
1. salaries and wages of Group A employees, and
2. all other expenses of the department.
C. There will be attributed to each dollar of a Group A employee's salary
or wage, that percentage of all other expenses of his department (as
defined in B above), that his salary or wage is to the total Group A
salaries and wages of that department.
D. Group A employees in each department will maintain a record of the
time they are employed in rendering service to Receiving Company or
group of Receiving Companies. An hourly rate will be determined by
dividing the total expense attributable to a Group A employee as
determined under subsection C above by the productive hours reported
by such employee.
IV. The charge to Receiving Company for a particular service will be determined
by multiplying the hours reported by Group A employees in rendering such
service to Receiving Company by the hourly rates applicable to such
employees. When such employees render service to a group of Receiving
Companies, the charge to each Receiving Company will be determined by
multiplying the hours attributable to Receiving Company under the
allocation formulas set forth in Section IX of this Exhibit by the hourly
rates applicable to such employees.
V. To the extent appropriate and practical, the foregoing computations of
hourly rates and charges may be determined for groups of employees within
reasonable salary range limits.
VI. Those expenses of Providing Company that are not included in the annual
expense of a department under Section II. above will be charged to
Receiving Company as follows:
A. Incremental out-of-pocket costs incurred for the direct benefit and
convenience of Receiving Company or group of Receiving Companies will
be charged directly to such company or group of companies. Such costs
incurred for a
2
<PAGE>
group of Receiving Companies will be allocated on the basis of an
appropriate formula.
B. Providing Company overhead expenses referred to in Section II. above
will be charged to Receiving Company in the proportion that the
charges made to the Receiving Company for costs, other than those set
forth in this Section VI, are to total costs incurred by Receiving
Company or, as the case may be, to the total of such charges to all
Receiving Companies receiving such service.
VII. Notwithstanding the foregoing basis of determining cost allocations for
billing purposes, cost allocations for certain services involving machine
operations and production units will be determined on an appropriate basis
established by the Providing Company relating to the direct use of machine
equipment or production units.
VIII.Monthly bills will be issued for the services rendered to the Receiving
Company on an actual or estimated basis. Estimates will normally be
predicated on service department budgets and estimated productive hours of
employees for the year. At the end of each year, estimated figures will be
revised to reflect actual experience during such year and adjustments will
be made in amounts billed to give effect to such revision.
IX. When Group A employees render services to a group of Receiving Companies,
and direct charging of cost is not appropriate, the following formulas
shall be used to allocate the time of such employees to the individual
companies receiving such service:
A. The Service Department or Function formulas to be used when employees
render services to all Receiving Companies participating in such
service, for the services indicated are set forth below.
Service Department Basis of Allocation
or Function
Corporate Planning:
- Capital Budgets Total investment in plant recorded at
preceding December 31st.
- Operating &
Maintenance Budgets Total operating expenses, excluding purchased
gas expense, purchased power expense
(including fuel expenses), other purchased
products and royalties, for the preceding
year ended December 31st.
Business and Operations Throughput gas and/or electricity load for
Services the preceding year ended December 31st.
3
<PAGE>
Service Department Basis of Allocation
or Function
Rates Total regulated company operating expenses,
excluding purchased gas expense, purchased
power expense (including fuel expense),
other purchased products and royalties, for
the preceding year ended December 31st.
Research Gross revenues from the sale of natural gas
(including intercompany sales) and
electricity, recorded during the preceding
year ended December 31st.
Tax The sum of the total income and total
deductions as reported for Federal Income Tax
purposes on the last return filed.
Customer Services For metering, the number of gas or electric
meters for the preceding year ended December
31st; otherwise the number of customers for
the preceding year ended December 31st.
Operations: Number of customers at the end of the
preceding year ended December 31st.
Information Technology:
LDC/EDC Computer Applications Number of residential and commercial
customers at the end of the preceding year
ended December 31st.
Other Computer Applications Number of users or usage of specific computer
systems at the end of the preceding year
ended December 31st.
Network Computer Applications Number of network devices at the end of the
preceding year ended December 31st.
Telecommunications Applications Number of telecommunications units at the end
of the preceding year ended December 31st.
Facility Services:
Building Services Square footage of office space as of the
preceding year ended December 31st.
4
<PAGE>
Service Department Basis of Allocation
or Function
Processing Services:
Payroll Number of employees on the previous December
31st or the number of payroll payments
generated during the previous year ending
December 31st.
Cash Management & Number of customer payments processed during
Customer Payment Processing the preceding year ended December 31st.
Accounts Payable Processing Number of accounts payable documents
processed during the preceding year ended
December 31st.
Fleet Administration Number of vehicles at December 31st.
Purchasing Dollar value of contract procurements for the
preceding year ended December 31st.
Engineering Services:
General Services Gas pipeline and/or electric supply line
footage as of the preceding year ended
December 31st.
Transmission and Storage
Services Total investment in storage and transmission
plant as of the preceding year ended
December 31st.
Gas Supply: Gas volumes purchased for each affiliate
for the preceding year ended December 31st.
Electricity Supply: Electricity load purchased for each affiliate
for the preceding year ended December 31st.
Marketing
Shared Projects Annual marketing plan budget for the current
year of allocation.
Other Indirect Costs Total marketing direct and shared project
costs billed to each Receiving Company for
the preceding year ended December 31st.
Material Management Material inventory assets as of the preceding
year ended December 31st.
5
<PAGE>
Service Department Basis of Allocation
or Function
Financial Accounting and
Reporting Number of financial related transactions,
records and reports generated, and account
code combinations for the preceding year
ended December 31st.
Regulated Fixed Assets Regulated companies fixed assets added,
retired or transferred during the preceding
year ended December 31st.
B. Company Group Formulas to be used in the absence of a service
department or function formula or when service rendered by employees
is for a different group of Receiving Companies than those companies
regularly participating in such service:
Company Group Basis of Allocation
All companies (includes all Total operating expenses, excluding
Receiving Companies except purchased gas expense, purchased power
Providing Company) expense (including fuel expense), other
purchased products and royalties, for the
preceding year ended December 31st.
All retail companies Volume of gas and quantity of electricity
sold at retail during the preceding year
ended December 31st (converted to dollar
value).
All wholesale companies Gross revenues from sales for resale recorded
during the preceding year ended December
31st.
All companies having Gross investment in transmission plant
transmission lines recorded at preceding December 31st.
All production companies Production plant budget for the current year
of allocation.
Appalachian production Gross investment in Appalachian production
companies plant recorded at preceding December 31st.
6
<PAGE>
All storage companies Gross investment in storage plant, excluding
non-current inventory, recorded at preceding
December 31st.
All Companies/ The weighted average of the previous three
Shareholder Activities years of Providing Company billings.
All unregulated companies Total unregulated companies' operating
expenses, excluding purchased gas expense,
purchased power expense (including fuel
expense), other purchased products and
royalties, for the preceding year ended
December 31st.
All regulated companies Total regulated companies' operating
expenses, excluding purchased gas expense,
purchased power expense (including fuel
expense), other purchased products and
royalties, for the preceding year ended
December 31st.
C. If the use of a basis of allocation would result in an inequity
because of a change in operations or organization, then the Providing
Company may adjust the basis to effect an equitable distribution.
7
