File No. 70-9679
As filed with the Securities and Exchange Commission on October 5, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
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AMENDMENT NO. 3
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Dominion Resources, Inc. Consolidated Natural Gas Company
120 Tredegar Street CNG Tower, 625 Liberty Avenue
Richmond, VA 23219 Pittsburgh, PA 15222-3199
(Name of company filing this statement and
address of principal executive offices)
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Dominion Resources, Inc.
(Name of top registered holding company
parent of each applicant or declarant)
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James F. Stutts
Vice President and
General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, VA 23219
(Name and address of agent for service)
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<PAGE>
The Commission is also requested to send copies
of any communication in connection with this matter to:
Norbert F. Chandler, Esq. Tia S. Barancik, Esq.
Managing Counsel LeBoeuf, Lamb, Greene &
Consolidated Natural Gas Service MacRae, L.L.P.
Company, Inc. 125 West 55th Street
CNG Tower, 625 Liberty Street New York, N.Y. 10019
Pittsburgh, PA 15222
<PAGE>
AMENDMENT NO. 3
TO
APPLICATION-DECLARATION
UNDER
SECTIONS 6(a), 7, 9(a), 10, 12(b), 12(c)
AND
RULES 42, 43, 45 and 46
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
PAYMENT OF DIVIDENDS OUT OF CAPITAL AND UNEARNED SURPLUS
AND
REORGANIZATION OF NON-UTILITY SUBSIDIARIES
Item 1. Description of Proposed Transactions.
------------------------------------
A. Introduction and Background; Summary of Request.
Dominion Resources, Inc. ("DRI") is a Virginia corporation and a registered
public utility holding company under the Public Utility Holding Company Act of
1935 ("Act"). DRI, through its subsidiaries, is engaged in the energy business,
principally in retail electricity and natural gas sales, electric and gas
distribution, wholesale natural gas and electric generation and electricity
sales, interstate gas transportation, and natural gas exploration and production
activities.
The principal subsidiaries of DRI are Virginia Electric and Power Company,
a regulated public utility engaged in the generation, transmission, distribution
and sale of electric energy in Virginia and northeastern North Carolina, and
Consolidated Natural Gas Company ("CNG") which is also a registered holding
company under the Act and which, through its subsidiaries is engaged in
producing, transporting and acting as a retail marketer of natural gas serving
customers in Pennsylvania, Ohio, Virginia, West Virginia, New York and other
cities focused in the Northeast and Mid-Atlantic regions of the United States,
although, as described in DRI's Application Declaration in File No. 70-9477, DRI
has contracted to sell Virginia Natural Gas, Inc., a wholly owned subsidiary of
CNG, to AGL Resources, Inc. Another major subsidiary of DRI is Dominion Energy,
Inc, an independent power and natural gas company. Pursuant to the Merger Order
referred to below, DRI is required to dispose of Dominion Capital, Inc.
(together with its subsidiaries, "DCI"), another major subsidiary which is a
diversified financial services company. DRI and all of its subsidiaries are
referred to herein as the "DRI System."
Pursuant to an Amended and Restated Agreement and Plan of Merger dated as
of May 11, 1999, on January 28, 2000, (i) a wholly-owned subsidiary of DRI was
merged with and into DRI with DRI being the surviving corporation and (ii)
Consolidated Natural Gas Company ("Old CNG"), a registered holding company under
the Act, was merged (the "Merger") into a wholly owned subsidiary of DRI at that
time called "New DRI Sub II" which, as a result of the Merger succeeded to all
the assets, liabilities and equity of Old CNG by operation of law. The Merger
occurred pursuant to authorization of the Securities and Exchange Commission
("Commission") in its order dated December 15, 1999, HCAR No. 27113, SEC File
No. 70-9477 ("Merger Order"). New DRI Sub II, the surviving corporation in the
Merger, was renamed "Consolidated Natural Gas Company" and is herein referred to
as "CNG". DRI and CNG (as the successor corporation to Old CNG) registered as
holding companies under the Act following the Merger.
In the Merger Order, the Commission acknowledged DRI's rationale for
entering into the Merger:
DRI and [Old] CNG state that, in the emerging competitive environment,
their combination into a regional energy provider will enable them to (i)
give the combined company the scale, scope and skills necessary to compete
successfully in the energy marketplace; (ii) create a platform for growth
in a region that is rapidly deregulating and is the source of approximately
40% of the nation's demand for energy; (iii) establish a company with
combined gas storage, transportation and electric power production
capability concentrated in the Northeast and Mid-Atlantic region; and (iv)
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 Commission's approval of DRI's acquisition of Old CNG in conjunction
with the authorizations granted in the Commission's Order approving a financing
program for the DRI System, HCAR No. 27112 (Dec. 15, 1999) (the "Initial
Financing Order") (which permits DRI and its subsidiaries to issue and maintain
in place equity, preferred and debt securities at both the DRI level and the
subsidiary level), reflect the Commission's understanding of the new competitive
environment confronting the nation's energy utilities and the Commission's
willingness to apply the Act in a manner designed to provide registered holding
companies with the opportunity to move quickly to take advantage of new and
expanding business opportunities.
In its application seeking authorization to complete the Merger and the related
application with respect to post-Merger financing authorization (the "Initial
Financing Application"), DRI sought reasonable authorization to permit DRI to
reorganize and consolidate its businesses and the acquired businesses of CNG
with a view towards integrating the two systems along rational business lines as
well as reasonable authorization to conduct and grow the combined businesses in
the immediate post-Merger time frame. Today, approximately six months after
completion of the Merger, DRI seeks authorization (i) for CNG to pay dividends
to DRI out of capital and unearned surplus which, as discussed below, is
intended to compensate for the accounting treatment of the Merger which resulted
in the recharacterization of CNG's retained earnings as paid-in-capital, and
(ii) to reorganize and restructure the non-utility businesses within the DRI
System which, as discussed below, is intended to permit all non-utility
subsidiaries within the DRI System which are engaged in similar activities to be
part of the same intra-corporate grouping. In a separate filing in File No.
70-9555 (the "New Financing Application"), DRI has requested new modern
system-wide financing authority to permit DRI greater flexibility to cover its
capital and financing needs in a competitive energy environment in which DRI
seeks to grow its core energy business.
<PAGE>
B. Payment of Dividends Out of Capital or Unearned Surplus.
As a result of the application of the purchase method of accounting to the
Merger, the retained earnings of Old CNG immediately prior to the Merger were,
following the Merger, recharacterized as paid-in-capital on the books of CNG as
the new company which survived the Merger. The effect of this accounting
convention left CNG, but not its subsidiaries, with no retained earnings, the
traditional source of dividend payment, but, nevertheless, a strong balance
sheet showing a significant common stock equity level. In fact, CNG's principal
subsidiaries have sufficient retained earnings to pay dividends to CNG in
accordance with Rule 46, but such dividends are trapped at the CNG level and
cannot be paid to CNG's new shareholder, DRI. The Applicants note that prior to
the Merger, dividends paid to CNG from its subsidiaries in accordance with
applicable law and rules of the Commission were available to pay dividends to
CNG's former public shareholders. Thus, the Applicants now request authorization
for CNG, only, to pay dividends out of the paid-in-capital account up to the
amount of Old CNG's retained earnings just prior to the Merger.
Section 12 of the Act, and Rule 46 thereunder, generally prohibit the
payment of dividends out of "capital or unearned surplus" except pursuant to an
order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of companies in the interest of the
controlling holding company groups." S. Rep. No. 621, 74th Cong., 1st Sess. 34
(1935). In determining whether to permit a registered holding company to pay
dividends out of capital surplus, the Commission considers various factors,
including: (i) the asset value of the company in relation to its capitalization,
(ii) the company's prior earnings, (iii) the company's current earnings in
relation to the proposed dividend, and (iv) the company's projected cash
position after payment of a dividend. See The National Grid Group plc, HCAR No.
35-27154 (March --- --------------------------- 15, 2000); Eastern Utilities
Associates, HCAR No. 35-25330 (June 13, 1991); and cases cited therein. Further,
---------------------------- the payment of the dividend must be "appropriate in
the public interest." Id., citing Commonwealth & Southern --
----------------------- Corporation, 13 S.E.C. 489, 492 (1943). -----------
DRI and CNG request authority for CNG, only, to pay dividends out of
paid-in-capital up to the amount of Old CNG's consolidated retained earnings
just prior to the Merger. This request reflects the role of CNG in the DRI
System as a conduit between DRI and certain of the operating companies within
the DRI System. DRI and CNG note that, while the relief sought herein is similar
to the relief granted to The National Grid Group plc in the above-cited order of
the Commission, the instant request differs slightly in that CNG is not itself
an operating company and no relief from Rule 46 is requested with respect to any
operating company within the DRI System.
In support of this request, the Applicants assert that each of the
standards of Section 12(c) of the 1935 Act are satisfied.
1. CNG's cash flow for dividend payments consists of dividends received from
CNG's subsidiaries. All of CNG's principal operating subsidiaries have
sufficient retained earnings to support their payment of dividends to CNG
in accordance with Rule 46.
2. The projected cash position of CNG will be adequate to meet its dividend
obligations. CNG's principal operating subsidiaries will provide CNG with
cash flow for dividend payments.
3. CNG is a holding company and, as such, it needs minimal funds for
operational purposes. Lastly, a prohibition on dividend payment out of
additional paid-in-capital would seriously harm the ability of DRI to
service the acquisition debt incurred in connection with the Merger.
Based upon the above, CNG's request to pay dividends from capital surplus
does not contravene the intent of Section 12. CNG's proposal is motivated by an
exceptional circumstance, i.e. the elimination of its outstanding retained
earnings balance as a result of the Merger. CNG's situation is not of the type
that Section 12(c) is designed to address. Since the retained earnings account
balances of CNG's utility subsidiaries were not affected by the Merger, the
granting of the request should not be detrimental to the financial integrity or
working capital of such subsidiaries.
C. Restructuring of Non-Utility Businesses
DRI, on behalf of itself and its direct and indirect non-utility
subsidiaries, requests authority, from time to time, to restructure its
non-utility interests as may be appropriate to enable the DRI System to
implement an intra-corporate rationalization of its non-utility activities. The
restructuring would allow DRI to change its non-utility corporate configuration
to consolidate activities of a particular type and in a manner consistent with
the way the non-utility businesses are being managed along functional and
business lines. Restructuring may involve the formation of new subsidiaries and
the reincorporation of existing subsidiaries in a different state. A
reincorporation could occur by merging an existing subsidiary with a successor
incorporated in the desired state and could also include the consolidation of
subsidiaries engaged in similar businesses under a subsidiary holding company,
the spin-off of a portion of an existing business to another non-utility
subsidiary, or simply the reincorporation of an existing company in a different
state. This reorganization could also occur through the transfer of non-utility
assets from one DRI subsidiary to another, particularly when the two
subsidiaries are in the same type of business. Thus, oil and gas wells and
leases might be transferred from Dominion Reserves, Inc. to Dominion Exploration
& Production, Inc. to consolidate like assets in one company. These transactions
would have no impact on public shareholders or on DRI System public-utility
companies or their ratepayers, but would otherwise still require individual
Commission review and the issuance of an order. It would not appear to matter,
from the standpoint of the Act, how various activities are allocated among DRI's
non-utility subsidiaries.
The Merger Order authorized DRI to continue its and CNG's existing
non-utility activities through already established subsidiaries. In this
application, DRI seeks the ability to form new subsidiaries as needed to allow
the DRI System to streamline and rationalize the corporate organization of
permissible non-utility activities, without the need to apply for or receive
specific Commission approval in each instance. These direct or indirect
subsidiaries might be corporations, partnerships, limited liability companies or
other entities in which DRI, directly or indirectly, might have a 100% interest,
a majority equity or debt position, or a minority debt or equity position. A
similar authorization was granted to Old CNG by order dated January 15, 1997,
HCAR No. 26647, and to National Fuel Gas Company by order dated February 12,
1997, HCAR No. 2666. These subsidiaries would engage only in non-utility
businesses only to the extent the DRI System is so authorized, whether by
statue, rule, regulation or order.
The Commission has previously authorized somewhat similar reorganizations
on a discrete basis to CNG by order dated April 22, 1996, HCAR No. 26509, File
No. 70-8703, and to Cinergy Corporation by order dated March 1, 1999, HCAR No.
26984, File No. 70-9123. The Commission has granted authority to Columbia Energy
Group to restructure nonutility interests in a manner as requested herein by
order dated November 5, 1999, HCAR No. 27099, File No. 70-9491.
A table showing the companies in the Dominion System that are now engaged
in non-utility activities, together with a description of type of non-utility
business in which they engage, is set forth in DRI's response to Item 4 of its
Registration Statement on Form U5B filed with the Commission on April 27, 2000,
which list is incorporated by reference.
The only companies listed in the Form U5B which are engaged in utility
businesses and are thus not non-utility companies are DRI's five utility company
subsidiaries. Virginia Electric and Power Company and the four gas utility
companies owned by CNG, The East Ohio Gas Company, The Peoples Natural Gas
Company, Hope Gas, Inc. and Virginia Natural Gas, Inc. ("VNG"). On May 8, 2000,
DRI and CNG entered into an agreement with AGL Resources Inc. ("AGL") whereby
CNG will sell all of the outstanding common stock of VNG to AGL for $500 million
in cash, or $550 million if at the option of CNG, the parties elect to treat the
transaction as a sale of assets for tax purposes, commonly referred to as a
Section 338(h)(10) election. This sale was made pursuant to a commitment made by
DRI and CNG to the Virginia State Corporation Commission to sell VNG in order to
obtain such commission's approval of the Merger. Reference is made to the
proceedings under File Nos. 70-9477 and 70-9707 for further information
concerning the sale of VNG.
D. Rule 24 Certificates.
DRI also requests that Rule 24 Certificates of Notification be filed by DRI
within 60 days after the end of each quarterly calendar period to report to the
Commission transactions authorized pursuant to this filing. The information may
be reported as a separate section in the quarterly Rule 24 Certificates of
Notification filed by DRI under File No. 70-9517.
Item 2. Fees, Commissions and Expenses
It is estimated that the fees, commissions and expenses ascertainable at
this time to be incurred by DRI System companies in connection with the herein
proposed transaction will not exceed $30,000, consisting of $20,000 payable to
Dominion Resources Services, Inc. or Consolidated Natural Gas Service Company,
Inc. for services on a cost basis (including regularly employed counsel) for the
preparation of this application-declaration and other documents, and $10,000 for
miscellaneous other expenses.
<PAGE>
Item 3. Applicable Statutory Provisions
The proposed transactions concerning nonutility activities within the DRI
System is subject to the following sections and rules under the Act.
Sections 6(a) and 7 Issuance of securities in connection with
restructuring activities
Sections 9(a) and 10 Acquisition of securities of a newly
organized or existing DRI subsidiary in
connection with restructuring activities
Section 12(c) Acquisition, retirement and redemptions of
securities of DRI subsidiaries in connection
with restructuring activities; payment of
dividends out of capital or unearned surplus
Rules 42, 43, 45 and 46 Acquisitions, retirements, and redemptions
of securities by the issuer, sales of
securities to associate companies, and
capital contributions to associates in
connection with restructuring activities;
payment of dividends out of capital or
unearned surplus
Rule 52 Intrasystem financing of nonutility
associates and the formation of certain new
nonutility subsidiaries in connection with
restructuring activities
If the Commission considers the proposed future transactions to require any
authorization, approval or exemption, under any section of the Act or Rule or
Regulation other than those cited herein above, such authorization, approval or
exemption is hereby requested.
Statement pursuant to Rule 54 and Related Matters
In the Initial Financing Application, DRI and CNG stated:
Each of DRI and CNG also holds investments in various EWGs and FUCOs. DRI's
specific EWG investments are described in detail in DRI's Exemption
Statement on Form U-3A-2 for the fiscal year ended December 31, 1998 and
filed with the Commission in File No. 69-278. Such Exemption Statement on
Form U-3A-2 is hereby incorporated by reference herein. CNG's specific EWG
and FUCO investments are described below and are also described in more
detail in CNG's Annual Report on Form U5S for fiscal year ended December
31, 1998 and filed with the Commission in File No. 30-203. Such Annual
Report on Form U5S is hereby incorporated by reference herein. However, in
order to obtain the cash required in connection with the Merger and in
order to focus DRI's efforts on achieving its MAIN to Maine strategy, DRI
has announced its intention to divest its interests (and the interests it
will acquire from CNG) in non-U.S. EWG and FUCO holdings. In that
connection, DRI has already entered into an agreement with Duke Energy
International, a subsidiary of Duke Energy Corporation, pursuant to which
DRI has agreed to sell to Duke all of DRI's interests in its Latin American
projects and, in fact, certain of such projects have already been so sold.
On a pro forma consolidated basis at December 31, 1998, DRI and CNG
together have invested $918,700,000 in EWGs and FUCOs which represents 32%
of pro forma consolidated retained earnings at December 31, 1998. These
historical pro forma figures do not reflect the sale of DRI's Latin
American projects (and the sale of the non-U.S. projects to be acquired
from CNG) nor do they reflect certain accounting adjustments that will be
required to be made under GAAP after giving effect to the Merger. After
giving effect to (i) the accounting treatment for the Merger which will
result in a consolidating accounting adjustment that will eliminate CNG's
retained earnings and (2) the sale of DRI's Latin American assets (and the
sale of the non-U.S. projects to be acquired from CNG), DRI's investment in
EWGs and FUCOs will total approximately $68,000,000, which represents 5% of
the pro forma combined consolidated retained earnings at September 30,
1999. DRI and CNG have submitted a separate Application-Declaration
requesting authorization to invest up to 100% of consolidated retained
earnings of DRI (as the registered holding company part of the combined
DRI-CNG system) in EWGs and FUCOs (File No. 70-9555).
The Initial Financing Application also described in detail DRI's existing
financial support, predominantly in the form of guarantees, of its unregulated
energy subsidiaries, namely, the DEI Companies, and including certain
obligations in respect of a new synthetic lease arrangement pursuant to which
certain of the DEI Companies proposed to acquire new gas-fired turbines. All of
DRI's investment in and support for the DEI Companies is described in detail in
DRI's Registration Statement on Form U5B, which was filed with the Commission
April 27, 2000.
Adopting the methodology used in the Initial Financing Application, in
which DRI did not give effect to accounting adjustments required in connection
with the Merger, as of June 30, 2000, DRI's aggregate investment in EWGs and
FUCOs including DRI's guarantee of the DEI Companies' obligations under the
synthetic lease referred to above was 49% of the combined retrained earnings of
DRI and CNG as of June 30, 2000. However, if DRI does give effect to the
accounting adjustment required in connection with the Merger (such accounting
adjustment is described above in detail), DRI's aggregate investment in EWGs and
FUCOs as of June 30, 2000 was 133% of consolidated retained earnings. DRI
represents that as of June 30, 2000, aggregate investment in EWGs and FUCOs
equaled $1,252,000,000 and DRI's consolidated retained earnings were
$940,000,000.
At the present time, DRI respectfully submits that, as contemplated by Rule
53(c) and Rule 54, the level of DRI's investment in EWGs and FUCOs is not having
and will not have a substantial adverse impact on the financial integrity of the
DRI System or on any utility subsidiary within the DRI System or on the ability
of any state regulatory commission to protect any such utility subsidiary or its
customers. DRI's investment of $1,252,000,000, including guarantees, in EWGs and
FUCOs was fully described and disclosed in the Initial Financing Application.
DRI represents to the Commission that the earnings produced from its current
investment in EWGs and FUCOs has contributed positively to the system's
consolidated earnings or net income since the date of the Merger Order.
Moreover, granting the specific relief sought in this Application-Declaration
will benefit the DRI System by permitting cash trapped at the CNG level, which
but for the accounting treatment of the Merger could have been dividended to
CNG's shareholder(s), to be deployed more efficiently throughout the DRI System
and also for the repayment of indebtedness incurred in connection with the
Merger.
In the Initial Financing Application, DRI stated that common equity as a
percentage of the combined companies capitalization on a pro forma basis
immediately following the closing of the Merger was 33%. For the period ended
June 30, 2000, common equity as a percentage of the DRI's System's consolidated
capitalization equaled 29%. DRI asserts that the change in the common equity
percentage is not material under any circumstances, but especially so in the
instant situation given the reasons for the change stated below. (DRI notes that
for the same period, common equity as a percentage of the capitalization of each
public utility company subsidiary of DRI equaled or exceeded 30%.) The temporary
reduction in the common equity percentage of the consolidated system only is
attributable to restructuring and merger-related costs and impairment and
re-valuation of DCI assets totaling $512 million, which reduced net income
during the period by $324 million. Management is in the process of implementing
a strategy to exit certain businesses of DCI, as required by the Merger Order,
and to de-emphasize the remaining components of the businesses that are expected
to be retained or possibly held only as long as necessary to wind up affairs.
DCI re-valued certain assets and businesses during the period and recognized
impairment losses of $292 million, resulting in a reduction to net income of
$184 million. DRI recognized restructuring and merger-related costs totaling
$220 million, which reduced net income during the period by $140 million. But
for these adjustments, DRI would be in compliance for the period ended June 30,
2000 with the capitalization requirement set forth in the Initial Financing
Order that the consolidated holding company system and each public utility
subsidiary of the combined system has 30% common stock equity in its capital
structure. DRI respectfully submits to the Commission that DRI will be in
compliance with the capitalization requirement that the consolidated holding
company system have 30% common stock equity in its capital structure at fiscal
year-end 2000, in part as a result of the application of proceeds resulting from
the disposition of Virginia Natural Gas, Inc. (as described in File No. 70-9477)
and the divestiture of certain assets of DCI as required by the Merger Order.
Item 4. Regulatory Approval
The authorizations sought herein are not subject to the jurisdiction of any
State or Federal Commission (other than the Commission), except that, to the
extent any non-utility activities are conducted through subsidiaries of any
utility company subsidiary of DRI, transfers of such businesses and assets may
require prior state utility commission approval. DRI requests that the
Commission retain jurisdiction over any such transaction requiring such state
commission approval pending completion of the record.
Item 5. Procedure
Given the pressing competitive conditions, it is hereby requested that the
Commission issue its order with respect to the transaction proposed herein as
soon as possible, but in any event on or before October 1, 2000.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed with respect to the proposed
transactions. The office of the Division of Investment Management - Office of
Public Utility Regulation may assist in the preparation of the Commission's
decision. There should be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
The following exhibits and financial statements are made a part of this
statement:
(a) Exhibits
F Opinion of counsel.
(To be filed by amendment)
O Draft of Notice.
(b) Financial Statements
Financial statements are deemed unnecessary with respect to the
authorizations herein sought due to the nature of the matter proposed.
Item 7. Information as to Environmental Effects
The proposed financing transactions do not involve major federal action
having a significant effect on the human environment.
No federal agency has prepared or is preparing an environmental impact
statement with respect to the proposed transaction.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this statement to be signed on
their behalf by the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
By /s/ James F. Stutts
Vice President and
General Counsel
CONSOLIDATED NATURAL GAS COMPANY
By /s/ N. F. Chandler
Managing Attorney
Date: October 5, 2000
