File No. 70-9555
As filed with the Securities and Exchange Commission on September 25, 2000
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
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AMENDMENT NO. 1
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Dominion Resources, Inc.
120 Tredegar Street
Richmond, VA 23219
(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>
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transactions..................................1
A. Introduction......................................................1
B. Summary of Request................................................4
C. Overview of Industry Restructuring................................5
D. Proposed Financing and Guarantee Authorization....................7
(1) Existing Financing and Guarantee Authorization................7
(2) Proposed Financing and Guarantee Authorization................8
a. Debt Securities..........................................10
i. Short-Term Notes.....................................10
ii. Commercial Paper.....................................11
iii.Long-Term Notes......................................11
iv. Interest Rate Risk Management........................12
b. Equity Securities........................................12
i. Common stock (including Stock Purchaser
Contracts/Units).....................................12
ii. Preferred Securities.................................13
c. Financing Conduits.......................................14
d. Guarantees...............................................14
e. Use of Proceeds..........................................15
E. Investment in EWGs and FUCOs.....................................15
F. Tax Allocation Agreement.........................................19
G. Management and Exploitation of DRI System Non-Utility
Real Estate......................................................21
Item 2. Fees, Commissions and Expenses.......................................21
Item 3. Applicable Statutory Provisions......................................21
Item 4. Regulatory Approvals.................................................25
Item 5. Procedure............................................................25
Item 6. Exhibits and Financial Statements....................................25
Item 7. Information as to Environmental Effects..............................25
<PAGE>
AMENDMENT NO. 1
TO
APPLICATION-DECLARATION
UNDER
SECTIONS 6(a), 7, 9(a), 10, 12(b), 12(c), 12(f), 32 and 33
AND
RULES 42, 45, 46, 53 and 54
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
SYSTEM-WIDE FINANCING AUTHORITY
ISSUANCE OF SECURITIES, GUARANTEES AND CREDIT SUPPORT IN
CONNECTION WITH INVESTMENT IN EXEMPT WHOLESALE GENERATORS
AND FOREIGN UTILITY COMPANIES
TAX ALLOCATION AGREEMENT
INVESTMENT AND PARTICIPATION IN NON-UTILITY BUSINESSES
Item 1. Description of Proposed Transactions.
A. Introduction.
Dominion Resources, Inc. ("DRI") is a Virginia corporation and a registered
public utility holding company under the Public Utility Holding Company Act of
1935 (the "Act"). DRI, through its subsidiaries, is engaged in the energy
business, principally in retail electricity and natural gas sales and
distribution, wholesale natural gas and electricity sales, wholesale electric
generation, interstate gas transportation, and natural gas exploration and
production activities.
DRI's principal utility subsidiaries are: (1) Virginia Electric and Power
Company ("Virginia Power"), a regulated public utility engaged in the
generation, transmission and distribution of electric energy in Virginia and
northeastern North Carolina, (2) The Peoples Natural Gas Company ("Peoples"), a
regulated public utility engaged in the distribution of natural gas in
Pennsylvania, (3) The East Ohio Gas Company ("East Ohio"), a regulated public
utility engaged in the distribution of natural gas in Ohio, and (4) Hope Gas,
Inc. ("Hope"), a regulated public utility engaged in the distribution of natural
gas in West Virginia. Virginia Power is a direct subsidiary of DRI. Peoples,
East Ohio and Hope are each direct subsidiaries of Consolidated Natural Gas
Company ("CNG") which is a direct subsidiary of DRI and which is also a
registered holding company under the Act. As of the date of this
Application-Declaration, Virginia Natural Gas, Inc. ("VNG"), a regulated public
utility engaged in the retail distribution of natural gas in Virginia, is also a
direct subsidiary of CNG and an indirect subsidiary of DRI; however, as
described in DRI's and CNG's Application-Declaration in File No. 70-9477, on May
8, 2000 DRI, CNG and VNG entered into a Stock Purchase Agreement with AGL
Resources, Inc. ("AGL") pursuant to which DRI and CNG agreed to sell VNG to AGL
for a purchase price of $550,000,000, subject to adjustment. Subject to receipt
of the required regulatory approvals, including approval of the Commission under
the Act, DRI expects that the VNG sale will be completed shortly.
DRI's non-utility activities are conducted through: (1) Dominion Energy,
Inc. ("DEI") which, through its direct and indirect subsidiaries (together with
DEI, the "DEI Companies"), is active in the competitive electric power
generation business and in the development, exploration and operation of natural
gas and oil reserves, (2) direct and indirect subsidiaries of Virginia Power,
which are engaged in acquiring raw materials for the fabrication of nuclear fuel
for use at power stations which are owned and operated by Virginia Power,
providing telecommunications services utilizing fiber optic lines which are
owned by Virginia Power, fuel procurement for Virginia Power, energy marketing
and nuclear consulting services and (3) direct and indirect subsidiaries of CNG
which are engaged in all phases of the natural gas business other than retail
distribution including transmission, storage and exploration and production. As
described in their Application-Declaration in File No. 70-9679, DRI and CNG are
in the process of rationalizing, reorganizing and restructuring their
non-utility businesses to permit the consolidation within intra-corporate groups
of all of their non-utility subsidiaries which are engaged in similar lines of
business. As of the date of this Application-Declaration, DRI has another
significant non-utility subsidiary, Dominion Capital, Inc. ("DCI" and, together
with its subsidiaries, the "DCI Companies") which is a diversified financial
services company with several operating subsidiaries in the commercial lending,
merchant banking and residential lending businesses. Pursuant to the Order of
the Commission approving the merger of DRI and CNG, HCAR No. 27113 (Dec. 15,
1999) (the "Merger Order"), DRI is obligated to dispose of its interest in the
DCI Companies (other than certain interests in specified independent power
projects) no later than January 28, 2003. DRI and all of its subsidiaries are
herein referred to as the "DRI System".
The Merger Order approved the transactions contemplated by the Amended and
Restated Agreement and Plan of Merger dated as of May 11, 1999, on January 28,
2000 pursuant to which; (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. New DRI Sub II, the
surviving corporation in the Merger, was renamed "Consolidated Natural Gas
Company" and is the entity which 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. Commission Order dated December 15, 1999, HCAR No.
27112, SEC File No. 70-9517, authorized various financings of DRI and its
subsidiaries for the period from the closing date of the Merger through January
28, 2002 ("Initial Financing Order"). The Initial Financing Order was issued on
the basis of the Application-Declaration in File No. 70-09517, including all
amendments thereof and exhibits thereto (the "Initial Financing Application").
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 Initial Financing Order, which permit DRI
to issue and maintain in place equity, preferred and debt securities at the DRI
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, including those for which non-traditional types of holding
company financing is required or, for reasons of economic efficiency, is
preferable. Oftentimes, non-traditional types of holding company financing, such
as preferred securities and debt, can be obtained at a lower cost of funds than
equity.
Less than two months after the issuance of the Merger Order and the Initial
Financing Order, the Commission was presented with the opportunity to express
its views on the issue of non-traditional holding company financing in a context
other than an acquisition of a regulated utility. In approving a request by The
Southern Company ("Southern") for expansive and comprehensive authorization to
issue holding company preferred and debt securities, HCAR No. 27134 (Feb. 9,
2000) (the "Southern Financing Order"), the Commission stated:
The central question presented in Southern's application is whether we
should administer the Necessary and Urgent Clause in a more flexible
manner to reflect the increasingly competitive environment Southern
and other electric systems face and the changing mix of holding
company businesses...Southern has made a number of compelling
arguments that support granting the requested
authorization....Limiting Southern's financing options may impose an
unreasonable financial burden...Southern has found the equity market
an unattractive source of financing, and asserts that its current cost
of equity is well above the cost associated with long-term debt.
Requiring Southern to issue equity under circumstances when debt
financing may be less expensive could impose an unreasonable financial
burden on the company...[w]e believe that a broader reading of the
Necessary and Urgent Clause that accepts purposes such as financing
investments in [exempt wholesale generators], [exempt
telecommunications companies], [foreign utility companies] and other
nonutility businesses presents no detriment to the interests protected
under the Act.
More recently, the Commission was presented with another opportunity to
take account of the ongoing dramatic changes in the energy industry arising from
both federal and state restructuring initiatives and to fashion a means of
regulating under the 1935 Act and its statutory mandate holding company system
financings in the emerging business and regulatory environment. In approving a
request by Cinergy Corp. ("Cinergy") for expansive and comprehensive
authorization to engage in system-wide financings in view of Cinergy's need to
comply with state mandated restructuring of its generation, HCAR No. 27190 (June
23, 2000) (the "Cinergy Financing Order"), the Commission granted Cinergy
relief, subject to a reservation of jurisdiction, from the more restrictive
provisions of Rule 53 which, as discussed below, can have the unintended effect
of preventing registered holding companies from complying, or making it fiscally
impossible for registered holding companies to comply, with state mandates
requiring the functional or actual separation of generation from transmission
and distribution activities.
B. Summary of Request.
In its application seeking authorization to complete the Merger and the
Initial Financing Application, DRI sought reasonable authorization to permit DRI
to conduct and grow its business in the immediate post-Merger time frame. Today,
approximately nine months after completion of the Merger, DRI seeks to
streamline and to update and modernize its financing authorization to keep pace
with DRI's needs as a new registered system seeking to rationalize and integrate
its businesses and operations in light of an increasingly competitive industry
environment. In this connection, DRI seeks financing authorization which is
compatible with DRI's newly rationalized and integrated business as well as
consistent with the modern, efficient and forward-looking authorization granted
to Southern in the Southern Financing Order and to Cinergy in the Cinergy
Financing Order. Thus, this Application-Declaration seeks authorization through
December 31, 2005 (the "Authorization Period") for DRI, subject to all of the
representations, covenants and restrictions set forth below, to:
(1) increase its total capitalization (excluding retained earnings and
accumulated other comprehensive income) by $6,000,000,000 by way of the
issuance of equity, preferred and debt securities, other than guarantees,
and, in connection with the issuance of preferred securities, as permitted
by the Initial Financing Order, to clarify and consolidate DRI's authority
to form special purpose financing subsidiaries and to guarantee the
obligations of such special purpose financing subsidiaries as described
below;
(2) increase the aggregate amount of the guarantee authorization for
DRI to $9,600,000,000 for all subsidiaries of DRI;
(3) make investments in exempt wholesale generators ("EWGs") and
foreign utility companies ("FUCOs") in an aggregate amount not to exceed
the sum of (x) 100% of DRI's consolidated retained earnings plus (y)
$8,000,000,000, but excluding from such amount, the amount of DRI's
Aggregate Investment in Restructured Assets (the "EWG/FUCO Investment
Limit"). (As used in this Application-Declaration, the term (a)
"Restructured Assets" means all or any part of the generation assets owned
by Virginia Power on the date hereof or hereafter acquired by Virginia
Power and to the extent such assets hereafter are, or after the date of
their acquisition by Virginia Power become, designated as "Restructured
Assets" by the Board of Directors of DRI and become owned, directly or
indirectly, by any subsidiary of DRI which is qualified as an EWG and (b)
"Aggregate Investment in Restructured Assets" means, with respect to any
generation assets owned by Virginia Power which are designated as
"Restructured Assets" by the Board of Directors of DRI and which become
owned, directly or indirectly, by any subsidiary of DRI which is qualified
as an EWG, the net book value of such generation assets immediately prior
to their designation as Restructured Assets); and
(4) with respect to all credit facilities, financing arrangements,
indebtedness and similar obligations (including, without limitation, any
facilities, financing arrangements, indebtedness and similar obligations
incurred to finance the Merger) and all guarantees, financing arrangements
and other credit support in respect of subsidiaries of DRI (collectively,
the "Existing Obligations"), in each case outstanding or existing as of the
date of the Merger, extend the period of time during which DRI may maintain
in place and Refinance the Existing Obligations through the Authorization
Date (as defined herein) to the extent that any of the Existing Obligations
have not been grandfathered pursuant to the Initial Financing Order.
This Application-Declaration also seeks Commission authorization for (I) an
extension of the period of time with respect to the financing authority
heretofore granted to the subsidiaries of DRI in the Initial Financing Order
through the Authorization Period (as defined herein), subject to all of the
other representations, covenants and restrictions set forth in the Initial
Financing Application, except to the extent that such financing authority is
expressly modified as requested in this Application-Declaration, (II) DRI and
its subsidiaries to enter into the Tax Allocation Agreement annexed hereto as
Exhibit C, and (III) DRI to invest and participate in the management and
exploitation of DRI System non-utility real estate.
C. Overview of Industry Restructuring.
DRI refers to and notes the extensive discussions of the changes occurring
in the energy industry described in detail in DRI's Application-Declaration
submitted in connection with the Merger Order and in the Initial Financing
Application, Southern's Application-Declaration submitted in connection with the
Southern Financing Order and Cinergy's Application-Declaration submitted in
connection with the Cinergy Financing Order as well as in Orders of the
Commission, most notably in addition to the Southern Financing Order, the
Commission's Orders approving the formations of New Century Energies, Inc., HCAR
No. 26748 (Aug. 1, 1997) and Alliant, Inc., WPL Holdings, Inc., HCAR No. 26856
(April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v. Securities
and Exchange Commission (D.C. Cir. 1999). DRI also refers to and notes the
exhaustive discussion of industry change and the recommendations for regulatory
reform and adaptation of the implementation of the Act described in the 1995
Report of the Staff of the Commission, Public-Utility Holding Companies. DRI
does not seek to repeat, yet again, in this Application-Declaration these
discussions, the thrust of which is, quite simply, that the regulatory framework
established in 1935 with the passage of the Act and the implementation of the
Act by the Commission over sixty-five years must, as contemplated by the Act
itself, adapt to changing technologies and means of conducting the energy
business if the Act is to remain a viable means of regulating the utility
industry for the purpose of achieving the policy goals set forth in Section 1 of
the Act while at the same time not thwarting reasonable growth and modernization
by those engaged in the energy business, including registered holding companies.
Failure to adapt the administration of the Act would cause the Act to function
as an artificial constraint on the legitimate business growth and expansion of
registered holding companies as well as on the ability of other potential
competitors to enter the new competitive energy marketplace.
In conjunction with its acquisition of CNG earlier this year, DRI
enunciated a business strategy of becoming a preeminent provider of energy
services in the MAIN to Maine region, generally the Northeastern quadrant of the
United States. Before the Merger, DRI had most of its electric power assets in
several of the region's states and gas reserves located within, or transportable
to, the region. CNG also had a significant concentration of assets in and, in
the case of its oil and gas reserves, transportable to the region. The Merger
has given the combined company a strong platform for future growth in the
region, allowing DRI to market its portfolio of energy products to a broad
customer base. DRI's assets are well positioned to serve the MAIN to Maine
region, and DRI is already building upon its asset base by siting and permitting
natural gas fired merchant power plans along CNG's interstate pipeline system.
Prior to becoming a registered holding company, DRI entered into a number
of development activities and related financing arrangements with respect to new
wholesale generation projects, the financing arrangements for which were
grandfathered in the Initial Financing Order; e.g., the financing arrangements
with respect to the $850 million lease financing for the construction and lease
of ten to fourteen new gas-fired turbines to be installed at various new power
generation facilities under development by DEI. Since the closing of the CNG
acquisition and in furtherance of its business plan, DRI has entered into a
Purchase and Sale Agreement dated August 7, 2000 for the acquisition of the
Millstone Nuclear Power Station for a purchase price of $1,298,000,000 (subject
to certain adjustments at closing). In addition, as part of DRI's plan for
continued expansion into the wholesale and merchant generation business, the DEI
Companies have firm commitments to purchase additional gas fired turbines and
steam generators totaling approximately $2,600,000,000. Finally, the DEI
Companies have potential commitments totaling approximately $850,000,000 under
currently pending bids. However, DRI's focused generation strategy is being
artificially limited by inappropriate and outdated 1935 Act constraints. For
example, DRI's current authorized investment in EWGs and FUCOs represents only
4% of its consolidated capitalization. See "Investment in EWGs and FUCOs" below.
At the same time, Virginia Power is subject to a mandate under Virginia law that
it functionally separate its generation activities from its transmission and
distribution activities.
Under the Virginia Electric Utility Restructuring Act ("Virginia
Restructuring Act"), which became law July 1, 1999, the Virginia State
Corporation Commission (the "Virginia Commission") is required to direct the
functional separation of generation, retail transmission and distribution of all
incumbent electric utilities to be completed by January 1, 2002. Each incumbent
electric utility is required to submit to the Virginia Commission by January 1,
2001 a plan for such functional separation, which may be accomplished through
the creation of affiliates or through such other means as may be acceptable to
the Virginia Commission. The Virginia Restructuring Act requires the Virginia
Commission to approve any transaction for the transfer of assets by an incumbent
electric utility in connection with the achievement of functional separation.
Virginia Power expects to file its plan for functional separation with the
Virginia Commission within the next few weeks, which will separate Virginia
Power's transmission, distribution, and generation assets to subsidiaries of
Dominion Resources./1/
It is not possible for DRI to proceed with these legitimate business plans
and to restructure as required under Virginia law while at the same time
remaining in compliance with Rule 53(a). For DRI, Rule 53(a) serves as an
artificial constraint on the growth and development of DRI's organic energy
business and has the effect of making compliance with Virginia law, if not
legally impossible, then fiscally impossible; as no responsible registered
holding company can risk the possibility that the Commission would deny needed
financing at some point in the future due merely to technical non-compliance
with Rule 53(a) when such technical non-compliance with the Act results
primarily from compliance with applicable state law and does not provide any
indication of the financial condition of the system as a whole.
D. Proposed Financing and Guarantee Authorization.
(1) Existing Financing and Guarantee Authorization.
The Initial Financing Order permits DRI, through December 31, 2002, to
maintain in place and to amend, renew, extend and/or replace (each a
"Refinancing", and the term "Refinance" shall have a correlative meaning) all
credit facilities and financing arrangements and maintain outstanding all
indebtedness and similar obligations created thereunder existing as of the date
of the Merger (including, without limitation, any facilities, financing
arrangements, indebtedness or similar obligations incurred in connection with or
to finance the Merger). The Initial Financing Order states that as of the date
of the Merger, DRI had in effect a number of credit and financing facilities
under which DRI could issue Other Securities (as defined in the Initial
Financing Order) of approximately $955.31 million in addition to the
approximately $4.5 billion in securities that DRI proposed to issue to finance
the cash consideration payable in connection with the Merger. The Initial
Financing Order also permits DRI, through December 31, 2002, to issue additional
equity, preferred and/or debt securities and to Refinance such additional
securities up to an aggregate principal or face amount not to exceed $1.5
billion and to issue additional securities, similar to the financing
arrangements existing on the date of the closing of the Merger up to an
aggregate principal amount of $250 million (the "New Financing Authority"). As
of the date of this Application-Declaration, DRI has issued no equity, preferred
and debt securities pursuant to the New Financing Authority. However, within the
next few months, DRI will be required to issue additional securities that will
exceed the level authorized by the Initial Financing Order. These securities
will be issued for the purpose of financing the acquisition of non-utility power
generation assets as part and parcel of DRI's ongoing growth and expansion into
the wholesale and merchant generation business.
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/1/ Also by January 1, 2001, each incumbent electric utility owning, operating,
controlling or having an entitlement to transmission is required to join a
regional transmission entity ("RTE"), to which such utility must transfer
the management and control of its transmission system. Virginia Power is a
founding member of the Alliance Regional Transmission Organization ("RTO"),
whose proposal for the establishment of an RTO in accordance with the
requirements of FERC's Order No. 2000 has been conditionally accepted by
FERC. The Virginia Commission is also required to approve any transaction
for the transfer of ownership or management and control of transmission to
an RTE. Also, within the next few weeks, Virginia Power will file with the
Virginia Commission an application for approval of Virginia Power's
transfer of management and control of its transmission system to the
Alliance RTO.
--------
The Initial Financing Order also permits DRI, through December 31, 2002, to
maintain in place and to Refinance all guarantees, financing arrangements and
other credit support and similar obligations existing as of the date of the
Merger. The Initial Financing Order states that as of the date of the Merger,
DRI had guarantees or other credit support outstanding (i) in support of payment
obligations of the DEI Companies of approximately $947.312 million, (ii) in
support of payment obligations of the DCI Companies of approximately $47.5
million and (iii) in support of payment obligations of Virginia Power Energy
Marketing, Inc., a subsidiary of Virginia Power, of approximately $200 million.
The Initial Financing Order also permits DRI to provide additional guarantees
and credit support to subsidiaries of DRI and to Refinance such additional
guarantees and credit support (the "New Guarantee Authority"). The amount of
such additional guarantees and credit support authorized is (i) $1.5 billion, in
the case of the DEI Companies, of which $325,000,000 has been utilized as of the
date of this Application Declaration, (ii) $1.6 billion, in the case of the DCI
Companies, of which $900,000,000 has been utilized as of the dated hereof and
(iii) $100 million, in the case of Virginia Power Energy Marketing, Inc., of
which none has been utilized as of the date hereof.
Finally, the Initial Financing Order also permits subsidiaries of DRI,
including CNG and its subsidiaries and Virginia Power, to maintain in place and
to Refinance the various financing arrangements described in the Initial
Financing Application and/or which are not otherwise permitted by Rule 52 (the
"Subsidiary Financing Authority"). By way of this Application-Declaration, DRI
does not seek any modification to its authority to maintain in place and to
Refinance the Existing Obligations or the Subsidiary Financing Authority except
to the extent of seeking an extension of the period of time for which such
authority was granted to the Authorization Date (as defined herein). This
extension of time is intended to rationalize and streamline the process of
obtaining Commission approval for system-wide financing and is sought for no
other purpose.
(2) Proposed Financing and Guarantee Authorization.
DRI now proposes to supersede the Initial Financing Order to the extent of
the New Financing Authority and the New Guarantee Authority by new financing and
guarantee authority the terms of which are set forth below. As with the New
Financing Authority and the New Guarantee Authority, the new authority requested
herein would be used for general corporate purposes, not merely to fund
investments in EWGs and FUCOs (see "use of proceeds" below).
The authority requested herein is intended to enable DRI to respond quickly
and efficiently to its financing needs and available conditions in capital
markets. The general approach embodied in this request is consistent with
similarly broad financing authority granted to other registered holding
companies in recent orders. It also provides DRI with a better ability to assess
its capital needs and to target investment in light of DRI's obligation to
divest of the DCI Companies. For example, the Initial Financing Order permits
DRI to incur incremental guarantees in support of the DCI Companies in the
amount of $1.6 billion through December 31, 2002. However, while such authority
may be appropriate at present, as DRI moves to divest of the DCI Companies at
the same time as DRI seeks to grow its organic energy business, DRI foresees
that it might be preferable to target more investment to the DEI Companies and
to DRI System Companies engaged in gas related activities. The "pigeon-holing"
aspect of DRI's New Guarantee Authority does not reflect DRI's stated business
plan and artificially constrains investment of available capital in DRI's energy
businesses while at the same time providing for the possibility of unneeded
credit support for a business which DRI is in process of divesting.
Subject to the terms and conditions described below, from time to time
through the Authorization Period, DRI proposes (A) to increase its total
capitalization (excluding retained earnings and accumulated other comprehensive
income) by $6,000,000,000 through issuance and/or sale of any combination of
equity, preferred and/or debt securities, whether directly or through one or
more special-purpose subsidiaries (the "Aggregate Financing Limit"), and (B) to
increase the level of its guarantees in support of DRI System companies
outstanding at any time to an aggregate of $9,600,000,000 (the "Guarantee
Limit"), all without further authorization from the Commission, including with
respect to the terms of sale or issuance. At June 30, 2000, DRI's total
capitalization (excluding retained earnings and accumulated other comprehensive
loss) totaled approximately $22,600,000,000, and DRI's subsidiaries and
affiliates had debt or other obligations outstanding totaling $781,000,000
backed by DRI guarantees.
In addition to the other terms and conditions hereinafter specified, the
following restrictions will govern the financing transactions proposed herein
and for which authority is sought pursuant to this Application-Declaration:
(i) Common equity will comprise at least 30 percent of DRI's
consolidated capitalization (based upon the financial statements
included in DRI's most recent quarterly report on Form 10-Q or
annual report on Form 10-K);
(ii) the interest rate on any series of debt security with a maturity
of one year or less will not exceed the greater of (a) 300 basis
points over the comparable term London interbank offered rate, or
(b) a rate that is consistent with similar securities of
comparable credit quality and maturities issued by other
companies;
(iii)the interest rate on any series of debt security with a maturity
greater than one year will not exceed the greater of (a) 300
basis points over the comparable term U.S. Treasury securities or
other market-accepted benchmark securities, or (b) a rate that is
consistent with similar securities of comparable credit quality
and maturities issued by other companies;
(iv) the distribution rate on any series of preferred security will
not exceed the greater of (a) 400 basis points over the
comparable term U.S. Treasury securities or other market-accepted
benchmark securities, or (b) a rate that is consistent with
similar securities of comparable credit quality and structure
issued by other companies;
(v) the underwriting fees, commissions or similar remuneration paid
in connection with the issue, sale or distribution of any
securities authorized hereunder (excluding interest rate risk
management instruments, as to which separate provisions governing
fees and expenses are proposed below) will not exceed 700 basis
points of the principal or face amount of the securities issued
or gross proceeds of the financing; and
(vi) solely with respect to investments in EWGs and FUCOs, DRI will
not issue any additional debt securities to finance such
investments if upon original issuance thereof DRI's senior debt
obligations are not rated investment grade by at least two of the
major ratings agencies, i.e., Standard & Poor's Corporation
("S&P"), Fitch Investor Service ("Fitch") and Moody's Investor
Service ("Moody's").
The following additional terms and conditions apply to the financing
transactions proposed herein and for which authority is sought pursuant to this
Application-Declaration.
a. Debt Securities.
i. Short-Term Notes.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI proposes to make
short-term borrowings from banks or other financial institutions. Such
borrowings will be evidenced by (1) "transactional" promissory notes to be dated
the date of such borrowings and to mature not more than one year after the date
thereof or (2) "grid" promissory notes evidencing all outstanding borrowings
from the respective lender, to be dated as of the date of the first borrowing
evidenced thereby, with each such borrowing maturing not more than one year
thereafter. Any such note may or may not be prepayable, in whole or in part,
with or without a premium in the event of prepayment. DRI notes that, at any
given time, some or all of its outstanding short-term notes will be issuable in
connection with the establishment of back-up credit facilities to support DRI's
commercial paper program but that such credit facilities will not be drawn upon
and no borrowings will occur thereunder except in certain limited circumstances
at which time obligations under the related commercial paper will be paid. Thus,
short-term notes issued in connection with the establishment of commercial paper
back-up facilities backstop and duplicate commercial paper issuances and should
not be deemed to be borrowings under DRI's financing authorization unless and
until an actual borrowing occurs under the related credit facility. Any other
result would "double count" DRI's actual financial obligation.
ii. Commercial Paper.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell commercial paper through one or more dealers or agents or
directly to a limited number of purchasers if the resulting cost of money is
equal to or less than that available from commercial paper placed through
dealers or agents.
DRI proposes to issue and sell the commercial paper at market rates with
varying maturities not to exceed 270 days. The commercial paper will be in the
form of book-entry unsecured promissory notes with varying denominations of not
less than $25,000 each. In commercial paper sales effected on a discount basis,
no commission or fee will be payable in connection therewith; however, the
purchasing dealer will re-offer the commercial paper at a rate less than the
rate to DRI. The discount rate to dealers will not exceed the maximum discount
rate per annum prevailing at the date of issuance for commercial paper of
comparable quality and the same maturity. The purchasing dealer will re-offer
the commercial paper in such a manner as not to constitute a public offering
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
iii. Long-Term Notes.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell long-term debt securities ("Notes") in one or more series.
Notes of any series may be either senior or subordinated obligations of
DRI. If issued on a secured basis, Notes would be secured solely by common
stock, or other assets or properties, of one or more of DRI's non-utility
subsidiaries (exclusive of any non-utility subsidiary held by Virginia Power).
Notes of any series (a) will have maturities greater than or equal to one year,
(b) may be subject to optional and/or mandatory redemption, in whole or in part,
at par or at various premiums above the principal amount thereof, (c) may be
entitled to mandatory or optional sinking fund provisions, and (d) may be
convertible or exchangeable into common stock of DRI. Interest accruing on Notes
of any series may be fixed or floating or "multi-modal" (where the interest is
periodically reset, alternating between fixed and floating interest rates for
each reset period, with all accrued and unpaid interest together with interest
thereon becoming due and payable at the end of each such reset period). Notes
will be issued under one or more indentures to be entered into between DRI and
financial institution(s) acting as trustee(s); supplemental indentures may be
executed in respect of separate offerings of one or more series of Notes.
Notes may be issued in private or public transactions. With respect to the
former, Notes of any series may be issued and sold directly to one or more
purchasers in privately negotiated transactions or to one or more investment
banking or underwriting firms or other entities who would resell the Notes
without registration under the Securities Act in reliance upon one or more
applicable exemptions from registration thereunder. From time to time DRI may
also issue and sell Notes of one or more series to the public either (i) through
underwriters selected by negotiation or competitive bidding or (ii) through
selling agents acting either as agent or as principal for resale to the public
either directly or through dealers.
The maturity dates, interest rates, redemption and sinking fund provisions,
if any, with respect to the Notes of a particular series, as well as any
associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable indenture or supplement
thereto and purchase agreement or underwriting agreement setting forth such
terms.
iv. Interest Rate Risk Management.
In connection with the issuance and sale of the short- and long-term debt
securities described above, DRI proposes to manage interest rate risk through
the use of various interest rate management instruments commonly used in today's
capital markets, such as interest rate swaps, caps, collars, floors, options,
forwards, futures and similar products designed to manage interest rate risks.
DRI will enter into such derivative transactions pursuant to agreements
with counterparties that are highly rated financial institutions, i.e., whose
senior secured debt, at the date of execution of the agreement with DRI, is
rated at least "A-" by S&P, Fitch or "A3" by Moody's. The derivative
transactions will be for fixed periods.
Fees, commissions and annual margins in connection with any interest rate
management agreements will not exceed 100 basis points in respect of the
principal or notional amount of the related debt securities or interest rate
management agreement. In addition, with respect to options such as caps and
collars, DRI may pay an option fee which, on a net basis (i.e., when netted
against any other option fee payable with respect to the same security), would
not exceed 10% of the principal amount of the debt covered by the option.
b. Equity Securities.
i. Common stock (including Stock Purchaser Contracts/
Units).
At June 30, 2000, DRI had 500 million shares of common stock authorized for
issuance, 237.8 million shares of which were issued and outstanding. As of the
date of this Application-Declaration, DRI has issued 76 thousand shares of
common stock pursuant to the Initial Financing Order.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI proposes to issue
and sell additional shares of its common stock (i) through solicitations of
proposals from underwriters or dealers, (ii) through negotiated transactions
with underwriters or dealers, (iii) directly to a limited number of purchasers
or to a single purchaser, and/or (iv) through agents. The price applicable to
additional shares sold in any such transaction will be based on several factors,
including the current market price of the common stock and prevailing capital
market conditions.
DRI also proposes to issue and sell from time to time stock purchase
contracts ("Stock Purchase Contracts"), including contracts obligating holders
to purchase from DRI and/or DRI to sell to the holders, a specified number of
shares or aggregate offering price of DRI common stock at a future date. The
consideration per share of common stock may be fixed at the time the Stock
Purchase Contracts are issued or may be determined by reference to a specific
formula set forth in the Stock Purchase Contracts. The Stock Purchase Contracts
may be issued separately or as part of units ("Stock Purchase Units") consisting
of a stock purchase contract and debt and/or preferred securities of DRI and/or
debt obligations of nonaffiliates, including U.S. Treasury securities, securing
holders' obligations to purchase the common stock of DRI under the Stock
Purchase Contracts. The Stock Purchase Contracts may require holders to secure
their obligations thereunder in a specified manner.
Further, DRI requests authorization to issue common stock as consideration,
in whole or in part, for acquisitions by DRI or any nonutility subsidiary
thereof of securities of businesses or the assets of such businesses, the
acquisition of which (a) is exempt under the Act or the rules thereunder or (b)
has been authorized by prior Commission order issued to DRI or any nonutility
subsidiary thereof, subject in either case to applicable limitations on total
investments in any such businesses. The shares of DRI common stock issued in any
such transaction would be valued at market value based on the closing price on
the day before closing of the sale, on average high and low prices for a period
prior to the closing of the sale, or on some other method negotiated by the
parties.
ii. Preferred Securities.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell preferred securities in one or more series.
Preferred securities of any series (a) will have a specified par or stated
value or liquidation value per security, (b) will carry a right to periodic cash
dividends and/or other distributions, subject among other things, to funds being
legally available therefor, (c) may be subject to optional and/or mandatory
redemption, in whole or in part, at par or at various premiums above the par or
stated or liquidation value thereof, (d) may be convertible or exchangeable into
common stock of DRI, (e) and may bear such further rights, including voting,
preemptive or other rights, and other terms and conditions, as set forth in the
applicable certificate of designation, purchase agreement and/or similar
instruments governing the issuance and sale of such series of preferred
securities.
Preferred securities may be issued in private or public transactions. With
respect to private transactions, preferred securities of any series may be
issued and sold directly to one or more purchasers in privately negotiated
transactions or to one or more investment banking or underwriting firms or other
entities who would resell the preferred securities without registration under
the Securities Act in reliance upon one or more applicable exemptions from
registration thereunder. From time to time DRI may also issue and sell preferred
securities of one or more series to the public either (i) through underwriters
selected by negotiation or competitive bidding or (ii) through selling agents
acting either as agent or as principal for resale to the public either directly
or through dealers.
The liquidation preference, dividend or distribution rates, redemption
provisions, voting rights, conversion or exchange rights, and other terms and
conditions of a particular series of preferred securities, as well as any
associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable certificate of designation,
purchase agreement or underwriting agreement, and other relevant instruments
setting forth such terms.
c. Financing Conduits.
In addition to issuing any of the foregoing debt or equity securities
directly, DRI requests approval (to the extent such approval may be required
under the Act) to form one or more subsidiaries for the sole purpose of issuing
and selling any of the foregoing securities, lending, dividending or otherwise
transferring the proceeds thereof to DRI or an entity designated by DRI, and
engaging in transactions incidental thereto, subject to the Aggregate Financing
Limit and the other conditions previously specified.
The proposed subsidiaries will comprise one or more financing subsidiaries
(each, a "Financing Subsidiary") and one or more special-purpose entities (each,
a "Special-Purpose Entity," and together with Financing Subsidiaries, "Financing
Conduits"). In either case the subsidiaries' businesses will be limited to
issuing and selling securities on behalf of DRI; the subsidiaries will have no
substantial physical assets or properties. Any securities issued by the
Financing Conduits will be fully guaranteed by DRI either directly or
ultimately.
DRI would acquire all of the outstanding shares of common stock or other
equity interests of the Financing Subsidiary for an amount not less than the
minimum required by the applicable law. The business of the Financing Subsidiary
will be limited to effecting financing transactions with third parties for the
benefit of DRI and its subsidiaries. As an alternative in a particular instance
to DRI directly issuing debt or equity securities, or through a Special-Purpose
Entity, DRI may determine to use a Financing Subsidiary as the nominal issuer of
the particular debt or equity security. In that circumstance, DRI would provide
a full guarantee or other credit support with respect to the securities issued
by the Financing Subsidiary, the proceeds of which would be lent, dividended or
otherwise transferred to DRI or an entity designated by DRI. The primary
strategic reason behind the use of a Financing Subsidiary would be to segregate
financings for the different businesses conducted by DRI, distinguishing between
securities issued by DRI to finance its investments in nonutility businesses
from those issued to finance its investments in the core utility business. A
separate Financing Subsidiary may be used by DRI with respect to different types
of nonutility businesses.
DRI would use Special-Purpose Subsidiaries in connection with certain
financing structures for issuing debt or equity securities, in order to achieve
a lower cost of capital, or incrementally greater financial flexibility or other
benefits, than would otherwise be the case.
d. Guarantees.
DRI also proposes to supersede the New Guarantee Authority with, as
discussed above, a general greater authority intended to accommodate DRI's
MAIN-to-Maine business plan.
Specifically, from time to time through the Authorization Period, DRI
requests authority to guarantee, obtain letters of credit, enter into financing
arrangements and otherwise provide credit support (each, a "Guarantee") in
respect of the debt or other securities or obligations of any or all of DRI's
subsidiary or associate companies (including any thereof formed or acquired at
any time during the Authorization Period), and otherwise to further the business
of DRI, provided that the total amount of Guarantees at any time outstanding
does not exceed the Guarantee Limit, and provided further, that (i) any
Guarantees of EWGs and FUCOs shall also be subject to the EWG/FUCO Investment
Limit; and (ii) any Guarantees of energy-related companies within the meaning of
rule 58 ("Rule 58 Companies") shall also be subject to the aggregate investment
limit of Rule 58. The terms and conditions of any Guarantees would be
established at arm's-length based upon market conditions.
DRI wishes to propose how the Guarantee Limit would operate relative to
Financing Conduits. As described above, in the event that DRI issues any debt or
equity securities authorized hereunder by means of any Financing Conduits, DRI
would provide a full Guarantee in respect of the payment and other obligations
of the Financing Conduit under the securities issued by it. Given that any
securities nominally issued by any such Financing Conduit are in substance
securities issued by DRI itself, any securities issued by a Financing Conduit
would count dollar-for-dollar against the Aggregate Financing Limit. However,
DRI submits that any Guarantees of securities of Financing Conduits should be
excluded entirely from the Guarantee Limit, since inclusion thereof would amount
to "double counting," in effect penalizing DRI for using Financing Conduits.
e. Use of Proceeds.
DRI proposes to issue the debt and equity securities authorized herein for
general corporate purposes, including without limitation (i) payments,
redemptions, acquisitions, and refinancings of outstanding securities issued by
DRI, (ii) acquisitions of and investments in EWGs and FUCOs, provided that DRI's
aggregate investment therein does not exceed the EWG/FUCO Investment Limit,
(iii) acquisitions of and investments in Rule 58 Companies as permitted by Rule
58, (iv) loans to and investments in other system companies and (v) other lawful
corporate purposes.
As previously described, in the event DRI utilizes Financing Conduits to
issue securities authorized herein, such entities would apply the proceeds of
securities nominally issued by them to make loans, dividends or other transfers
thereof to DRI or an entity designated by DRI, which would then be applied for
any of the purposes enumerated in the preceding paragraph.
E. Investment in EWGs and FUCOs.
This Application-Declaration also seeks authorization and approval of the
Commission with respect to the issuance of securities, guarantees and credit
support in connection with DRI's investment in EWGs under Section 32 of the Act
and foreign FUCOs under Section 33 of the Act. Specifically, this
Application-Declaration seeks authorization and approval of the Commission under
Sections 32 and 33 and Rules 53 and 54 for DRI and CNG to invest an amount up to
the EWG/FUCO Investment Limit in EWGs and FUCOs all as more specifically
described below.
Each of DRI and CNG today holds investments in various EWGs and FUCOs.
DRI's specific EWG and FUCO investments are described in detail in DRI's
Registration Statement on Form U5B filed with the Commission on April 27, 2000,
which includes disclosures with respect to CNG for the fiscal year ended
December 31, 1999. Such Registration Statement is hereby incorporated by
reference herein. On a consolidated basis at June 30, 2000, DRI had invested
$1,252,000,000 in EWGs and FUCOs (which amount includes the DRI Guarantee in
respect of the $850 million lease financing referred to above and which was
grandfathered in the Initial Financing Order) which represents 49% of the sum of
(x) consolidated retained earnings at June 30, 2000 plus (y) the amount of CNG's
retained earnings immediately prior to the Merger which were recharacterized as
paid-in-capital as a result of the accounting treatment of the Merger.
DRI respectfully submits that the amount, expressed as a percentage of
consolidated retained earnings, of DRI's investment in EWGs and FUCOs is
artificially distorted by accounting adjustments required in connection with the
Merger. 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, but,
nevertheless, a strong balance sheet showing a significant common stock equity
level. DRI respectfully submits that tying the level of DRI's investment in EWGs
and FUCOs solely to a standard premised upon the level of the consolidated
retained earnings of DRI, without giving effect to the historic retained
earnings of Old CNG, unfairly penalizes DRI by making it impractical, if not
impossible, for DRI to compete for investment in the restructuring energy
industry while at the same time seeking a financing and capital structure which
is fiscally responsible. Thus, DRI requests authority under Rule 53(c) to invest
up to the EWG/FUCO Investment Limit in EWGs and FUCOs: an aggregate amount not
to exceed the sum of (x) 100% of DRI's consolidated retained earnings plus (y)
$8,000,000,000.
In support of its request, DRI notes that, in other contexts, specifically
with respect to the payment of dividends which are ordinarily payable only out
of retained earnings, the Commission has permitted companies to pay dividends
out of capital and unearned surplus when retained earnings were reduced by
reason of required accounting adjustments similar to that which occurred in
connection with 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
respectfully submits that the same rationale for permitting the payment of
dividends out of capital or unearned surplus in the above-cited cases supports
DRI's request to "add back" the historic retained earnings of Old CNG in
determining the EWG/FUCO Investment Limit.
Additionally, the Commission has granted similar relief to other registered
holding companies seeking both to restructure and to grow their organic energy
business. For example, in the Cinergy Financing Order, the Commission granted
authorization to Cinergy to invest up to 100% of consolidated retained earnings
plus $4 billion in EWGs and FUCOs, subject to a reservation of jurisdiction,
which represents 87% of Cinergy's total capitalization. In comparison, DRI has a
total capitalization which is four times the capitalization of Cinergy but, as
stated above, has an authorized investment level in EWGs and FUCOs representing
only 4% of its total capitalization. Investment by DRI at the maximum level of
the EWG/FUCO Investment Limit would represent 40% of DRI's consolidated
capitalization at June 30, 2000, an investment level, as a percentage of total
capitalization, which is more consistent with industry norms.
Denial of this request would make it impossible for DRI to proceed with the
implementation of its MAIN-to-Maine business plan in a restructured energy
industry and, perhaps more importantly, would make it impossible for DRI to
comply with applicable restructuring mandates under Virginia law while at the
same time maintaining a fiscally responsible capital structure and access to
financing on reasonable terms. DRI notes that, 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 in non-U.S. EWGs and FUCOs and other non-core assets not
consistent with its MAIN to Maine Strategy. In that connection, DRI has already
disposed of certain of its Latin American projects to Duke Energy International,
a subsidiary of Duke Energy Corporation and has announced the sale of other
non-US assets to Sempra and PowerGen, plc. To date DRI's EWG and FUCO
investments have been primarily non-U.S. enterprises, but in the future, DRI
anticipates that its investment in U.S. EWGs will increase substantially over
the next several years.
The principal reason for this anticipated increase is DRI's announced
intention to build new independent power plants as well as DRI's desire to
purchase existing generating facilities which may be sold as a result of the
ongoing restructuring of the U.S. utility industry which has resulted in the
enactment of state laws mandating separation and/or divestiture of generation by
vertically integrated utilities. Opportunities in domestic power markets are
significantly more attractive and available today than several years ago. In
1996 the FERC issued Orders 888 and 889, introducing competition into U.S.
wholesale power markets. In the past several years, many states have enacted,
and most of the rest are considering legislation providing for competitive
supply of electricity to retail consumers, in many cases requiring franchised
utilities to divest generating assets. Only about half the states have enacted
restructuring legislation, so many important auctions are yet to occur. In
addition, some initial buyers, like Sithe Energies, are reselling assets
acquired in these utility divestitures. Finally, peak demand for electricity has
been steadily growing, and in several regions capacity margins have been
decreasing. The U.S. and Canada are projected to require more than 186 GW of new
generating capacity by 2010, according to a 1998 report by Resource Data
International, the strategic information firm. The new growth represents about
$90 billion worth of projects.
These factors help explain both the buoyant sellers' market for auctions of
nuclear and fossil-fueled power plants, and the boom in new power plant
construction. In 1998, U.S. power plant developers made reservations for about
$12 billion in new plants, or nearly 40 percent of global orders, for plants
with total output of 40 GW. In the next decade, about $80 billion will be
invested in new power plants in North America, according to the energy
consulting firm Hagler Bailly.
Many of these new plants will be operated in whole or in part on a
"merchant," or market, basis. By definition, merchant plants produce energy to
sell on the competitive wholesale market. Unlike independent power production,
or "IPP," facilities, merchant plants are not supported by long-term offtake
contracts, but rather by their ability to produce power at market clearing
prices. In September 1996, the E.J. Stoneman plant, a 53 MW coal-fired facility
in Cassville, Wisconsin, became the first plant to sell its electricity entirely
on a merchant basis. Notwithstanding the lack of long-term power sales and other
"offtake" agreements, merchant plants have been able to secure investment grade
ratings, based on low marginal cost position and other relevant factors.
Planned merchant plant capacity in the United States more than doubled over
a recent twelve-month span, from 56,500 MW in October 1998 to 121,733 MW in
October 1999, according to the Electric Power Supply Association, a trade group
for independent power producers and power marketers ("EPSA"). Development is
occurring all over the country, with about 40,000 MW under construction or
development in New England and the Pennsylvania-New Jersey-Maryland region;
27,000 MW in the Southeast; 24,000 MW in the Midwest; and 29,000 MW in the West.
Additional merchant capacity is emerging through divestitures as buyers convert
previously regulated plants into open market participants. According to the
executive director of EPSA:
Overall, what we've seen in the past three years is a total sea change
in the structure of the industry, which has marked the beginning of a
totally competitive generation sector. In the future, we'll continue
to see this trend of dramatically increasing merchant plant capacity.
Often, newly constructed generation facilities and divested generation
facilities will not satisfy the criteria for designation as qualifying
facilities ("QFs") under the Public Utility Regulatory Policy Act of 1978 and,
thus, if they are to be acquired by independent (i.e., non-utility generation or
out-of-region competitors) energy providers, they must be designated as EWGs.
Failure to obtain QF or EWG status for these newly constructed and divested
generation facilities would raise difficult issues under the 1935 Act because,
in the absence of the 1935 Act exemption for QFs and EWGs, most independent
acquirors of these assets could not satisfy the integration requirements of the
1935 Act with respect to the acquisition of non-exempt assets or continue to own
and operate the assets as part of a registered system.
Finally, pursuant to Virginia restructuring legislation, DRI's principal
electric utility subsidiary, Virginia Power, has been mandated to implement a
functional separation of its generation activities from its retail distribution
activities. Thus, as described in the Press Release dated April 19, 1999 and
annexed hereto as Exhibit A-2, Virginia Power will undertake the functional
separation of Virginia Power's generation assets. The authority requested herein
is essential if DRI is to adapt to state restructuring impacting its own
regulated utility operations. DRI must obtain sufficient investment flexibility
under the Act to accommodate the restructuring of Virginia Power's generation
assets and their ownership by EWG affiliates.
Virginia Power has significant ownership of electric generation facilities.
The generation assets are either wholly-owned by Virginia Power or jointly-owned
with other utilities, and are located in Virginia and North Carolina. The
installed capacity and net book value of the generation assets allocable to
Virginia Power's ownership interests are 13,591 MW and $6.4 billion,
respectively, at December 31, 1999. None of DRI's other utility subsidiaries own
any electric generating facilities.
The recently enacted Virginia restructuring legislation deregulates
generation and provides that beginning January 1, 2002, generation of electric
power will no longer be subject to public utility regulation in Virginia, except
as specified in the Act./2/
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/2/ Also on January 1, 2002, a phase-in of retail choice for electric customers
will begin under which, by January 1, 2004, all retail electric customers
will be permitted to purchase electric energy from any licensed supplier,
subject to up to a one-year delay by the Virginia Commission. The Virginia
Commission will retain jurisdiction to issue certificates for the
construction and operation of generation facilities. Virginia law has been
revised to accommodate merchant facilities, and several have been
certificated by the Virginia Commission.
--------
DRI needs to be able to reposition its existing regulated generation to
maximize the value of those assets in a competitive environment. Like a number
of other utilities in states undergoing restructuring, DRI is seeking to achieve
asset flexibility and optimization by holding such assets in EWG affiliates,
where they can be used for electric sales back to the remnant affiliated "T&D"
utility or marketed for sale to off-system buyers, either with respect to all or
some of the particular assets. DRI's current intention is to convert all or a
substantial number of Virginia Power's power plants to EWG status, since DRI
believes that functional separation ultimately will be required for the entire
fleet. Therefore, DRI has requested that Aggregate Investment in Restructured
Assets be excluded from the EWG/FUCO Investment Limit.
For the foregoing reasons and to enable DRI to compete effectively in the
independent generation market, DRI hereby requests authorization under Rule
53(c) to invest up to the EWG/FUCO Investment Limit in EWGs and FUCOs. The EWGs
and FUCOs may be held, and the investments may be made, directly, or indirectly
through intermediate companies, partnerships or other corporate entities.
F. Tax Allocation Agreement
DRI also requests the Commission's approval of an agreement for the
allocation of consolidated tax among DRI and its subsidiaries (the "Tax
Allocation Agreement"). Approval is necessary because the proposed Tax
Allocation Agreement may provide for the retention by DRI of certain payments
for tax losses that it has incurred, rather than the allocation of such losses
to its subsidiaries without payment as would otherwise be required by Rule
45(c)(5).
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from, directly or indirectly, lending or in any
manner extending its credit to or indemnifying, or making any donation or
capital contribution to, any company in the same holding company system, except
pursuant to a Commission order, Rule 45(c) provides, however, that no approval
is required for a tax allocation agreement between eligible associate companies
in a registered holding company system which "provides for allocation among such
associate companies of the liabilities and benefits arising from such
consolidated tax return for each tax year in a manner not consistent with" the
conditions of the rule. Rule 45(c)(5) provides that:
[t]he agreement may, instead of excluding members as provided in
paragraph (c) (4), include all members of the group in the tax
allocation, recognizing negative corporate taxable income or a
negative corporate tax, according to the allocation method chosen. An
agreement under this paragraph shall provide that those associate
companies with a positive allocation will pay the amount allocated and
those subsidiary companies with a negative allocation will receive
current payment of their corporate tax credits. The agreement shall
provide a method for apportioning such payments, and for carrying over
uncompensated benefits, if the consolidated loss is too large to be
used in full. Such method may assign priorities to specified kinds of
benefits. (Emphasis added)
Under the rule, only "subsidiary companies," as opposed to "associate
companies" (which includes the holding company in a holding company system), are
entitled to be paid for corporate tax credits. However, if a tax allocation
agreement does not fully comply with the provisions of Rule 45(c), it may
nonetheless be approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the Commission explained
that the distinction between "associate companies" and "subsidiary companies"
represented a policy decision to preclude the holding company from sharing in
consolidated return savings. The Commission noted that exploitation of utility
companies by holding companies through the misallocation of consolidated tax
return benefits was among the abuses examined in the investigations underlying
the enactment of the Act 38. It must be noted, however, that the result of Rule
45(c)(5) is not dictated by the statute and, as the Commission has recognized,
there is discretion on the part of the agency to approve tax allocation
agreements that do not, by their terms, comply with the Rule 45(c) -- so long as
the policies and provisions of the Act are otherwise satisfied. In this matter,
where the holding company is seeking only to receive payment for tax losses that
have been generated by it, the proposed arrangement will not give rise to the
types of problems (e.g., upstream loans) that the Act was intended to address.
The relief sought herein is directly analogous to the relief granted to The
National Grid Group plc in the Commission's order approving the acquisition of
New England Electric System. HCAR No. 27154 (March 15, 2000).
Accordingly, Dominion requests that the Commission approve the Tax
Allocation Agreement to be filed hereto as Exhibit C.
G. Management and Exploitation of DRI System Non-Utility Real Estate
DRI, on behalf of itself and its subsidiaries, requests authorization to
manage and exploit real estate in the DRI System, without the need for any
additional prior Commission order. From time to time various companies in the
DRI System may determine that real estate which they own is not being used as
profitably as it could. In order to derive further value from such real estate,
DRI requests authority for the owner of such real estate to lease, sell or
otherwise market its excess or unwanted real estate and to facilitate the
exploitation of resources contained on or in real estate. As an example of the
type of transactions that would be authorized pursuant to an order granted in
this proceeding, Martin-Marietta Corporation has expressed an interest in mining
limestone deposits on land owned by Dominion Transmission, Inc., an indirect
wholly-owned non-utility subsidiary of DRI.
DRI also requests authority either to designate an already existing
non-utility subsidiary or to form one or more new companies as a non-utility
subsidiary in which the real-estate activities of the DRI System will be
centralized. Such a company ("RealCo") may act as agent for DRI System companies
for these activities, manage the real estate portfolio of DRI and its associate
companies, market excess or unwanted real estate and facilitate the exploitation
of resources on or in DRI System real estate. The net proceeds realized from any
sale or from exploitation of resources thereon will be credited to the company
that owns the subject asset. Services performed for associate companies by
RealCo will be provided at cost in compliance with Rules 90 and 91. A DRI
company, including RealCo, will not acquire any real estate in connection with
its activities pursuant to this authorization.
Similar authorization was granted to Allegheny Power System, Inc. by
supplemental Commission order dated October 27, 1995, HCAR No. 26401, File No.
70-8411.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with seeking the authorizations herein requested are
estimated as follows:
Fee, Commission or Expense Thousands
-------------------------- ---------
Legal Fees and Expenses $50
=======
Total $50
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
transactions for which authorization is sought in this Application-Declaration.
Section of/Rule under Transactions to which such Section/Rule is or
the 1935 Act may be applicable
Sections 6(a), 7 Issuance of Securities; Incurrence of Indebtedness;
Provision of Guarantees and other Credit Support;
Investment and Participation in Non-Utility
Businesses
Section 9(a) Investment and Participation in Non-Utility
Businesses
Section 12(b), 12(c) Transactions with Special Purpose Subsidiary
Rules 42, 45 and 46 Companies and Tax Allocation Agreement
Sections 32, 33 Investment in EWGs and FUCOs
Rules 53 and 54
In support of its request for an increase in its financing authorization,
DRI respectfully submits that the Commission has already stated the best
rationale for granting such request in the Southern Financing Order. Energy
companies are confronting a new competitive environment characterized by their
need to respond quickly to business opportunities and their need to utilize the
most efficient financing that is reasonably available in the capital markets.
For these same reasons, the Commission should also grant the relief requested
with respect to the Tax Allocation Agreement. In the new competitive energy
marketplace, tax benefits should inure to the benefit of the companies that
create them and should not be siphoned off to the benefit of another company.
With respect to DRI's request to invest up to the EWG/FUCO Investment Limit
in EWGs and FUCOs, the Commission has previously recognized that investment in
the domestic utility industry does not pose the same risks that might arise in
the non-U.S. utility industry. The Southern Company, HCAR No. 26501 (April 1,
1996). From a business perspective, however, DRI imposes the same level of
scrutiny with respect to U.S. investments as it does with respect to non-U.S.
investments. Every potential investment in independent energy projects undergoes
a series of reviews by project managers responsible for identifying business
opportunities, senior management and the Board of Directors of DEI (the DRI
company through which most of these investments are made) and, in some cases,
senior management and the Board of Directors of DRI.
Investments are evaluated against a number of investment criteria including
(i) economic viability of the project, (ii) political and regulatory risk, (iii)
availability of non-recourse financing on reasonable terms and (iv) strategic
fit within the DRI system.
Economic Viability of the Project. Analysis of the economic
viability of the project includes an analysis of the overall industry
environment in which the project will operate (i.e., progress towards
privatization and/or restructuring, depending on where the project is
located), the ability of the project to produce electricity at or
below long-run marginal costs in the competitive region and the credit
worthiness of potential power purchasers and other project
counterparties.
Political and Regulatory Risk. Analysis of political and
regulatory risks involves careful review of changing political and
regulatory regimes as well as long-term economic stability in the
region. This analysis is a critical component of DRI's investment
review as each of the 50 states and the U.S. Congress consider utility
industry restructuring and has always been a threshold level review in
the analysis of non-U.S. investments. The analysis also includes
review of permitting and environmental risks as well as legal risk
associated with the ability to enforce contracts relating to the
project and its financing.
Non-Recourse Financing. All of DRI's existing independent energy
projects have obtained some of their long-term financing on a
non-recourse basis with, in some cases, limited support from DRI. In
most cases, DRI's involvement is limited to acting as a backstop to
support arrangements provided in the first instance by DEI. It is an
essential element of the investment analysis that DRI have a
reasonable degree of comfort that each project have an ability to
obtain a substantial part of its ongoing financing needs without DRI
support except indirectly through DRI's support of DEI. As is
described in DRI's Exemption Statement on Form U-3A-2 for the fiscal
year ended December 31, 1998 and as is further described above, DRI
has had substantial success in limiting its financial exposure to its
independent energy projects.
Strategic Fit. Finally, DRI is particularly sensitive to ensuring
that its independent energy investments contribute to DRI's overall
strategic growth plan building upon DRI's strengths and resources to
achieve broad corporate objectives within budgeting and expenditure
guidelines. Thus, each potential investment must be reviewed and
approved by a number of managers within the DRI system who will focus
their review not only on the questions of whether a particular project
satisfies DRI's investment criteria and is reasonably anticipated to
generate earnings commensurate with risk, but also on the question of
whether the project is likely to aid in achieving DRI's long-term
overall strategic objectives.
With respect to Restructured Assets, the rationale for excluding investment
in these assets from the EWG/FUCO Investment Limit is as follows:
I. The functional separation of Virginia Power's generation
assets from its retail distribution activities is mandated
by Virginia law. Virginia, like many other states, has
recently adopted electric restructuring legislation
requiring a transition to retail competition. A retail
distribution company's retention of control over generation
assets is inconsistent with this legislative goal. As
discussed above, functional separation of generation supply
from the retail distribution function is an essential
element of most state restructuring initiatives.
II. DRI will be making only minimal investment in Restructured
Assets in connection with their initial designation as such
and their ownership by EWG affiliates. Thus, DRI will not,
as a result of such transfer, be increasing its exposure to
new EWG investment such as would result from the acquisition
of new generation assets for cash and/or with DRI support.
Any new investment made by DRI in support of such new
acquisitions would be included in the calculation of DRI's
aggregate investment in EWGs.
III. Rule 53 was adopted prior to the onset of state mandated
functional separation of generation in connection with the
adoption of state retail restructuring laws and was not
designed or intended to capture functional separation by
registered holding companies. Rule 53 was adopted pursuant
to Section 32(h)(6) of the 1935 Act which required the
Commission to promulgate rules relating to registered
holding companies' financing support for their affiliate
EWGs and the circumstances under which such financing
support could have a "substantial adverse impact" on the
"financial integrity" of a registered system. Neither Rule
53 nor Section 32 was designed or intended to penalize
registered holding companies for their compliance with
state-mandated functional separation laws because such laws
and the results of functional separation were not
contemplated when Section 32 was enacted or when Rule 53 was
adopted. As discussed above, the alternative of not
designating disaggregated generation assets as EWGs raises
even greater issues under the 1935 Act. First, failure to
obtain EWG exemption for such assets would necessitate prior
Commission approval of the functional separation transaction
under Section 9(a)(1) as the creation of a new company to
own such assets would constitute the acquisition of a
separate "public utility company" for purposes of Section
9(a)(1). Second, serious questions are raised as to whether
the Commission could approve such a transaction given the
integration requirements of the 1935 Act. Pursuant to
Section 32(k) of the 1935 Act, an electric utility company
is prohibited from entering into a contract to purchase
electricity from an EWG which is an affiliate or associate
company unless every state commission with retail rate
jurisdiction over such electric utility company expressly
approves the transaction after having made the specific
findings required by Section 32(k)(2). A state which has
just mandated functional separation of generation from
retail distribution for the express purpose of granting
choice to retail customers is unlikely to approve a contract
which effectively takes that choice away. Thus, it would be
virtually impossible for any registered holding company to
demonstrate that its functionally separated generation is
integrated with its functionally separated distribution
under current Commission interpretation of Section
2(a)(29)(A).
For all of the foregoing reasons, it would unfairly and inappropriately
penalize registered holding companies in their ability to compete for true new
EWG investments if investment in their own newly deregulated generation assets
were to be construed as new EWG investment.
Item 4. Regulatory Approvals.
No other regulatory commission has jurisdiction over the transactions for
which authority is sought herein.
Item 5. Procedure.
The Commission is respectfully requested to issue and publish, not later
than September 29, 2000, the requisite notice under Rule 23, with respect to the
filing of this Application-Declaration, such notice to specify a date not later
than October 29, 2000 by which comments may be entered and a date not later than
October 30, 2000 as the date after which an order of the Commission granting and
permitting this Application-Declaration to become effective may be entered by
the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements.
A-1 DRI Registration Statement on Form U5B filed on April 27, 2000
(incorporated by reference herein)
A-2 Press Release issued by DRI re Virginia Power restructuring. (Filed in
paper format on Form SE on October 15, 1999)
B Tax Allocation Agreement (to be filed by amendment)
C Form of Notice (to be filed by amendment)
Item 7. Information as to Environmental Effects.
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 10(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Section 4321, et seq. The only federal actions related to the Transaction
pertain to the Commission's approval of this Application-Declaration under the
1935 Act and the Commission's clearance and declaration of the effectiveness of
the Joint Proxy and Registration Statement of DRI and CNG on Form S-4 pursuant
to the Securities Exchange Act of 1934 and the other approvals and actions
described in Item 4 of this Application-Declaration. Consummation of the
Transaction will not result in changes in the operations of DRI, CNG or any of
their respective subsidiaries that would have any impact on the environment. No
federal agency is preparing an environmental impact statement with respect to
this matter.
Pursuant to the Public Utility Holding Company Act of 1935, the undersigned
company has caused this Application-Declaration to be signed on its behalf by
the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
By: /s/ James F. Stutts
------------------------
Name: James F. Stutts
Title: Vice President and
General Counsel
Date: September 25, 2000
