-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HfFdfstbxzVVbzOGpeRyeH4w/E+dIVmcKj7wnCPb0W+8odHC1TeTdq+jb2Tsjs2s Y5RrNBYt/vTFhiTpF19cPw== 0000898080-99-000284.txt : 19991018 0000898080-99-000284.hdr.sgml : 19991018 ACCESSION NUMBER: 0000898080-99-000284 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 6 FILED AS OF DATE: 19991015 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DOMINION RESOURCES INC /VA/ CENTRAL INDEX KEY: 0000715957 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC SERVICES [4911] IRS NUMBER: 541229715 STATE OF INCORPORATION: VA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: SEC FILE NUMBER: 070-09477 FILM NUMBER: 99729148 BUSINESS ADDRESS: STREET 1: 901 E BYRD ST, WEST TOWER STREET 2: P O BOX 26532 CITY: RICHMOND STATE: VA ZIP: 23219 BUSINESS PHONE: 8047755700 MAIL ADDRESS: STREET 1: P O BOX 26532 STREET 2: 901 EAST BYRD STREET CITY: RICHMOND STATE: VA ZIP: 23261 U-1/A 1 PRE EFFECTIVE AMENDMENT NO. 4 File No. 70-09477 As filed with the Securities and Exchange Commission on October 15, 1999 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM U-1 APPLICATION-DECLARATION ------------------------------- AMENDMENT NO. 4 TO APPLICATION-DECLARATION UNDER THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 ----------------------------------- Dominion Resources, Inc. Consolidated Natural Gas 120 Tredegar Street Company Richmond, VA 23219 CNG Tower, 625 Liberty Avenue Pittsburgh, PA 15222 (Name of company filing this statement and address of principal executive offices) ------------------------------ None Consolidated Natural Gas Company (Name of top registered holding company parent of each applicant or declarant) ---------------------------- James F. Stutts Stephen E. Williams Vice President and Senior Vice President and General Counsel General Counsel Dominion Resources, Inc. Consolidated Natural Gas 120 Tredegar Street Company Richmond, VA 23219 CNG Tower, 625 Liberty Avenue Pittsburgh, PA 15222 (Name and address of agent for service) ------------------------------- The Commission is also requested to send copies of any communications in connection with this matter to: Gary W. Wolf, Esq. Kevin J. Burke, Esq. Cahill Gordon & Reindel 80 Pine Street New York, NY 10005 APPLICATION-DECLARATION UNDER SECTIONS 9(a)(2), 10, 11 AND 13 OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 FOR APPROVAL OF ACQUISITION OF REGISTERED HOLDING COMPANY, RETENTION OF NON-UTILITY BUSINESSES, FORMATION OF SERVICE COMPANY AND RELATED MATTERS Table of Contents Page Item 1. Description of Proposed Transaction...................................1 A. Introduction......................................................1 1. General Request...............................................3 2. Overview of the Transaction...................................3 B. Description of the Parties to the Transaction.....................5 1. DRI and its Subsidiaries......................................5 a. Virginia Power............................................5 b. DEI.......................................................5 c. DCI.......................................................6 2. CNG and its Subsidiaries......................................6 a. The Distribution Companies: VNG, Hope, Peoples and East Ohio......................................................6 b. CNG Transmission Corporation..............................6 c. CNG Producing Company.....................................7 d. CNG Retail Services Corporation and CNG Products and Services, Inc.............................................7 e. CNG International Corporation.............................7 C. Description of the Transaction....................................7 1. Background....................................................7 2. The Merger Agreement.........................................10 D. Management and Operations of DRI and CNG Following the Merger....12 Item 2. Fees, Commissions and Expenses.......................................12 Item 3. Applicable Statutory Provisions......................................13 A. Approval of the Merger...........................................14 1. Section 10(b)(1).............................................15 a. Interlocking Relationships................................15 b. Concentration of Control..................................15 2. Section 10(b)(2).............................................18 a. Fairness of Consideration.................................18 b. Reasonableness of Fees....................................19 3. Section 10(b)(3).............................................19 4. Section 10(c)(1).............................................20 a. Section 8 Analysis........................................21 b. Section 11 Analysis.......................................21 Retention of Non-Utility Businesses..................................22 5. Section 10(c)(2).............................................25 6. Section 10(f)................................................32 B. Establishment of Service Company and Approval of Service Agreement........................................................33 -i- Item 4. Regulatory Approvals.................................................39 Item 5. Procedure............................................................43 Item 6. Exhibits and Financial Statements....................................44 B. Financial Statements.............................................46 Item 7. Information as to Environmental Effects..............................47 -ii- APPLICATION-DECLARATION UNDER SECTIONS 9(a)(2), 10, 11 AND 13 OF THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 FOR APPROVAL OF ACQUISITION OF REGISTERED HOLDING COMPANY, RETENTION OF NON-UTILITY BUSINESSES, FORMATION OF SERVICE COMPANY AND RELATED MATTERS Dominion Resources, Inc. and Consolidated Natural Gas Company hereby amend and restate in its entirety their Application-Declaration in File No. 70-09477. Item 1. Description of Proposed Transaction. A. Introduction. This Application-Declaration is submitted in connection with the proposed merger of Dominion Resources, Inc., a Virginia corporation and currently a holding company exempt from the registration requirements of the Public Utility Holding Company Act of 1935 (the "1935 Act") pursuant to Section 3(a)(1) thereof and Rule 2 thereunder ("DRI"), and Consolidated Natural Gas Company, a Delaware corporation and a registered holding company under the 1935 Act ("CNG"), pursuant to the Amended and Restated Agreement and Plan of Merger dated as of May 11, 1999 (the "Merger Agreement"). After entering into an initial Agreement and Plan of Merger dated as of February 19, 1999, as amended and restated as of March 31, 1999, the Boards of Directors of DRI and CNG approved a revised structure for their merger following CNG's receipt of an unsolicited offer from a third party. The companies negotiated a revised merger agreement and entered into the revised merger agreement as of May 11, 1999. In this Application, any references to the Merger Agreement refer to the revised merger agreement entered as of May 11, 1999 unless otherwise noted. The Merger Agreement contemplates a two-step merger transaction. In the first step, a wholly owned subsidiary of DRI ("SPV") will merge (the "First Merger") with and into DRI in a transaction in which DRI will be the surviving corporation. The First Merger does not require Commission approval under the 1935 Act. In the second step, CNG will either merge (the "Second Merger") (i) with and into another wholly owned subsidiary of DRI ("CNG Acquisition") in a transaction in which CNG Acquisition will be the surviving corporation (which is the preferred structure for the Second Merger) or (ii) with and into DRI in a transaction in which DRI will be the surviving corporation (the alternative structure for the Second Merger). The Second Merger is the transaction for which authority is sought hereunder. The First and the Second Merger are each conditioned on the other occurring. The First Merger and the Second Merger are herein together referred to as the "Merger" or the "Transaction". As a result of the Merger and the other transactions contemplated by the Merger Agreement (collectively, irrespective of the transaction structure actually implemented, the "Transaction"), CNG will cease to exist and either CNG Acquisition, as the successor in interest to CNG, will become a direct subsidiary of DRI or each of CNG's four public utility subsidiaries will become direct subsidiaries of DRI. As a result of the Merger, CNG's non-utility subsidiaries will each become direct or indirect subsidiaries of CNG Acquisition or DRI, as the case may be. Following completion of the Merger, irrespective of the transaction structure actually implemented, DRI will register as a holding company pursuant to Section 5 of the 1935 Act. DRI and CNG have filed a concurrent application-declaration (File No. 70-09517) under the 1935 Act with the Commission with respect to authorization for financing arrangements in connection with the Merger and activities of the combined company after giving effect to the Merger and the registration of DRI as a holding company. DRI and CNG believe that their combination provides a unique opportunity for DRI, CNG and their respective shareholders, customers and employees to participate in the formation of a competitive energy services provider in the rapidly evolving energy services business and to share in the benefits of industry restructuring which is already occurring in the majority of states in which DRI and CNG operate. The energy industry, including both the gas and electricity segments of the business, is evolving from an industry characterized by the presence of regulated natural monopolies confined in their operations to prescribed geographical service territories to a dynamic, competitive industry in which national and regional participants compete for the right to provide energy services to retail customers who increasingly have a choice in their energy supply needs. The result of these increasingly rapid changes wrought by both legislative and administrative initiatives as well as by demands of the marketplace, is a far reaching transformation of the US energy industry in which energy production, transportation/transmission and distribution are reorganizing along national and regional functional lines. The energy company of tomorrow will, if it seeks to be an effective competitor, of necessity need to be bigger and will need to be focused on the development and delivery of newly repackaged energy products and services designed to meet the changing demands of the marketplace. DRI and CNG believe that, in the restructured and competitive energy industry of tomorrow, the combined companies will be well-positioned to compete with other national and regional industry participants, a competitive position that neither DRI nor CNG, acting alone, would be able to achieve. The Merger will provide DRI and CNG with the ability to integrate their complementary lines of business: retail and wholesale natural gas and electricity sales, natural gas exploration and production, international operations and new electric generation. The Merger will also provide the combined companies with the lower risk profile inherent in geographic and product diversification. In short, the Merger will provide the combined companies with the operational and practical ability to compete for the right to provide energy services to their combined customer base of 4 million as well as, once the transition to retail competition has been fully established, 18 million additional electric customers and 12 million additional gas customers in states already served. Moreover, few job cuts are expected as a result of the Merger as there is not much redundancy between the two companies. A more fulsome description of the -2- Merger and its anticipated benefits is contained in the Joint Proxy and Registration Statement on Form S-4 of DRI and CNG which is annexed as Exhibit C-1 hereto. 1. General Request. Pursuant to Sections 9(a)(2) and 10 of the 1935 Act, DRI and CNG hereby request authorization and approval of the Commission for DRI to acquire, through the Second Merger (including, indirectly, through CNG Acquisition or otherwise), all of the issued and outstanding common stock of CNG and, indirectly , all of the common stock of each of the four public utility subsidiaries of CNG; namely, (i) Virginia Natural Gas, Inc., a Virginia corporation ("VNG"), (ii) Hope Gas, Inc., a West Virginia corporation ("Hope"), (iii) The Peoples Natural Gas Company, a Pennsylvania corporation ("Peoples") and (iv) The East Ohio Gas Company, an Ohio corporation ("East Ohio"). Following completion of the Merger, DRI will register as a holding company pursuant to Section 5 of the 1935 Act. DRI and CNG also hereby request Commission approval for (i) the retention by DRI of the existing businesses, investments and non-utility activities of DRI and CNG (ii) the designation of Dominion Resources Services, Inc., a Virginia corporation ("DRI Services"), as a subsidiary service company of DRI under Section 13(b) of the 1935 Act and (iii) the Service Agreement and the other service arrangements described below to be entered into in accordance with Section 13 of the Act and the rules promulgated thereunder. 2. Overview of the Transaction. Pursuant to the Merger Agreement, in the preferred structure for the Second Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition with CNG Acquisition as the surviving company. This will result in all of CNG's current rights, obligations, duties and liabilities being assumed by CNG Acquisition as a matter of law. CNG Acquisition, as a wholly owned subsidiary of DRI and as the successor to CNG, will become a registered holding company under the 1935 Act. Alternatively, DRI and CNG may decide to merge CNG directly into DRI. In that case, DRI will be the surviving entity. Under either alternative transaction structure, the companies are sometimes referred to after the Merger as the combined company. In the Merger (which comprises both the First Merger and the Second Merger), shareholders of both DRI and CNG will have the option to elect to receive either cash or DRI common stock in return for each of their DRI or CNG shares, as the case may be, subject to allocation and also subject to certain limitations (discussed below) in order to ensure the desired tax treatment for the Second Merger. Shareholders of both DRI and CNG may elect to exchange some of their shares for cash and some for stock. Following the Merger, current DRI shareholders will own approximately 65% of the combined company and current CNG shareholders will own approximately 35% of the combined company. As discussed in more detail below, the Merger will produce substantial benefits to the public interest and the interests of investors and consumers in the states in which the combined company will operate. The Merger will create a combined electric and natural gas system with the ability to compete effectively for the nearly four million retail customers in five states -3- presently served by the combined company as well as by other retail customers in the region. The majority of the states in which the combined company will operate as well as adjacent states have adopted energy restructuring legislation. In the emerging competitive environment, DRI and CNG believe that their combination into a regional energy provider will enable them to: o give the combined company the scale, scope and skills necessary to be successful in the competitive energy marketplace, allowing the combined company to offer a broad line of energy products as the gas and electric industries continue to converge; o create a platform for growth in a region that is rapidly deregulating and is the source of approximately 40 percent of the nation's demand for energy, allowing the combined company to market its portfolio of energy products to a broad customer base; o establish a company with combined gas storage, transportation and electric power production capability concentrated in the Northeast and Mid-Atlantic region; and o enable the combined company to realize cost savings from elimination of duplicate corporate and administrative programs, greater efficiencies in operations and business processes and streamlined purchasing practices. The First Merger and the Second Merger each required approval by a majority of all shares of DRI common stock represented at a duly called meeting of DRI's shareholders at which a quorum was present and the Second Merger required approval by holders of a majority of all outstanding shares of CNG common stock. The vote of such shareholders was solicited pursuant to a Joint Proxy and Registration Statement on Form S-4 of DRI and CNG which was authorized for mailing by the Commission under the Securities Act of 1933 and the Securities Exchange Act of 1934, with respect to DRI, and under the 1935 Act, with respect to CNG. On June 30, 1999 the shareholders of DRI and CNG approved the Transaction by the required votes at duly called meetings of the respective companies. In addition, the Transaction requires (i) clearance by the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC") under the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act"), (ii) approval of the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act ("FPA"), (iii) approval of the Nuclear Regulatory Commission ("NRC") under the Atomic Energy Act of 1954 ("AEA"), (iv) approval of the Federal Communications Commission ("FCC") under the Federal Communications Act of 1934 ("FCA"), and (v) approval and/or clearance of and/or review by the state regulatory commissions of the states of Virginia, North Carolina, West Virginia, Pennsylvania and Ohio. See Item 4 hereto for additional detail regarding these other regulatory approvals/clearances/ reviews. Apart from the approval of the Commission under the 1935 Act, the foregoing approvals are the only regulatory approvals required for the Transaction. In order to permit timely consummation of the Transaction and the realization of the substantial opportunities the Transaction is expected to produce, DRI and CNG request that the Commission's review of this Application-Declaration commence and proceed as expeditiously as possible. -4- B. Description of the Parties to the Transaction. 1. DRI and its Subsidiaries. DRI, a diversified utility holding company, has its principal office at 120 Tredegar Street, Richmond, Virginia 23219, telephone (804) 819-2000. DRI's common stock is listed on the New York Stock Exchange. DRI's principal subsidiary is Virginia Electric and Power Company ("Virginia Power"), a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy. The primary service area of Virginia Power is in Virginia and northeastern North Carolina. DRI's other major subsidiaries are Dominion Energy, Inc. ("DEI"), an independent power and natural gas subsidiary, and Dominion Capital, Inc. ("DCI"), a diversified financial services company. DRI was incorporated in 1983 as a Virginia corporation. DRI and its subsidiaries had 11,033 full-time employees as of December 31, 1998. DRI is currently exempt from registration as a holding company under the 1935 Act. DRI also owns and operates a 365 Mw natural gas fired generating facility in the United Kingdom. Attached hereto as Exhibit E-4 is a corporate organization chart of DRI and its subsidiaries. a. Virginia Power. Virginia Power is a public utility engaged in the generation, transmission, distribution and sale of electric energy within a 30,000 square-mile area in Virginia and northeastern North Carolina. Virginia Power operates nuclear, fossil fuel and hydroelectric generating units with an aggregate capability of 13,635Mw. It supplies energy at retail to approximately two million customers and sells electricity at wholesale to rural electric cooperatives, power marketers and certain municipalities. The term "Virginia Power" refers to the entirety of Virginia Electric and Power Company, including its Virginia and North Carolina operations and all of its subsidiaries. In Virginia it trades under the name "Virginia Power". The Virginia service area comprises about 65 percent of Virginia's total land area, but accounts for over 80 percent of its population. In North Carolina it trades under the name "North Carolina Power" and serves retail customers located in the northeastern region of the state, excluding certain municipalities. Virginia Power also engages in off-system wholesale purchases and sales of electricity and purchases and sales of natural gas, and is developing trading relationships beyond the geographic limits of its retail service territory. b. DEI. DEI is active in the competitive electric power generation business and in the development, exploration and operation of natural gas and oil reserves. DEI is involved in power projects in five states, Argentina, Bolivia, Belize and Peru. Domestic power projects include the Kincaid Power Station, a 1,108 Mw coal fired station in Central Illinois; a 600Mw gas-fired peaking facility under construction in Central Illinois; two geothermal projects and one solar project in California; three small hydroelectric projects in New York; a waste coal-fueled project in West Virginia and a waste wood- and coal-fueled project in Maine. International power projects include one hydroelectric and one gas-fired project in Argentina, two hydroelectric projects in Bolivia, a run-of-river hydroelectric project in Belize and two hydroelectric projects and six diesel -5- oil-fueled projects in Peru. DEI is also involved in natural gas and oil development, exploration and production in Canada, the Appalachian Basin, the Michigan Basin, the Illinois Basin, the Black Warrior Basin, the Uinta Basin, the San Juan Basin and owns proven oil and natural gas reserves of approximately 1.2 trillion cubic feet of natural gas equivalent. c. DCI. DCI is a diversified financial services company with several operating subsidiaries in the commercial lending, merchant banking and residential lending business. Its principal subsidiaries are First Source Financial, LLP, First Dominion Capital LLC, Saxon Mortgage, Inc. and Stanton Associates, Inc. DCI also owns a 46 percent interest in Cambrian Capital LLP. First Source Financial provides cash-flow and asset-based financing to middle-market companies seeking to expand, recapitalize or undertake buyouts. First Dominion Capital is an integrated merchant banking and asset management business located in New York. Saxon Mortgage and its affiliates originate and securitize home equity and mortgage loans to individuals. Cambrian Capital provides financing to small and mid-sized independent oil and natural gas producers undertaking acquisitions, refinancings and expansions. Stanton Associates, Inc. engages in real estate investment and management. 2. CNG and its Subsidiaries. CNG is a Delaware corporation organized on July 21, 1942, and a public utility holding company registered under the 1935 Act. CNG's common stock is listed on the New York Stock Exchange. CNG is engaged solely in the business of owning and holding all of the outstanding equity securities of nineteen directly owned subsidiary companies. CNG and its subsidiaries are engaged in all phases of the natural gas business: distribution, transmission, storage and exploration and production. The company's principal subsidiaries are described below. Attached hereto as Exhibit E-5 is a corporate organization chart of CNG and its subsidiaries. a. The Distribution Companies: VNG, Hope, Peoples and East Ohio. VNG, Hope, Peoples and East Ohio are the four public utility subsidiaries of CNG. Principal cities served at retail are: Cleveland, Akron, Youngstown, Canton, Warren, Lima, Ashtabula and Marietta in Ohio; Pittsburgh (a portion), Altoona and Johnstown in Pennsylvania; Norfolk, Newport News, Virginia Beach, Chesapeake, Hampton and Williamsburg in Virginia; and Clarksburg and Parkersburg in West Virginia. At December 31, 1998, CNG served at retail approximately two million residential, commercial and industrial gas sales and transportation customers. b. CNG Transmission Corporation. CNG Transmission Corporation operates a regional interstate pipeline system and provides gas transportation and storage services to each of CNG's public utility subsidiaries and to non-affiliated utilities, end-users and others in the Midwest, the Mid-Atlantic states and the -6- Northeast. Through its wholly owned subsidiary, CNG Iroquois, Inc., CNG Transmission Corporation holds a 16 percent general partnership interest in the Iroquois Gas Transmission System, L.P., that owns and operates an interstate natural gas pipeline extending from the Canada- United States border near Iroquois, Ontario, to Long Island, New York. The Iroquois pipeline transports Canadian gas to utility and power generation customers in metropolitan New York and New England. c. CNG Producing Company. CNG Producing Company is CNG's exploration and production subsidiary. Its activities are conducted primarily in the Gulf of Mexico, the southern and western United States, the Appalachian region, and in Canada. d. CNG Retail Services Corporation and CNG Products and Services, Inc. CNG Retail Services Corporation was created in 1997 to market natural gas, electricity and related products and services to residential, commercial and small industrial customers. CNG Products and Services, Inc. also provides energy-related services to customers of CNG's local distribution subsidiaries and others. e. CNG International Corporation. CNG International Corporation was formed by CNG in 1996 to invest in foreign energy activities. CNG International Corporation currently owns interests in natural gas pipeline companies in Australia, and gas and electric utility companies in Argentina. C. Description of the Transaction. 1. Background. During late 1997 and early 1998, CNG reassessed its strategic plan in response to business changes caused by slower than expected unbundling of the gas and electric distribution businesses at the retail level and the company's decision to exit the wholesale energy business. Management then discussed and explored alternatives for increasing shareholder value with the CNG Board of Directors at its meetings throughout 1998. Throughout 1997 and the first half of 1998, DRI engaged in a number of acquisition transactions and considered a variety of strategic alternatives to enable it to compete and grow in the deregulating energy industry. Among the strategic alternatives DRI considered was the acquisition of regional gas or other electric utility companies. DRI's growth strategy and specific possible acquisition candidates were reviewed by the DRI Board of Directors at several meetings during this period. The DRI Board of Directors encouraged management to pursue a number of different strategic alternatives, including investigating the desirability of a transaction with CNG. -7- A merger of DRI and CNG was announced on February 22, 1999. Following the announcement of a merger transaction between DRI and CNG in February 1999, CNG received an unsolicited offer from a third party. Thereafter, DRI and CNG negotiated and entered into the Merger Agreement. The revised merger transaction was announced on May 12, 1999. A more fulsome description of the Merger and its anticipated benefits is contained in the Joint Proxy and Registration statement on Form S-4 of DRI and CNG which is annexed as Exhibit C-1 hereto. The Merger of DRI and CNG will result in an integrated electric and natural gas company, serving nearly four million retail customers in five states. The companies believe the combined company will be well positioned to be successful in the increasingly competitive energy marketplace, in particular in the Northeast quadrant of the United States. The companies expect the Merger to enhance shareholder value more than either company could do on its own. The combined company should have three elements key to success in the competitive energy marketplace: size; geographic focus in strong regional markets; and efficient assets in the right locations. o Increase in Scale, Scope and Skills The Merger will result in the combined company having pro forma 1998 assets of $28.0 billion as of March 31, 1999 and revenues of $8.8 billion for the year ended December 31, 1998. DRI and CNG believe that the combined company's increased size and scope will improve its opportunities for expansion, allowing the company to offer a broad line of energy products. The combination will expand and diversify DRI's core customer base from approximately two million retail customers in two states to four million retail customers in five states. The Merger aligns successful leaders with seasoned managers proven in the competitive marketplace. As a result, the combined company should have the scale, scope and skills to be successful in the competitive energy marketplace. o Compatible Geographic Markets The Merger is consistent with DRI's previously announced strategy of growing in the Northeast quadrant of the U.S.--covering the Midwest, Mid-Atlantic and Northeast portions of the U.S. This region is referred to as MAIN-to-Maine. The first MAIN refers to the Mid-America Interconnected Network. It covers the states of Missouri, Illinois, Wisconsin, Michigan and Indiana. The reference to the State of Maine designates the northeast end of this region. Virginia represents the southern boundary of this region. This area is the source of approximately 40 percent of the nation's demand for energy. DRI and CNG believe that the Merger will give the combined company the platform it needs for growth in a region that is rapidly deregulating, allowing the company to market its portfolio of energy products to a broad customer base. In the states where the companies already have operations, there are an estimated 16 million power customers not currently serviced by Virginia Power. There are an estimated 8 million additional natural gas -8- customers not currently served by CNG. Millions of prospective customers live in adjoining states. The companies intend to seek out these prospective customers. DRI has most of its electric power assets in several of the region's states and has gas reserves located within, or transportable to, the region. The Merger gives it a strong platform for growth, allowing it to more rapidly and effectively compete in the emerging electric retail competition markets in states where CNG currently has facilities. Pennsylvania and Ohio, especially, have strong policies encouraging new competition. For CNG, the Merger gives it a broader platform in Virginia and North Carolina, the primary service area of DRI's principal subsidiary, Virginia Power. o Efficient and Well Located Assets DRI and CNG combined will have storage, transportation and electric power production capability concentrated in the Northeast and Mid-Atlantic region. The combined company will have an energy portfolio of more than 20,000 megawatts of domestic power generation, 2.9 trillion cubic feet equivalent in natural gas and oil reserves producing nearly 300 billion cubic feet equivalent annually. It will operate a major interstate gas pipeline system and the largest natural gas storage system in North America with almost 900 Bcfe of storage. The combined company will rank as the eleventh largest independent oil and gas producer in the United States measured by reserves. The combined company will have more than 5,000 miles of electric transmission lines. These power lines are well located to transmit power from low-cost producers in the Southeast, including Virginia Power, into higher-cost markets in the Northeast and Midwest, including CNG's service territory. The combined company's assets are well positioned to serve the MAIN to Maine region. The companies believe a strategic advantage of the Merger is a better positioned exploration and production portfolio. After the Merger, the combined company will have a well balanced mix of offshore and onshore properties. This should reduce the risk profile of the exploration and production operations. Other Reasons For The Merger When the Merger is complete the companies expect the combined company will have the following primary businesses: o retail natural gas and electricity sales; o electric and gas distribution; o wholesale natural gas and electricity sales; o interstate gas transportation; -9- o natural gas exploration and production activities; o electric generation; and o international gas-related and exempt operations. The companies intend to integrate these complementary businesses, subject to applicable state and federal regulatory requirements. The complementary nature of these businesses will result in lower costs and in improved service. These businesses will not only serve existing retail and wholesale customers, but will reach out to new customers as a full service energy provider as deregulation proceeds. Applicants expect to achieve enhanced revenues and net income through increased efficiency in providing energy to customers, whether gas or electric. In addition, the Merger will enable the combined company to realize cost savings from elimination of duplicate corporate and administrative programs, greater efficiencies in operations and business processes, and streamlined purchasing practices. 2. The Merger Agreement. Pursuant to the Merger Agreement, in the preferred structure for the Second Merger, DRI and CNG intend for CNG to be merged with and into CNG Acquisition, a wholly owned subsidiary of DRI, with CNG Acquisition as the surviving company. This will result in CNG Acquisition assuming all of the rights, duties, obligations and liabilities of CNG as a matter of law and pursuant to the Merger Agreement. CNG Acquisition will become a registered holding company following completion of the Merger as will DRI. Alternatively, DRI and CNG may decide to merge CNG directly into DRI. In that case, DRI will be the surviving entity and will register as a holding company pursuant to Section 5 of the 1935 Act. The Merger is structured as a two-step merger transaction. In the First Merger, SVP, a wholly owned subsidiary of DRI, will be merged with and into DRI with DRI being the surviving corporation. In the Second Merger, CNG will be merged with and into CNG Acquisition with CNG Acquisition being the surviving corporation. Alternatively, CNG will merge with and into DRI with DRI being the surviving corporation. DRI shareholders have approved both the First Merger and the Second Merger and CNG shareholders have approved the Second Merger. In the Merger, shareholders of both DRI and CNG will have the option to elect to receive either cash or DRI common stock in return for each of their DRI or CNG shares, as the case may be, subject to allocation and also subject to certain limitations (discussed below) in order to ensure the desired tax treatment for the Second Merger. Shareholders of both DRI and CNG may elect to exchange some of their shares for cash and some for stock. Following completion of the Merger, current DRI shareholders will own approximately 65% of the combined company and current CNG shareholders will own approximately 35% of the combined company. -10- Treatment of DRI Shareholders. In exchange for each share of DRI common stock held, DRI shareholders will be given the option to receive either $43.00 in cash or one share of DRI common stock. In either case this option is subject to the limitation that the aggregate amount of cash to be distributed to DRI shareholders in the First Merger shall be equal to $1,251,055,526 (plus any cash paid for fractional shares). DRI has the right to increase this amount to $1,668,400,000 to more closely follow the actual elections of DRI shareholders as long as the increase in the cash consideration does not affect the desired tax treatment of the Second Merger. When completed, the First Merger will reduce DRI shares outstanding so that the Second Merger is less dilutive to earnings for DRI shares outstanding after the Merger. Treatment of CNG Shareholders. In exchange for each share of CNG common stock held, CNG shareholders will be given the option to receive either $66.60 in cash or shares of DRI common stock at an exchange ratio described below, plus cash equal to 1.52 multiplied by the excess, if any, of $43.816 over the Average Price (as defined below). In either case, this option is subject to proration so that 38,159,060 shares of CNG common stock (including any fractional shares exchanged for cash) will be converted into the right to receive cash in the Second Merger. However, DRI may reallocate the cash and shares of DRI common stock to be received by CNG shareholders to more closely follow the actual elections of the CNG shareholders as long as the reallocation does not affect the desired tax treatment of the Second Merger. The exchange ratio will be $66.60 divided by the Average Price if that price is greater than or equal to $43.816, and 1.52 if the average closing market price is less than $43.816. The exchange ratio will vary depending on the average market price of DRI common stock over a 20 consecutive day trading period ending on the tenth business day before the closing (the "Average Price"). Allocations. As a result of the limitation described above and the tax allocation provisions described below, the amount of cash and stock received by shareholders may differ from their actual elections. If DRI common stock is over-subscribed by the shareholders of either company, a shareholder of that company who elected DRI common stock may receive part of his consideration in cash. If cash is over-subscribed by the shareholders of either company, a shareholder of that company who elected cash may receive part of his consideration in the form of DRI common stock. DRI is required to reduce the amount of cash delivered and increase the number of shares issued pursuant to the Second Merger to the extent necessary to maintain the desired tax treatment for the Second Merger. Fractional Shares. Shareholders who hold certificated shares will receive cash for any fractional share of DRI common stock received in the First Merger or the Second Merger, as the case may be, based upon the market value of DRI common stock on the date the First Merger and the Second Merger are completed. However, any fractional shares held in certain of DRI's or CNG's stock plans may be retained as fractional shares. Closing Conditions. The Merger is subject to customary closing conditions, including receipt of necessary regulatory approvals, including approval of the Commission under the 1935 Act. -11- Tax Consequences. Neither DRI nor CNG will recognize corporate level gain or loss as a result of the First Merger or the Second Merger. Additionally, neither shareholders of DRI nor shareholders of CNG will recognize gain or loss for shares of DRI common stock they receive in connection with the First Merger or the Second Merger, respectively. In general, however, CNG shareholders will recognize taxable gain for any cash they receive in the Second Merger and DRI shareholders will recognize taxable gain or loss, if any, for any cash they receive in the First Merger. Accounting Treatment. The First Merger will be treated as a reorganization with no changes in the recorded amount of DRI's assets and liabilities. The Second Merger will be accounted for under the purchase method of accounting. Miscellaneous. As part of their approval of the Merger, DRI shareholders approved an amendment to the DRI Articles of Incorporation to increase the authorized shares of common stock of DRI from 300,000,000 to 500,000,000. This amendment provides DRI with the shares it needs for issuance under the Merger Agreement and to maintain a reserve of shares for general corporate purposes. DRI common stock trades on the New York Stock Exchange under the symbol "D". DRI will obtain approval from the New York Stock Exchange for listing of additional shares of DRI common stock to be issued as a result of the Merger. If the Merger is completed, the CNG common stock will be delisted from the New York Stock Exchange. D. Management and Operations of DRI and CNG Following the Merger. Following completion of the Merger, DRI will be the direct parent company to CNG Acquisition as the successor in interest to CNG or, if the Alternative Merger is implemented, the direct parent company to VNG, Hope, Peoples and East Ohio, and will register as a holding company under Section 5 of the 1935 Act. CNG Acquisition will be a registered holding company under the 1935 Act. Thos. E. Capps will be the President and Chief Executive Officer of DRI after the Merger, and George A. Davidson, Jr. will serve as Chairman of the Board of Directors until his previously announced retirement on August 1, 2000, at which time Mr. Capps will reassume his position as Chairman. The Board of Directors of DRI will have 17 members, 10 of whom will be designated by DRI and 7 of whom will be designated by CNG. DRI will continue to use the name Dominion Resources and be headquartered in Richmond, Virginia. The combined company will continue to maintain a significant operating office in Pittsburgh, Pennsylvania. Item 2. Fees, Commissions and Expenses. The fees, commissions and expenses to be paid or incurred, directly or indirectly, in connection with the Transaction, including the solicitation of proxies, registration of securities of DRI under the Securities Act of 1933, and other related matters, are estimated as follows: -12- Fee, Commission or Expense Thousands Commission filing fee relating to $2,710 Joint Proxy and Registration Statement on Form S-4 Accountants' Fees 1,500 Legal Fees and Expenses 5,500 Shareholder Communication, NYSE Listing Fee and Proxy Solicitation 2,205 Total Investment Bankers' Fees and Expenses 42,600 Lehman Brothers Inc. Merrill Lynch & Co. Morgan Stanley & Co. Incorporated Consulting Fees related to human resource issues, public relations, regulatory support, and other matters relating to the Transaction 485 Expenses relating to integrating the merged company and miscellaneous * ======= Total $55,000 * Estimated costs of integrating the merged companies have not been fully quantified. Item 3. Applicable Statutory Provisions. The following sections of the 1935 Act and the Commission's rules thereunder are or may be directly or indirectly applicable to the proposed Transaction: Section of/Rule under Transactions to which such Section or Rule is or the 1935 Act may be applicable Sections 8, 9(a)(2), 10 Acquisition by DRI or CNG Acquisition of common stock of CNG, VNG, Hope, Peoples and East Ohio -13- Section 11(b) Retention by DRI of the existing business, investments and non-utility activities of DRI and CNG Section 13 and Rules 80-92 Designation of DRI Services as a subsidiary service company and approval of the Service Agreement. To the extent that other Sections of the 1935 Act or the Commission's Rules thereunder are deemed applicable to the Transaction, such Sections and Rules should be considered to be set forth in this Item 3. A. Approval of the Merger. In pertinent part, Section 9(a) provides that: Unless the acquisition has been approved by the Commission under section 10, it shall be unlawful... for any person... to acquire, directly or indirectly, any security of any public utility company, if such person is an affiliate, under clause (A) of paragraph (11) of subsection (a) of section 2, of such company and of any other public utility or holding company, or will by virtue of such acquisition become such an affiliate. For purposes of Section 9(a)(2), an "affiliate" of a specified company is any person that, directly or indirectly, owns, controls or holds with power to vote 5% or more of the voting securities of such specified company. The Merger requires approval of the Commission under Section 9(a)(2) of the 1935 Act because DRI (which already owns 100% of the common stock of Virginia Power, a "public utility company" within the meaning of Section 2(a)(5) of the 1935 Act) will, by virtue of the Merger, also acquire 100% of the outstanding common stock of each of VNG, Hope, Peoples and East Ohio, each of which is also a "public utility company" within the meaning of Section 2(a)(5) of the 1935 Act. The criteria the Commission must consider in evaluating any acquisition for which approval under Section 9(a)(2) is required are set forth in Section 10 of the 1935 Act. As set forth more fully below, the Transaction complies with all of the applicable provisions of Section 10. Thus, - The Transaction will not tend towards interlocking relations or the concentration of control of public utility companies of a kind or to an extent detrimental to the public interest or the interest of investors or consumers (Section 10(b)(1)) - The consideration to be paid in the Transaction is fair and reasonable (Section 10(b)(2)) - The Transaction will not result in an unduly complicated capital structure for the DRI-CNG combined system and will not be detrimental to the public interest or the interest of investors or consumers or to the proper functioning of the DRI-CNG system (Section 10(b)(3)) -14- - The Transaction is not unlawful under the provisions of Section 8 and is not detrimental to the carrying out of the provisions of Section 11 (Section 10(c)(1)) - The Transaction will serve the public interest by tending towards the economical and efficient development of an integrated public utility system (Section 10(c)(2)) - The Transaction will be consummated in accordance with and will comply with all applicable state laws (Section 10(f)) 1. Section 10(b)(1). a. Interlocking Relationships. Section 10(b)(1) was primarily aimed at preventing business combinations unrelated to operational and economic synergies and was never intended to prohibit mergers that otherwise were sensible and permissible under the 1935 Act because, by its nature, any merger results in new links between theretofore unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15, 1991), aff'd sub nom., City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992) ("interlocking relationships are necessary to integrate [the two merging entities]"). The Merger Agreement provides for the Board of Directors of DRI to comprise representatives from both the existing boards of DRI and CNG. This is necessary to integrate fully the two companies and will, therefore, be in the public interest and the interests of investors and consumers by facilitating the management of DRI-CNG as an integrated and economically efficient energy services company. In the context of ongoing industry restructuring, the forging of such relations is necessary to the creation and efficient management of an integrated energy services provider and, therefore, is not prohibited by Section 10(b)(1). b. Concentration of Control. Section 10(b)(1) is intended to avoid "an excess of concentration and bigness" while preserving the "opportunities for economies of scale, the elimination of duplicate facilities and activities, the sharing of production capacity and reserves and generally more efficient operations" afforded by the coordination of local utilities into an integrated system. American Electric Power Co., 46 SEC 1299, 1309 (1978). In applying Section 10(b)(1) to utility acquisitions, the Commission must determine whether the acquisition will create "the type of structures and combinations at which the Act was specifically directed". Vermont Yankee Nuclear Corp., 43 SEC 693, 700 (1968). As discussed below, the Merger will not create a "huge, complex, and irrational system," but rather will result in a new registered holding company with the capability of offering integrated energy services to its combined customer base of 4 million in a competitive region that is, in fact, much larger. In evaluating the size of the combined enterprise, it is critical to recognize that several of the states in which the regulated subsidiaries of DRI and CNG operate and adjoining states are, through legislative or administrative action, allowing retail competition in the electric -15- and gas industries. Transition to retail electric competition has already begun in Illinois, New Jersey and Pennsylvania and is slated to begin in Delaware later in 1999, in Maryland in 2000, and in Virginia in 2002. Ohio has retail competition legislation pending. Further, individual utilities are currently conducting retail choice programs in New York and Michigan. With respect to the gas industry, Georgia and New Jersey have passed legislation allowing gas utilities to offer retail supply choice to all their customers. Additionally, retail choice gas programs are ongoing in all or parts of New Jersey, Ohio, Pennsylvania, Maryland and Virginia. Efficiencies and Economies: The Commission has rejected a mechanical size analysis under Section 10(b)(1) in favor of assessing the size of the resulting system with reference to the efficiencies and economies that can be achieved through the integration and coordination of utility operations. American Electric Power Co., 46 SEC 1299, 1309. More recent pronouncements of the Commission confirm that size is not determinative. Thus, in Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986), the Commission stated flatly that a "determination of whether to prohibit enlargement of a system by acquisition is to be made on the basis of all the circumstances, not on the basis of size alone". See also Entergy Corporation, Holding Co. Act Release No. 25952 (December 17, 1993). In addition, the Division of Investment Management recommended in its 1995 Report on The Regulation of Public-Utility Holding Companies (the "1995 Report") that the Commission approach its analysis of merger and acquisition transactions in a flexible manner with emphasis on whether the underlying transaction creates an entity subject to effective regulation and is beneficial for shareholders and consumers as opposed to focusing on rigid, mechanical tests. 1995 Report at 73-4. By virtue of the Transaction and, in particular, its convergence nature, DRI and CNG will be in a position to realize substantial opportunities to become an effective competitor in a rapidly deregulating and increasingly competitive energy market that neither, acting alone, would be in a position to achieve. The combination of DRI and CNG offers the same type of synergies and efficiencies that were sought and are now being realized by the applicants (both exempt and registered) in TUC Holding Company, Holding Co. Act Release No. 35-26749 (Aug. 1, 1997); Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24, 1997); WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); and New Century Energies, Inc., Holding Co. Act Release No. No. 35-26748 (Aug. 1, 1997). Moreover, the retail operations of DRI-CNG will continue, as prior to the Merger, to be fully subject to the jurisdiction of state regulators in the states in which such operations are conducted. Thus, the Transaction, by virtue of the fact that DRI will register as a holding company upon completion of the Transaction, will in fact increase the regulation to which DRI and CNG are presently subject rather than provide a means for evading regulation. Size: The Merger will create the nation's fourth largest electric and natural gas utility, serving nearly 4 million retail customers in 5 states. The size of the combined company in relation to the sizes of all other companies in the U.S. is, however, no more than a reflection of the fragmentation which characterizes the U.S. utility industry today. This fragmentation is one of the principal reasons for the current trend towards consolidation as companies seek to become more competitive in the emerging deregulated marketplace for energy. In the energy marketplace of tomorrow, the region in which a company operates will comprise not only its -16- historical service territory but also, at a minimum, the service territories of its neighbors and its neighbors' neighbors: if a company can compete for the retail customers of its neighbor, so can the company which is its neighbors' neighbor. Thus, for purposes of Section 10(b)(1), DRI and CNG have delineated the region in which they will operate to include: (i) the States in which the regulated utility subsidiaries of DRI and CNG presently operate (which includes Virginia, North Carolina, Ohio, Pennsylvania and West Virginia), plus (ii) all States in which any utility operates if such utility is part of an integrated electric utility system which has an actual electric interconnection with Virginia Power (which includes Maryland, Delaware, New Jersey, the District of Columbia, Indiana, Kentucky, Michigan, South Carolina and Tennessee in addition to the States in which the DRI/CNG Companies presently operate) (the "Neighboring States"), plus (iii) all States which are one wheel away from any of the Neighboring States (which adds Alabama, Georgia, Mississippi, Illinois and New York). DRI and CNG submit that their analytical delineation of the region in which the combined company will operate is sensible in an era of restructuring and competition in which DRI-CNG's neighbors are also its competitors (i.e., both DRI-CNG and its immediate neighbors will compete for each other's customers) and in which DRI-CNG's neighbors' neighbors are also competitors (i.e., both DRI-CNG and its neighbors' neighbors will compete for DRI-CNG's neighbors' customers). Within its competitive region the combined company will have (without giving effect to the contemplated divestiture of VNG discussed below in Item 4 of this Application-Declaration) approximately (i) 4 million retail electric and gas customers, or 3.47% of total retail customers in the region, (ii) $10,992,535,263 net utility plant, or 3.89% of total net utility plant in the region, (iii) $6,475,463,395 of gross utility revenues, or 4.42% of gross utility revenues in the region and (iv) $3,356,707,970 of net utility revenues, or 3.74% of total net utility revenues in the region. (Additional statistical analysis is contained in Exhibit E-3 annexed hereto.) The relative level of the DRI-CNG presence in their competitive region is not so large as to create an "excess of concentration and bigness" and, in fact, the statistical analysis reveals an intensely competitive market. There are 122 combination electric and gas utilities in the competitive region served by DRI-CNG. Competitive Effects: In Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), the Commission stated that "antitrust ramifications of an acquisition must be considered in light of the fact that public utilities are regulated monopolies and that federal and state administrative agencies regulate the rates charged consumers". DRI and CNG have filed Notification and Report Forms with the DOJ and FTC pursuant to the HSR Act describing the effects of the Merger on competition in the relevant market and it is a condition to the consummation of the Merger that the applicable waiting periods under the HSR Act shall have expired or been terminated. Moreover, any anti-competitive effects of the Merger in Virginia have been addressed in the order of the Virginia Commission requiring divestiture of VNG. In addition, the competitive impact of the Merger will be fully considered by the FERC pursuant to Section 203 of the Federal Power Act in its review of the Merger. As explained more fully in the FERC application, a copy of which is attached hereto as Exhibit C-2, -17- the Merger will not have an adverse effect on competition. With the exception of a small area in Virginia, the retail operations of DRI and CNG do not overlap. Moreover, as discussed above, the Virginia legislature has adopted legislation which will permit other energy providers to compete directly with Virginia Power for customers in Virginia commencing in 2002. Finally, in the past, the Commission has largely relied on, or "watchfully deferred" to the determination of these other regulators.1 In at least three recent cases, interveners have challenged the Commission's policy of watchful deference but without success.2 In both WPL Holdings, Inc. and New Century Energies, Inc., the Commission rejected interveners' claims that the resulting holding companies would be anti-competitive and declined to reconsider issues of size and market dominance that had been fully considered by and litigated before the FERC in addition to having been reviewed and cleared by federal antitrust regulators. For these reasons, the Merger will not "tend toward interlocking relations or the concentration of control" of public utility companies, of a kind or to the extent detrimental to the public interest or the interests of investors or consumers within the meaning of Section 10(b)(1) and the Commission may justifiably rely on the FERC and the DOJ/FTC to review any other allegations that the Merger will result in anti-competitive effects. 2. Section 10(b)(2). Section 10(b)(2) requires the Commission to determine whether the consideration to be paid in connection with the combination of DRI and CNG, including all fees, commissions and other remuneration, is reasonable and whether it bears a fair relation to, investment in and earning capacity of the underlying utility assets. a. Fairness of Consideration. For the reasons set forth below, the requirements of Section 10(b)(2) are satisfied in this Transaction. First, the consideration for the Second Merger is the product of extensive and vigorous arm's-length negotiations between DRI and CNG. These negotiations were preceded by extensive due diligence, analysis and evaluation of the assets, liabilities and business prospects of each of DRI and CNG and reflect a renegotiation of the terms and consideration by DRI and CNG following receipt by CNG of an unsolicited proposal for an alternative business combination with - -------- 1 See City of Holyoke Gas & Electric Department v. SEC, 972 F.2d 358, 363 (D.C. Cir. 1992), citing Wisconsin's Environmental Decade v. SEC, 882 F.2d 523 (D.C. Cir. 1989) ("we are not prepared to say that the Commission abdicates its duty in an exemption determination by deciding to rely, watchfully, on the course of state regulation"). 2 WPL Holdings, Inc., et al., Holding Co. Act Release No. 35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999), and New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1997). -18- a third party. See "Background of the Merger" of the Joint Proxy and Registration Statement on Form S-4 of DRI and CNG which is attached hereto as Exhibit C-1. As recognized by the Commission in Ohio Power Co., 44 SEC 340, 346 (1970), prices arrived at through arm's-length negotiations are particularly persuasive evidence that Section 10(b)(2) is satisfied. In addition, nationally recognized investment bankers for each of DRI and CNG have reviewed extensive information concerning the companies and have analyzed the merger consideration employing a variety of valuation methodologies, and have opined that the merger consideration is fair from a financial point of view, to DRI and to the holders of CNG common stock. The investment bankers opinions are attached as Exhibits to the Joint Proxy and Registration Statement on Form S-4 of DRI and CNG which is attached hereto as Exhibit C-1 and are described in such Joint Proxy and Registration Statement. The assistance of independent consultants in setting consideration has been recognized by the Commission as evidence that the requirements of Section 10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Holding Co. Act Release No. 245709 (February 12, 1988). b. Reasonableness of Fees. DRI and CNG believe that the overall fees, commissions and expenses incurred and to be incurred in connection with the Merger are reasonable and fair in light of the size and complexity of the merger relative to other transactions and the anticipated benefits of the Merger to the public, investors and consumers; that they are consistent with recent precedent; and that they meet the standards of Section 10(b)(2). As set forth in Item 2 of this Application-Declaration, DRI and CNG together expect to incur a combined total of approximately $55.5 million in fees, commissions and expenses in connection with the Merger. DRI and CNG believe that the estimated fees and expenses in this matter bear a fair relation to the value of their combined company and the strategic benefits to be achieved by the Merger, and further that the fees and expenses are fair and reasonable in light of the complexity of the Merger. See Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992), modified on other grounds, Holding Co. Act Release No. 25550 (June 4, 1992) (noting that fees and expenses must bear a fair relation to the value of the company to be acquired and the benefits to be achieved in connection with the acquisition). Based on a price for CNG stock of $66.60, the Merger would be valued at approximately $6.381 billion. The total estimated fees and expenses of $55.5 million represent approximately .8698% of the value of the consideration to be paid to shareholders of CNG, and are consistent with percentages previously approved by the Commission. See, e.g., Entergy Corp., Holding Co. Act Release No. 25952 (Dec. 17, 1993) (fees and expenses represented approximately 1.7% of the value of the consideration paid to the shareholders of Gulf States Utilities); Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (approximately 2% of the value of the assets to be acquired). -19- 3. Section 10(b)(3). Section 10(b)(3) requires the Commission to determine whether the Transaction will unduly complicate the capital structure of the combined DRI-CNG system or will be detrimental to the public interest, the interest of investors or consumers or the proper functioning of the combined DRI-CNG system. The economic benefits achievable through the combination of natural gas operations with electric power operations, such as those identified above in section I(C)(1), serve the public interest through enabling suppliers to satisfy the needs of consumers more efficiently. In Consolidated Natural Gas Co., Holding Co. Act Release No. 35-26512 (April 30, 1996), the Commission acknowledged the nature of the market energy suppliers must prepare to satisfy "fundamental changes in the energy industry are leading to an increasingly competitive and integrated market, in which marketers deal in interchangeable units of energy expressed in British thermal unit values, rather than natural gas or electricity. To retain and attract wholesale and industrial customers, utilities need to provide competitively priced power and related customer services . . . . It now appears that the restructuring of the electricity industry now underway will dramatically affect all United States energy markets as a result of growing interdependence of natural gas transmission and electric generation; and the interchangeability of different forms of energy, particularly gas and electricity". The Merger is designed to position Applicants to be responsive to these emerging market conditions and is therefore consistent with the public interest. The registration of both DRI and CNG Acquisition and, thereafter, their continued existence as registered holding companies in the same system is somewhat unusual but is not inappropriate for the facts of this situation and the benefits of implementing the structure contemplated by the Merger rather than the alternative structure for Merger are substantial and outweigh any undue interest in simplicity for its own sake. The Commission has equated the public interest with the interest in a financially sound U.S. utility industry. Certainly, realization of the tangible economic benefits of the Merger structure contributes to the financial stability of the DRI-CNG system and outweighs any historical preference for the alternative merger structure. Additionally, holders of DRI and CNG securities will not be disadvantaged by the preferred structure for the Merger. Holders of CNG debentures will be able to continue to look to exactly the same mix of companies for repayment of outstanding CNG securities as prior to the Merger. The interest of DRI and its security holders will likewise not be impaired as securities issued prior to the Merger would not have been issued on the basis that CNG was part of the DRI system and the interests of investors purchasing securities issued thereafter will be protected by the disclosure requirements under the other federal securities laws. Finally, consumer interests are likewise not impaired as no change is being made to the capital structures of any of the operating subsidiaries in the combined system and each such operating subsidiary will continue to be regulated by relevant regulators as prior to the Merger. The 1935 Act is not energy regulation per se. Rather, -20- the statute is intended "simply to provide a mechanism to create conditions under which effective federal and state regulation will be possible".3 4. Section 10(c)(1). Section 10(c)(1) prohibits the Commission from approving an acquisition for which Commission approval is required under Section 9(a) if such acquisition is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11. a. Section 8 Analysis. Section 8 prohibits a registered holding company from acquiring interests in an electric utility company and a gas utility company serving substantially the same territory in contravention of state law. The only state in which DRI and CNG have overlapping electric and gas service territories is Virginia. DRI's acquisition of CNG, which will result in DRI acquiring indirect control over VNG and bring both VNG and Virginia Power under the common control of DRI, is not prohibited by Virginia law.4 However, as described in greater detail in Item 4 below of this Application-Declaration, DRI and CNG have agreed with the VSCC that, within one year following completion of the Merger, they will divest their interest in VNG. Following such divestiture, the combined company will not have overlapping electric and gas service territories in any state. Thus, the Transaction does not present the Commission with any issues under Section 8 of the 1935 Act. - -------- 3 S. Rep. No. 621, 74th Cong., 1st Sess 11 (1935). 4 In some cases, Virginia law prohibits a public service corporation from conducting more than one kind of public service business in the state. Specifically, ss. 13.1-620(D) of the Code of Virginia provides that "[n]o corporation shall be organized under this chapter for the purpose of conducting in this Commonwealth more than one kind of public service business except that the telephone and telegraph businesses or the water and sewer businesses may be combined, but this provision shall not limit the powers of domestic corporations existing on January 1, 1996". This provision would not be implicated by the Transaction, however, for several reasons. First, neither DRI nor CNG is a public service corporation, so their "combination", directly or indirectly would not implicate the statute. Second, the public service businesses of the two public service companies in question, Virginia Power and VNG, are not being combined, in that DRI and CNG are not proposing that these companies be merged. Third, if the statute could be construed to cover an indirect combination of public service businesses through common control over Virginia Power and VNG, both Virginia Power and VNG were domestic corporations existing on January 1, 1986 and are therefore grand-fathered under the statute. Thus, the Transaction as proposed neither violates Section 8 of the 1935 Act nor is prohibited by Section 10(c)(2) of the 1935 Act. -21- b. Section 11 Analysis. In pertinent part, Section 11(b)(1) of the 1935 Act provides: To require . . . that each registered holding company, and each subsidiary company thereof, shall take such action as the Commission shall find necessary to limit the operations of the holding-company system of which such company is a part to a single integrated public-utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public-utility system. . . . The Commission may permit as reasonably incidental, or economically necessary or appropriate to the operations of one or more integrated public-utility systems the retention of an interest in any business (other than the business of a public-utility company as such) which the Commission shall find necessary or appropriate in the public interest or for the protection of investors or consumers and not detrimental to the proper functioning of such system or systems. (i) Retention of Gas Utility System The Transaction raises a potential issue under Section 11 and Section 10(c)(1): Is the combination of DRI's electric business and CNG's gas business permissible under a registered holding company? The 1935 Act regulated gas utility operations of CNG will comprise a relatively small part of the combined companies overall operations (on a pro forma basis for 1998, retail gas operations comprised 18.8% of the combined company's net utility operating revenues), but are nonetheless critical to positioning the combined companies as a competitor in deregulating retail markets. In several recent decisions, the Commission has stated explicitly that the 1935 Act does not prohibit combination electric and gas registered holding companies. WPL Holdings, Inc., et al., Holding Co. Act Release No. 35-26856 (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999), and New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1997). Historically, the Commission considered the question of whether a registered electric system could retain a separate gas system under a strict standard that required a showing of loss of substantial economies before retention would be permitted. New England Electric System, 41 SEC 888 (1964). In its affirmation of that decision, the United States Supreme Court declared that a loss of substantial economies could be demonstrated by the inability of the separate gas system to survive on a stand-alone basis. SEC v. New England Electric System, 384 U.S. 176, 181 (1966). This rigid interpretation of the requirements of Section 11(b)(1) has been explicitly rejected by the Commission in its most recent decisions under Sections 9(a) and 10 of the 1935 Act both with respect to exempt holding companies, TUC Holding Company, Holding Co. Act Release No. 35-26749 (Aug. 1, 1997) and Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24, 1997), and newly formed registered holding companies. -22- WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998) and New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1997). In these recent decisions, the Commission acknowledged that as a result of the transformation of utilities' status as franchised monopolies with captive ratepayers to competitors and also as a result of the convergence of the electric and gas industries that was then underway (and which continues today and of which the Transaction is a prime example), the historical standards of review had become outdated and that separated electric and gas companies might be weaker competitors than they would be together in the same market. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); TUC Holding Company, Holding Co. Act Release No. 35-26749 (Aug. 1, 1997); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1977); and Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24, 1997). Importantly, the Courts have upheld the Commission's reinterpretation of the requirements of Section 10(c)(1) and Section 11 as they apply to combination electric and gas registered holding companies. Madison Gas and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999). Thus, newer transactions, such as the Transaction, should be evaluated on the basis of new Commission precedent and policy in light of changing industry standards and should not be evaluated against criteria that have been repudiated by recent Commission decisions. The instant Transaction is in accord with the foregoing recent Commission decisions approving combination electric and gas companies under a registered holding company and also is consistent with, and furthers the policy, of fostering the creation of competitive energy services companies as the energy industry continues its evolution towards a more competitive market. One issue remains, however. In two of the recent four cases approving combination companies, the resulting holding company obtained exemption from the registration requirements of the 1935 Act. There are numerous combination gas and electric exempt holding companies operating in the United States today. In the other two cases, in which registered holding companies were formed, the merger partners were already combination electric and gas companies and the Commission was addressing the question of whether additional systems could be retained rather than acquired. In the instant situation, DRI, an electric company, is acquiring CNG, a gas company, and, thus, the instant transaction is the first time the Commission is presented with the question of whether a newly formed registered holding company can acquire an additional system as part of the transaction in which it became a registered holding company. Applicants believe the Commission should approve the Transaction as a matter of policy and as a matter of fairness and can approve the Transaction as a matter of law. First, the Commission has already acknowledged that the electric and gas industries are converging and that combination companies may be more effective competitors in a given market. In fact, there are 122 such combination electric and gas companies operating in the region in which the combined company will operate. The Commission has recognized and accepted the changing nature of the energy industry and, in particular, the fact that the combination of electric and gas operations in a single company offers that company a means to compete more effectively in the emerging energy services business in which a few cents can make the difference between economic success and economic failure. WPL Holdings, Inc., et al., Holding Co. Act Release No. 35-26856 -23- (April 14, 1998), aff'd sub nom., Madison Gas and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999). In the instant situation, the lost economies that would follow from denial of approval for the Merger are substantial, both quantitatively and qualitatively. (The companies have commissioned a lost economies study from The Reed Consulting Group, a copy of which is annexed hereto as Exhibit J-1, which measures the quantitative loss associated with the forced divestiture of CNG's retail gas operations from the other operations of the combined company.) Second, the Commission has allowed exempt holding companies to acquire gas utilities and thereby to become combination companies, See TUC Holding Company, Holding Co. Act Release No. 35-2674 (Aug. 1, 1997) and Houston Industries Incorporated, Holding Co. Act Release No. 35-26744 (July 24, 1997), and has allowed newly formed registered holding companies to retain their combination assets. See WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998) and New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (Aug. 1, 1997). In addition, as stated by the Commission in NIPSCO Industries, Inc., Holding Co. Act Release No. 26975 (Feb. 10, 1999), the Commission stated that Section 11(b)(1) applies to exempt "holding companies" by analogy. If there is no basis for treating exempt holding companies and registered holding companies differently under Section 11(b)(1), then there is no rational policy basis for treating one group of registered holding companies differently from another group of registered holding companies. Finally, Section 10(c)(1) does not require that the Commission rigidly enforce Section 11(b)(1) without consideration of the lost economies that would result from divestiture of additional systems in considering acquisitions under Section 9(a). As the Court of Appeals stated In Madison Gas and Electric Company v. SEC (D.C. Cir. 1999): By its terms ..., section 10(c)(1) does not require that new acquisitions comply to the letter with section 11. In contrast to its strict incorporation of section 8 ..., with respect to section 11 section 10(c)(1) prohibits approval of an acquisition only if it "is detrimental to the carrying out of [its] provisions. The Commission has consistently read this provision to import into section 10's regime not only the integration requirement of 11(b)(1)'s main clause but also the exception to the requirement in the ABC clauses. In the instant situation, substantial economies would be lost by requiring the combined company to divest the retail gas operations of CNG. In addition, a substantial portion of the rationale for concluding the Merger is the convergence of the electric and gas markets as the utility industry evolves towards competition. DRI and CNG are seeking to create a convergence company that will be an effective competitor. Limiting either DRI or CNG to a single energy commodity would prevent each from realizing their combined competitive potential and is not required as a matter of law. The Commission has adopted a new model of regulation under the 1935 Act which permits convergence of energy services under a registered holding company and which promotes -24- competition among energy providers. The Transaction is consistent with that policy. For all of the foregoing reasons, the Commission should hold that the combination of electric and gas operations under a newly formed registered holding company is lawful under the provisions of Section 8 and is not detrimental to the carrying out of the provisions of Section 11. (ii) Retention of Non-Utility Businesses. DRI is presently a holding company which is exempt from the registration requirements of the 1935 Act. As an exempt holding company, DRI has been free to invest in a variety of non-utility businesses and activities without the need to obtain prior Commission approval under Section 9(a). DRI's diversification program has been very successful and has resulted in tangible benefits to DRI's shareholders. Most importantly, from the 1935 Act perspective, DRI's diversification program has been conducted in compliance with applicable state laws and regulations and in a manner designed to minimize any risk that any losses incurred as a result of diversification could be borne by Virginia Power. Virginia Power has made investments in discrete non-utility businesses with the express approval of the VSCC and subject to conditions and limitations imposed by the VSCC. Virginia Power supports the investment and financing needs of its subsidiaries as part of Virginia Power's stand-alone financing arrangements. All of DRI's other diversified businesses are held by separate subsidiaries of DRI and are managed as independent stand-alone businesses receiving only minimal indirect credit support from DRI; i.e., DRI provides financial support to DEI and DCI which in turn support the operations of the DEI Companies and the DCI Companies, respectively. Thus, DRI's diversified activities are conducted in the manner approved by the Commission in National Utilities & Industries, 45 SEC 167 (1973), and Pacific Lighting Corporation, 45 SEC 152 (1973). Set forth below is a brief description of the non-utility businesses and activities engaged in by DRI subsidiaries. Reference is also made to Exhibit E-6 hereto, which contains additional information concerning individual non-utility subsidiaries of DRI. DEI. DEI is a holding company and is a direct subsidiary of DRI. DEI has interests in various generation and small power production facilities in various states of the United States all of which are QFs or EWGs under the 1935 Act and, thus, are exempt under the 1935 Act. DEI also owns, through EWGs, interests in gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize, Bolivia and Peru. DEI, through its subsidiaries, is also involved in the ownership, exploration and development of natural gas and oil reserves in Western Canada, the Appalachian Basin, the Uinta Basin the Black Warrior Basin, the onshore Gulf Coast region, the Illinois Basin, the Michigan Basin and the San Juan Basin. As of March 31, 1999, DEI had proven reserves of approximately 1.2 trillion cubic feet of natural gas equivalent. DEI, through its subsidiaries, is also involved in the wholesale aggregation, marketing and trading of natural gas and storage capacity positions, on behalf of DEI and third parties. DEI maintains its own credit facilities, with some limited support from DRI, through which it finances the activities of its subsidiaries. Certain subsidiaries of DEI also maintain their own credit facilities with varying degrees of support from DEI. All of these financing arrangements would have been permitted under Rule 52 had DRI been a registered holding company at the time the same were entered into, provided the underlying investment had been made in compliance with Section 9(a)(1) or Rule 58, as the case may be. -25- DCI. DCI is a holding company and is a direct subsidiary of DRI. DCI, through its subsidiaries, is a diversified financial services company with its core operations being commercial finance, corporate finance and consumer finance. Commercial finance comprises senior secured loans, unsecured or subordinated debt or mezzanine investments, bridge loans and equity investments. Senior secured loans have a first priority lien on all assets which includes, but is not limited, to accounts receivable, inventory, real and personal property, equipment, trademarks, and copyrights. Corporate finance activities include underwriting and syndication of debt and equity instruments and debt and equity securities, managing assets for third parties and broker-dealer operations. Consumer finance comprises origination, purchase, securitization, and servicing of mortgages. Other operations include investments in real estate, a lease in a hydroelectric facility, venture capital and a portfolio of preferred and equity securities. DCI maintains its own credit facilities, with some support from DRI, through which it finances the activities of its subsidiaries. Certain subsidiaries of DCI also maintain their own credit facilities with varying degrees of support from DCI. All of these financing arrangements would have been permitted under Rule 52 had DRI been a registered holding company at the time the same were entered into, provided the underlying investment had been made in compliance with Section 9(a)(1) or Rule 58, as the case may be. Virginia Power. Virginia Power through its Wholesale Power Group, is engaged in the wholesale marketing and trading of electricity and natural gas, on behalf of Virginia Power and third parties. Wholesale electricity and gas marketing and trading activities, whether done by Virginia Power or one of the DEI Companies, are regulated by the FERC in particular as to transactions with affiliates. Virginia Power and its subsidiaries and DEI Companies involved in these activities are required to comply with FERC approved codes of conduct. Set forth below is a description of the other businesses of DRI by general categories together with the basis including precedents on which the Commission should find such businesses retainable under the Act. Ownership of Qualifying Facilities and Exempt Wholesale Generators. DEI has interests in various generation and small power production facilities in various states in the United States all of which are QFs or EWGs under the 1935 Act and, thus, are exempt under the 1935 Act. DEI also owns through EWGs interests in gas-fired, diesel-fueled and hydroelectric facilities in Argentina, Belize, Bolivia and Peru. These facilities are also exempt under the 1935 Act as EWGs. As described in further detail on Exhibit E-6 hereto, QFs in which DEI has an interest include Caithness BLM Group LP, Caithness Navy II Group L.P., Luz Solar Partners Ltd, VII, LP, Rumford Cogeneration Company, Ltd., Morgantown Energy Associates, Middle Falls Limited Partnership, NYSD Limited Partnership, and Sissonville Limited Partnership. EWGs in which DEI owns an interest include Dominion Elwood Services Company, Inc., Dominion Energy Services Company, Inc., Belize Electric Company Limited, Kincaid Generation, LLC, Elwood Energy, LLC, Empresa Electrica Corani, S.A., Central Termica Alto Valle, S.A., Dominion Management Argentina, S.A., Hidroelectrica Cerros Colorados and EGENOR S.A. -26- DRI owns, through various entities, Corby Power Limited, which in turn owns all interest in a natural gas-fired generating facility in the United Kingdom. Corby Power Limited has qualified as an EWG and, thus, is exempt under the 1935 Act. The ownership of a QF is specifically authorized under Section 713 of the Energy Policy Act of 1992 and Rule 58(b)(1) (viii) under the 1935 Act. The ownership of EWGs is permitted under Section 32 of the Act. The Commission has routinely permitted newly formed registered holding companies to retain their pre-existing interests in QFs and EWGs. Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). Oil and Gas Exploration and Development. DEI, through its subsidiaries is a participant in oil and natural gas development programs in Canada, Louisiana, Michigan, New Mexico, Pennsylvania, Texas, Utah, New Mexico, Indiana, Kentucky, Virginia and West Virginia. DEI's oil and gas subsidiaries, which are described in further detail on Exhibit E-3 hereto, include Wolverine Reserves, LLC, Dominion Reserves-Indiana Inc., Dominion Reserves, Inc., Dominion Reserves-Utah, Inc., Wolverine Environmental Production, Inc., Dominion Energy Canada Ltd., Dominion Midwest Energy, Inc., Wolverine Gas and Oil Company, Inc., Dominion Appalachian Development Properties, LLC, Dominion Appalachian Development, Inc., Cypress Energy, Inc., Dominion Reserves Gulf Coast, Inc., Remington Energy, Ltd., Remington Energy Partnership, and DEI Canada Holding Co., Inc. Through its investment in Cambrian Capital Corporation, DCI holds net profits interests in certain oil and gas properties. The exploration of natural resources or the holding of rights to such resources are activities of the kind routinely permitted to be retained in prior Commission orders approving the mergers and creations of new registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997); New England Energy Inc., Holding Co. Act Release No. 35-23988 (January 13, 1986). Gas Activities. DEI owns interests in companies engaged in the transportation and processing of natural gas and in the manufacture and sale of equipment used in connection therewith. These subsidiaries, which are described in greater detail on Exhibit E-3 hereto, include Niton Hub Services Company, Dominion Gas Processing MI, Inc., Great Lakes Compression, Inc., Dominion Energy Canada Ltd., Daval Industries Inc., GTG Pipeline Corporation, Dominion Reserves-Indiana, Inc., Frederick HOF Limited Partnership, Wilderness Energy, L.C. and Wilderness Energy Services Limited Partnership. These companies engage in gas-related activities including operation of gas storage facilities, gas processing, ownership and operation of gas pipelines, gathering and gas compression. The ownership of such businesses is specifically authorized under Rule 58(b)(1)(ix), and such businesses have routinely been permitted to be retained in prior Commission orders approving mergers and creations of new registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998) (gas pipeline, gas gathering, dehydration -27- & compression facilities); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997) (gas pipelines, storage facilities). Energy Marketing and Brokering. DEI owns a number of subsidiaries engaged in the marketing and brokering of gas and electric energy. These companies, which are described in further detail on Exhibit E-6 hereto, include Elwood Marketing, LLC, Phoenix Dominion Energy LLC and Carthage Energy Services, Inc. Virginia Power is engaged in the marketing and brokering of gas and electric energy. In addition, Virginia Power owns two subsidiaries which are engaged in the marketing and brokering of gas. These companies, which are described in further detail on Exhibit E-3 hereto, include Virginia Power Energy Marketing, Inc. and Virginia Power Services Energy Corp. The ownership of businesses engaged in the brokering and marketing of energy commodities is specifically authorized under Rule 58(b)(1)(v), and retention of such businesses has routinely been permitted in prior Commission orders approving mergers and creations of new registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). Moreover, Virginia Power's investment in subsidiaries engaged in energy marketing and trading has also been expressly approved by the VSCC. Telecommunications. DRI, through Virginia Power, owns VPS Telecommunications, Inc., which is engaged in providing telecommunications services utilizing fiber optic line owned by Virginia Power. DRI, through DCI, also owns a 50% interest in Stonehouse Communications, L.L.C. and, through DCI's subsidiary, First Dominion Capital, LLC, owns a 10.6% interest in ConStar International, Inc., and a 19.5% non-voting interest in Protocol Communications. These entities are engaged in various telecommunications-related businesses as further described on Exhibit E-3 hereto. Prior to completion of the Merger, each DRI subsidiary involved in the telecommunications business will be qualified as an "exempt telecommunications company" under Section 34 of the 1935 Act. The ability of registered holding companies to acquire and retain interests in "exempt telecommunications companies" is expressly permitted under Section 34 and retention of such businesses has been routinely permitted in prior Commission orders approving mergers resulting in the creation of new registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). Real Estate Activities. DCI owns a number of subsidiaries that are engaged in the business of holding, managing and developing real estate, primarily for investment purposes. DCI's investment real estate holding and related companies are primarily held through its subsidiaries, Dominion Lands, Inc., Dominion Land Management Company and Stanton Associates, and their respective direct and indirect subsidiaries. These entities are described in further detail on Exhibit E-6 hereto. DCI develops and manages real estate interests, specializing in acquisitions of large residential developments as well as commercial and other residential ventures. The Commission has allowed retention of real estate operations created by exempt -28- holding companies before becoming registered even though such operations were not strictly related to utility operations. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); Conectiv, Inc., Holding Co. Act Release No. 35-26832 (February 25, 1998); Ameren Corporation, Holding Co. Act Release No. 35-26809 (December 30, 1997); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997). The Commission has also authorized real estate investments where they benefitted utility operations. UNITIL Corp., Holding Co. Act Release No. 35-25524 (April 24, 1992), American Electric Power Co., Holding Co. Act Release No. 35-21898 (January 27, 1981). Energy Lending. DCI, through its subsidiary Dominion Venture Investments, Inc., owns a 46% interest in Cambrian Capital Corporation and a 45% interest in Cambrian Capital Partners L.P. These entities, together with their respective subsidiaries, Triassic Energy Corporation and Triassic Energy Partners, L.P., are engaged in providing financing to small and mid-sized independent oil and natural gas producers who are seeking to acquire or expand their property holdings or to refinance existing operations. As noted above, in "Oil and Gas Exploration and Development", the exploration of natural resources or the holding of rights to such resources are activities of the kind routinely permitted to be retained in prior Commission merger orders creating new registered holding companies. WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998); New Century Energies, Inc., Holding Co. Act Release No. 35-26748 (August 1, 1997); New England Energy Inc., Holding Co. Act Release No. 35- 23988 (January 13, 1986). Because retention of ownership of independent oil and natural gas producers is routinely permitted, DCI should likewise be permitted to retain its businesses of providing financing to such entities. Debt and Equity Financing to Commercial Businesses and Consumers. As described in more detail above, DCI is a diversified financial services company whose activities include commercial, corporate and consumer finance. In connection with financing companies, DCI subsidiaries often acquire equity or non-voting equity interests and warrants in the companies they are financing as compensation for the related financing as well as, sometimes, on a stand-alone basis. Obtaining such types of equity interests is a recognized and customary practice for firms involved in similar lending businesses. DCI's primary subsidiaries in these areas include First Source Financial, LLP, First Dominion Capital, L.L.C. and Cambrian Capital L.P. These companies, together with DCI's other subsidiaries engaged in these activities, are described in further detail on Exhibit E-6 hereto. The Commission has permitted other exempt holding companies, upon becoming registered holding companies, to retain similar businesses in prior orders. E.g., Ameren Corporation, Holding Co. Act Release No. 35-26809 (December 30, 1997) (venture capital fund, investment in national bank specializing in minority business development lending and residential mortgage lending); WPL Holdings, Inc., Holding Co. Act Release No. 35-26856 (April 14, 1998) (venture capital fund). While the size of DRI's investment and the degree of its active participation are admittedly greater than that of holding companies in prior Commission precedents, DRI's acquisition and ownership of such businesses are lawful under its current status as an exempt holding company and are larger because they have been successful investments. The growth of these subsidiaries which is attributable to the business success of the underlying -29- businesses should not form the basis of a divestiture order. DRI has maintained these businesses in subsidiaries separate from its regulated utility affiliates, and will continue to do so. These subsidiaries do not engage in business with DRI's regulated utility affiliates. Accordingly, given the protections DRI has implemented and will continue to maintain in effect, together with the likelihood of substantial harm to DRI's investors should DRI be required to divest these businesses, DRI should be permitted to retain these businesses. Other Miscellaneous Investments. DRI, through DCI, also holds minority interests in a number of other businesses, none of which are public utilities for purposes of the 1935 Act. Many of these investments were obtained in the ordinary course in connection with DCI's commercial and corporate finance operations, and many are not voting securities. The aggregate amount of such investments made by DCI at March 31, 1999 was $176,000,000. Divestiture of these de minimis portfolio investments would provide no benefit to any protected interests under the 1935 Act, and would potentially cause harm to DRI's investors. Accordingly, DRI should be permitted to retain these interests. CNG. A full description of CNG's non-utility businesses is described above in this Item 1, Section B.2. No issues are raised under the 1935 Act with respect to the retention of these businesses by DRI as a registered holding company as each of such businesses was in fact acquired by a registered holding company in compliance with all applicable provisions of, and rules under, the 1935 Act. DRI hereby requests Commission authorization, following completion of the Merger and the registration of DRI as a holding company under Section 5 of the 1935 Act, to retain its interest in DEI and the other DEI Companies and to retain its indirect interest in the non- utility subsidiaries of Virginia Power and, through the Merger, to acquire and retain the interests of CNG in the non-utility businesses of CNG. DRI further requests that the Commission authorize DRI to retain its interest in DCI and the other DCI Companies for a period of not less than 3 years following completion of the Merger and the registration of DRI as a holding company under the 1935 Act and to reserve jurisdiction over the timing and terms of any future disposition or divestiture of DCI. DRI further requests that any order of the Commission under Section 11(b)(1) which requires DRI to divest DRI's interest in DCI satisfy the requirements of Section 1081 of the Internal Revenue Code to enable DRI to obtain the tax treatment provided for in said Section 1081. DRI has previously stated its intention to dispose of its interest in DCI, in part to obtain funds to repay indebtedness incurred to finance the cash component of the consideration to be paid to DRI and CNG shareholders in connection with the First Merger and the Second Merger, respectively. However, neither the nature nor the timing of such disposition has been determined and it would be to the detriment of DRI investors if DRI were to be obliged to divest its interest in DCI in an untimely or uneconomic manner. Pursuant to the last paragraph of Section 11(b)(1) of the 1935 Act, the "Commission may permit as reasonably incidental, or economically necessary or appropriate to the operations of one or more integrated public utility systems the retention of an interest in any -30- business (other than the business of a public utility company as such) which the Commission shall find necessary or appropriate in the public interest or for the protection of investors or consumers and not detrimental to the proper functioning of such system or systems". Section 9(a) of the 1935 Act was designed, among other things, to prevent the acquisition of businesses that would not meet the above test. In an effort to streamline its administration of the 1935 Act and to provide guidance to registered holding company systems, the Commission promulgated Rule 58 which provides an exemption from the provisions of Section 9(a)(1) for, in the case of registered electric systems, acquisitions of businesses of the types listed in subparagraph (b)(1) of the Rule provided that the aggregate investment by such holding company in such businesses does not exceed the greater of $50 million or 15% of consolidated capitalization. While historically the Commission generally took a narrow view of what business could be retained under the standards of Section 11(b), with the promulgation of Rule 58, the Commission signaled a less narrow approach to the issue. Similarly, in the recent numerous creations of registered holding companies as a result of mergers, the Commission has continued to view the retainability issue more broadly and has also recognized that it is appropriate to judge the issue of retainability differently when businesses were lawfully acquired prior to registration.5 In part the broader view of what is an appropriate other business to retain is justified on the possible harm to investors or consumers that could result from required divestiture, because the evils Congress addressed in 1935 relative to non-utility businesses in utility holding company systems no longer present the same potential for abuse as prior to 1935 for a variety of reasons including: much greater stock market discipline, stronger state regulatory supervision, much more rigorous accounting standards and controls, the role played by rating agencies in monitoring utility holding company systems and the changes in the whole utility industry which are broadening the types of services offered by utilities to their customers today versus what were offered only a few years ago. These reasons also support the use of Rule 58 and the continuing broadening of permitted acquisitions of other businesses outside of the Rule 58 safe harbor. The language of Section 11 quoted above gives the Commission the authority to go much beyond Rule 58 and the retentions allowed in the recent orders establishing new registered holding company systems indicate that the interpretation of such language is extremely broad. In the instant application, there is no issue to be decided relative to CNG since it is currently a registered holding company and therefore does not have any businesses that would be considered unretainable "other businesses" under Section 11 of the Act. With respect to DRI, in 1998, its franchised utility, Virginia Power, accounted for $4,285 million of revenues while its two other principal subsidiaries, DEI and DCI had revenues of $383 million and $409 million, respectively. - -------- 5 "[T]he Commission reaches this conclusion [as to retainability of non-utility businesses] in view of the fact that Applicants were not subject to the restrictions that Section 11(b)(1) and related precedent of the Commission place upon the nonutility activities of registered system companies". WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998). See also Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997). -31- In considering the non-utility businesses of DRI as described in this Application-Declaration, the Commission should start with those that fit within Rule 58, which constitute a majority of such businesses. Thereafter, the Commission, in line with the Staff's Recommendation in The Regulation of Public-Utility Holding Companies, June 1995, should consider as other businesses retainable under the Section 11 language, those businesses that do not fall strictly in one of the ten categories of investments set out in Rule 58 but are of the type permitted by the Commission in orders since Rule 58 was promulgated or are deemed to be energy related in the evolving concept of that term in a rapidly changing industry. Finally, consistent with the view taken by the Commission in recent merger approvals6 substantial weight should be given to the fact that the businesses were created or acquired prior to registration and therefore should be grand-fathered. To the extent that in any given case a DRI business is not deemed to fit within any of the foregoing categories, the Commission should defer consideration of the retainability of such business, and reserve jurisdiction as it did in CINergy Corp, Holding Co. Act Release No. 26146 (October 21, 1994). 5. Section 10(c)(2). Section 10(c)(2) requires the Commission to find that a proposed transaction will serve the public interest by tending towards the economical and efficient development of an integrated public utility system. For all of the foregoing reasons, the Transaction meets the criteria of Section 10(c)(2). The Transaction will produce both quantitative and qualitative economies and efficiencies and will result in the creation of an economically integrated and efficient energy company consistent with modern notions of "integration". The Transaction will also produce long-term benefits. Although some of the anticipated economies and efficiencies will be fully realizable only in the longer term, they are properly considered in determining whether the standards of Section 10(c)(2) have been met. See American Electric Power Co., 46 SEC 1299, 1320-1321 (1978). Further, the Commission has recognized that while some potential benefits cannot be precisely estimated, nevertheless they too are entitled to be considered: "[S]pecific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable". Centerior Energy Corp., Holding Co. Act Release No. 24073 (April 29, 1986) (citation omitted). See Energy East Corporation, Holding Co. Act Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on strategic benefits and potential but presently unquantifiable saving). Finally, as discussed in detail above, a number of qualitative benefits flow from the Transaction. As discussed above, many of the states in which DRI and CNG operate as well as neighboring states have adopted retail competition legislation. The creation of DRI as a - -------- 6 WPL Holdings, Inc., Holding Co. Act Release No. 26856 (April 14, 1998). See also Conectiv, Inc., Holding Co. Act Release No. 26832 (February 25, 1998); New Century Energies, Inc., Holding Co. Act Release No. 26748 (August 1, 1997). -32- competitive energy services provider introduces into the energy marketplace a viable and effective competitor. 6. Section 10(f). Section 10(f) prohibits the Commission from approving the Transaction unless the Commission is satisfied that the Transaction will be undertaken in compliance with applicable state laws. As described in Item 4 of this Application-Declaration, the Transaction will be consummated in compliance with the laws of each of the states in which DRI and CNG have retail operations. B. Establishment of Service Company and Approval of Service Agreement. As an exempt holding company, DRI currently provides a number of services to its affiliates and subsidiaries. As a registered holding company, CNG has established Consolidated Natural Gas Service Company, Inc. ("CNG Services") as a service company pursuant to Section 13(b) of, and Rule 88 under, the 1935 Act. CNG Services is a wholly-owned subsidiary of CNG. It was formed as a subsidiary service company, pursuant to temporary authorization given CNG in Commission order dated March 8, 1962, Holding Co. Act Release No. 35-14592. CNG Services' authorization was made permanent by the Commission by order dated August 26, 1966, Holding Co. Act Release No. 35-15548. The basic form of service agreement, including exhibits thereto which described the services offered and methods of allocation of costs, was an exhibit to CNG's application-declaration seeking authority for CNG Services and made effective by the Commission. Several amendments to the service agreement exhibits have been approved by the Commission pursuant to "60 day letter proceedings" since 1966. As part of their business combination, DRI and CNG anticipate some centralization of some of the service functions in the combined company but have not yet completed their analysis of how best to accomplish this goal, a task that is not probably capable of being completed until after the two companies are in fact merged. Thus, in order to ensure the transition to a combined company proceeds smoothly and in compliance with applicable laws and regulations (as discussed below, the provision of intra-system services is also regulated by the Virginia, North Carolina, West Virginia and Pennsylvania state commissions), DRI and CNG propose, initially, to commence their combined operations with two subsidiary service companies. In that connection, prior to closing of the Merger, DRI will establish a new direct subsidiary service company, DRI Services, which will assume from DRI all of the service functions currently performed for affiliates by DRI and all employees performing such functions will become employees of DRI Services. Upon closing of the Merger, DRI Services and the other DRI affiliates will enter into a new single systemwide Service Agreement with CNG, CNG Services and the other subsidiaries of CNG which is modeled after the current Service Agreement in effect for the CNG system. Thus, the combined company will operate with two service companies and each DRI-CNG affiliate will have the opportunity to elect to purchase the services specified from the menu of options contained in the Service Agreement. The cost allocation -33- formula will account for the possibility that two service company providers are available. DRI and CNG believe that their approach to service company arrangements provides them with the appropriate degree of flexibility to integrate their operations in a manner consistent with applicable laws and regulations. Accordingly, DRI requests authorization to maintain subsequent to the Merger DRI Services. Initially, DRI Services will issue 100 shares of common stock, no par value, all of which will be subscribed to by DRI at a price of $1 per share. Over time it is anticipated that the provision of services within the combined DRI- CNG system will be rationalized. In the interim, however, DRI and CNG seek authorization from the Commission to enter into the form of Service Agreement annexed as Exhibit K-1 hereto which contemplates that the following services will be offered to system companies: 1. Accounting. The Service Companies will offer advice and assistance to system companies in accounting matters, including the development of accounting practices, procedures and controls, the preparation and analysis of financial reports, and the processing of certain accounts such as accounts payable, payroll, customer and cash management. 2. Auditing. The Service Companies' internal auditing staff will offer to audit, periodically, the accounting records and other records maintained by system companies, coordinating their examination, where applicable, with that of independent public accountants. Such personnel will report on their examination and submit recommendations, as appropriate, on improving methods of internal control and accounting procedures. 3. Legal and Regulatory. The Service Companies will offer advice and assistance with respect to legal and regulatory issues as well as regulatory compliance, including 1935 Act authorizations and compliance and regulatory matters under other Federal and State laws. In addition, the Service Companies will provide consulting, cleanup and other service activities as required to ensure full compliance with applicable environmental statutes and regulations. 4. Information Technology, Electronic Transmission and Computer Services. The Service Companies will offer to provide the organization and resources for the operation of an information technology function including the operation of a centralized data processing facility and the management of a telecommunications network. This function includes the central processing of computerized applications and support of individual applications in system companies. The Service Companies will also develop, implement, and process those computerized applications for system companies that can be economically best accomplished on a centralized basis. 5. Software Pooling. The Service Companies will offer to accept from system companies ownership of and rights to use, assign, license or sublicense all software owned, acquired or developed by or for system companies which system companies can and do transfer or assign to it. The Service Companies will preserve and protect the rights to all such software -34- to the extent reasonable and appropriate under the circumstances; to license system companies, on a non-exclusive, no-charge or at-cost basis, to use all software which the relevant Service Companies has the right to sell, license or sublicense; and, at the relevant system companies' expense, to permit system companies to enhance any such software and to license others to use all such software and enhancements to the extent that the relevant Service Companies shall have the legal right to so permit. 6. Employee Benefits/Pension Investment. The Service Companies will offer to provide central accounting for employee benefit and pension plans of system companies. The Service Companies will offer to advise and assist system companies in the administration of such plans and will offer to prepare and maintain records of employee and company accounts under the said plans, together with such statistical data and reports as are pertinent to the plans. 7. Employee Relations. The Service Companies will offer to advise and assist system companies in the formulation and administration of employee relations policies and programs relating to the relevant system companies' labor relations, personnel administration, training, wage and salary administration and safety. 8. Operations. The Service Companies will offer to advise and assist system companies in the study, planning, engineering and construction of energy plant facilities of each system company and of the System as a whole, and will advise, assist and manage the planning, engineering (including maps and records) and construction operations of system companies electing this service. The Service Companies will develop long-range operational programs for all the system companies and will advise and assist each system company in the coordination of such programs with the programs of the other system companies. The Service Companies will also offer to perform meter management for system companies. 9. Executive and Administrative. The Service Companies will offer to advise and assist system companies in the solution of major problems and in the formulation and execution of the general plans and policies of system companies electing this service. The Service Companies will advise and assist system companies as to operations, the issuance of securities, the preparation of filings arising out of or required by the various Federal and State securities, business, public utilities and corporation laws, the selection of executive and administrative personnel, the representation of system companies before regulatory bodies, proposals for capital expenditures, budgets, financing, acquisition and disposition of properties, expansion of business, rate structures, public relationships and other related matters. 10. Business & Operations Services. The Service Companies will offer to advise and assist system companies in all matters relating to operational capacity and the preparation and coordination of operating studies. The Service Companies will manage system companies' purchase, sale, movement, transfer and accounting of volumes to ensure continued recovery of all prudently incurred energy purchase costs through local jurisdictional cost recovery mechanisms. The Service Companies will also compile and communicate information relevant to system operation. Additionally, the Service Companies will offer to perform general -35- 10/15/99 12:49 PM administrative support services, including travel services, aviation, fleet, mail and facilities management. 11. Exploration and Development. The Service Companies will offer to advise and assist system companies in all geological and exploration matters including those relating to the discovery and maintenance of gas and oil reserves, the acquisition and surrender of acreage, the selection of well locations and the development of underground storage facilities. 12. Risk Management. The Service Companies will offer to advise and assist system companies in securing requisite insurance, in the purchase and administration of all property, casualty and marine insurance, in the settlement of insured claims and in providing risk prevention advice. 13. Marketing. The Service Companies will offer to plan, formulate and implement marketing programs, as well as provide associated marketing services to assist system companies with improving customer satisfaction, load retention and shaping, growth of throughput, energy conservation and efficiency. The Service Companies will also offer to assist system companies in carrying out policies and programs for the development of plant locations and of industrial, commercial and wholesale markets and will assist with community redevelopment and rehabilitation programs. 14. Medical. The Service Companies will offer to direct and administer all medical and health activities of system companies, will provide systems of physical examination for employment and other purposes and will direct and administer programs for the prevention of sickness. 15. Corporate Planning. The Service Companies will offer to advise and assist system companies in studying and planning in connection with operations, budgets, economic forecasts, capital expenditures and special projects. 16. Purchasing. The Service Companies will offer to advise and assist system companies in the purchase of materials, supplies and services, will conduct purchase negotiations, prepare purchasing agreements and will administer programs of material control. 17. Rates. The Service Companies will offer to advise and assist system companies in the analysis of their rate structure in the formulation of rate policies and in the negotiation of large contracts. The Service Companies will also offer to advise and assist system companies in proceedings before regulatory bodies involving the rates and operations of system companies and of other competitors where such rates and operations directly or indirectly affect system companies. 18. Research. The Service Companies will offer to investigate and conduct research into problems relating to production, utilization, testing, manufacture, transmission, storage and distribution of energy. The Service Companies will keep abreast of and evaluate for system companies all research developments and programs of significance affecting system -36- companies and the energy industry, will conduct research and development in promising areas and will advise and assist in the solution of technical problems arising out of system companies' operations. 19. Tax. The Service Companies will offer to advise and assist system companies in the preparation of Federal and other tax returns, and will generally advise system companies as to any problems involving taxes including the provision of due diligence in connection with acquisitions. 20. Corporate Secretary. The Service Companies will offer to provide all necessary functions required of a publicly held corporation; coordinating information and activities among shareholders, the transfer agent, and Board of Directors; providing direct services to security holders; preparing and filing required annual and interim reports to shareholders and the SEC; conducting the annual meeting of shareholders and ensuring proper maintenance of corporate records. 21. Investor Relations. The Service Companies will offer to provide fair and accurate analysis of DRI and its operating subsidiaries and its outlook within the financial community, enhancing DRI's position in the energy industry; balancing and diversifying shareholder investment in DRI through a wide range of activities; providing feedback to DRI and its operating subsidiaries regarding investor concerns, trading and ownerships; holding periodic analysts meetings; and providing various operating data as requested or required by investors. The proposed form of Service Agreement, including the proposed cost allocation methodology to be applied thereunder, is annexed hereto as Exhibit K-1. Following completion of the Merger, DRI anticipates that all services provided to system companies by affiliates will be provided in accordance with all applicable provisions of the 1935 Act and the rules and regulations of the Commission promulgated thereunder. However, as of the date of this Application-Declaration, Virginia Power has entered into a number of affiliate transactions with system companies in compliance with Virginia law and the express approval of the VSCC, which must approve all transactions between affiliates involving a jurisdictional Virginia utility. These existing arrangements do not fully comply with the Commission's "at-cost" rules. The pricing of these affiliate transactions has been done in a manner consistent with a 1986 settlement order issued by the VSCC following a much publicized and controversial proceeding involving DRI and Virginia Power and are based on the standard that goods or services provided to Virginia Power are priced at the lower of cost or market whereas purchases of goods or services from Virginia Power are priced at the higher of cost or market. The Virginia rules are designed to insure that the regulated utility, Virginia Power, always benefits from any contract entered into with an affiliate. Following completion of the Merger, Virginia Power will not take any services from affiliates except in compliance with all applicable provisions of the 1935 Act and the rules and regulations of the Commission promulgated thereunder as well as all applicable provisions of state law which apply to Virginia Power. However, DRI does request an exemption from the "at-cost" rules (i) to permit Virginia Power to continue to meet its obligations under existing arrangements which have been approved by the Virginia Commission -37- to provide services to "Exempt Non-Utility Affiliates" in accordance with the terms of the 1986 settlement order and (ii) with respect to future service arrangements under which Virginia Power would provide services to "Exempt Non-Utility Affiliates" within the DRI-CNG system. The term "Exempt Non-Utility Affiliates" as used in the preceding clauses (i) and (ii) means (1) FUCOs and EWGs which do not derive any part of their income, directly or indirectly, from the generation and sale of electric energy within the United States, (2) EWGs which sell electricity at market-based rates that have been approved by the FERC or the relevant state public utility commission, provided that the purchaser is not an electric utility company affiliate of DRI, (3) QFs under PURPA which sell electricity exclusively at rates negotiated at arm's-length to one or more industrial or commercial customers purchasing electricity for their own use and not for resale or to an electric utility company which is not a DRI affiliate at the purchaser's "avoided costs" as determined under applicable regulation and (4) EWGs and QFs under PURPA which sell electricity at rates based upon cost of service, as approved by the FERC or any state utility commission having jurisdiction, provided that the purchaser is not an electric utility company affiliate of DRI (collectively, the "Exempt non-Utility Affiliates"). DRI also requests an exemption from the "at-cost" rules with respect to other service arrangements that might be entered into by Virginia Power with other non-utility affiliates of DRI which are not "Exempt Non-Utility Affiliates" and pursuant to which Virginia Power might provide services to such other non-utility affiliates; however, DRI requests that the Commission reserve jurisdiction over this request pending completion of the record. In support of its request for such exemption from the "at-cost" rules, DRI notes that the Commission has, in a number of cases, granted exemptions to the "at-cost" rules in order to give effect to state regulatory commission orders or settlement agreements pursuant to Section 13(b)'s authorization to grant exceptions for transactions including "special or unusual circumstances".7 In particular, in the recent order issued to Entergy, the Commission granted authority for payment to regulated utilities for services rendered to nonregulated businesses at the fully allocated cost of the service plus 5%, as provided for in settlement agreements between Entergy and the Arkansas, Louisiana, Mississippi state commissions and the commission of the City of New Orleans. In its decision, the Commission stated that, while there was no evidence to suggest that fully allocated costs would not adequately reimburse the regulated utilities for the services they provide, it was appropriate to give substantial weight to the views of New Orleans, the Arkansas Commission, the Mississippi Commission and the Louisiana Commission in concluding the provisions of the settlement agreements will protect retail ratepayers. The Commission further stated that the grant of exemptive relief was consistent with its precedent under Section 13(b) insofar as the provisions of the settlement agreements were the ancillary steps needed to implement a "carefully crafted settlement of a long and full-aired controversy". DRI's request for an exemption from the "at-cost" rules limited to the provision of services by Virginia Power to non-utility affiliates is designed to give effect to arrangements which the Virginia - -------- 7 See Entergy Corporation, Holding Co. Act Release No. 27040 (June 22, 1999); Entergy Corporation, Holding Co. Act Release No. 27039 (June 22, 1999); Blackhawk Coal Co., Holding Co. Act Release No. 23834 (Sept. 20, 1985) and EUA Cogenex Corp., Holding Co. Act Release No. 26373 (Sept. 14, 1995). -38- Commission has approved as consistent with the interest of ratepayers in a "fully aired" proceeding and is therefore consistent with existing precedent under the Act.8 As stated above, following completion of the Merger, Virginia Power will not take any services from affiliates except in compliance with all applicable provisions of the 1935 Act and the rules and regulations of the Commission promulgated thereunder as well as all applicable provisions of state law of those states having jurisdiction over Virginia Power relating to such matters. DRI's request for exemption from the "at-cost" rules with respect to existing and future service arrangements under which Virginia Power provides services to non-utility affiliates is designed to permit Virginia Power to perform such service arrangements in compliance with state law (which mandates that Virginia Power receive the higher of cost and market) for the benefit of ratepayers and investors. No purpose is served under the 1935 Act in requiring Virginia Power to perform such services at cost when cost is less than market. Item 4. Regulatory Approvals. Set forth below is a summary of the regulatory approvals that DRI and CNG have obtained or expect to obtain in connection with the Merger in addition to the approval of the Commission under the 1935 Act. Antitrust Considerations Under the HSR Act, DRI and CNG cannot consummate the Second Merger until each has submitted certain information to the Antitrust Division of the DOJ and the FTC. Additionally, each company must satisfy specified HSR Act waiting period requirements. The expiration or earlier termination of the HSR Act waiting period will not prevent the DOJ or the FTC from challenging the Merger on antitrust grounds. Neither DRI nor CNG believes that the Second Merger will violate Federal antitrust laws. If the Second Merger is not consummated within 12 months after the expiration or earlier termination of the HSR Act waiting period, DRI and CNG must submit new information to the DOJ and the FTC, and new HSR Act waiting period will begin. AEA DRI holds various licenses issued by the NRC to own and operate the North Anna and Surry nuclear generating stations. Under the AEA and NRC regulations, nuclear licensees must seek and obtain prior NRC consent for any changes that would constitute a transfer of an NRC license, directly or indirectly, through transfer of control of the license to any person. DRI does not believe that the Merger will constitute a transfer of control of its NRC licenses or that - -------- 8 In its 1995 Report on The Regulation of Public-Utility Holdings Companies, the Division of Investment Management specifically recommended that the SEC work with other regulators to satisfy concerns over affiliate transactions and respond flexibly and effectively in this area. -39- the Merger will affect the basis for prior NRC decisions relating to its financial qualifications as an NRC licensee. DRI has requested confirmation that the NRC concurs with its belief. FPA Section 203 of the FPA provides that no public utility may sell or otherwise dispose of its jurisdictional facilities, directly or indirectly merge or consolidate its facilities with those of any other person, or acquire any security of any other public utility, without first having obtained authorization from the FERC. Because CNG has subsidiary power marketers that are considered to be "public utilities" and to own "jurisdictional facilities" under the FPA, FERC's approval under Section 203 is required before DRI and CNG may consummate the Merger. Section 203 provides that FERC is required to grant its approval if the Second Merger is found to be "consistent with the public interest". FERC has stated in its 1996 Utility Merger Policy Statement that, in analyzing a merger under Section 203, it will evaluate the following criteria: o the effect of the merger on competition in wholesale electric power markets, utilizing an initial screening approach derived from the DOJ/FTC-Initial Merger Guidelines to determine if a merger will result in an increase in an applicant's market power; o the effect of the merger on the applicants' FERC jurisdictional ratepayers; and o the effect of the merger on state and federal regulation of the applicants. DRI's power-marketing affiliates are authorized by FERC to sell electric power at wholesale in interstate commerce at market-based rates. CNG's power marketing affiliates have similar authorizations from FERC. These authorizations, which were obtained under Section 205 of the FPA, were predicated in part on FERC's finding that the power-marketing affiliates of DRI and CNG lack market power over the generation and transfer of electric energy and, therefore, could not sell electric power at prices above competitive levels. As a condition of the power marketer authorizations, the power marketing affiliates of DRI and CNG are required to report any changes in status that could result in a change in the facts FERC relied upon in approving market-based rates. Pursuant to this requirement, the power-marketing affiliates of DRI and CNG will file notifications of a "change in status" with FERC. These notifications will inform FERC of the Merger Agreement and will advise FERC that the power-marketing affiliates of both DRI and CNG would not deal with one another except under specified certain circumstances during the pendency of the Second Merger. Pending FERC approval of the merger under Section 203 and related action under Section 205, the authorizations under which the power-marketing affiliates of both DRI and CNG engage in market-based sales are expected to remain effective. The necessary filings have been made with FERC to allow DRI and CNG power-marketing affiliates to continue to engage in wholesale power transactions at market-based rates. -40- Virginia Commission DRI's wholly owned subsidiary, Virginia Power, and CNG's wholly-owned subsidiary, VNG, are subject to the jurisdiction of the VSCC. The VSCC must approve the acquisition of any Virginia public utility. The applicants must show that the provision of adequate service at just and reasonable rates will not be threatened or impaired as a result of the acquisition. On September 17, 1999, the VSCC issued its order approving the merger. The order of the VSCC requires that Virginia Power/DRI and VNG/CNG advise the Commission of certain conditions contained in the VSCC order. Those conditions are as follows: Petitioners, Virginia Power and VNG9 shall have the following continuing obligations: (A) With respect to any contract that is subject to Section 12 or 13 of the [1935 Act]: (i) Neither Virginia Power, VNG, nor any other DRI affiliate subject to [VSCC] regulation, shall enter into such contract without first obtaining an order from [the VSCC] approving such action. (ii) Any such contract shall contain language providing that neither Virginia Power, VNG nor such affiliate shall have any obligation under such contract except to the extent [the VSCC] has approved such obligation. (B) Neither Virginia Power nor VNG shall transfer, or commit to transfer, to any affiliate or nonaffiliate, the control or ownership of any asset or portion thereof used for the generation, transmission, distribution or other provision of electric power and/or service or gas supply and/or service to customers in Virginia, without first obtaining all approvals from [the VSCC] that are required by state law. The VSCC order also contains a condition to the effect that the VSCC must determine that "any orders of the [Commission] approving the Petitioners' [Virginia Power and VNG] merger application are not inconsistent with" the order of the VSCC. A copy of the VSCC order approving the merger is annexed hereto as Exhibit D-2.2. North Carolina Commission Virginia Power is subject to the jurisdiction of the North Carolina Utilities Commission (the "North Carolina Commission"). The North Carolina Commission must approve any merger or combination affecting any public utility, whether made through acquisition or - -------- 9 All conditions will continue in force as to VNG only until such time as its divestiture from the Petitioners is completed, except as otherwise required by law. -41- control by stock purchase or otherwise. Under this authority, the North Carolina Commission has advised that it will assert jurisdiction to approve DRI's acquisition of CNG. The North Carolina Commission must give its approval if justified by the public convenience and necessity. DRI has filed an application seeking the approval of the North Carolina Commission consistent with these requirements and has entered into a Stipulation with the Public Staff of the North Carolina Commission as a result of which, on September 20, 1999, at a hearing before the North Carolina Commission, the Public Staff stated its support of the Merger as being in the public interest. DRI expects the North Carolina Commission to act on the Merger shortly. West Virginia Commission CNG's wholly owned subsidiary, Hope, is subject to the jurisdiction of the West Virginia Public Service Commission (the "West Virginia Commission"). No person or corporation may acquire either directly or indirectly a majority of the common stock of any public utility organized and doing business in West Virginia without the approval of the West Virginia Commission. The West Virginia Commission may approve such a transaction upon proper showing that the terms and conditions are reasonable, that neither party to it is given an undue advantage over the other, and that it does not adversely affect the public in West Virginia. The West Virginia Commission granted its approval on July 27, 1999. A copy of the order is annexed hereto as Exhibit D-4.2. Pennsylvania Commission CNG's wholly owned subsidiary, Peoples, is subject to the jurisdiction of the Pennsylvania Public Utility Commission (the "Pennsylvania Commission"). The issuance of a certificate of public convenience and necessity may be required. The Pennsylvania Commission has advised that it will assert jurisdiction to approve DRI's acquisition of CNG. The standard for approval is whether the transaction is necessary and proper for the service, accommodation, convenience, or safety of the public. This standard has been applied by the Pennsylvania Commission to require that the companies demonstrate that the transaction will affirmatively promote the service, accommodation, convenience or safety of the public in some substantial way. The Pennsylvania Commission granted its approval on June 16, 1999. A copy of the order is annexed hereto as Exhibit D-5.2. Ohio Commission CNG's wholly owned subsidiary, East Ohio, is subject to the jurisdiction of the Public Utilities Commission of the State of Ohio (the "Ohio Commission"). The Ohio Commission does not have statutory jurisdiction over the transaction, but is being provided any relevant information for its review and use in evaluating the impact of the transaction, if any, on retail customers in Ohio. Annexed hereto as Exhibit D-6 is a letter from the Ohio Commission dated September 2, 1999 stating that in light of agreements between the applicants and the Ohio Commission, the Ohio Commission "is satisfied that the merger will not adversely affect Ohio's interests". -42- Affiliate Contracts and Arrangements Following the Second Merger and registration of DRI as a holding company under the 1935 Act, DRI and CNG and their subsidiaries may need to enter into or amend agreements related to the provision by affiliates of the combined companies of various services, including management, supervisory, construction, engineering, accounting, legal, financial or similar services. The approval or non-opposition of certain federal and state regulatory commissions is required with respect to the creation or amendment of certain inter-affiliate agreements. DRI, CNG and their subsidiaries will file such agreements with the appropriate federal and state regulatory commissions and seek such regulatory approvals as may be required by applicable law. Other Regulatory Matters DRI and its subsidiaries and CNG and its subsidiaries have obtained from various regulatory authorities certain franchises, permits and licenses which may need to be renewed, replaced or transferred in connection with the Merger, and approvals, consents or notifications may be required in connection with such renewals, replacements or transfers. Regulatory commissions in states where DRI's and CNG's utilities operate may intervene in the Federal regulatory proceedings. In addition, such regulatory commissions regulate the rates charged to utility customers within their jurisdictions. In approving rates, each state may take into account other affects of, including possible savings resulting from, the Merger. Item 5. Procedure. The Commission is respectfully requested to issue and publish, not later than October 15, 1999, the requisite notice under Rule 23, a form of which is attached hereto as Exhibit I-1, with respect to the filing of this Application-Declaration, such notice to specify a date not later than November 9, 1999 by which comments may be entered and a date not later than November 10, 1999 as the date after which an order of the Commission granting and permitting this Application-Declaration to become effective may be entered by the Commission. It is submitted that a recommended decision by a hearing or other responsible officer of the Commission is not needed for approval of the Transaction. The Division of Investment Management may assist in the preparation of the Commission's decision. There should be no waiting period between the issuance of the Commission's order and the date on which it is to become effective. -43- Item 6. Exhibits and Financial Statements. A. Exhibits A-1 Articles of Incorporation of DRI as in effect on April 16, 1999. (Filed as Exhibit 3(i) to DRI's Form 10-Q for the quarter ended March 31, 1999, File No. 1-8489 and incorporated by reference herein) A-2 By-Laws of DRI as in effect on April 16, 1999. (Filed as Exhibit 3(ii) to DRI's Form 10-Q for the quarter ended March 31, 1999 and incorporated by reference herein) A-3 Restated Certificate of Incorporation of CNG. (Filed as Exhibit A-1 to Form U-1, File No. 70-7811 and incorporated by reference herein) A-3.1 Amendment, dated May 31, 1996, to Exhibit A-1. (Filed as Exhibit 4(B) to the Registration Statement on Form S-3, File No. 333-10869 and incorporated by reference herein) A-4 By-laws of CNG, last amended May 19, 1996. (Filed as Exhibit 3B to Form 2158 for the year ended December 31, 1998, File No. 1-3196 and incorporated by reference herein) A-5 Articles of Incorporation of DRI New Sub I, Inc. A-6 Bylaws of DRI New Sub I, Inc. (to be filed by amendment) A-7 Certificate of Incorporation of DRI New Sub II, Inc. A-8 Bylaws of DRI New Sub II, Inc. (to be filed by amendment) B-1 Amended and Restated Agreement and Plan of Merger, dated as of May 11, 1999 by and between DRI and CNG. (Included in Exhibit C-1 hereto) C-1 Registration Statement on Form S-4 of DRI for the shareholders meeting to be held in connection with the Merger. (Filed with the Commission on May 20, 1999, File No. 333-75669 and incorporated by reference herein) C-2 Joint Proxy Statement/Prospectus of DRI and CNG for the special meeting of shareholders to be held in connection with the Merger. (Included in Exhibit C-1) D-1.1 Application to the FERC under the FPA. (Previously filed) D-1.2 Order of the FERC. (To be filed by amendment) -44- D-2.1 Submission to the Virginia Commission. (Previously filed) D-2.2 Order of the Virginia Commission. (Filed in paper format on Form SE) D-2.2A Amending Order of the Virginia Commission. (Filed in paper format on Form SE) D-3.1 Submission to the North Carolina Commission. (Previously filed) D-3.1A Stipulation Agreement filed with the North Carolina Commission (Filed in paper format on Form SE) D-3.2 Order of the North Carolina Commission. (To be filed by amendment) D-4.1 Submission to the West Virginia Commission. (Previously filed) D-4.2 Order of the West Virginia Commission. (Previously filed) D-5.1 Submission to the Pennsylvania Commission. (Previously filed) D-5.2 Order of the Pennsylvania Commission. (Previously filed) D-6 Letter of the Ohio Commission. (Filed in paper format on Form SE) E-1 Map of service territory of DRI. (Previously filed) E-2 Map of service territory of CNG. (Previously filed) E-3 Statistical Analysis of companies in the DRI-CNG region. E-4 DRI Corporate Organization Chart. (Filed in paper format on Form SE) E-5 CNG Corporate Organization Chart. (Previously filed) E-6 Description of Non-Utility Subsidiaries F-1 Opinion of Counsel. (To be filed by amendment) F-2 Past tense opinion of counsel. (To be filed by amendment) G-1 Opinion of Lehman Brothers, Inc. (Included in Exhibit C-1) G-2 Opinion of Merrill Lynch, Pierce, Fenner & Smith Incorporated. (Included in Exhibit C-1) -45- H-1 Annual Report of DRI on Form 10-K for the year ended December 31, 1998. (Filed with the Commission on March 1, 1999, File No. 1-8489 and incorporated by reference herein) H-2 Annual Report of CNG on Form 10-K for the year ended December 31, 1998. (Filed with the Commission on March 15, 1999, File No. 1-3196 and incorporated by reference herein) H-3 Quarterly Report on Form 10-Q of DRI for the quarter ended March 31, 1999. (Filed with the Commission on May 17, 1999, File No. 1-8489 and incorporated by reference herein) H-4 Quarterly Report on Form 10-Q of CNG for the quarter ended March 31, 1999. (Filed with the Commission on May 14, 1999, File No. 1-3196 and incorporated by reference herein) H-5 Quarterly Report on Form 10-Q of DRI for the quarter ended June 30, 1999. (Filed with the Commission on August, 1999, File No. 8489 and incorporated by reference herein) H-6 Quarterly Report on Form 10-Q of CNG for the quarter ended June 30, 1999. (Filed with the Commission on August, 1999 File No. 1-3196 and incorporated by reference herein) H-7 Form U-3A-2 of DRI for the year ended December 31, 1998. (Filed with the Commission on February 26, 1999, File No. 69-278 and incorporated by reference herein) I-1 Proposed Form of Notice J-1 Lost Economies Study. (Previously filed) K-1 Form of Service Agreement. (To be filed by amendment) B. Financial Statements FS-1 DRI Unaudited Pro Forma Condensed Consolidated Balance Sheet. (Included in Exhibit C-1) FS-2 DRI Unaudited Pro Forma Condensed Consolidated Statement of Income. (Included in Exhibit C-1) FS-3 Notes to DRI Unaudited Pro Forma Condensed Consolidated Financial Statements. (Included in Exhibit C-1) -46- FS-4 DRI Consolidated Balance Sheet as of December 31, 1998. (Included in Exhibit H-1) FS-5 DRI Consolidated Statement of Income for the twelve months ended December 31, 1998. (Included in Exhibit H-1) FS-6 CNG Consolidated Balance Sheet as of December 31, 1998. (Included in Exhibit H-2) FS-7 CNG Consolidated Statement of Income for the twelve months ended December 31, 1998. (Included in Exhibit H-2) Item 7. Information as to Environmental Effects. The Transaction neither involves a "major federal action" nor "significantly affects the quality of the human environment" as those terms are used in Section 10(2)(C) of the National Environmental Policy Act, 42 U.S.C. Section 4321, et seq. The only federal actions related to the Transaction pertain to the Commission's approval of this Application-Declaration under the 1935 Act and the Commission's clearance and declaration of the effectiveness of the Joint Proxy and Registration Statement of DRI and CNG on Form S-4 pursuant to the Securities Exchange Act of 1934 and the other approvals and actions described in Item 4 of this Application-Declaration. Consummation of the Transaction will not result in changes in the operations of DRI, CNG or any of their respective subsidiaries that would have any impact on the environment. No federal agency is preparing an environmental impact statement with respect to this matter. -47- SIGNATURE Pursuant to the Public Utility Holding Company Act of 1935, each of the undersigned companies has caused this Application-Declaration to be signed on its behalf by the undersigned thereunto duly authorized. DOMINION RESOURCES, INC. CONSOLIDATED NATURAL GAS COMPANY By: /s/ James F. Stutts By: /s/ Stephen E. Williams Name: James F. Stutts Name: Stephen E. Williams Title: Vice President and Title: Senior Vice President and General Counsel General Counsel Date: October 15, 1999 Date: October 15, 1999 -48- EX-3.1 2 CHARTER OF SPV DRI NEW SUB I, INC. ARTICLES OF INCORPORATION September 14, 1999 ARTICLE I The name of the Corporation is DRI New Sub I, Inc. ARTICLE II The Corporation is organized to carry on any business not prohibited by law or required to be specifically set forth in these Articles. ARTICLE III The Corporation shall have authority to issue 100 shares of Common Stock without par value. ARTICLE IV The number of Directors shall be fixed by the Bylaws. Each Director and Officer shall be indemnified by the Corporation against liabilities, fines, penalties and claims imposed upon or asserted against him (including amounts paid in settlement) by reason of having been such a Director or Officer, whether or not then continuing so to be, and against all expenses (including counsel fees) reasonably incurred by him in connection therewith. In the event of any judgment against such Director or Officer or in the event of a settlement, the indemnification shall be made only if the Corporation shall be advised, in case none of the persons involved shall be or have been a Director of the Corporation, by the Board of Directors, and otherwise by independent counsel to be appointed by the Board of Directors, that in its or his opinion such Director or Officer was not guilty of willful misconduct or a knowing violation of the criminal law. If the determination is to be made by the Board of Directors, it may rely, as to all questions of law, on the advice of independent counsel. Every reference herein to Director or Officer shall include every Director or Officer or former Director or Officer of the Corporation and every person who may have served at its request as a Director or Officer of another corporation in which the Corporation owns shares of stock or of which it is a creditor or, in case of a non-stock corporation, to which the Corporation contributed and, in all of such cases, his executors and administrators. The right of indemnification hereby provided shall not be exclusive of any other rights to which any Director or Officer may be entitled. In every instance in which the Virginia Stock Corporation Act, as it exists on the date hereof or may hereafter be amended, permits the limitation or elimination of liability of directors or officers of a corporation to the corporation or its shareholders, the directors and officers of this Corporation shall not be liable to the Corporation or its shareholders. ARTICLE V The address of the initial registered office of the Corporation, which is located in the City of Richmond, Virginia, is c/o Dominion Resources, Inc., 100 Tredegar Street, 2nd Floor, P.O. Box 26532, Richmond, Virginia 23261. The initial registered agent of the Corporation is James F. Stutts, whose business office is identical with the registered office and who is a member of the Virginia State Bar, and a resident of the Commonwealth of Virginia. Incorporator: /s/ Mark D. Westmoreland, Esq. -2- EX-3.2 3 CHARTER OF CNG ACQUISITION CERTIFICATE OF INCORPORATION OF DRI NEW SUB II, INC. FIRST. The name of the corporation is DRI New Sub II, Inc. SECOND. The address of the corporation's registered office in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of Newcastle. The name of its registered agent at such address is The Corporation Trust Company. THIRD. The nature of the business or objects or purposes to be transacted, promoted or carried on by the Corporation are: To engage in the business of a public utility holding company, and to guarantee, purchase, hold, sell, assign, transfer, mortgage, pledge or otherwise dispose of shares of the capital stock or other ownership interests of, or any bonds, securities or evidence of indebtedness created by any other corporations or other legal entities organized under the laws of this State or any other state, country, nation or government, and while the owner thereof to exercise all the rights, powers and privileges of ownership, including the right to vote thereon; and To carry on any other business not prohibited by law or required to be specifically set forth in this Certificate of Incorporation; and In general, to possess and exercise all the powers and privileges granted by the General Corporation Law of Delaware or by any other law of Delaware or by this Certificate of Incorporation together with any powers incidental thereto. The objects and purposes specified in the foregoing clauses shall, except where otherwise expressed, be in nowise limited or restricted by reference to, or inference from, the terms of any other clause in this Certificate of Incorporation, but the objects and purposes specified in each of the foregoing clauses of this article shall be regarded as independent objects and purposes. FOURTH. The total number of shares which the corporation shall have authority to issue is 100 shares of Common Stock without par value. FIFTH. The name and mailing address of the incorporator is: Mark D. Westmoreland, Esq. McGuire, Woods, Battle & Boothe LLP 901 East Cary St. Richmond, Virginia 23219-4057 SIXTH. The Board of Directors of the corporation is expressly authorized to adopt, amend or repeal bylaws of the corporation but the stockholders may adopt additional bylaws and may amend or repeal any bylaw whether adopted by them or otherwise. SEVENTH. Whenever a compromise or arrangement is proposed between this corporation and its creditors or any class of them and/or between this corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all of the stockholders or class of stockholders, of this corporation, as the case may be, and also on this corporation. EIGHTH. No director of this corporation shall be liable to the corporation or its stockholders for monetary damages for breach or breaches of fiduciary duties as a director, provided that the provisions of this article shall not eliminate or limit the liability of a director (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv) for any transaction from which the director derived an improper personal benefit. NINTH. Election of directors need not be by written ballot except and to the extent provided in the bylaws of the corporation. IN WITNESS WHEREOF, I have signed this certificate of incorporation this 14th day of September, 1999. /s/ Mark D. Westmoreland EX-99.1 4 STATISTICAL ANALYSIS DRI/CNG COMPANIES RELATIVE REGIONAL SIZE ANALYSIS Introduction The attached statistical analysis has been prepared at the request of the Staff of the Securities and Exchange Commission (the "SEC") with responsibility for administering the Public Utility Holding Company Act of 1935 (the "1935 Act") in connection with their review of the merger of Dominion Resources, Inc. and Consolidated Natural Gas Company and related transactions under the 1935 Act, and for no other purpose. The assumptions, which are set forth below, and which are reflected in the analysis with respect to the characterization of the region in which the combined DRI/CNG Companies will operate reflect SEC practice under the 1935 Act in analyzing other utility merger transactions under the 1935 Act and are not intended to be utilized for any other purpose. Assumptions 1. The region in which the combined DRI/CNG Companies will operate has been defined to include: (a) the States in which the regulated utility subsidiaries of DRI and CNG presently operate (which includes Virginia, North Carolina, Ohio, Pennsylvania and West Virginia) plus (b) all States in which any utility operates if such utility is part of an integrated electric utility system which has an actual electric interconnection with Virginia Power (which includes Maryland, Delaware, Pennsylvania, New Jersey, the District of Columbia, Indiana, Kentucky, Michigan, South Carolina and Tennessee in addition to the States in which the DRI/CNG Companies presently operate) (the "Neighboring States") plus (c) all States which are one wheel away from any of the Neighboring States (which adds Alabama, Georgia, Mississippi, Illinois and New York). 2. The regional definition is sensible in an era of restructuring and competition in which DRI/CNG's neighbors are also its competitors (i.e., both DRI/CNG and its immediate neighbors will compete for each other's customers) and in which DRI/CNG's neighbors' neighbors are also competitors (i.e., both DRI/CNG and its neighbors' neighbors will compete for DRI/CNG's neighbors' customers). 3. The aggregate relative size analysis does not reflect the possible divestiture of Virginia Natural Gas as contemplated by the August 9, 1999 Stipulation with the Virginia State Corporation Commission Staff which would have no effect on the size of the region (as Virginia would be included within the region in any event) but would result in a decrease in the relative size of the DRI/CNG Companies within the region.
ELECTRIC NO. GAS ELECTRIC GAS TOTAL GAS RETAIL CUSTOMERS TRANS. LIN TRANS. SALES GAS SALES TRANSPORTED SALES ELECTRIC GAS (MILES) MILES (MWH) (Mcf) (Mcf) (Mcf) ------------------------------------------------------------------------------------------------------ Dominion/CNG Companies: Virginia Power 1,977,248 5,050 79,787,099 East Ohio Gas 1,187,844 1,305 192,178,022 116,114,372 308,292,394 Peoples Gas 269,620 5,510 39,690,461 37,818,257 77,508,718 Virginia Natural Gas 208,332 80 24,814,316 25,149,611 49,963,927 Hope Gas 119,719 23 15,207,807 15,557,205 30,765,012 Total Dominion/CNG Companies 1,977,248 1,785,515 5,050 6,919 79,787,099 271,890,606 194,639,445 466,530,051 Total Market Data 57,022,418 25,276,169 151,778 118,322 2,292,939,138 3,948,343,536 7,653,373,748 11,601,717,284 Dominion/CNG Market Share 3.47% 7.06% 3.33% 5.85% 3.48% 6.89% 2.54% 4.02%
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NET NET NET NET NET PEAK UTILITY PLANT ELECTRIC GAS GROSS UTILITY UTILITY UTILITY GEN. ($) PLANT ($) PLANT ($) REV. ($) EXP. ($) REV. ($) CAP. (MW) ------------------------------------------------------------------------------------------------------ Dominion/CNG Companies: Virginia Power 9,214,529,263 9,099,733,800 4,627,617,395 1,959,911,425 2,667,705,970 13,390 East Ohio Gas 848,269,000 0 848,269,000 1,200,493,000 800,695,000 399,798,000 0 Peoples Gas 453,007,000 0 45,300,700 329,329,000 184,174,000 145,155,000 0 Virginia Natural Gas 366,640,000 0 366,640,000 209,691,000 116,764,000 92,927,000 0 Hope Gas 110,090,000 0 110,090,000 108,333,000 57,211,000 51,122,000 0 Total Dominion/CNG Companies 10,992,535,263 9,099,733,800 1,370,299,700 6,475,463,395 3,118,755,425 3,356,707,970 13,390 Total Market Data 282,648,420,442 256,734,558,517 26,218,235,868 146,647,145,477 55,611,479,453 89,862,051,847 346,437 Dominion/CNG Market Share 3.89% 3.54% 5.23% 4.42% 5.61% 3.74% 3.87%
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NET PEAK GAS SYSTEM NUMBER OF GEN. LOAD CAPACITY COMBINATION (MWh) (MW) (MCF/DAY) UTILITIES ----------------------------------------------------------- Dominion/CNG Companies: Virginia Power 57,408,421 14,537 East Ohio Gas 0 0 849,982 Peoples Gas 0 0 235,720 Virginia Natural Gas 0 0 251,000 Hope Gas 0 0 92,200 Total Dominion/CNG Companies 57,408,421 14,537 1,428,902 Total Market Data 1,583,173,157 393,027 28,331,371 122 Dominion/CNG Market Share 3.63% 3.70% 5.04%
-3- EX-99.2 5 DESCRIPTION OF NON-UTILITIES DOMINION CAPITAL, INC. AND KEY SUBSIDIARIES Dominion Capital, Inc. [identified as "Dominion Capital Holding" on financials], a Virginia corporation ("DCI"), is a diversified financial services holding company whose principal assets are financial services companies. DCI's other holdings include land development and management subsidiaries and a limited partnership interest in a Louisiana hydroelectric project, Vidalia Hydroelectric. DCI's largest subsidiary is Dominion Capital Financial, Inc., a Virginia corporation ("DCFI"), which is a holding company for DCI's financial services subsidiaries. DCFI's subsidiaries include (1) Dominion Mortgage Services, Inc., a Virginia corporation, which owns various subsidiaries that originate, purchase, securitize and service residential home equity and mortgage loans; (2) Virginia Financial Ventures, Inc., a Virginia corporation which holds an interest in a national finance company that provides senior debt financing on a cash flow or asset-based lending basis to middle-market companies needing funds to expand, recapitalize or undertake buyouts; (3) Dominion Capital Ventures Corporation, a Virginia corporation whose subsidiaries are engaged in an integrated merchant banking and asset management business specializing in originating, structuring and syndicating complete financial instruments and solutions for middle-market companies for leveraged buyouts, recapitalizations, acquisitions and growth, and in acquiring and managing positions in leveraged senior debt and high yield transactions; (4) OptaCor Financial Services Company, a Virginia corporation that originates and services unsecured loans primarily to members of professional groups and organizations; (5) Dominion Venture Investments, Inc., a Virginia corporation whose subsidiaries engage in the financing of small and mid-sized independent oil and natural gas producers in order to facilitate the acquisition, recapitalization, refinancing and development of domestic onshore and offshore oil and gas properties; (6) Edgen, Inc., a Delaware corporation whose subsidiaries own a planned waterfront community in Texas and provide real estate brokerage services for such project; (7) Dominion Land Management Company, a Virginia corporation whose subsidiaries manage the development and sale of planned community real estate assets; (8) Stanton Associates, Inc., a Virginia corporation whose subsidiaries own various real estate assets including shopping centers and an air cargo facility; and (9) Rincon Securities Inc., a New York corporation whose assets consist of a high-grade preferred stock portfolio. Vidalia Audit, Inc., a Virginia corporation, is a DCI subsidiary that acts as the audit company for the Vidalia hydroelectric project on the Mississippi River in Louisiana. Louisiana Hydroelectric Capital Corporation, a Virginia corporation, is a DCI subsidiary that acts as an investment company. Its only asset is a 9.93% owner participation in the Sydney A. Murray Hydroelectric plant. Dominion Lands, Inc., a Virginia corporation, is a DCI subsidiary whose subsidiaries own and develop various residential real estate developments in Virginia and North Carolina. - 2 - DOMINION ENERGY, INC. AND KEY SUBSIDIARIES Dominion Energy, Inc., a Virginia corporation ("DEI"), is an energy services holding company. DEI's business is divided among three principal lines of business: domestic power generation, foreign power generation, and oil and gas exploration and development. DEI subsidiaries engaged in domestic power generation include (1) Dominion Cogen, Inc., a Virginia corporation that engages in cogeneration activities; (2) Dominion Energy Services, Inc., a Virginia corporation which operates and provides maintenance services for nonutility domestic power projects; (3) Dominion Cogen NY, Inc., a Virginia corporation engaged in cogeneration projects in the State of New York; (4) Dominion Cogen WV, Inc., a Virginia corporation engaged in cogeneration projects in the State of West Virginia; (5) Dominion Kincaid, Inc., a Virginia corporation whose subsidiary operates a 1,108 MW coal-fired power plant in the State of Illinois; (6) Dominion Elwood, Inc., a Delaware corporation that owns a 50% interest in an entity that owns a power plant in the State of Illinois; and (7) Dominion Energy Construction Company, a Virginia corporation that acts as general contractor for the Kincaid power plant. DEI subsidiaries engaged in foreign power generation include (1) Dominion Generating S.A. ("DGSA"), an Argentine corporation engaged in electric power generation in Argentina; (2) Dominion Management Argentina, S.A. ("DMASA"), an Argentine corporation providing operation and maintenance services for electric power production in Argentina; (3) Dominion Energy Central America, Inc. ("DECA"), a Belize corporation whose subsidiary engages in hydroelectric power generation in Belize; (4) Inversiones Dominion Bolivia S.A. ("IDB"), a Bolivian corporation that owns a 50% interest in an entity that engages in hydroelectric power production in Bolivia; and (5) Dominion Holdings Peru S.A.C. ("DHP"), a Peruvian corporation whose subsidiaries engage in hydroelectric power generation in Peru. DEI subsidiaries engaged in oil and gas activities include (1) Dominion Reserves, Inc., a Virginia corporation whose subsidiaries engage in oil and gas exploration and production primarily in the States of West Virginia and Michigan; (2) Dominion Black Warrior Basin, Inc., an Alabama corporation engaged in methane gas production; (3) Dominion Reserves-Utah, Inc., a Utah corporation engaged in methane gas production in Utah; (4) Carthage Energy Services, Inc., a Michigan corporation engaged in gas marketing; (5) Dominion Canada Holding Company, Inc., a Canadian corporation whose subsidiaries engage in gas exploration and production in Canada; and (6) Dominion San Juan, Inc., a Virginia corporation whose subsidiary holds oil and gas investments. EX-99.3 6 PROPOSED FORM OF NOTICE EXHIBIT I-1 UNITED STATES OF AMERICA before the SECURITIES AND EXCHANGE COMMISSION PUBLIC UTILITY HOLDING COMPANY ACT OF 1935 Release No. / , 1999 - - - - - - - - - - - - - - - - - - - ) In the Matter of ) ) Dominion Resources, Inc. ) 120 Tredegar Street ) Richmond, VA 23219 ) ) and ) ) Consolidated Natural Gas Company ) CNG Tower, 625 Liberty Avenue ) Pittsburgh, PA 15222 ) ) (70 - 09477) ) - - - - - - - - - - - - - - - - - - - Dominion Resources, Inc., a Virginia corporation and currently a holding company exempt from the registration requirements of the Public Utility Holding Company Act of 1935 (the "Act") pursuant to Section 3(a)(1) thereof and Rule 2 thereunder ("DRI"), and Consolidated Natural Gas Company, a Delaware corporation and a registered holding company under the Act ("CNG"), have entered into an Amended and Restated Agreement and Plan of Merger dated as of May 11, 1999 (the "Merger Agreement"). DRI and CNG have filed an application on Form U-1 under the Act seeking approval of (i) their merger (the "Merger") under Sections 9(a)(2) and 10 of the Act, (ii) their retention of their existing businesses, investments and non-utility activities under Section 11 (b) and (iii) the establishment of DRI Services, Inc. as a subsidiary service company under Section 13 and the adoption of a new system-wide Service Agreement. The Merger Agreement contemplates a two-step merger transaction. In the first step, a wholly owned subsidiary of DRI ("SPV") will merge (the "First Merger") with and into DRI in a transaction in which DRI will be the surviving corporation. In the second step, CNG will either merge (the "Second Merger") (i) with and into another wholly owned subsidiary of DRI ("CNG Acquisition") in a transaction in which CNG Acquisition will be the surviving corporation (which is the preferred structure for the Second Merger) or (ii) with and into DRI in a transaction in which DRI will be the surviving corporation (the alternative structure for the Second Merger). The First Merger and the Second Merger are herein together referred to as the "Merger" or the "Transaction". As a result of the Merger and the other transactions contemplated by the Merger Agreement (collectively, irrespective of the transaction structure actually implemented, the "Transaction"), CNG will cease to exist and either CNG Acquisition, as the successor in interest to CNG, will become a direct subsidiary of DRI or each of CNG's four public utility subsidiaries will become direct subsidiaries of DRI. As a result of the Merger, CNG's non-utility subsidiaries will each become direct or indirect subsidiaries of CNG Acquisition or DRI, as the case may be. Following completion of the Merger, irrespective of the transaction structure actually implemented, DRI and CNG Acquisition, if applicable, will register as a holding company pursuant to Section 5 of the 1935 Act. DRI and CNG have filed a concurrent application-declaration (File No. 70- 09517) seeking authorization for financing arrangements in connection with the Merger and activities of the combined company after giving effect to the Merger and the registration of DRI as a holding company. DRI and CNG believe that their combination provides a unique opportunity for DRI, CNG and their respective shareholders, customers and employees to participate in the formation of a competitive energy services provider in the rapidly evolving energy services business and to share in the benefits of industry restructuring which is already occurring in the majority of states in which DRI and CNG operate. The energy industry, including both the gas and electricity segments of the business, is evolving from an industry characterized by the presence of regulated natural monopolies confined in their operations to prescribed geographical service territories to a dynamic, competitive industry in which national and regional participants compete for the right to provide energy services to retail customers who increasingly have a choice in their energy supply needs. The result of these increasingly rapid changes wrought by both legislative and administrative initiatives as well as by demands of the marketplace, is a far reaching transformation of the U.S. energy industry in which energy production, transportation/transmission and distribution are reorganizing along national and regional functional lines. The energy company of tomorrow will, if it seeks to be an effective competitor, of necessity need to be bigger and will need to be focused on the development and delivery of newly repackaged energy products and services designed to meet the changing demands of the marketplace. DRI and CNG believe that, in the restructured and competitive energy industry of tomorrow, the combined companies will be well-positioned to compete with other national and regional industry participants, a competitive position that neither DRI nor CNG, acting alone, would be able to achieve. The Merger will provide DRI and CNG with the ability to integrate their complementary lines of business: retail and wholesale natural gas and electricity sales, natural gas exploration and production, international operations and new electric generation. The Merger will also provide the combined companies with the lower risk profile inherent in geographic and product diversification. In short, the Merger will provide the combined companies with the operational and practical ability to compete for the right to provide energy services to their combined customer base of 4 million as well as, once the transition to retail competition has been fully established, 18 million additional electric customers and 12 million additional gas customers in states already served. Moreover, few job cuts are expected as a result of the Merger as there is not much redundancy between the two companies. Pursuant to Sections 9(a)(2) and 10 of the Act, DRI and CNG request authorization and approval of the Commission for DRI to acquire, through the Merger (including, indirectly, through CNG Acquisition or otherwise), all of the issued and outstanding common stock of CNG and, indirectly, all of the common stock of each of the four public utility subsidiaries of CNG; namely, (i) Virginia Natural Gas, Inc., a Virginia corporation, (ii) Hope Gas, Inc., a West Virginia corporation, (iii) The Peoples Natural Gas Company, a Pennsylvania corporation, and (iv) The East Ohio Gas Company, an Ohio corporation. Following completion of the Merger, DRI will register as a holding company pursuant to Section 5 of the 1935 Act. Pursuant to Section 11(b) of the Act, DRI and CNG request authorization and approval of the Commission for DRI and CNG to retain their existing businesses, investments and non-utility activities. Pursuant to Section 13 of the Act, DRI and CNG request authorization and approval of the Commission to form DRI Services, Inc., a Delaware corporation, which initially will have 100 shares of common stock, no par value, all of which will be subscribed to by DRI at a price of $1 per share, as a subsidiary service company and for DRI Services, Inc. and other affiliates in the combined DRI-CNG system to enter into a new systemwide Service Agreement. DRI and CNG will also request authorization and approval of the Commission, (i) an exemption from Section 13(b) of the Act with respect to certain services provided by Virginia Electric and Power Company ("Virginia Power"), DRI's electric utility subsidiary, and its subsidiaries pursuant to a settlement agreement with state regulators and (ii) grandfathering of certain existing investments for purposes of Rules 53 and 58 promulgated under the Act. DRI, a diversified utility holding company, has its principal office at 120 Tredegar Street, Richmond, Virginia 23219, telephone (804) 819-2000. DRI's common stock is listed on the New York Stock Exchange. DRI's principal subsidiary is Virginia Power, a regulated public utility engaged in the generation, transmission, distribution and sale of electric energy. The primary service area of Virginia Power is in Virginia and northeastern North Carolina. DRI's other major subsidiaries are Dominion Energy, Inc., an independent power and natural gas subsidiary, and Dominion Capital, Inc., a diversified financial services company. DRI was incorporated in 1983 as a Virginia corporation. DRI and its subsidiaries had 11,033 full-time employees as of December 31, 1998. DRI is currently exempt from registration as a holding company under the Act. DRI also owns and operates a 365 Mw natural gas fired generating facility in the United Kingdom. CNG is a Delaware corporation organized on July 21, 1942, and a public utility holding company registered under the 1935 Act. CNG's common stock is listed on the New York Stock Exchange. CNG is engaged solely in the business of owning and holding all of the outstanding equity securities of nineteen directly owned subsidiary companies. CNG and its subsidiaries are engaged in all phases of the natural gas business: distribution, transmission, storage and exploration and production. The Application and any amendments thereto are available for public inspection through the Commission's Office of Public Reference. Interested persons wishing to comment or request a hearing should submit their views in writing by May 31, 1999, to the Secretary, Securities and Exchange Commission, Washington, D.C. 20549, and serve a copy on AES at the address specified above. Proof of service (by affidavit or, in case of an attorney at law, by certificate) should be filed with the request. Any request for hearing shall identify specifically the issues of fact or law that are disputed. A person who so requests will be notified of any hearing, if ordered, and will receive a copy of any notice or order issued in the manner. After said date, the Application, as filed or as amended, may be granted and/or permitted to become effective. For the Commission, by the Division of Investment Management, pursuant to delegated authority. -----END PRIVACY-ENHANCED MESSAGE-----