File No. 70-9555
As filed with the Securities and Exchange Commission on May 22, 2001
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM U-1 APPLICATION-DECLARATION
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AMENDMENT NO. 4
TO
APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Dominion Resources, Inc.
120 Tredegar Street
Richmond, VA 23219
(Name of company filing this statement and
address of principal executive offices)
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Dominion Resources, Inc.
(Name of top registered holding company
parent of each applicant or declarant)
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James F. Stutts
Vice President and
General Counsel
Dominion Resources, Inc.
120 Tredegar Street
Richmond, VA 23219
(Name and address of agent for service)
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The Commission is also requested to send copies
of any communication in connection with this matter to:
Norbert F. Chandler, Esq. Tia S. Barancik, Esq.
Managing Counsel LeBoeuf, Lamb, Greene &
Dominion Resources Services, Inc. MacRae, L.L.P.
Dominion Tower, 625 Liberty Avenue 125 West 55th Street
Pittsburgh, PA 15222 New York, N.Y. 10019
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transactions..................................1
A. Introduction. ...................................................1
B. Summary of Request................................................7
C. Overview of Industry Restructuring................................9
D. Proposed Financing and Guarantee Authorization...................13
(1) Existing Financing and Guarantee Authorization..............13
(2) Proposed Financing and Guarantee Authorization..............15
a. Debt Securities.........................................18
i. Short-Term Notes....................................18
ii. Commercial Paper....................................19
iii.Long-Term Notes.....................................19
iv. Interest Rate Risk Management.......................21
b. Equity Securities.......................................22
i. Common stock (including Stock Purchaser
Contracts/Units)..................................22
ii. Preferred Securities................................23
c. Financing Conduits......................................24
d. Guarantees..............................................26
e. Use of Proceeds.........................................27
E. Investment in EWGs and FUCOs.....................................27
F. Tax Allocation Agreement.........................................38
G. Management and Exploitation of DRI System Non-Utility
Real Estate....................................................40
Item 2. Fees, Commissions and Expenses.......................................41
Item 3. Applicable Statutory Provisions......................................41
Item 4. Regulatory Approvals.................................................44
Item 5. Procedure. .......................................................44
Item 6. Exhibits and Financial Statements....................................45
Item 7. Information as to Environmental Effects..............................45
i
AMENDMENT NO. 4
TO
APPLICATION-DECLARATION
UNDER
SECTIONS 6(a), 7, 9(a), 10, 12(b), 12(c), 12(f), 32 and 33
AND
RULES 42, 45, 46, 53 and 54
OF
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
FOR APPROVAL OF
SYSTEM-WIDE FINANCING AUTHORITY
ISSUANCE OF SECURITIES, GUARANTEES AND CREDIT SUPPORT IN
CONNECTION WITH INVESTMENT IN EXEMPT WHOLESALE GENERATORS
AND FOREIGN UTILITY COMPANIES
TAX ALLOCATION AGREEMENT
AND
INVESTMENT AND PARTICIPATION IN NON-UTILITY BUSINESSES
Item 1. Description of Proposed Transactions.
A. Introduction.
Dominion Resources, Inc. ("DRI") is a Virginia corporation and a registered
public utility holding company under the Public Utility Holding Company Act of
1935 (the "Act"). DRI, through its subsidiaries, is engaged in the energy
business, principally in retail electricity and natural gas sales and
distribution, wholesale natural gas and electricity sales,
1
wholesale electric generation, interstate gas transportation, and natural gas
exploration and production activities.
DRI's principal utility subsidiaries are: (1) Virginia Electric and Power
Company ("Virginia Power"), a regulated public utility engaged in the
generation, transmission and distribution of electric energy in Virginia and
northeastern North Carolina, (2) The Peoples Natural Gas Company ("Peoples"), a
regulated public utility engaged in the distribution of natural gas in
Pennsylvania, (3) The East Ohio Gas Company ("East Ohio"), a regulated public
utility engaged in the distribution of natural gas in Ohio, and (4) Hope Gas,
Inc. ("Hope"), a regulated public utility engaged in the distribution of natural
gas in West Virginia. Virginia Power is a direct subsidiary of DRI. Peoples,
East Ohio and Hope are each direct subsidiaries of Consolidated Natural Gas
Company ("CNG") which is a direct subsidiary of DRI and which is also a
registered holding company under the Act.
DRI's non-utility activities are conducted through: (1) Dominion Energy,
Inc. ("DEI") which, through its direct and indirect subsidiaries (together with
DEI, the "DEI Companies"), is active in the competitive electric power
generation business and in the development, exploration and operation of natural
gas and oil reserves, (2) direct and indirect subsidiaries of Virginia Power,
which are engaged in acquiring raw materials for the fabrication of nuclear fuel
for use at power stations which are owned and operated by Virginia Power,
providing telecommunications services utilizing fiber optic lines which are
owned by Virginia Power, fuel procurement for Virginia Power, energy marketing
and nuclear consulting services and (3) direct and indirect subsidiaries of CNG
which are engaged in all phases of the natural gas business other than retail
distribution including transmission, storage and exploration and production. DRI
and all of its subsidiaries are herein referred to as the "DRI System". As
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described in their Application-Declaration in File No. 70-9679 and as approved
by the Commission on October 5, 2000, HCAR No. 27242 (Oct. 5, 2000), DRI and CNG
are in the process of rationalizing, reorganizing and restructuring their
non-utility businesses to permit the consolidation within intra-corporate groups
of all of their non-utility subsidiaries which are engaged in similar lines of
business.
In addition, as described in greater detail below, this rationalization
will be occurring simultaneously with the restructuring of Virginia Power's
generation and transmission and distribution functions as required by Virginia
law and could ultimately result in a realignment into a single group of
companies of all generation activities of the DRI System. In such event, all of
such generation activities, including regulated generation activities currently
conducted by Virginia Power as well as unregulated generation activities
currently conducted by the DEI Companies, could be held under a single corporate
entity below the DRI level (presently each of Virginia Power and DEI is a direct
subsidiary of DRI) and any or all of these generation activities could be
conducted through separate indirect subsidiaries of DRI which are qualified as
exempt wholesale generators ("EWGs"). As discussed below, Virginia Power is
under a mandate of Virginia law to effect the functional separation of its
generation and transmission and distribution activities. At the present time, it
has not yet been determined how that separation will be accomplished and whether
or not that separation will result in the transfer of currently regulated
generation activities to EWG affiliates of DRI. Moreover, such separation and
any related transfer of regulated generation activities to affiliated EWGs will
require the approval of the Virginia State Corporation Commission (the "Virginia
Commission"). For purposes of this Application, DRI merely notes the possibility
that regulated generation activities currently
3
conducted by Virginia Power could, in the future, be conducted by subsidiaries
of DRI which are EWGs but that this development will not occur without Virginia
Commission approval.
As of the date of this Application-Declaration, DRI has another significant
non-utility subsidiary, Dominion Capital, Inc. ("DCI" and, together with its
subsidiaries, the "DCI Companies") which is a diversified financial services
company with several operating subsidiaries in the commercial lending, merchant
banking and residential lending businesses. Pursuant to the Order of the
Commission approving the merger of DRI and CNG, HCAR No. 27113 (Dec. 15, 1999)
(the "Merger Order"), DRI is obligated to dispose of its interest in the DCI
Companies (other than certain interests in specified independent power projects)
no later than January 28, 2003.
The Merger Order approved the transactions contemplated by the Amended and
Restated Agreement and Plan of Merger dated as of May 11, 1999, pursuant to
which, on January 28, 2000, (i) a wholly-owned subsidiary of DRI was merged with
and into DRI with DRI being the surviving corporation and (ii) Consolidated
Natural Gas Company ("Old CNG"), a registered holding company under the Act, was
merged (the "Merger") into a wholly owned subsidiary of DRI at that time called
"New DRI Sub II" which, as a result of the Merger succeeded to all the assets,
liabilities and equity of Old CNG by operation of law. New DRI Sub II, the
surviving corporation in the Merger, was renamed "Consolidated Natural Gas
Company" and is the entity which is herein referred to as "CNG". DRI and CNG (as
the successor corporation to Old CNG) registered as holding companies under the
Act following the Merger. By Order dated December 15, 1999, HCAR No. 27112, SEC
File No. 70-9517, the Commission also authorized various financings of DRI and
its subsidiaries for the period from the closing date of the Merger through
January 28, 2002 ("Initial Financing Order"). The Initial Financing
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Order was issued on the basis of the Application-Declaration in File No.
70-09517, including all amendments thereof and exhibits thereto (the "Initial
Financing Application").
In the Merger Order, the Commission acknowledged DRI's rationale for
entering into the Merger:
DRI and [Old] CNG state that, in the emerging competitive environment,
their combination into a regional energy provider will enable them to (i)
give the combined company the scale, scope and skills necessary to compete
successfully in the energy marketplace; (ii) create a platform for growth
in a region that is rapidly deregulating and is the source of approximately
40% of the nation's demand for energy; (iii) establish a company with
combined gas storage, transportation and electric power production
capability concentrated in the Northeast and Mid-Atlantic region; and (iv)
enable the combined company to realize cost savings from elimination of
duplicate corporate and administrative programs, greater efficiencies in
operations and business processes and streamlined purchasing practices.
The Commission's approval of DRI's acquisition of Old CNG in conjunction
with the authorizations granted in the Initial Financing Order, which permit DRI
to issue and maintain in place equity, preferred and debt securities at the DRI
level, reflect the Commission's understanding of the new competitive environment
confronting the nation's energy utilities and the Commission's willingness to
apply the Act in a manner designed to provide registered holding companies with
the opportunity to move quickly to take advantage of new and expanding business
opportunities, including those for which non-traditional types of holding
company financing is required or, for reasons of economic efficiency, is
preferable. Oftentimes, non-traditional types of holding company financing, such
as preferred securities and debt, can be obtained at a lower cost of funds than
equity.
Less than two months after the issuance of the Merger Order and the Initial
Financing Order, the Commission was presented with the opportunity to express
its views on the issue of non-traditional holding company financing in a context
other than an acquisition of a
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regulated utility. In approving a request by The Southern Company ("Southern")
for expansive and comprehensive authorization to issue holding company preferred
and debt securities, HCAR No. 27134 (Feb. 9, 2000) (the "Southern Financing
Order"), the Commission stated:
The central question presented in Southern's application is whether we
should administer the Necessary and Urgent Clause in a more flexible manner
to reflect the increasingly competitive environment Southern and other
electric systems face and the changing mix of holding company
businesses...Southern has made a number of compelling arguments that
support granting the requested authorization....Limiting Southern's
financing options may impose an unreasonable financial burden...Southern
has found the equity market an unattractive source of financing, and
asserts that its current cost of equity is well above the cost associated
with long-term debt. Requiring Southern to issue equity under circumstances
when debt financing may be less expensive could impose an unreasonable
financial burden on the company...[w]e believe that a broader reading of
the Necessary and Urgent Clause that accepts purposes such as financing
investments in [exempt wholesale generators], [exempt telecommunications
companies], [foreign utility companies] and other nonutility businesses
presents no detriment to the interests protected under the Act.
More recently, the Commission has been presented with other opportunities
to take account of the ongoing dramatic changes in the energy industry arising
from both federal and state restructuring initiatives and to fashion a means of
regulating under the 1935 Act and its statutory mandate holding company system
financings in the emerging business and regulatory environment. In approving a
request by Cinergy Corp. ("Cinergy") for expansive and comprehensive
authorization to engage in system-wide financings in view of Cinergy's need to
comply with state mandated restructuring of its generation, HCAR No. 27190 (June
23, 2000) (the "Cinergy Financing Order"), the Commission granted Cinergy
relief, subject to a reservation of jurisdiction, from the more restrictive
provisions of Rule 53 which, as discussed below, can have the unintended effect
of preventing registered holding companies from complying, or making it fiscally
impossible for registered holding companies to comply, with state mandates
requiring the functional or actual separation of generation from transmission
and distribution
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activities. Most recently, building on the prior authorizations given to DRI,
Southern and Cinergy, the Commission approved a comprehensive financing scheme
for Exelon Corporation ("Exelon") which included an authorization for Exelon to
invest up to $4 billion in EWGs and foreign utility companies ("FUCOs"). HCAR
No. 27296 (Dec. 8, 2000) (the "Exelon Financing Order").
B. Summary of Request.
In its application seeking authorization to complete the Merger and the
Initial Financing Application, DRI sought reasonable authorization to permit DRI
to conduct and grow its business in the immediate post-Merger time frame. Today,
approximately sixteen months after completion of the Merger, DRI seeks to
streamline and to update and modernize its financing authorization to keep pace
with DRI's needs as a new registered system seeking to rationalize and integrate
its businesses and operations in light of an increasingly competitive industry
environment. In this connection, DRI seeks financing authorization which is
compatible with DRI's newly rationalized and integrated business as well as
consistent with the modern, efficient and forward-looking authorizations granted
to Southern in the Southern Financing Order, to Cinergy in the Cinergy Financing
Order and to Exelon in the Exelon Financing Order. Thus, this
Application-Declaration seeks authorization through December 31, 2004 (the
"Authorization Period") for DRI, subject to all of the representations,
covenants and restrictions set forth below, to:
(1) increase its total capitalization (excluding retained earnings and
accumulated other comprehensive income) by $6,000,000,000 by way of the
issuance of equity, preferred securities and debt securities, other than
guarantees, and, with respect to the issuance of preferred securities, as
permitted by the Initial Financing Order, to clarify and consolidate DRI's
authority to form special purpose financing subsidiaries and to guarantee
the obligations of such special purpose financing subsidiaries as described
below;
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(2) increase the aggregate amount of the guarantee authorization for
DRI to $9,600,000,000 for all subsidiaries of DRI, including, without
limitation, subsidiaries of DRI which are EWGs and/or FUCOs;
(3) obtain authorization under Sections 6, 7, 32 and 33 of the Act
and/or Rules 53(c) and 54 and/or any other applicable provision of the Act
or Rule to enter into the above described financing transactions and to
apply the proceeds thereof, and to provide the above described guarantees,
for any lawful purpose given DRI's current level of investment in EWGs and
FUCOs (which is approximately $2,861,000,000 as of the date hereof) as well
as DRI's current intention to make further investments in EWGs and FUCOs,
including, without limitation, with the proceeds of such financing
transactions and by way of such guarantees, provided that the aggregate
amount of DRI's aggregate investment in EWGs and FUCOs does not exceed 100%
of DRI's consolidated retained earnings plus $8,000,000,000 but excluding
from such amount and such calculation the amount of DRI's Aggregate
Investment in Restructured Assets (the "EWG/FUCO Investment Limit"), which
amount approximates the sum of (i) $2,861,000,000 (the amount of DRI's
current investment in EWGs and FUCOs) plus (ii) $6,000,000,000 (the amount
of additional investment DRI contemplates that it will make in EWGs and
FUCOs during the Authorization Period which investment may be made from the
proceeds of any equity, preferred or debt financing or by way of a
guarantee or otherwise) but excludes (iii) approximately $7,000,000,000
representing (the net book value of DRI's indirect investment, through
Virginia Power, in the generation assets owned by Virginia Power on the
date hereof or hereafter acquired by Virginia Power and which are or become
included in Virginia Power's retail ratebase if and to the extent such
assets hereafter are, or after the date of their acquisition by Virginia
Power become, "eligible facilities" within the meaning of Section 32(a)(2)
of the Act and which become owned, directly or indirectly, by any
subsidiary of DRI which is qualified as an EWG. DRI notes that this
approximately $7,000,000,000 of investment represents investment in
regulated generation assets which are owned by Virginia Power prior to its
restructuring in compliance with Virginia law by January 1, 2002, and which
are to be deregulated ("Aggregate Investment in Restructured Assets").
Although no new financing is associated with this investment, this
investment would count as "aggregate investment" in EWGs for purposes of
Rule 53 if these assets are recharacterized for regulatory purposes as
"eligible facilities" and are owned by EWG. If DRI's Aggregate Investment
in Restructured Assets were to be included in aggregate investment in EWGs
and FUCOs, on the basis of the assumptions set forth above, the approximate
amount of such aggregate investment would be $16,028,000,000.); and
(4) with respect to all securities, credit facilities, financing
arrangements, indebtedness and similar obligations (including, without
limitation, any securities, credit facilities, financing arrangements,
indebtedness and similar obligations incurred to finance the Merger) and
all guarantees, financing arrangements and other credit support in respect
of subsidiaries of DRI (collectively, the "Existing Obligations"), in each
case outstanding or existing as of the date of the Commission's Order
approving this Application-Declaration and whether issued, created or
incurred prior to or after the date of the Merger, extend the period of
time during which DRI may amend, renew, extend and/or replace and/or
otherwise refinance or modify (each, a "Refinancing" and the term
8
"Refinance" shall have a correlative meaning) such Existing Obligations,
such period of time to extend through the Authorization Date.
This Application-Declaration also seeks Commission authorization for (I) an
extension of the period of time with respect to the financing authority
heretofore granted to the subsidiaries of DRI in the Initial Financing Order
through the Authorization Period (as defined herein) and for the subsidiaries of
DRI, during such period of time, to Refinance and to engage in Refinancings of
their outstanding securities, credit facilities financing arrangements,
indebtedness and similar obligations which are outstanding at any time during
the Authorization Period whether issued, created or incurred prior to or after
the date hereof, subject to all of the other representations, covenants and
restrictions set forth in the Initial Financing Application, except to the
extent that such financing authority is expressly modified as requested in this
Application-Declaration, (II) DRI and its subsidiaries to enter into the Tax
Allocation Agreement annexed hereto as Exhibit C, and (III) DRI to manage and
exploit DRI System non-utility real estate as described below.
C. Overview of Industry Restructuring.
DRI refers to and notes the extensive discussions of the changes occurring
in the energy industry described in detail in DRI's Application-Declaration
submitted in connection with the Merger Order and in the Initial Financing
Application, Southern's Application-Declaration submitted in connection with the
Southern Financing Order, Cinergy's Application-Declaration submitted in
connection with the Cinergy Financing Order and Exelon's Application-Declaration
submitted in connection with the Exelon Financing Order as well as in Orders of
the Commission, most notably in addition to the Orders noted above, the
Commission's Orders approving the formations of New Century Energies, Inc., HCAR
No. 26748 (Aug. 1, 1997) and Alliant, Inc., WPL Holdings, Inc., HCAR No. 26856
(April 14, 1998), aff'd sub nom., Madison
9
Gas and Electric Company v. Securities and Exchange Commission (D.C. Cir. 1999).
DRI also refers to and notes the exhaustive discussion of industry change and
the recommendations for regulatory reform and adaptation of the implementation
of the Act described in the 1995 Report of the Staff of the Commission, The
Regulation of Public-Utility Holding Companies. DRI does not seek to repeat, yet
again, in this Application-Declaration these discussions, the thrust of which
is, quite simply, that the regulatory framework established in 1935 with the
passage of the Act and the implementation of the Act by the Commission over
sixty-five years must, as contemplated by the Act itself, adapt to changing
technologies and means of conducting the energy business if the Act is to remain
a viable means of regulating the utility industry for the purpose of achieving
the policy goals set forth in Section 1 of the Act while at the same time not
thwarting reasonable growth and modernization by those engaged in the energy
business, including registered holding companies. Failure to adapt the
administration of the Act would cause the Act to function as an artificial
constraint on the legitimate business growth and expansion of registered holding
companies as well as on the ability of other potential competitors to enter the
new competitive energy marketplace.
In conjunction with its acquisition of CNG last year, DRI enunciated a
business strategy of becoming a preeminent provider of energy services in the
MAIN to Maine region, generally the Northeastern quadrant of the United States.
Before the Merger, DRI had most of its electric power assets in several of the
region's states and gas reserves located within, or transportable to, the
region. CNG also had a significant concentration of assets in and, in the case
of its oil and gas reserves, transportable to the region. The Merger has given
the combined company a strong platform for future growth in the region, allowing
DRI to market its portfolio of energy products to a broad customer base. DRI's
assets are well positioned to serve the MAIN
10
to Maine region, and DRI is already building upon its asset base by siting and
permitting natural gas fired merchant power plans along CNG's interstate
pipeline system.
Prior to becoming a registered holding company, DRI entered into a number
of development activities and related financing arrangements with respect to new
wholesale generation projects, the financing arrangements for which were
approved in the Initial Financing Order; e.g., the financing arrangements with
respect to the $850 million lease financing for the construction and lease of
ten to fourteen new gas-fired turbines to be installed at various new power
generation facilities under development by DEI. Since the closing of the CNG
acquisition and in furtherance of its business plan, DRI has acquired the
Millstone Nuclear Power Station for a purchase price of approximately
$1,300,000,000. In addition, as part of DRI's plan for continued expansion into
the wholesale and merchant generation business, the DEI Companies have firm
commitments to purchase additional gas fired turbines and steam generators
totaling approximately $2,600,000,000. However, DRI's focused generation
strategy is artificially limited by inappropriate and outdated 1935 Act
constraints. By way of example DRI notes that 50% of DRI's consolidated retained
earnings would represent only 2% of DRI's consolidated capitalization. See
"Investment in EWGs and FUCOs" below. At the same time, Virginia Power is
subject to a mandate under Virginia law that it functionally separate its
generation activities from its transmission and distribution activities.
Under the Virginia Electric Utility Restructuring Act ("Virginia
Restructuring Act"), which became law July 1, 1999, the Virginia Commission is
required to direct the functional separation of generation, retail transmission
and distribution of all incumbent electric utilities to be completed by January
1, 2002. Each incumbent electric utility is required to submit to the Virginia
Commission by January 1, 2001 a plan for such functional separation,
11
which may be accomplished through the creation of affiliates or through such
other means as may be acceptable to the Virginia Commission. The Virginia
Restructuring Act requires the Virginia Commission to approve any transaction
for the transfer of assets by an incumbent electric utility in connection with
the achievement of functional separation. Virginia Power filed its plan for
functional separation with the Virginia Commission in November, 2000./1/
For DRI, Rule 53(a) would serve as a rigid and artificial constraint on the
legitimate and lawful growth and development of DRI's organic energy business
and would also have the potential effect of making compliance with Virginia law,
if not legally impossible, then fiscally impossible; as no responsible
registered holding company can risk the possibility that the Commission would
deny needed financing at some point in the future due merely to technical
non-compliance with Rule 53(a). This is especially true when such technical
non-compliance with the Act results primarily from compliance with applicable
state law and does not provide any indication of the financial condition of the
system as a whole. Moreover, DRI affirmatively represents that the contemplated
financing investments by DRI in EWGs and FUCOs for which approval of the
Commission is sought herein will not have a substantial adverse impact on the
financial integrity of the DRI System. In fact, the opposite is true: it is
precisely DRI's investments in these types of activities which are a principal
source of growth and expansion for the DRI System.
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/1/ Also by January 1, 2001, each incumbent electric utility owning, operating,
controlling or having an entitlement to transmission is required to join a
regional transmission entity ("RTE"), to which such utility must transfer
the management and control of its transmission system. Virginia Power is a
founding member of the Alliance Regional Transmission Organization ("RTO"),
whose proposal for the establishment of an RTO in accordance with the
requirements of FERC's Order No. 2000 has been conditionally accepted by
FERC. The Virginia Commission is also required to approve any transaction
for the transfer of ownership or management and control of transmission to
an RTE. Also, Virginia Power, in October, 2000, filed with the Virginia
Commission an application for approval of Virginia Power's transfer of
management and control of its transmission system to the Alliance RTO.
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D. Proposed Financing and Guarantee Authorization.
(1) Existing Financing and Guarantee Authorization.
The Initial Financing Order permits DRI, through December 31, 2002, to
maintain in place and to Refinance all credit facilities and financing
arrangements and maintain outstanding all indebtedness and similar obligations
created thereunder existing as of the date of the Merger (including, without
limitation, any facilities, financing arrangements, indebtedness or similar
obligations incurred in connection with or to finance the Merger). The Initial
Financing Order states that as of the date of the Merger, DRI had in effect a
number of credit and financing facilities under which DRI could issue Other
Securities (as defined in the Initial Financing Order) of approximately $955.31
million in addition to the approximately $4.5 billion in securities that DRI
proposed to issue to finance the cash consideration payable in connection with
the Merger. The Initial Financing Order also permits DRI, through December 31,
2002, to issue additional equity, preferred and/or debt securities and to
Refinance such additional securities up to an aggregate principal or face amount
not to exceed $1.5 billion and to issue additional securities, similar to the
financing arrangements existing on the date of the closing of the Merger up to
an aggregate principal amount of $250 million (the "New Financing Authority").
As of the date of this Application-Declaration, DRI has issued an aggregate of
$4.8 billion of securities pursuant to the Initial Financing Order including
approximately $4.2 billion of Refinancings of the approximately $4.5 billion of
securities originally issued to finance the Merger. Excluding Refinancings, DRI
has issued an aggregate of $604 million of new securities pursuant to the
Initial Financing Order comprising $354 million of equity securities and $250
million of preferred securities. However, within the next few months, DRI will
be required to issue additional securities that will exceed the level authorized
by the Initial Financing Order. These securities will be issued for general
corporate purposes of the DRI System which includes
13
the ongoing financing of DRI's non-utility businesses as well as the acquisition
of non-utility power generation assets as part and parcel of DRI's ongoing
growth and expansion into the wholesale and merchant generation business.
The Initial Financing Order also permits DRI, through December 31, 2002, to
maintain in place and to Refinance all guarantees, financing arrangements and
other credit support and similar obligations existing as of the date of the
Merger. The Initial Financing Order states that as of the date of the Merger,
DRI had guarantees or other credit support outstanding (i) in support of payment
obligations of the DEI Companies of approximately $947.312 million, (ii) in
support of payment obligations of the DCI Companies of approximately $47.5
million and (iii) in support of payment obligations of Virginia Power Energy
Marketing, Inc., a subsidiary of Virginia Power, of approximately $200 million.
The Initial Financing Order also permits DRI to provide additional guarantees
and credit support to subsidiaries of DRI and to Refinance such additional
guarantees and credit support (the "New Guarantee Authority"). The amount of
such additional guarantees and credit support authorized is (i) $1.5 billion, in
the case of the DEI Companies, of which $866,400,000 has been utilized as of the
date of this Application Declaration, (ii) $1.6 billion, in the case of the DCI
Companies, of which $946,000,000 has been utilized as of the dated hereof and
(iii) $100 million, in the case of Virginia Power Energy Marketing, Inc., all of
which has been utilized as of the date hereof.
Finally, the Initial Financing Order also permits subsidiaries of DRI,
including CNG and its subsidiaries and Virginia Power, to issue securities and
to incur financing obligations to the extent not permitted by Rule 52 without
express Commission authorization as described in the Initial Financing
Application and to maintain in place and to Refinance the various financing
arrangements described in the Initial Financing Application and/or which are
14
not otherwise permitted by Rule 52 (all of such authority is herein referred to
as the "Subsidiary Financing Authority"). By way of this
Application-Declaration, DRI does not seek any modification to the Subsidiary
Financing Authority except to the extent of seeking (x) an extension of the
period of time for which such Refinancing authority was granted to the
Authorization Date (as defined herein) and (y) clarification of the authority of
DRI's subsidiaries to Refinance outstanding securities, credit facilities,
financing arrangements, indebtedness and similar obligations. This modified
authority is intended to mirror the authority sought for DRI and serves to
rationalize and streamline (and minimize the administrative burdens associated
with) the process of obtaining Commission approval for system-wide financing and
is sought for no other purpose.
(2) Proposed Financing and Guarantee Authorization.
DRI now proposes to supersede the Initial Financing Order to the extent of
the New Financing Authority and the New Guarantee Authority by new financing and
guarantee authority the terms of which are set forth below. As with the New
Financing Authority and the New Guarantee Authority, the new authority requested
herein would be used for general corporate purposes as well as to fund
investments in EWGs and FUCOs (see "use of proceeds" below).
The authority requested herein is intended to enable DRI to respond quickly
and efficiently to its financing needs and available conditions in capital
markets. The general approach embodied in this request is consistent with
similarly broad financing authority granted to other registered holding
companies in recent orders. It also provides DRI with a better ability to assess
its capital needs and to target investment in light of DRI's obligation to
divest of the DCI Companies. For example, the Initial Financing Order permits
DRI to incur incremental
15
guarantees in support of the DCI Companies in the amount of $1.6 billion through
December 31, 2002. However, while such authority may be appropriate at present,
as DRI moves to divest of the DCI Companies at the same time as DRI seeks to
grow its organic energy business, DRI foresees that it might be preferable to
target more investment to the DEI Companies and to DRI System Companies engaged
in gas related activities. The "pigeon-holing" aspect of DRI's New Guarantee
Authority does not reflect DRI's stated business plan and artificially
constrains investment of available capital in DRI's energy businesses while at
the same time providing for the possibility of unneeded credit support for a
business which DRI is in process of divesting.
Subject to the terms and conditions described below, from time to time
through the Authorization Period, DRI proposes (A) to increase its total
capitalization (excluding retained earnings and accumulated other comprehensive
income) by $6,000,000,000 through issuance and/or sale of any combination of
equity, preferred and/or debt securities, whether directly or through one or
more special-purpose subsidiaries (the "Aggregate Financing Limit"), and (B) to
increase the level of its guarantees in support of DRI System companies
(including, without limitation, subsidiaries of DRI which are EWGs and/or FUCOs)
outstanding at any time to an aggregate of $9,600,000,000 (the "Guarantee
Limit"), all without further authorization from the Commission, including with
respect to the terms of sale or issuance. At December 31, 2000, DRI's total
capitalization (excluding retained earnings and accumulated other comprehensive
loss) totaled approximately $20,563,000,000 ($21,868,000,000, after giving pro
forma effect to the acquisition of the Millstone Nuclear Power Station), and
DRI's subsidiaries and affiliates had debt or other obligations outstanding
totaling $3,057,000,000 ($3,057,000,000, after giving pro forma effect to the
acquisition of the Millstone Nuclear Power Station) backed by DRI guarantees.
16
Except as expressly modified by this Application-Declaration, all terms,
conditions and restrictions set forth in the Initial Financing Application will
be adhered to by DRI. In addition to the other terms and conditions hereinafter
specified, the following restrictions (many of which are already included in the
Initial Financing Application but are restated here for ease of reference) will
govern the financing transactions proposed herein and for which authority is
sought pursuant to this Application-Declaration:
(i) Common equity will comprise at least 30 percent of DRI's consolidated
capitalization (based upon the financial statements included in DRI's
most recent quarterly report on Form 10-Q or annual report on Form
10-K). DRI has already represented in the Initial Financing
Application that it and each public utility subsidiary in the DRI
System will maintain at least 30% common stock equity in its capital
structure. DRI represents that as of December 31, 2000, common equity
comprised 32% (30.6%, after giving pro forma effect to the acquisition
of the Millstone Nuclear Power Station) of DRI's consolidated
capitalization.
(ii) DRI will not issue any debt securities if, upon original issuance
thereof, DRI's senior debt obligations are not rated investment grade
by at least two of the major ratings agencies; i.e., Standard & Poor's
Corporation ("S&P"), Fitch Investor Service ("Fitch") or Moody's
Investor Service ("Moody's").
(iii) The interest rate on any series of debt security with a maturity of
one year or less will not exceed the greater of (a) 300 basis points
over the comparable term London interbank offered rate, or (b) a rate
that is consistent with similar securities of comparable credit
quality and maturities issued by other companies.
(iv) The interest rate on any series of debt security with a maturity
greater than one year will not exceed the greater of (a) 300 basis
points over the comparable term U.S. Treasury securities or other
market-accepted benchmark securities, or (b) a rate that is consistent
with similar securities of comparable credit quality and maturities
issued by other companies. As set forth in the Initial Financing
Application, the final maturity of any long-term debt securities
issued by DRI will not exceed 50 years.
(v) The distribution rate on any series of preferred security will not
exceed the greater of (a) 400 basis points over the comparable term
U.S. Treasury securities or other market-accepted benchmark
securities, or (b) a rate that is consistent with similar securities
of comparable credit quality and structure issued by other companies.
17
(vi) The underwriting fees, commissions or similar remuneration paid in
connection with the issue, sale or distribution of any securities
authorized hereunder (excluding interest rate risk management
instruments, as to which separate provisions governing fees and
expenses are proposed below) will not exceed 700 basis points of the
principal or face amount of the securities issued or gross proceeds of
the financing.
The following additional terms and conditions apply to the financing
transactions proposed herein and for which authority is sought pursuant to this
Application-Declaration.
a. Debt Securities.
i. Short-Term Notes.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI proposes to make
short-term borrowings from banks or other financial institutions. Such
borrowings will be evidenced by (1) "transactional" promissory notes to be dated
the date of such borrowings and to mature not more than one year after the date
thereof or (2) "grid" promissory notes evidencing all outstanding borrowings
from the respective lender, to be dated as of the date of the first borrowing
evidenced thereby, with each such borrowing maturing not more than one year
thereafter. Any such note may or may not be prepayable, in whole or in part,
with or without a premium in the event of prepayment. DRI notes that, at any
given time, some or all of its outstanding short-term notes will be issuable in
connection with the establishment of back-up credit facilities to support DRI's
commercial paper program but that such credit facilities will not be drawn upon
and no borrowings will occur thereunder except in certain limited circumstances
at which time obligations under the related commercial paper will be paid. Thus,
short-term notes issued in connection with the establishment of commercial paper
back-up facilities backstop and duplicate commercial paper issuances and should
not be deemed to be borrowings under DRI's financing
18
authorization unless and until an actual borrowing occurs under the related
credit facility. Any other result would "double count" DRI's actual financial
obligation.
ii. Commercial Paper.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell commercial paper through one or more dealers or agents or
directly to a limited number of purchasers if the resulting cost of money is
equal to or less than that available from commercial paper placed through
dealers or agents.
DRI proposes to issue and sell the commercial paper at market rates with
varying maturities not to exceed 270 days. The commercial paper will be in the
form of book-entry unsecured promissory notes with varying denominations of not
less than $25,000 each. In commercial paper sales effected on a discount basis,
no commission or fee will be payable in connection therewith; however, the
purchasing dealer will re-offer the commercial paper at a rate less than the
rate to DRI. The discount rate to dealers will not exceed the maximum discount
rate per annum prevailing at the date of issuance for commercial paper of
comparable quality and the same maturity. The purchasing dealer will re-offer
the commercial paper in such a manner as not to constitute a public offering
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
iii. Long-Term Notes.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell long-term debt securities ("Notes") in one or more series.
19
Notes of any series may be either senior or subordinated obligations of
DRI. Notes of any series (a) will have maturities greater than one year, (b) may
be subject to optional and/or mandatory redemption, in whole or in part, at par
or at various premiums above the principal amount thereof, (c) may be entitled
to mandatory or optional sinking fund provisions, and (d) may be convertible or
exchangeable into common stock of DRI. Interest accruing on Notes of any series
may be fixed or floating or "multi-modal" (where the interest is periodically
reset, alternating between fixed and floating interest rates for each reset
period, with all accrued and unpaid interest together with interest thereon
becoming due and payable at the end of each such reset period). Notes will be
issued under one or more indentures to be entered into between DRI and financial
institution(s) acting as trustee(s); supplemental indentures may be executed in
respect of separate offerings of one or more series of Notes.
Notes may be issued in private or public transactions. With respect to the
former, Notes of any series may be issued and sold directly to one or more
purchasers in privately negotiated transactions or to one or more investment
banking or underwriting firms or other entities who would resell the Notes
without registration under the Securities Act in reliance upon one or more
applicable exemptions from registration thereunder. From time to time DRI may
also issue and sell Notes of one or more series to the public either (i) through
underwriters selected by negotiation or competitive bidding or (ii) through
selling agents acting either as agent or as principal for resale to the public
either directly or through dealers.
The maturity dates, interest rates, redemption and sinking fund provisions,
if any, with respect to the Notes of a particular series, as well as any
associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be
20
established by negotiation or competitive bidding and reflected in the
applicable indenture or supplement thereto and purchase agreement or
underwriting agreement setting forth such terms.
iv. Interest Rate Risk Management.
In connection with the issuance and sale of the short- and long-term debt
securities described above, DRI proposes to manage interest rate risk through
the use of various interest rate management instruments commonly used in today's
capital markets, such as interest rate swaps, caps, collars, floors, options,
forwards, futures and similar products designed to manage interest rate risks.
DRI will enter into such derivative transactions pursuant to agreements
with counterparties that are highly rated financial institutions, i.e., whose
senior secured debt, at the date of execution of the agreement with DRI, is
rated at least "A-" by S&P or Fitch or "A3" by Moody's. The derivative
transactions will be for fixed periods and in no case will the notional
principal amount exceed the principal amount of the underlying debt security
except to the extent necessary to adjust for the duration of the hedged
securities and the underlying of the derivative. DRI will not engage in
"leveraged" or "speculative" derivative transactions.
Fees, commissions and annual margins in connection with any interest rate
management agreements will not exceed 100 basis points in respect of the
principal or notional amount of the related debt securities or interest rate
management agreement. In addition, with respect to options such as caps and
collars, DRI may pay an option fee which, on a net basis (i.e., when netted
against any other option fee payable with respect to the same security), would
not exceed 10% of the principal amount of the debt covered by the option.
21
b. Equity Securities.
i. Common stock (including Stock Purchaser
Contracts/Units).
At December 31, 2000, DRI had 500 million shares of common stock authorized
for issuance, 245.8 million shares of which were issued and outstanding. As of
the date of this Application-Declaration, DRI has issued 6 million shares of
common stock pursuant to the Initial Financing Order.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI proposes to issue
and sell additional shares of its common stock (i) through solicitations of
proposals from underwriters or dealers, (ii) through negotiated transactions
with underwriters or dealers, (iii) directly to a limited number of purchasers
or to a single purchaser, and/or (iv) through agents. The price applicable to
additional shares sold in any such transaction will be based on several factors,
including the current market price of the common stock and prevailing capital
market conditions.
DRI also proposes to issue and sell from time to time stock purchase
contracts ("Stock Purchase Contracts"), including contracts obligating holders
to purchase from DRI and/or DRI to sell to the holders, a specified number of
shares or aggregate offering price of DRI common stock at a future date. The
consideration per share of common stock may be fixed at the time the Stock
Purchase Contracts are issued or may be determined by reference to a specific
formula set forth in the Stock Purchase Contracts. The Stock Purchase Contracts
may be issued separately or as part of units ("Stock Purchase Units") consisting
of a stock purchase contract and debt and/or preferred securities of DRI and/or
debt obligations of nonaffiliates, including U.S. Treasury securities, securing
holders' obligations to purchase the common stock of DRI under
22
the Stock Purchase Contracts. The Stock Purchase Contracts may require holders
to secure their obligations thereunder in a specified manner.
Further, DRI requests authorization to issue common stock as consideration,
in whole or in part, for acquisitions by DRI or any nonutility subsidiary
thereof of securities of businesses or the assets of such businesses, the
acquisition of which (a) is exempt under the Act or the rules thereunder or (b)
has been authorized by prior Commission order issued to DRI or any nonutility
subsidiary thereof, subject in either case to applicable limitations on total
investments in any such businesses. The shares of DRI common stock issued in any
such transaction would be valued at market value based on the closing price on
the day before closing of the sale, on average high and low prices for a period
prior to the closing of the sale, or on some other method negotiated by the
parties.
ii. Preferred Securities.
From time to time during the Authorization Period, subject to the Aggregate
Financing Limit and the other conditions specified above, DRI also proposes to
issue and sell preferred securities in one or more series.
Preferred securities of any series (a) will have a specified par or stated
value or liquidation value per security, (b) will carry a right to periodic cash
dividends and/or other distributions, subject among other things, to funds being
legally available therefor, (c) may be subject to optional and/or mandatory
redemption, in whole or in part, at par or at various premiums above the par or
stated or liquidation value thereof, (d) may be convertible or exchangeable into
common stock of DRI, (e) and may bear such further rights, including voting,
preemptive or other rights, and other terms and conditions, as set forth in the
applicable
23
certificate of designation, purchase agreement and/or similar instruments
governing the issuance and sale of such series of preferred securities.
Preferred securities may be issued in private or public transactions. With
respect to private transactions, preferred securities of any series may be
issued and sold directly to one or more purchasers in privately negotiated
transactions or to one or more investment banking or underwriting firms or other
entities who would resell the preferred securities without registration under
the Securities Act in reliance upon one or more applicable exemptions from
registration thereunder. From time to time DRI may also issue and sell preferred
securities of one or more series to the public either (i) through underwriters
selected by negotiation or competitive bidding or (ii) through selling agents
acting either as agent or as principal for resale to the public either directly
or through dealers.
The liquidation preference, dividend or distribution rates, redemption
provisions, voting rights, conversion or exchange rights, and other terms and
conditions of a particular series of preferred securities, as well as any
associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable certificate of designation,
purchase agreement or underwriting agreement, and other relevant instruments
setting forth such terms.
c. Financing Conduits.
In addition to issuing any of the foregoing debt or equity securities
directly, DRI requests approval (to the extent such approval may be required
under the Act) to form one or more subsidiaries for the sole purpose of issuing
and selling any of the foregoing securities, lending, dividending or otherwise
transferring the proceeds thereof to DRI or an entity
24
designated by DRI, and engaging in transactions incidental thereto, subject to
the Aggregate Financing Limit and the other conditions previously specified.
The proposed subsidiaries will comprise one or more financing subsidiaries
(each, a "Financing Subsidiary") and one or more special-purpose entities (each,
a "Special-Purpose Entity," and together with Financing Subsidiaries, "Financing
Conduits"). In either case the subsidiaries' businesses will be limited to
issuing and selling securities on behalf of DRI; the subsidiaries will have no
substantial physical assets or properties. Any securities issued by the
Financing Conduits will be fully guaranteed by DRI either directly or
ultimately.
DRI would acquire all of the outstanding shares of common stock or other
equity interests of the Financing Subsidiary for an amount not less than the
minimum required by the applicable law. The business of the Financing Subsidiary
will be limited to effecting financing transactions with third parties for the
benefit of DRI and its subsidiaries. As an alternative in a particular instance
to DRI directly issuing debt or equity securities, or through a Special-Purpose
Entity, DRI may determine to use a Financing Subsidiary as the nominal issuer of
the particular debt or equity security. In that circumstance, DRI would provide
a full guarantee or other credit support with respect to the securities issued
by the Financing Subsidiary, the proceeds of which would be lent, dividended or
otherwise transferred to DRI or an entity designated by DRI. The primary
strategic reason behind the use of a Financing Subsidiary would be to segregate
financings for the different businesses conducted by DRI, distinguishing between
securities issued by DRI to finance its investments in nonutility businesses
from those issued to finance its investments in the core utility business. A
separate Financing Subsidiary may be used by DRI with respect to different types
of nonutility businesses.
25
DRI would use Special-Purpose Subsidiaries in connection with certain
financing structures for issuing debt or equity securities, in order to achieve
a lower cost of capital, or incrementally greater financial flexibility or other
benefits, than would otherwise be the case.
d. Guarantees.
DRI also proposes to supersede the New Guarantee Authority with, as
discussed above, a general greater authority intended to accommodate DRI's
MAIN-to-Maine business plan.
Specifically, from time to time through the Authorization Period, DRI
requests authority to guarantee, obtain letters of credit, enter into financing
arrangements and otherwise provide credit support (each, a "Guarantee") in
respect of the debt or other securities or obligations of any or all of DRI's
subsidiary or associate companies (including any thereof formed or acquired at
any time during the Authorization Period), and otherwise to further the business
of DRI, provided that the total amount of Guarantees at any time outstanding
does not exceed the Guarantee Limit, and provided further, that (i) any
Guarantees of EWGs and FUCOs shall also be subject to the EWG/FUCO Investment
Limit; and (ii) any Guarantees of energy-related companies within the meaning of
rule 58 ("Rule 58 Companies") shall also be subject to the aggregate investment
limit of Rule 58. The terms and conditions of any Guarantees, and the underlying
liabilities covered thereby, would be established at arm's-length based upon
market conditions.
DRI wishes to propose how the Guarantee Limit would operate relative to
Financing Conduits. As described above, in the event that DRI issues any debt or
equity securities authorized hereunder by means of any Financing Conduits, DRI
would provide a full Guarantee in respect of the payment and other obligations
of the Financing Conduit under the
27
securities issued by it. Given that any securities nominally issued by any such
Financing Conduit are in substance securities issued by DRI itself, any
securities issued by a Financing Conduit would count dollar-for-dollar against
the Aggregate Financing Limit. However, DRI submits that any Guarantees of
securities of Financing Conduits should be excluded entirely from the Guarantee
Limit, since inclusion thereof would amount to "double counting," in effect
penalizing DRI for using Financing Conduits.
e. Use of Proceeds.
DRI proposes to issue the debt and equity securities authorized herein for
general corporate purposes, including without limitation (i) payments,
redemptions, acquisitions, and refinancings of outstanding securities issued by
DRI, (ii) acquisitions of and investments in EWGs and FUCOs, provided that DRI's
aggregate investment therein does not exceed the EWG/FUCO Investment Limit,
(iii) acquisitions of and investments in Rule 58 Companies as permitted by Rule
58, (iv) loans to and investments in other system companies and (v) other lawful
corporate purposes.
As previously described, in the event DRI utilizes Financing Conduits to
issue securities authorized herein, such entities would apply the proceeds of
securities nominally issued by them to make loans, dividends or other transfers
thereof to DRI or an entity designated by DRI, which would then be applied for
any of the purposes enumerated in the preceding paragraph.
E. Investment in EWGs and FUCOs.
This Application-Declaration also seeks authorization and approval of the
Commission with respect to the issuance of securities, guarantees and credit
support in connection with DRI's investment in EWGs under Section 32 of the Act
and FUCOs under
27
Section 33 of the Act. Specifically, this Application-Declaration seeks
authorization and approval of the Commission under Sections 6, 7, 32 and 33 and
Rules 53 and 54 for DRI to undertake the financing transactions for which
authority is sought herein in view of DRI's intention, directly or indirectly
through one or more of its subsidiaries including, without limitation, CNG, to
invest an amount up to the EWG/FUCO Investment Limit in EWGs and FUCOs all as
more specifically described herein.
Today, DRI holds investments in various EWGs and FUCOs. DRI's specific EWG
and FUCO investments are described in detail in DRI's Registration Statement on
Form U5B filed with the Commission on April 27, 2000, which includes disclosures
with respect to CNG for the fiscal year ended December 31, 1999. Such
Registration Statement is hereby incorporated by reference herein. On a
consolidated basis at December 31, 2000 and after giving pro forma effect to the
acquisition of the Millstone Nuclear Power Station, DRI had invested
approximately $2,861,000,000 in EWGs and FUCOs (which amount also includes the
DRI Guarantee in respect of the $850 million lease financing referred to above
and which was approved in the Initial Financing Order) which represents 278% of
DRI's consolidated retained earnings at December 31, 2000 or 109% of the sum of
(x) DRI's consolidated retained earnings at December 31, 2000 plus (y) the
amount of CNG's retained earnings immediately prior to the Merger which were
recharacterized as paid-in-capital as a result of the accounting treatment of
the Merger.
In the Initial Financing Application, DRI and Old CNG stated:
Each of DRI and [Old] CNG also holds investments in various EWGs and FUCOs.
DRI's specific EWG investments are described in detail in DRI's Exemption
Statement on Form U-3A-2 for the fiscal year ended December 31, 1998 and
filed with the Commission in File No. 69-278. Such Exemption Statement on
Form U-3A-2 is hereby incorporated by reference herein. [Old]
28
CNG's specific EWG and FUCO investments are described below and are also
described in more detail in [Old] CNG's Annual Report on Form U5S for
fiscal year ended December 31, 1998 and filed with the Commission in File
No. 30-203. Such Annual Report on Form U5S is hereby incorporated by
reference herein. However, in order to obtain the cash required in
connection with the Merger and in order to focus DRI's efforts on achieving
its MAIN to Maine strategy, DRI has announced its intention to divest its
interests (and the interests it will acquire from [Old] CNG) in non-U.S.
EWG and FUCO holdings. In that connection, DRI has already entered into an
agreement with Duke Energy International, a subsidiary of Duke Energy
Corporation, pursuant to which DRI has agreed to sell to Duke all of DRI's
interests in its Latin American projects and, in fact, certain of such
projects have already been so sold. On a pro forma consolidated basis at
December 31, 1998, DRI and [Old] CNG together have invested $918,700,000 in
EWGs and FUCOs which represents 32% of pro forma consolidated retained
earnings at December 31, 1998. These historical pro forma figures do not
reflect the sale of DRI's Latin American projects (and the sale of the
non-U.S. projects to be acquired from [Old] CNG) nor do they reflect
certain accounting adjustments that will be required to be made under GAAP
after giving effect to the Merger. After giving effect to (i) the
accounting treatment for the Merger which will result in a consolidating
accounting adjustment that will eliminate [Old] CNG's retained earnings and
(2) the sale of DRI's Latin American assets (and the sale of the non-U.S.
projects to be acquired from [Old] CNG), DRI's investment in EWGs and FUCOs
will total approximately $68,000,000, which represents 5% of the pro forma
combined consolidated retained earnings at September 30, 1999. DRI and
[Old] CNG have submitted a separate Application-Declaration requesting
authorization to invest up to 100% of consolidated retained earnings of DRI
(as the registered holding company part of the combined DRI-CNG system) in
EWGs and FUCOs (File No. 70-9555)).
The Initial Financing Application also described in detail DRI's existing
financial support, predominantly in the form of guarantees, of its unregulated
energy subsidiaries, namely, the DEI Companies, and including certain
obligations in respect of a new synthetic lease arrangement pursuant to which
certain of the DEI Companies proposed to acquire new gas-fired turbines which
were to be installed in then as-yet-to-be-created EWGs. All of DRI's investment
in and support for the DEI Companies is described in detail in DRI's
Registration Statement on Form U5B, which was filed with the Commission April
27, 2000.
Adopting the methodology used in the Initial Financing Application, in
which DRI did not give effect to accounting adjustments required in connection
with the Merger, as of
29
December 31, 2000, DRI's aggregate investment in EWGs and FUCOs including DRI's
guarantee of the DEI Companies' obligations under the synthetic lease referred
to above and after giving pro forma effect to the acquisition of the Millstone
Nuclear Power Station was 109% of the combined retained earnings of DRI and CNG
as of December 31, 2000. However, if DRI does give effect to the accounting
adjustment required in connection with the Merger, DRI's aggregate investment in
EWGs and FUCOs as of December 31, 2000 after giving pro forma effect to the
acquisition of the Millstone Nuclear Power Station was 278% of consolidated
retained earnings. DRI represents that as of December 31, 2000, aggregate
investment in EWGs and FUCOs equaled approximately $2,861,000,000 (including the
Millstone plant) and DRI's consolidated retained earnings were $1,028,000,000.
DRI respectfully submits that the amount, expressed as a percentage of
consolidated retained earnings, of DRI's investment in EWGs and FUCOs is
artificially distorted by accounting adjustments required in connection with the
Merger. As a result of the application of the purchase method of accounting to
the Merger, the retained earnings of Old CNG immediately prior to the Merger
were, following the Merger, recharacterized as paid-in-capital on the books of
CNG as the new company which survived the Merger. The effect of this accounting
convention left CNG, but not its subsidiaries, with no retained earnings, but,
nevertheless, a strong balance sheet showing a significant common stock equity
level. DRI respectfully submits that tying the level of DRI's investment in EWGs
and FUCOs solely to a standard premised upon the level of the consolidated
retained earnings of DRI, without giving effect to the historic retained
earnings of Old CNG, unfairly penalizes DRI by making it impractical, if not
impossible, for DRI to compete for investment in the restructuring energy
30
industry while at the same time seeking a financing and capital structure which
is fiscally responsible.
At the present time, DRI respectfully submits that, as contemplated by Rule
53(c) and Rule 54, the level of DRI's investment in EWGs and FUCOs is not having
and will not have a substantial adverse impact on the financial integrity of the
DRI System or on any utility subsidiary within the DRI System or on the ability
of any state regulatory commission to protect any such utility subsidiary or its
customers. DRI represents to the Commission that the earnings produced from its
current investment in EWGs and FUCOs have contributed positively to the DRI
System's consolidated earnings or net income since the date of the Merger Order.
Moreover, granting the specific relief sought in this Application-Declaration
will benefit the DRI System by permitting DRI to access the capital markets in
the most efficient manner to support the operations, growth and expansion of the
DRI System in the new competitive environment. Thus, DRI requests authority
under Sections 6, 7, 32 and 33 and under Rules 53(c) and 54 to undertake the
financing transactions for which authority is sought herein in view of DRI's
intention to invest up to the EWG/FUCO Investment Limit in EWGs and FUCOs:
specifically for DRI to invest an aggregate amount not to exceed 100% of DRI's
consolidated retained earnings plus $8,000,000,000 in EWGs and FUCOs, in part,
from the proceeds of securities offerings effected by DRI and also by way of the
provision of guarantees, which amount includes DRI's existing investment in EWGs
and FUCOs of approximately $2,861,000,000 plus $6,000,000,000 of new investment
authority but excludes an estimate, as of December 31, 2001, of the net book
value of Virginia Power's investment in generation assets which are currently in
ratebase of approximately $7,000,000,000 and which, as described above, are to
be functionally separated from Virginia Power's transmission and retail
distribution operations no later than
31
January 1. 2002. No additional financing authorization is sought with respect to
these restructured assets of Virginia Power, but possibly, following their
restructuring they may be "eligible facilities" and could be owned by EWG
affiliates of DRI. Thus, the amount of investment therein could count as
"aggregate investment" for purposes of Rule 53.
In support of its request, DRI notes that the Commission has granted
similar relief to other registered holding companies seeking both to restructure
and to grow their organic energy business. For example, in the Cinergy Financing
Order, the Commission grandfathered Cinergy's existing EWG and FUCO investment
and permitted Cinergy to invest up to an additional $1 billion in EWGs and
FUCOs, with further investment subject to a reservation of jurisdiction. The
amount of investment authority requested represents 87% of Cinergy's total
capitalization. More recently, in the Exelon Financing Order, the Commission
granted authorization to Exelon to invest up to $4 billion in EWGs and FUCOs,
which represents 18.9% of Exelon's consolidated capitalization. In comparison,
DRI has a total capitalization which is four times the capitalization of Cinergy
but, as stated above, 50% of DRI's consolidated retained earnings would
represent only 2% of its total capitalization. Investment by DRI at the maximum
level of the EWG/FUCO Investment Limit, approximately $9,028,000,000
(approximately $16,028,000,000, if Aggregate Investment in Restructured Assets
is included), would represent 42% (74%, if Aggregate Investment in Restructured
Assets is included) of DRI's consolidated capitalization at December 31, 2000
and 878% (1,559%, if Aggregate Investment in Restructured Assets is included) of
DRI's consolidated retained earnings at December 31, 2000.
DRI respectfully submits that these percentages are artificially distorted,
and do not provide an adequate measure of the financial condition and strength
of the DRI System for two principal reasons. First, the possible approximate
$16,028,000,000 aggregate investment
32
amount would reflect approximately $7,000,000,000 of existing investment in
Virginia Power's ratebase generation assets which are to be restructured and
with respect to which no new financing is to be incurred for their acquisition
or development. DRI respectfully submits that the recharacterization of Virginia
Power's ratebase generation as "eligible facilities", if it occurs, is a purely
legal distinction under the 1935 Act and is without economic effect on the
capitalization or retained earnings of the DRI System or its financial
condition. In point of fact, DRI respectfully suggests that the application of
Rule 53 to an internal reorganization/restructuring transaction in which
generation assets are simply being moved from one subsidiary to another was not
the kind of transaction at which Rule 53 was targeted.
Second, DRI does not anticipate that the full amount of its new investment
of $6,000,000,000 will be made all at once or that DRI's consolidated
capitalization or retained earnings will remain constant; rather these
investments will be made over an extended timeframe in which DRI expects that
its consolidated capitalization and retained earnings would also change. Thus, a
more appropriate pro forma comparison would be to compare the aggregate amount
of this investment to a pro forma capitalization of DRI reflecting the full
increase of the financing authority sought herein of $6,000,000,000; or
approximately $9,028,000,000 (approximately $16,028,000,000, if Aggregate
Investment in Restructured Assets is included), of investment as compared to
$27,560,000,000 of pro forma consolidated capitalization which equates to
approximately 33% (58%, if Aggregate Investment in Restructured Assets is
included). With respect to retained earnings, DRI's investments in EWGs and
FUCOs have contributed positively to the consolidated retained earnings of the
DRI System.
Denial of DRI's request would make it impossible for DRI to proceed with
the implementation of its MAIN-to-Maine business plan in a restructured energy
industry and,
33
perhaps more importantly, would make it impossible for DRI to comply with
applicable restructuring mandates under Virginia law while at the same time
maintaining a fiscally responsible capital structure and access to financing on
reasonable terms. DRI notes that, in order to obtain the cash required in
connection with the Merger and in order to focus DRI's efforts on achieving its
MAIN to Maine strategy, DRI has announced its intention to divest its interests
in non-U.S. EWGs and FUCOs and other non-core assets not consistent with its
MAIN to Maine Strategy. In that connection, DRI has already disposed of certain
of its Latin American projects to Duke Energy International, a subsidiary of
Duke Energy Corporation and has announced the sale of other non-US assets to
Sempra and PowerGen, plc. To date DRI's EWG and FUCO investments have been
primarily non-U.S. enterprises, but in the future, DRI anticipates that its
investment in U.S. EWGs will increase substantially over the next several years.
The principal reason for this anticipated increase is DRI's announced
intention to build new independent power plants as well as DRI's desire to
purchase existing generating facilities which may be sold as a result of the
ongoing restructuring of the U.S. utility industry which has resulted in the
enactment of state laws mandating separation and/or divestiture of generation by
vertically integrated utilities. Opportunities in domestic power markets are
significantly more attractive and available today than several years ago. In
1996 the FERC issued Orders 888 and 889, introducing competition into U.S.
wholesale power markets. In the past several years, many states have enacted,
and most of the rest are considering legislation providing for competitive
supply of electricity to retail consumers, in many cases requiring franchised
utilities to divest generating assets. Only about half the states have enacted
restructuring legislation, so many important auctions are yet to occur. In
addition, some initial
34
buyers, like Sithe Energies, are reselling assets acquired in these utility
divestitures. Finally, peak demand for electricity has been steadily growing,
and in several regions capacity margins have been decreasing. The U.S. and
Canada are projected to require more than 186 GW of new generating capacity by
2010, according to a 1998 report by Resource Data International, the strategic
information firm. The new growth represents about $90 billion worth of projects.
These factors help explain both the buoyant sellers' market for auctions of
nuclear and fossil-fueled power plants, and the boom in new power plant
construction. In 1998, U.S. power plant developers made reservations for about
$12 billion in new plants, or nearly 40 percent of global orders, for plants
with total output of 40 GW. In the next decade, about $80 billion will be
invested in new power plants in North America, according to the energy
consulting firm Hagler Bailly.
Many of these new plants will be operated in whole or in part on a
"merchant," or market, basis. By definition, merchant plants produce energy to
sell on the competitive wholesale market. Unlike independent power production,
or "IPP," facilities, merchant plants are not supported by long-term offtake
contracts, but rather by their ability to produce power at market clearing
prices. In September 1996, the E.J. Stoneman plant, a 53 MW coal-fired facility
in Cassville, Wisconsin, became the first plant to sell its electricity entirely
on a merchant basis. Notwithstanding the lack of long-term power sales and other
"offtake" agreements, merchant plants have been able to secure investment grade
ratings, based on low marginal cost position and other relevant factors.
Planned merchant plant capacity in the United States more than doubled over
a recent twelve-month span, from 56,500 MW in October 1998 to 121,733 MW in
October 1999, according to the Electric Power Supply Association , a trade group
for independent power
35
producers and power marketers ("EPSA"). Development is occurring all over the
country, with about 40,000 MW under construction or development in New England
and the Pennsylvania-New Jersey-Maryland region; 27,000 MW in the Southeast;
24,000 MW in the Midwest; and 29,000 MW in the West. Additional merchant
capacity is emerging through divestitures as buyers convert previously regulated
plants into open market participants. According to the executive director of
EPSA:
Overall, what we've seen in the past three years is a total sea change in
the structure of the industry, which has marked the beginning of a totally
competitive generation sector. In the future, we'll continue to see this
trend of dramatically increasing merchant plant capacity.
Often, newly constructed generation facilities and divested generation
facilities will not satisfy the criteria for designation as qualifying
facilities ("QFs") under the Public Utility Regulatory Policy Act of 1978 and,
thus, if they are to be acquired by independent (i.e., non-utility generation or
out-of-region competitors) energy providers, they must be designated as EWGs.
Failure to obtain QF or EWG status for these newly constructed and divested
generation facilities would raise difficult issues under the 1935 Act because,
in the absence of the 1935 Act exemption for QFs and EWGs, most independent
acquirors of these assets could not satisfy the integration requirements of the
1935 Act with respect to the acquisition of non-exempt assets or continue to own
and operate the assets as part of a registered system.
Finally, pursuant to Virginia restructuring legislation, DRI's principal
electric utility subsidiary, Virginia Power, has been mandated to implement a
functional separation of its generation activities from its retail distribution
activities. The recently enacted Virginia restructuring legislation deregulates
generation and provides that beginning January 1, 2002, generation of electric
power will no longer be subject to public utility regulation in Virginia,
36
except as specified in that Act./2/ Thus, as described in the Press Release
dated April 19, 1999 and annexed hereto as Exhibit A-2, Virginia Power will
undertake the functional separation of Virginia Power's generation assets.
Virginia Power has significant ownership of electric generation facilities. The
generation assets are either wholly-owned by Virginia Power or jointly-owned
with other utilities, and are located in Virginia and North Carolina. The
installed capacity and net book value of the generation assets allocable to
Virginia Power's ownership interests are 13,591 MW and $6.4 billion,
respectively, at December 31, 1999. None of DRI's other utility subsidiaries own
any electric generating facilities.
DRI needs to be able to reposition its existing regulated generation to
maximize the value of those assets in a competitive environment. In this
connection, over the longer term, it is likely that DRI will, in a continuation
of the currently ongoing integration and rationalization of its businesses
(including the businesses of Old CNG), seek to hold all of its unregulated
generation in a single line of subsidiaries under a common sub-holding company.
Like a number of other utilities in states undergoing restructuring, DRI is
seeking to achieve asset flexibility and optimization by holding such assets in
EWG affiliates, where they can be used for electric sales back to the remnant
affiliated "T&D" utility or marketed for sale to off-system buyers, either with
respect to all or some of the particular assets. DRI's current intention is to
convert all or a substantial number of Virginia Power's power plants to EWG
status, since DRI believes that functional separation ultimately will be
required for the entire fleet. These EWGs
----------
/2/ Also on January 1, 2002, a phase-in of retail choice for electric customers
will begin under which, by January 1, 2004, all retail electric customers
will be permitted to purchase electric energy from any licensed supplier,
subject to up to a one-year delay by the Virginia Commission. The Virginia
Commission will retain jurisdiction to issue certificates for the
construction and operation of generation facilities. Virginia law has been
revised to accommodate merchant facilities, and several have been
certificated by the Virginia Commission.
----------
37
and FUCOs may be held, and the investments may be made, directly, or indirectly
through intermediate companies, partnerships or other corporate entities.
The authority requested herein is essential if DRI is to adapt to state
restructuring impacting its own regulated utility operations. DRI must obtain
sufficient investment flexibility under the Act to accommodate the restructuring
of Virginia Power's generation assets and their ownership by EWG affiliates. For
the foregoing reasons and to enable DRI to compete effectively in the
independent generation market, DRI hereby requests authorization to undertake
the financing transactions for which authority is sought herein in view of DRI's
intention to invest up to the EWG/FUCO Investment Limit in EWGs and FUCOs.
Pending completion of the record but without subtracting from the authority
granted to DRI under the Initial Financing Order, DRI requests that the
Commission reserve jurisdiction over: (i) DRI's request to invest an additional
$6,000,000,000 in EWGs and FUCOs from the proceeds of new financings or by way
of guarantees and (ii) any effect under the Act of the recharacterization of
ratebase assets of Virginia Power as "eligible facilities" and the transfer of
such assets to EWG affiliates.
F. Tax Allocation Agreement
DRI also requests the Commission's approval of an agreement for the
allocation of consolidated tax among DRI and its subsidiaries (the "Tax
Allocation Agreement"). Approval is necessary because the proposed Tax
Allocation Agreement may provide for the retention by DRI of certain payments
for tax losses that it has incurred, rather than the allocation of such losses
to its subsidiaries without payment as would otherwise be required by Rule
45(c)(5).
Provisions in a tax allocation agreement between a registered holding
company and its subsidiaries must comply with Section 12 of the Act and Rule 45
thereunder. Rule 45(a) of the Act generally prohibits any registered holding
company or subsidiary company from,
38
directly or indirectly, lending or in any manner extending its credit to or
indemnifying, or making any donation or capital contribution to, any company in
the same holding company system, except pursuant to a Commission order, Rule
45(c) provides, however, that no approval is required for a tax allocation
agreement between eligible associate companies in a registered holding company
system which "provides for allocation among such associate companies of the
liabilities and benefits arising from such consolidated tax return for each tax
year in a manner not consistent with" the conditions of the rule. Rule 45(c)(5)
provides that:
[t]he agreement may, instead of excluding members as provided in paragraph
(c) (4), include all members of the group in the tax allocation,
recognizing negative corporate taxable income or a negative corporate tax,
according to the allocation method chosen. An agreement under this
paragraph shall provide that those associate companies with a positive
allocation will pay the amount allocated and those subsidiary companies
with a negative allocation will receive current payment of their corporate
tax credits. The agreement shall provide a method for apportioning such
payments, and for carrying over uncompensated benefits, if the consolidated
loss is too large to be used in full. Such method may assign priorities to
specified kinds of benefits. (Emphasis added)
Under the rule, only "subsidiary companies," as opposed to "associate
companies" (which includes the holding company in a holding company system), are
entitled to be paid for corporate tax credits. However, if a tax allocation
agreement does not fully comply with the provisions of Rule 45(c), it may
nonetheless be approved by the Commission under Section 12(b) and Rule 45(a).
In connection with the 1981 amendments to Rule 45, the Commission explained
that the distinction between "associate companies" and "subsidiary companies"
represented a policy decision to preclude the holding company from sharing in
consolidated return savings. The Commission noted that exploitation of utility
companies by holding companies through the misallocation of consolidated tax
return benefits was among the abuses examined in the investigations underlying
the enactment of the Act 38. It must be noted, however, that the result
39
of Rule 45(c)(5) is not dictated by the statute and, as the Commission has
recognized, there is discretion on the part of the agency to approve tax
allocation agreements that do not, by their terms, comply with the Rule 45(c) --
so long as the policies and provisions of the Act are otherwise satisfied. In
this matter, where the holding company is seeking only to receive payment for
tax losses that have been generated by it, the proposed arrangement will not
give rise to the types of problems (e.g., upstream loans) that the Act was
intended to address. The relief sought herein is directly analogous to the
relief granted to The National Grid Group plc in the Commission's order
approving the acquisition of New England Electric System. HCAR No. 27154 (March
15, 2000).
DRI requests that the Commission reserve jurisdiction over the Tax
Allocation Agreement to be filed hereto as Exhibit C pending completion of the
record.
G. Management and Exploitation of DRI System Non-Utility Real Estate
DRI, on behalf of itself and its subsidiaries, requests authorization to
lease, sell or otherwise grant third persons access to or rights in excess or
unwanted real estate and to permit the extraction or harvesting of mineral or
other resources contained on or in such real estate. As an example of the type
of transactions that would be authorized pursuant to an order granted in this
proceeding, Martin-Marietta Corporation has expressed an interest in mining
limestone deposits on land owned by Dominion Transmission, Inc., an indirect
wholly-owned non-utility subsidiary of DRI.
DRI also requests authority either to designate an already existing
non-utility subsidiary or to form one or more new companies as a non-utility
subsidiary in which the real-estate activities of the DRI System will be
centralized. Such a company ("RealCo") may act as agent for DRI System companies
for these activities, manage the real estate portfolio of DRI and
40
its associate companies, market excess or unwanted real estate and facilitate
the exploitation of resources on or in DRI System real estate. The net proceeds
realized from any sale or from exploitation of resources thereon will be
credited to the company that owns the subject asset. Services performed for
associate companies by RealCo will be provided at cost in compliance with Rules
90 and 91. A DRI company, including RealCo, will not acquire any real estate in
connection with its activities pursuant to this authorization. Similar
authorization was granted to Allegheny Power System, Inc. by supplemental
Commission order dated October 27, 1995, HCAR No. 26401, File No. 70-8411.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with seeking the authorizations herein requested are
estimated as follows:
Fee, Commission or Expense Thousands
-------------------------- ---------
Legal Fees and Expenses $50
=======
Total $50
Item 3. Applicable Statutory Provisions.
The following sections of the 1935 Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
transactions for which authorization is sought in this Application-Declaration.
Section of/Rule Transactions to which such Section/Rule is or may be
under the 1935 Act applicable
------------------ ----------------------------------------------------
Sections 6(a), 7 Issuance of Securities; Incurrence of Indebtedness;
Provision of Guarantees and other Credit Support; Investment
and Participation in Non-Utility Businesses
Section 9(a) Investment and Participation in Non-Utility Businesses
Section
12(b), 12(c) Transactions with Special Purpose Subsidiary Companies
Rules 42, 45 and 46 and Tax Allocation Agreement
Sections 32, 33 Investment in
Rules 53 and 54 EWGs and FUCOs
41
In support of its request for an increase in its financing authorization,
DRI respectfully submits that the Commission has already stated the best
rationale for granting such request in the Southern Financing Order. Energy
companies are confronting a new competitive environment characterized by their
need to respond quickly to business opportunities and their need to utilize the
most efficient financing that is reasonably available in the capital markets.
With respect to DRI's request to undertake the financing transactions for
which authority is sought herein in view of DRI's intention to invest up to the
EWG/FUCO Investment Limit in EWGs and FUCOs, the Commission has previously
recognized that investment in the domestic utility industry does not pose the
same risks that might arise in the non-U.S. utility industry. The Southern
Company, HCAR No. 26501 (April 1, 1996). From a business perspective, however,
DRI imposes the same level of scrutiny with respect to U.S. investments as it
does with respect to non-U.S. investments. Every potential investment in
independent energy projects undergoes a series of reviews by project managers
responsible for identifying business opportunities, senior management and the
Board of Directors of DEI (the DRI company through which most of these
investments are currently made) and, in some cases, senior management and the
Board of Directors of DRI.
Investments are evaluated against a number of investment criteria including
(i) economic viability of the project, (ii) political and regulatory risk, (iii)
availability of non-recourse financing on reasonable terms and (iv) strategic
fit within the DRI System.
Economic Viability of the Project. Analysis of the economic viability
of the project includes an analysis of the overall industry environment in
which the project will operate (i.e., progress towards privatization and/or
restructuring, depending on where the project is located), the ability of
the project to produce electricity at or below long-run marginal costs in
the competitive region and the credit worthiness of potential power
purchasers and other project counterparties.
42
Political and Regulatory Risk. Analysis of political and regulatory
risks involves careful review of changing political and regulatory regimes
as well as long-term economic stability in the region. This analysis is a
critical component of DRI's investment review as each of the 50 states and
the U.S. Congress consider utility industry restructuring and has always
been a threshold level review in the analysis of non-U.S. investments. The
analysis also includes review of permitting and environmental risks as well
as legal risk associated with the ability to enforce contracts relating to
the project and its financing.
Non-Recourse Financing. All of DRI's existing independent energy
projects have obtained some of their long-term financing on a non-recourse
basis with, in some cases, limited support from DRI. In most cases, DRI's
involvement is limited to acting as a backstop to support arrangements
provided in the first instance by DEI. It is an essential element of the
investment analysis that DRI have a reasonable degree of comfort that each
project have an ability to obtain a substantial part of its ongoing
financing needs without DRI support except indirectly through DRI's support
of DEI. As is described in DRI's Exemption Statement on Form U-3A-2 for the
fiscal year ended December 31, 1998 and as is further described above, DRI
has had substantial success in limiting its financial exposure to its
independent energy projects.
Strategic Fit. Finally, DRI is particularly sensitive to ensuring that
its independent energy investments contribute to DRI's overall strategic
growth plan building upon DRI's strengths and resources to achieve broad
corporate objectives within budgeting and expenditure guidelines. Thus,
each potential investment must be reviewed and approved by a number of
managers within the DRI system who will focus their review not only on the
questions of whether a particular project satisfies DRI's investment
criteria and is reasonably anticipated to generate earnings commensurate
with risk, but also on the question of whether the project is likely to aid
in achieving DRI's long-term overall strategic objectives.
In addition, the amount of the EWG/FUCO Investment Limit must be reviewed
in light of the following additional considerations:
I. The functional separation of Virginia Power's generation assets from
its retail distribution activities is mandated by Virginia law.
Virginia, like many other states, has recently adopted electric
restructuring legislation requiring a transition to retail
competition. A retail distribution company's retention of control over
generation assets is inconsistent with this legislative goal. As
discussed above, functional separation of generation supply from the
retail distribution function is an essential element of most state
restructuring initiatives.
II. DRI will not be making additional investment in restructured assets of
Virginia Power. Thus, DRI will not, as a result of such transfer, be
increasing its exposure to new EWG investment such as would result
from the acquisition of new generation assets for cash and/or with DRI
support.
43
Any new investment made by DRI in support of such new acquisitions or
any further investment in restructured assets or credit support
therefor would be included in the calculation of DRI's aggregate
investment in EWGs.
III. Rule 53 was adopted prior to the onset of state mandated functional
separation of generation in connection with the adoption of state
retail restructuring laws and was not designed or intended to capture
functional separation by registered holding companies. Rule 53 was
adopted pursuant to Section 32(h)(6) of the 1935 Act which required
the Commission to promulgate rules relating to registered holding
companies' financing support for their affiliate EWGs and the
circumstances under which such financing support could have a
"substantial adverse impact" on the "financial integrity" of a
registered system. Neither Rule 53 nor Section 32 was designed or
intended to penalize registered holding companies for their compliance
with state-mandated functional separation laws because such laws and
the results of functional separation were not contemplated when
Section 32 was enacted or when Rule 53 was adopted.
For all of the foregoing reasons, it would unfairly and inappropriately
penalize registered holding companies in their ability to compete for true new
EWG investments if investment in their own newly deregulated generation assets
were to be construed as new EWG investment.
Item 4. Regulatory Approvals.
No other regulatory commission has jurisdiction over the transactions for
which authority is sought herein.
Item 5. Procedure.
The Commission is respectfully requested to issue and publish, not later
than March 2, 2001, the requisite notice under Rule 23, with respect to the
filing of this Application-Declaration, such notice to specify a date not later
than March 27, 2001 by which comments may be entered and a date not later than
March 28, 2001 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.
44
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the
Transaction. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements.
A-1 DRI Registration Statement on Form U5B filed on April 27, 2000
(incorporated by reference herein)
A-2 Press Release issued by DRI re Virginia Power restructuring. (Filed in
paper format on Form SE on October 15, 1999)
B Tax Allocation Agreement (to be filed by amendment)
C Form of Notice
D-1 Opinion of Counsel
D-2 "Past Tense" Opinion of Counsel (to be filed by amendment)
Item 7. Information as to Environmental Effects.
The Transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 10(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Section 4321, et seq. The only federal actions related to the Transaction
pertain to the Commission's approval of this Application-Declaration under the
1935 Act and the Commission's clearance and declaration of the effectiveness of
the Joint Proxy and Registration Statement of DRI and CNG on Form S-4 pursuant
to the Securities Exchange Act of 1934 and the other approvals and actions
described in Item 4 of this Application-Declaration. Consummation of the
Transaction will not result in changes in the operations of DRI, CNG or any of
their respective subsidiaries that would have any impact on
45
the environment. No federal agency is preparing an environmental impact
statement with respect to this matter.
Pursuant to the Public Utility Holding Company Act of 1935, the undersigned
company has caused this Application-Declaration to be signed on its behalf by
the undersigned thereunto duly authorized.
DOMINION RESOURCES, INC.
By: /s/ James F. Stutts
---------------------
Name: James F. Stutts
Title: Vice President and
General Counsel
Date: May 22, 2001
46