File No. 70-8589
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
Cinergy Investments, Inc.
Cinergy Services, Inc.
139 East Fourth Street
Cincinnati, Ohio 45202
(Name of companies filing this statement
and addresses of principal executive offices)
Cinergy Corp.
(Name of top registered holding company)
William L. Sheafer
Treasurer
Cinergy Corp.
(address above)
(Name and address of agent for service)
Applicants request that the Commission send copies of all notices, orders
and communications in connection herewith to:
Cheryl M. Foley William T. Baker, Jr.
Vice President, General Counsel Reid & Priest LLP
and Corporate Secretary 40 West 57th Street
Cinergy Corp. New York, New York
(address above) 10019
Item 1. Description of Proposed Transactions
A. Background: Prior Orders
1. September 1995 EWG/FUCO Order
By order dated September 21, 1995 in File No. 70-8589 (Rel. No. 35-26376)
(the "September 1995 EWG/FUCO Order"), the Securities and Exchange
Commission ("Commission" or "SEC"), among other things, authorized Cinergy
Corp. ("Cinergy" or "Company"), a registered holding company under the
Public Utility Holding Company Act of 1935 (the "Act"), and Cinergy's
wholly-owned nonutility holding company subsidiary, Cinergy Investments,
Inc. ("Investments"), from time to time through May 31, 1998:
* to acquire the securities of one or more special-purpose
entities (each, a "Project Parent"/1/) formed to engage exclusively in the
business of acquiring and holding, directly or indirectly, the securities
of, and/or providing services to, exempt wholesale generators ("EWGs") and
foreign utility companies ("FUCOs") as defined in Sections 32 and 33 of the
Act; and
* to make direct and indirect investments in EWGs, FUCOs
and Project Parents (by means of equity and debt investments including
guarantees and other forms of credit support) in an aggregate amount at any
time outstanding not to exceed $115 million (the "Original EWG/FUCO
Investment Limitation"), provided that any such direct or indirect
investment by Cinergy or Investments would be made only if, on a pro forma
basis, Cinergy's "aggregate investment" would not exceed 50% of Cinergy's
"consolidated retained earnings" as determined pursuant to Rule 53(a) under
the Act.
2. March 1996 EWG/FUCO Order
By order dated March 8, 1996 in File No. 70-8589 (Rel. No. 35-26486)
(the "March 1996 EWG/FUCO Order"), the Commission modified the
September 1995 EWG/FUCO Order in two respects. Specifically, the
Commission:
* extended the expiration date of the authorization period
established in the September 1995 EWG/FUCO Order from May 31, 1998 to
December 31, 1999; and
* authorized Cinergy and Investments to increase their
direct or indirect aggregate investment in EWGs, FUCOs and Project Parents
from the $115 million limit established in the September 1995 EWG/FUCO
Order to an aggregate amount equal to 50% of Cinergy's consolidated
retained earnings, as defined in Rule 53(a) (the "50% Limitation")./2/
3. January 1995 Cinergy Debt Financing Order
By order dated January 11, 1995 in File No. 70-8521 (Rel. No. 35-26215)
(the "January 1995 Cinergy Debt Financing Order"), the Commission
authorized Cinergy:
* to issue and sell from time to time through January 31, 1997,
in an aggregate principal amount at any one time outstanding not to exceed
$375 million (the "Aggregate Debt Limitation"), within certain parameters
set out in the Commission's order and Cinergy's Declaration as amended, (1)
unsecured short-term promissory notes to banks and other financial
institutions, (2) commercial paper to commercial paper dealers and
financial institutions, and (3) unsecured demand promissory notes to banks
evidencing Cinergy's reimbursement obligation in respect of letters of
credit issued by such banks on Cinergy's behalf (collectively, "Short-Term
Financings"); and
* to use the proceeds of Short-Term Financings, inter alia, to
invest in EWGs and FUCOs, subject to the receipt of any required further
authorization from the Commission.
4. March 1996 Cinergy Debt Financing Order
By order dated March 12, 1996 in File No. 70-8521 (Rel. No. 35-26488)
("March 1996 Cinergy Debt Financing Order"), the Commission modified
the January 1995 Cinergy Debt Financing Order in three respects.
Specifically, the Commission:
* extended the expiration date of the authorization period
established in the January 1995 Cinergy Debt Financing Order from January
31, 1997 to December 31, 1999;
* increased the Aggregate Debt Limitation established in
the January 1995 Cinergy Debt Financing Order from $375 million to $1
billion; and
* authorized Cinergy to apply proceeds from Short-Term
Financings, up to the full amount of the increased Aggregate Debt
Limitation, to investments in EWGs, FUCOs and Project Parents, subject to
the 50% Limitation.
The March 1996 EWG/FUCO Order and the March 1996 Cinergy Debt
Financing Order are sometimes hereinafter collectively referred to as the
"Previous Orders."
B. Proposed Modifications to Prior Orders
At December 31, 1996, Cinergy's "aggregate investment" and
"consolidated retained earnings" (each as defined in Rule 53(a)(1)) were
approximately $487 million and approximately $990 million, respectively.
As of January 30, 1997, Cinergy increased its aggregate investment to
approximately $495 million./3/
Accordingly, under the 50% Limitation as of January 31, 1997,
Cinergy is foreclosed from further investments in Exempt Projects and the
unique financial and strategic opportunities afforded by these investments.
By contrast, if Cinergy were authorized to invest in Exempt Projects in an
amount equal to 100% of consolidated retained earnings, Cinergy could
presently invest an additional $495 million.
Cinergy considers Exempt Project investments to be a critical
element of its strategy for providing value to investors and successfully
competing in the evolving energy industry. In view of the lack of
available capacity under the 50% Limitation, and Cinergy's satisfaction of
the applicable standards under the Act for the removal of the 50%
Limitation as proposed herein, Cinergy hereby requests that the Commission
issue an order pursuant to Rule 53(c) under the Act:
1. modifying the March 1996 EWG/FUCO Order to exempt Cinergy from
the requirements of Rule 53(a)(1) and thereby authorize Cinergy to increase
its "aggregate investment" to an amount equal to 100% of "consolidated
retained earnings";
2. modifying the March 1996 Cinergy Debt Financing Order to
authorize Cinergy to apply proceeds from Short-Term Financings, up to the
full amount of the increased Aggregate Debt Limitation (i.e., $1 billion),
to investments in EWGs, FUCOs and Project Parents in an aggregate amount up
to 100% of consolidated retained earnings; and
3. modifying the Prior Orders to extend the respective
authorization periods set forth therein to December 31, 2002.
Other than to the extent set forth immediately above, Applicants do
not seek authority herein to modify any of the terms or conditions of the
Prior Orders.
C. Existing Interests in Exempt Projects
As of January 31, 1997, Cinergy's interests in Exempt Projects are
as follows:
1. EDESUR
Cinergy indirectly owns a 1% interest in Edesur, S.A. ("EDESUR"), a
FUCO which owns an electricity distribution network serving approximately
2.1 million customers in the southern half of the city of Buenos Aires,
Argentina. Cinergy's 1% interest in EDESUR, which is held by PSI Energy
Argentina, Inc., a wholly-owned subsidiary of PSI Energy, Inc., an Indiana
corporation and electric utility subsidiary of Cinergy ("PSI"), equated to
an aggregate investment at January 31, 1997 of approximately $11 million.
PSI Energy Argentina also provides operating and consulting services to
EDESUR. Cinergy's ownership interest in EDESUR was acquired in 1992 prior
to the 1994 merger creating Cinergy, by PSI Resources, Inc. ("Resources"),
the then parent holding company of PSI, in connection with the sale by the
Argentine government of a majority interest in this electric distribution
company. See Release No. 35-25570, July 2, 1992./4/
2. Midlands
Cinergy indirectly owns 50% of Midlands, a FUCO serving
approximately 2.2 million customers in mid-central England. One of 12
regional electricity companies created in 1990 by the British Government as
a part of the privatization of the electric utility industry in England and
Wales, Midlands is primarily a distribution company, purchasing most of its
electricity requirements from third-party generators. At January 31, 1997,
Cinergy's aggregate investment in Midlands was approximately $484 million.
As previously reported,/5/ Cinergy acquired its interest in
Midlands in a 50-50 joint venture transaction with GPU, Inc. ("Joint
Venture"). To accomplish the Midlands acquisition several Project Parents
were established. In May 1996, Investments formed Cinergy UK under
Delaware law for the purpose of indirectly acquiring and holding Cinergy's
interest in Midlands. Pursuant to the Joint Venture agreements, Cinergy UK
and a subsidiary of GPU then formed and acquired respective 50% equity
interests in Avon Energy Partners Holdings, a U.K. unlimited liability
company ("Avon Holdings"), which in turn formed and acquired all the
capital stock of Avon Energy Partners plc, a U.K. limited liability company
("Avon Energy"). On May 7, 1996, Avon Energy commenced its public offer to
acquire Midlands. On June 6th, Avon Energy declared the offer
unconditional. During the third quarter of 1996, Avon Energy completed its
acquisition of all of the outstanding common stock of Midlands. Under
GAAP, Cinergy accounts for its interest in Midlands pursuant to the equity
method of accounting.
The total consideration paid by Avon Energy for the acquisition of
Midlands was approximately $2.6 billion. The funds for the acquisition
were obtained from Cinergy's and GPU's equity investments in Avon Energy of
approximately $500 million each, with the remainder obtained by Avon Energy
from funds borrowed under a 1.5 billion (british pounds) Term Loan and
Revolving Facility Agreement, dated May 7,1996 ("Avon Credit Agreement"),
among Avon Energy, Avon Holdings, as guarantor, certain banks named
therein, Barclays and Chase Investment Bank Limited, as arrangers, and
Barclays as agent. Funds borrowed by Avon Energy under the Avon Energy
Credit Agreement are not recourse directly or indirectly to Cinergy or any
subsidiary thereof (other than Avon Energy and Avon Holdings and their
assets).
Cinergy used debt to finance its entire $503 million equity
investment in Midlands, with Cinergy borrowing $471 million under the
Cinergy Corp. Credit Agreement and Cinergy UK borrowing $32 million under
the Cinergy UK Credit Agreement./6/ The lenders under the Cinergy UK
Credit Agreement have recourse solely to Cinergy UK and its assets for
repayment of borrowings thereunder.
D. Exempt Projects: Opportunities and Risks
Investments in Exempt Projects present an opportunity to earn a
return in excess of the risk adjusted cost of capital for such projects as
well as other valuable strategic opportunities.
For instance, Cinergy expects that Midlands should contribute to
Cinergy's financial strength for many years to come. Preliminary results
bolster this conviction. The Midlands acquisition added 10 cents (based on
net income of $15.4 million) to Cinergy's 1996 earnings per share of $2.12.
On a pro forma basis, assuming Cinergy had acquired its 50% interest in
Midlands on January 1, 1996, Cinergy's earnings from its investment in
Midlands would have equated to approximately 18 cents per share for 1996.
Earnings from Midlands also helped to make possible an increase in the
dividend payable on Cinergy common stock, from $1.72 to $1.80 annualized,
which Cinergy's board of directors approved in October 1996./7/
Beyond providing Cinergy with a relatively stable source of income
into the future, the Midlands acquisition is attractive to Cinergy for
other important financial and strategic reasons. First, Cinergy believes
that it can add value to its investment in Midlands shares, primarily
through implementation of cost saving measures. Cinergy's experience in
achieving merger-related savings and its current reengineering efforts will
provide Midlands with valuable intellectual resources./8/ Under the
British regulatory system, the benefits of these cost savings will accrue
primarily to the shareholders of Midlands. Second, Midlands competes as a
power marketer in a market in which retail customers with a maximum annual
peak demand of 100 kW, or more, can choose their electricity supplier.
Beginning in 1998, all customers in the U.K., regardless of load size, will
have the opportunity to choose their electricity supplier. The experience
that Cinergy will gain in operating a utility in such a competitive
environment should be highly valuable to Cinergy in connection with its
power marketing efforts in the U.S. Third, the electricity sector in the
U.K. may experience further consolidations, a process that in itself will
likely produce attractive returns for investors. By its acquisition of an
ownership interest in Midlands, Cinergy has achieved early entry into that
market and therefore is positioned to earn an additional attractive return
on its investment. Another benefit is that the Midlands acquisition
provides access to valuable managerial resources: Midlands' management
team is generally regarded by the U.K. financial community as one of the
strongest in the U.K. utility industry. As an affiliated team, the
combined managerial resources of Cinergy and Midlands will provide
complementary skills and experience and valuable managerial depth.
Together with these opportunities, investments in EWGs and FUCOs
present risks. Cinergy scrutinizes potential Exempt Project investments to
identify and mitigate these risks. The following discussion summarizes the
systematic review process and the risk mitigation techniques that Cinergy
currently employs./9/
1. The Project Review Process
Every investment opportunity pursued by Cinergy is subjected to a
series of formal reviews. The process begins with the identification of an
investment opportunity. If the investment opportunity is located in a
foreign country, risk analysis of that country is performed. The analysis
focuses on the political, economic and currency stability of the particular
country, the government's commitment to energy services, the legal and
regulatory framework for private investment in energy facilities, and
whether local business practices will support long-term investment of
private capital. The analysis frequently entails a review of independent
analyses and evaluations as well as discussions with third parties, such as
banks, equipment suppliers, governmental agencies and consulting experts.
This extensive review process mitigates the exposure to the expenditure of
development funds without a realistic expectation of success in terms of
both making investments in projects and in obtaining appropriate levels of
non-recourse financing on commercially reasonable terms.
Once development of a project is undertaken, the project's status
and progress are continually reviewed to ensure that development
expenditures are producing acceptable results. In addition, the project
team identifies the major operating, commercial, financial, interest rate,
foreign currency exchange, legal and country risks associated with the
particular project and whether and how those risks have been mitigated.
The members of the project team are responsible for the due diligence
investigation of risks that have been identified.
Potential projects are subjected to increasing levels of management
review. Depending on the amount of Cinergy's anticipated financial
exposure to a particular project, the proposed investment must be approved
by Investments' board of directors, by the Finance Committee of Cinergy's
board of directors (comprised entirely of outside directors), and by the
full board of directors of Cinergy.
As a practical matter, the investment review process is to a large
extent replicated by the lenders and their consulting experts (i.e.,
engineers, legal, etc.) who provide debt financing on a non-recourse basis,
since repayment of that debt will depend solely upon the success of the
investment. Typically, non-recourse debt documents require the
establishment of debt service and other funded reserves, and the
achievement of specific financial measurements and performance, each of
which is designed to preserve and protect the assets and the financial
performance of the investment against operational, financial and other
contingencies. Cinergy's success in arranging appropriate levels of Exempt
Project non-recourse financing confirms the soundness of Cinergy's project
review process.
2. Risk Mitigation of Exempt Projects
Cinergy carefully evaluates the potential risks of an Exempt
Project before Cinergy's funds are committed. Such risks may include one
or more of the following:
* Operating risks. Cinergy limits project development
efforts to technologies/industries with which it has existing competencies
such as electric generation and the transmission and distribution of
electricity and gas. Due diligence of operating assumptions is carried out
by experienced Cinergy employees and by outside consultants. Operating
risks can be covered by equipment warranties and by casualty, business
interruption and other forms of insurance. Further, when Cinergy or an
affiliate is actively involved in the operation or administration of the
investment, the Company enhances its ability to identify and address
developing and existing problems.
* Commercial risks. In competitive power markets
electricity prices are determined by the economic laws of supply and
demand. Cinergy conducts extensive investigations of the electricity
markets in these environments. Cinergy seeks to ensure that the investment
will be capable of providing electricity at or below the marginal cost in
the region, thus ensuring that the investment can be a competitive supplier
in a non-regulated environment.
* Financial risks. Cinergy addresses the financial risks
of Exempt Projects in a variety of ways. First and foremost, the Company
seeks debt financing which is non-recourse to Cinergy or its subsidiaries
(other than to the Exempt Project). With non-recourse financing, the debt
of each Exempt Project is secured solely by its assets and revenues, and
creditors have no recourse to seek repayment upon default from Cinergy or
its subsidiaries (other than to the Exempt Project). This method of
financing ensures that Cinergy's exposure to any investment is limited to
the amount of its equity commitment and that Cinergy's domestic public
utility subsidiaries (the "Operating Companies"/10/) and their customers
are properly insulated from the risk of an investment's financial distress.
* Interest rate risk. Interest rate variability can be
addressed, in part, by borrowing on a fixed-rate basis or by purchasing
financial instruments that fix or cap variable interest rates. The effects
of interest rate volatility can be mitigated principally through two
strategies: hedging and diversifying. Hedging techniques that Cinergy may
utilize are designed to limit the impact that rising interest rates have on
floating rate debt instruments. Diversification implies that liabilities
will be spread among short- and long-term debt instruments, as well as
fixed and floating interest obligations.
* Foreign currency exchange risk. In general, Cinergy
would intend to implement foreign currency risk minimization strategies
when it enters into projects that subject it to material foreign exchange
rate risk. For instance, this risk can be significantly mitigated where
non-recourse project debt is borrowed in the same currency as the project
revenues, ensuring a match between debt service obligations and operating
income. In addition, Cinergy evaluates the various approaches available to
mitigate foreign currency exchange risk based on the anticipated project
return and timing of cash flows. Various types of both option-based (e.g.,
call, put and average rate options) and fixed rate instruments (e.g.,
futures contracts and currency swaps) are readily available from numerous
domestic and foreign counterparties.
* Legal risks. Legal risks are addressed by careful review
of any investment by legal counsel, including local and international
counsel, if applicable. Such legal reviews address, among other things,
regulatory and permitting risks, environmental risks, the adequacy and
enforceability of guarantees or other contractual undertakings of third
parties, the status of title to utility property, and the obligations
inherent in the financing arrangements.
* Country risks. In addition to the specific risks
mentioned above, investing outside the U.S. can entail country-specific
risks related to political or economic performance. As indicated
previously, Cinergy evaluates country risk in the project review process
and attempts to mitigate this risk through a number of measures. Most
importantly, the country review process ensures that the political and
economic stability of any country has been reviewed at several managerial
levels, including Cinergy's board of directors, before any investment
occurs. In addition to a general review, the country analysis focuses
specifically on the country's energy sector and on the government's support
for private ownership in that sector. If appropriate, introductory
discussions are arranged to facilitate dialogue between the local political
community and Cinergy management.
Also at the outset of development work in a foreign
country, Cinergy will likely seek local and international partners who are
experienced in doing business in the host country and internationally./11/
Such partners can be a very important element in mitigating the risk of
expropriation or unfair regulatory treatment. In addition, political risk
and currency convertibility can often be addressed through insurance
underwritten by the Overseas Private Investment Corporation ("OPIC"), a
U.S. agency, or private insurers. In the case of Cinergy's Argentine
investments (EDESUR and Costanera), insurance was purchased from Lloyds of
London and OPIC.
* Liquidity risk. Cinergy believes an exit strategy is an
important element of liquidity risk mitigation. Investment liquidity is
analyzed during the investment review process by identifying exit options,
such as potential investors. In addition to partners already committed to
the investment, potential investors typically include local and
international businesses which may seek vertical or horizontal integration.
Increased investment liquidity enhances the ability to maximize economic
performance and the ability to optimize returns. In 1995, Cinergy employed
this return-maximization strategy in liquidating its investment in
Costanera. The divestiture of Cinergy's interest in Costanera (which had
been acquired through Cinergy's then-EWG, Costanera Power Corp.) resulted
in the realization of a $6.4 million gain, net of income taxes. Over the 3
1/2 year period of its investment in Costanera, Cinergy realized an after-tax
average annualized return of 21%.
* Construction risk. Although there may be circumstances
where Cinergy would seek to invest in "greenfield" projects, involving the
development and construction of new utility facilities, to date Cinergy has
invested only in existing utility systems and established utility
companies.
3. Case Study: Midlands
Cinergy's acquisition of a 50% interest in Midlands illustrates the
risk analysis outlined above.
In assessing the commercial and operating risks of acquiring its
interest in Midlands, Cinergy was influenced by a number of factors,
including Midlands' successful operating history since privatization and
its strong competitive position. The transaction presented no significant
construction risk since Midlands is an established company with operational
utility facilities. Cinergy was impressed by the high quality of Midlands'
management and sought to retain the services of existing management
following the acquisition.
Financial risks were addressed most basically through an
acquisition financing structure in which the bulk of the financing
consisted of non-recourse debt (i.e., to Cinergy or to any subsidiary
thereof other than Cinergy UK, Avon Holdings, Avon Energy and/or Midlands).
To limit interest rate risk, Avon Energy entered into various interest rate
swaps and cap arrangements which essentially provided one-half of its debt
with a fixed rate for an average of a two-year period. To limit the
foreign currency risk of the acquisition, Cinergy took a number of steps.
All of the financing for the acquisition borrowed under the Avon Credit
Agreement is denominated in sterling and is expected to be repaid
ultimately out of Midlands' operating profits, which are also predominantly
in sterling. By matching the currency of the debt and the repayment
source, these arrangements eliminate the exchange rate and currency risks
of the sterling-denominated debt. The remainder of the acquisition
financing by Cinergy was in the form of dollar-denominated borrowings by
Cinergy and Cinergy UK under the Cinergy Corp. Credit Agreement and the
Cinergy UK Credit Agreement, respectively. To hedge the dollar value of
its investment, Cinergy entered into a currency swap that obligates Cinergy
and a counterparty to deliver pounds sterling and dollars, respectively, at
an agreed upon exchange rate at a future date. The currency swap also
provides a natural hedge of dividends payable by Midlands to Cinergy.
Given the advanced state of the British legal and political systems
and the British economy, the Midlands acquisition did not present
significant legal, political, country or economic risks. With respect to
the potential for the imposition of a windfall profits levy on regulated
businesses (as noted earlier), Cinergy determined that such a levy was
probable; consequently Cinergy factored that assumption into its pricing
model for the acquisition and Cinergy's acquisition price was adjusted to
reflect an estimated liability. To address any residual legal risk
associated with the acquisition, and to ensure compliance with local law,
Cinergy and GPU retained local U.K. counsel to assist in the acquisition.
4. Return on Exempt Projects
Cinergy's Exempt Project investments have historically generated
modest but important contributions to earnings. In 1994 and 1995,
Cinergy's investments in EDESUR and Costanera contributed total net income
of $175,000 and $7,160,000 ($770,000 after elimination of the gain on the
sale of Costanera), respectively. Since first investing in international
utility systems in 1992 through Cinergy's predecessor, Resources, Cinergy
has never reported a full-year operating loss attributable to such
projects. The Midlands investment added 10 cents to Cinergy's 1996
earnings per share and, on a pro forma basis assuming the acquisition had
taken place on January 1, 1996, would have added 18 cents to Cinergy's 1996
earnings per share.
E. Potential Investments in Additional Exempt Projects
Potential investments in additional Exempt Projects are a critical
element of the Company's overall business strategy. However, because
Cinergy's level of investments is at the ceiling imposed by the 50%
Limitation, this important avenue for delivering value to Cinergy's
shareholders and customers is currently closed to Cinergy. As a result,
Cinergy is severely constrained in its ability to seriously consider
opportunities for potential investments in additional Exempt Projects.
Several factors account for the strategic importance of Cinergy's
EWG/ FUCO investment program. First, investments in Exempt Projects
present Cinergy with the opportunity to continue to grow through
reinvestment of retained earnings in an industry sector that the Cinergy
companies have decades of experience in, while at the same time
diversifying overall asset risk. Second, Cinergy to date has deliberately
pursued utility investments in England and Argentina, countries which have
progressed much further than the United States towards deregulation and
full competition in both wholesale and retail electricity markets. Cinergy
believes that the creation and maintenance of value for its shareholders
will hinge on its ability to effectively operate its core business in the
U.S. as that business becomes subject to increasing competition. Cinergy's
experience in markets that are already largely deregulated will greatly
enhance its long-term prospects for success in that endeavor. The lessons
learned from these deregulated markets will provide Cinergy with insights
about the elements of market structures that produce efficient and
equitable results for consumers and shareholders. These insights will
assist Cinergy in helping to shape the evolution of the electric sector in
the U.S.
Item 2. Fees, Commissions and Expenses
The fees, commissions, and expenses ("Fees") paid or to be paid or
incurred by Applicants or any associate companies thereof in connection
with the filing of this statement are estimated not to exceed $25,000,
comprised of Fees of Cinergy Services, Inc., estimated not to exceed
$10,000, and Fees of Reid & Priest LLP, estimated not to exceed $15,000.
Item 3. Applicable Statutory Provisions
A. General Provisions
Sections 6(a), 7, 9(a), 10, 12(b), 13(b), 32 and 33 of the Act and
Rules 43, 45, 53 and 100(a) thereunder are or may be applicable to the
proposed transactions.
Rule 53 provides that, if each of the conditions of paragraph (a)
thereof is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make certain adverse findings under
Sections 7 and 12 of the Act in determining whether to approve a proposal
by a registered holding company to issue securities in order to finance an
investment in any EWG or to guarantee the securities of any EWG. Giving
effect to the proposals contained herein, Cinergy will satisfy all of the
conditions of Rule 53(a) except for clause (1) thereof, since Cinergy is
proposing herein that Cinergy's "aggregate investment" may exceed 50% of
Cinergy's "consolidated retained earnings". None of the conditions
specified in Rule 53(b) is or will be applicable.
B. Compliance with Rule 53(c)
Rule 53(c) states that, in connection with a proposal to issue and
sell securities to finance an investment in any EWG, or to guarantee the
securities of any EWG, a registered holding company that is unable to
satisfy the requirements of paragraph (a) or (b) of Rule 53 must
affirmatively demonstrate that such proposal:
1. will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and
2. will not have an adverse impact on any utility subsidiary of
the registered holding company, or its customers, or on the ability of
State commissions to protect such subsidiary or customers.
The proposed transactions meet each of these tests.
1. The proposed transactions will not have a substantial adverse
impact upon the financial integrity of the Cinergy system.
The absence of any substantial adverse impact on Cinergy's
financial integrity within the meaning of Rule 53(c)(1) as a result of the
Commission granting Cinergy's request for authorization to invest up to
100% of consolidated retained earnings in Exempt Projects is evident from a
review of relevant factors, including (a) key financial ratios and
benchmarks, (b) the market's view of Cinergy's securities and its
investments in Exempt Projects, (c) the ratings assigned to Cinergy system
securities by nationally recognized ratings agencies, (d) Cinergy's success
in obtaining appropriate levels of Exempt Project non-recourse debt
financing, and (e) Cinergy's historical success in its investments in
Exempt Projects.
a. Key Financial Ratios/Benchmarks
An "aggregate investment" equal to 100% of Cinergy's "consolidated
retained earnings" would still represent a relatively small commitment of
capital based on various key financial ratios at December 31, 1996.
Investments in this amount (assumed to be $990 million) would be equal to
only 16% of Cinergy's consolidated capitalization ($6.2 billion), 16% of
consolidated net utility plant ($6.3 billion), 11% of consolidated assets
($8.8 billion), and 19% of the market value of Cinergy's outstanding common
stock ($5.3 billion). Cinergy's consolidated retained earnings increased
$73 million in 1995, Cinergy's first full year of operations, and an
additional $42 million in 1996.
Cinergy's consolidated capitalization ratios at December 31, 1996,
45% equity and 55% debt (including short-term debt), are within the
guidelines prescribed by Standard & Poor's for "A" rated utilities.
<PAGE>
<TABLE>
<CAPTION>
Capitalization Ratio Table
Capitalization Ratio
"A" Industry
Cinergy Guidelines
<S> <C> <C>
Equity 45% 44-57%
Debt 55% 43-56%
</TABLE>
With respect to relevant financial benchmarks specifically
contemplated by the terms of Rule 53, none of the conditions enumerated in
paragraph (b) thereof is applicable: (1) there has been no bankruptcy of a
Cinergy associate company (cf. Rule 53(b)(1)); (2) Cinergy's consolidated
retained earnings for the four most recent quarterly periods have not
decreased by 10% from the average for the preceding four quarterly periods
(cf. Rule 53(b)(2)); and (3) Cinergy has never reported a full-year
"operating loss" attributable to its Exempt Projects (cf. Rule 53(b)(3)).
Cinergy undertakes to notify the Commission by filing a further
post-effective amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) arise during the authorization
period. Cinergy also represents that it will remain in compliance with the
requirements of Rule 53(a), other than Rule 53(a)(1), at all times during
the authorization period./12/
b. Market Assessment
The equity market's assessment of Cinergy's future growth and
earnings evidences exceedingly strong investor confidence in Cinergy's
ability to deliver shareholder value relative to Cinergy's competitors.
Cinergy's market-to-book ratio of 2.04 at the end of 1996 was the highest
among the 25 largest electric utilities, and Cinergy's price/earnings ratio
of 15.7 at year end 1996 was among the top five.
<PAGE>
<TABLE>
<CAPTION>
Pre and Post Midlands Table
Pre-Midlands Post-Midlands
Investment Investments
(3/96) (12/96)
Market-to-Book Ratio:/13/
<S> <C> <C>
Cinergy 186% 204%
Industry 149% 145%
Price/Earnings Ratio:/l4/
Cinergy 13.5 15.7
Industry 12.5 12.2
</TABLE>
In addition, for the year 1996, Cinergy's common stock price
increased 9% compared to a decrease of 3% for the industry as a whole.
This extremely favorable comparison of market prices and ratios
bears witness to the market's endorsement of Cinergy's management team, its
track record, and the investment strategy, techniques and evaluation skills
it employs.
Moreover, as indicated in the table above, the relative improvement
in market indicators following the Midlands acquisition testifies to the
market's specific endorsement of this transaction. On the day the offer to
acquire Midlands was announced, Cinergy common stock appreciated 3% while
the industry's most generally referenced indices decreased in price. The
market's full review of the transaction resulted in an even greater
appreciation of its value. For the two-week period following the
announcement, the total return on Cinergy common stock was more than twice
the total return on the industry's stock indices. To Cinergy's
shareholders, outperforming the industry's indices resulted in additional
value of approximately $168 million.
For all of 1996, Cinergy produced a total return to shareholders of
15.42%, placing Cinergy third among the 25 largest electric utilities in
total shareholder return for the year.
c. Ratings
The senior securities of each of the Operating Companies are
currently rated "A-" by Standard & Poor's and have all experienced upgrades
since the Cinergy merger. These upgrades have been received in a period
when the industry is generally being viewed as more risky by the rating
agencies, as evidenced by the number of recent downgrades experienced by
utilities.
<PAGE>
<TABLE>
<CAPTION>
S&P Bond Ratings
S&P Bond Ratings
<S> <C> <C> <C>
1994 1995 1996
CG&E BBB+ A- A-
ULH&P BBB+ A- A-
PSI BBB+ A- A-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Duff & Phelps Bond Ratings
Duff & Phelps Bond Ratings
<S> <C> <C> <C>
1994 1995 1996
CG&E BBB+ A- A-
ULH&P N/A A- A-
PSI BBB+ A- A-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Fitch Bond Ratings
Fitch Bond Ratings
<S> <C> <C> <C>
1994 1995 1996
CG&E A- A- A-
ULH&P N/A N/A N/A
PSI A- A- A
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Moody's Bond Ratings
Moody's Bond Ratings
<S> <C> <C> <C>
1994 1995 1996
CG&E Baa1 A3 A3
ULH&P Baa1 A3 A3
PSI Baa1 A3 A3
</TABLE>
All four rating agencies affirmed their ratings for Operating
Company debt following announcement of the Midlands acquisition.
d. Non-recourse Financing
As previously noted, approximately $1.6 billion of the $2.6 billion
purchase price of Midlands was financed through the issuance to banks and
other financing institutions of debt ultimately secured entirely by the
interests of Avon Holdings, Avon Energy and Cinergy UK in Midlands and its
earnings. The success in placing non-recourse debt of that magnitude,
secured by the borrowers' interests in Midlands, attests to the lenders'
views of the merits of the Midlands transaction.
e. Success in Exempt Project Investments
As discussed earlier, Cinergy's investments in Exempt Projects have
contributed to Cinergy's financial strength. With respect to Argentina,
Cinergy's sale in late 1995 of its interest in Costanera resulted in the
realization of a gain of $6.4 million, net of taxes. Cinergy achieved an
after-tax average annualized return of 21% from its investment in
Costanera. The Midlands acquisition has already enhanced Cinergy's short-term
earnings growth, adding 10 cents to Cinergy's 1996 earnings per share.
2. The proposed transactions will not have an adverse impact on
any utility subsidiary of Cinergy, or its customers, or on the
ability of Cinergy's state public utility commissions to protect
such customers.
The proposed transactions likewise will not have an adverse impact
within the meaning of Rule 53(c)(2) on any of the Operating Companies or
their customers, or on the ability of the applicable state public utility
commissions to protect those customers. Among the factors that compel this
conclusion are:
a. the Operating Companies' financial integrity;
b. the absence in the foreseeable future of any anticipated need
on the part of the Operating Companies for additional capital from Cinergy;
c. Cinergy's compliance with other applicable requirements of
Rule 53(a) intended to protect the interests of customers of the Operating
Companies; and
d. the enhanced state commission oversight of the Operating
Companies resulting from the global settlement agreements, commitments and
conditions agreed to by Cinergy and the Operating Companies as part of the
1994 merger that created Cinergy.
Cinergy is supplementing these safeguards with the additional commitment
set forth in subsection "d" below.
Prior to filing this application, senior officers and other
personnel of Cinergy met with personnel of each of the state public utility
commissions that regulate the retail electric or gas rates of the Operating
Companies - the Public Utilities Commission of Ohio, the Indiana Utility
Regulatory Commission and the Kentucky Public Service Commission - to
discuss Cinergy's proposal and to address the concerns of the state
commissions. The state commissions will be providing their written
positions to this Commission regarding Cinergy's proposal.
a. Operating Company Financial Integrity
Debt (including short-term debt) ratios of the Operating Companies
are consistent with industry averages for "A" rated electric utilities.
<PAGE>
<TABLE>
<CAPTION>
Debt Capitalization Table
Debt as % of Capitalization
<S> <C> <C> <C>
1994 1995 1996
CG&E 49% 51% 52%
ULH&P 50% 39% 39%
PSI 51% 47% 49%
A-rated utilities/15/ 49% 49%
</TABLE>
The Operating Companies' ability to issue first mortgage bonds and
preferred stock depends upon satisfaction of certain earnings coverages in
their mortgage bond indentures and corporate charters at the time such
securities are issued. Currently, the Operating Companies anticipate
having more than adequate earnings coverages for financing requirements in
the foreseeable future.
The Operating Companies' coverages have generally been within the
"A" range set by the major rating agencies in recent years. The Operating
Companies continue to show strong financial statistics as measured by the
rating agencies (pre-tax interest coverage, debt ratio, funds from
operations to debt, funds from operations interest coverage, and net cash
flow to capital expenditures).
b. Lack of Foreseeable Need for Cinergy Capital
Additional investments in Exempt Projects will not have any
negative impact on the Operating Companies' ability to fund operations and
growth since the Operating Companies do not depend on Cinergy for capital.
Since the merger, with the exception of a December 1994 $160 million
capital contribution from Cinergy to PSI,/16/ the Operating Companies have
been financing their capital needs entirely with their own internal funds
or with the proceeds of sales to nonassociates of their securities. Current
projections indicate that Cinergy should not have to make any equity
investments in the Operating Companies in connection with their ordinary
business operations through 2005.
c. Additional Protections for Operating Company Customers
and State Commissions under Rule 53(a)
Cinergy has complied and will continue to comply with various
conditions of Rule 53(a) providing specific protections to customers of the
Operating Companies and their state commissions - in particular, the
requirements of Rule 53(a)(2) regarding the preparation and making
available of books and records and financial reports regarding Exempt
Projects; the requirements of Rule 53(a)(3) regarding the limitation on the
use of Operating Company employees in connection with providing services to
Exempt Projects; and the requirement of Rule 53(a)(4) regarding filing of
copies of applications and reports with other regulatory commissions.
d. 1994 Merger Settlement Agreements and Commitments; Additional
Commitment
The scope and magnitude of the commitments made by Cinergy to its
state regulators and other parties in connection with the settlement of
merger proceedings in 1994 provide unique assurances that the proposal will
not have an adverse impact on the ability of the state commissions to
protect Cinergy's utility subsidiaries or their customers. Cinergy is not
aware that any other registered holding company system has entered into
comparable consensual arrangements with all of its state regulators.
Copies of all of these settlement agreements and merger approvals
were submitted by Cinergy into the record in the Commission proceeding
approving the Cinergy merger (see amended Application-Declaration in File
No. 70-8427) and were discussed by the Commission in its order granting
Cinergy's application (see Rel. No. 35-26146, October 21, 1994).
In addition to these existing commitments, Cinergy represents that
it will not seek recovery through higher rates to the Operating Companies'
utility customers in order to compensate Cinergy for any possible losses
that it may sustain on investments in Exempt Projects or for any inadequate
returns it may realize on such investments.
The following is a detailed summary of the relevant provisions of
the 1994 merger settlement agreements and commitments.
i. Indiana
On March 3, 1994, PSI, Cinergy, Resources and representatives of
various Indiana retail electric customers of PSI ("Indiana Settling
Parties") entered into a comprehensive Settlement Agreement ("Indiana
Settlement Agreement") in the context of proceedings before the Federal
Energy Regulatory Commission ("FERC") concerning the Cinergy merger. The
Indiana Utility Regulatory Commission ("IURC") approved the Indiana
Settlement Agreement in its March 29, 1994 order in Cause No. 39897.
The Indiana Settlement Agreement ensures the continuing
effectiveness of state regulation in a number of ways, including the
following:
* PSI and Cinergy agreed to the continuing application of
Indiana statutory law to PSI, Cinergy and their affiliates or subsidiaries
to the extent such law overlaps with federal law (including the allowance
or denial of recovery of costs in retail rates).
* PSI and Cinergy agreed that (a) any proposed amendment to the
Cinergy system operating agreement filed under Section 205 of the Federal
Power Act with the FERC (the "Operating Agreement") or to the Cinergy
system utility service agreement approved by the SEC in its 1994 merger
order (the "Service Agreement") and (b) certain other proposed affiliates
contracts to which PSI would be a party that are required to be filed with
and/or approved by the FERC or the SEC would not become effective unless
and until the proposed amendment or affiliate contract had been filed with
and approved, or not finally rejected, disapproved, or found unreasonable
by the IURC.
* PSI and Cinergy agreed that in any pending proceeding before
the IURC, PSI and Cinergy would make available to the IURC and the Indiana
Office of Utility Consumer Counselor ("UCC") all books and records, and
employees and officers of Cinergy, PSI and any affiliate or subsidiary of
Cinergy or PSI.
As part of the Indiana Settlement Agreement, the Indiana Settling
Parties agreed to certain "Principles of Diversification." These
principles apply to Cinergy's or PSI's participation in non-utility
businesses or in public utility businesses outside of the United States.
In particular, Section 11.2 of the Indiana Settlement Agreement provides
that:
[T]he Cinergy Companies recognize and acknowledge that the IURC
under I.C. 8-1-2 [i.e., Indiana Code 8-1-2] has continuing authority over
[PSI's] capital structure, financings and cost of capital for ratemaking
purposes sufficient to enable the IURC to protect [PSI's] retail electric
customers from any material adverse affects that may result from [PSI's] or
Cinergy's participation in non-utility businesses or in public utility
businesses outside of the United States of America.
The foregoing statement is consistent with the following statements
contained in a July 2, 1992 letter from the then-Chairman of the IURC to
the SEC/17/ concerning a proposed investment by Resources in a public
utility business in Argentina:
In general, the IURC's continuing authority over PSI Energy's
capital structure, financings and cost of capital for ratemaking
purposes will enable the IURC to protect PSI Energy's retail electric
customers from any financial effects resulting from the activities in PSI
Argentina. The IURC has authority to investigate transactions between
utilities and their subsidiaries, pursuant to Indiana Code ("I.C.") 8-1-1-11,
to prescribe the form of all books, accounts, papers and records of
utilities, I.C. 8-1-2-12 and 14, and is required to inquire into the
management of the business of all public utilities, I.C. 8-1-2-48, and to
keep itself informed as to the manner and method in which such business is
conducted, I.C. 8-1-2-49. The IURC can use these powers, in addition to
its general ratemaking authority as noted above, to ensure that PSI
Argentina's activities do not adversely affect PSI Energy's ratepayers.
In sum, the IURC has both general and specific authority and will
exercise its authority, as appropriate, to protect Indiana ratepayers.
With respect to the furnishing of pertinent information by PSI to
the IURC concerning the diversification activities of PSI or Cinergy,
Section 11.3 of the Indiana Settlement Agreement further provides:
In addition to the annual information filings to be made by PSI
under the Affiliate Guidelines attached hereto as Appendix "E", PSI agrees
that it shall on an annual basis file with the IURC and provide to the UCC
the following information for each applicable PSI Affiliate (as defined in
the Affiliate Guidelines attached hereto as Appendix "E" [which definition
includes, among others, all subsidiaries of Cinergy]):
1. The capital structure of each Affiliate as of the end of the
applicable period;
2. A statement of the changes in the capital structure of each
Affiliate during the applicable period;
3. An assessment of the effects on PSI's capital structure and
PSI's ability to attract capital of the activities of each Affiliate during
the applicable period; and
4. If requested by the IURC or the UCC, the names and job
descriptions of any employees of PSI transferred to, or for whom 75 percent
of their time has been allotted to, an Affiliate during the applicable
period.
In short, the Indiana Settlement Agreement confers additional
significant rights on the IURC, beyond those otherwise accruing to it under
state law, the net effect of which is to preserve unimpaired the ability of
the IURC to protect Cinergy's utility subsidiaries and their customers in
the context of the instant proposal.
ii. Ohio
As part of a comprehensive merger settlement, Cinergy also entered
into an Ohio Joint Stipulation and Agreement ("Ohio Settlement Agreement")
that was filed with FERC on March 4, 1994. The Ohio Settlement Agreement,
which was signed by Cinergy, CG&E, the Public Utilities Commission of Ohio
("PUCO"), and the Office of the Ohio Consumers' Counsel ("OCC"), ensures
the continuing effectiveness of state regulation in a number of ways,
including the following:
* CG&E and Cinergy agreed to the continuing application of Ohio
statutory law to CG&E, Cinergy, their affiliates or subsidiaries to the
extent such law overlaps with federal law (including the allowance or
denial of recovery of costs in retail rates).
* CG&E and Cinergy agreed that (a) any proposed amendment to the
Operating Agreement or the Service Agreement and (b) certain other proposed
affiliates contracts to which CG&E would be a party that are required to be
filed with and/or approved by the FERC or the SEC would not become
effective unless and until the proposed amendment or affiliate contract had
been filed with and approved, or not finally rejected, disapproved, or
found unreasonable by the PUCO.
* CG&E and Cinergy agreed that in any pending proceeding before
the PUCO, CG&E and Cinergy would make available to the PUCO and the OCC all
books and records, and employees and officers of Cinergy, CG&E and any
affiliate or subsidiary of Cinergy or CG&E.
In addition, as part of the merger settlement process, CG&E agreed
in February 1994 to certain Principles of Diversification similar to the
PSI principles discussed above. In these principles, CG&E and Cinergy:
recognize and acknowledge that the [PUCO] under Title 49 of The
Ohio Revised Code has continuing authority over CG&E's capital structure,
financings and cost of capital for ratemaking purposes sufficient to enable
the [PUCO] to protect CG&E's retail electric customers from any material
adverse [e]ffects that may result from CG&E's or Cinergy's Participation in
Diversified Business./18/
Principles of Diversification Section V.
As part of the Principles, CG&E also agreed to make certain
informational filings with the PUCO (with copies to the OCC), including:
1. The capital structure of each Affiliate as of the end of the
applicable period;
2. A statement of the changes in the capital structure of each
Affiliate during the applicable period;
3. An assessment of the effects on CG&E's capital structure and
CG&E's ability to attract capital of the activities of each Affiliate
during the applicable period; and
4. If requested by the [PUCO] or the OCC, the names and job
descriptions of any employees of CG&E transferred to, or for whom 100
percent of their time has been allocated to, an Affiliate during the
applicable period.
Principles of Diversification Section VI.
Finally, the Principles of Diversification specify (in Exhibit B)
that the financial policies and guidelines for transactions between CG&E
and its affiliates shall reflect certain cross-subsidization principles,
including:
* CG&E's utility customers shall not subsidize the activities of
CG&E's non-utility affiliates or CG&E's utility affiliates.
* Neither CG&E's non-utility affiliates nor CG&E's utility
affiliates shall subsidize the public utility activities of CG&E.
* CG&E's costs for jurisdictional rate purposes shall reflect
only those costs attributable to its jurisdictional customers.
* CG&E shall maintain and utilize accounting systems and records
which are sufficient to identify and appropriately allocate costs between
CG&E and its affiliates, consistent with these cross-subsidization
principles and such financial policies and guidelines.
In sum, the numerous protections built into the Ohio Settlement
Agreement and ancillary agreements give substantial assurance that the
proposal before this Commission will not have an adverse impact on the
ability of the PUCO to protect Cinergy's utility subsidiaries or their
customers.
iii. Kentucky
As with Indiana and Ohio, the Kentucky Public Service Commission
("KPSC") secured various commitments through the merger settlement process
that ensure its ability to protect Cinergy utility subsidiaries and their
customers. In its order issued May 13, 1994 in Case No. 94-104
conditionally approving the Cinergy merger, the KPSC accepted certain
commitments made by Cinergy and CG&E during the course of that proceeding
"to ensure that the creation of Cinergy does not impair the [KPSC's]
regulatory authority over ULH&P ... ." These initial commitments included:
* Access to the accounts and records of Cinergy, Cinergy's
service company subsidiary, Cinergy Services, Inc., and any affiliates and
subsidiaries controlled by Cinergy to verify transactions with ULH&P.
* The ability of the KPSC to review and approve or reject
certain affiliate contracts involving Cinergy system companies.
* A commitment that no claim of SEC preemption would be raised
before the KPSC or in any action in any forum in the event that any
affiliated costs, other than those included in ULH&P's purchased power
costs, are excluded for rate-making purposes.
Beyond these commitments, the KPSC in its merger order imposed
certain additional conditions, all of which were accepted in writing by
Cinergy and CG&E. As summarized in detail below, these conditions focused
on three areas: (1) protection of utility resources; (2) the KPSC's ability
to monitor the corporate activities of ULH&P, CG&E, Cinergy and Cinergy's
other affiliates; and (3) reporting requirements. Specifically, To
implement these protections, the KPSC imposed certain "conditions and
requirements," including but not limited to:
1. Protection of utility resources: The KPSC stated that in
future proceedings it will be the responsibility of ULH&P to show that its
allocation methodologies have not resulted in any cross-subsidization. As
part of that showing, ULH&P should be prepared to disclose fully all
allocated costs, the portion allocated to each subsidiary of Cinergy,
complete details of the methods of allocation, and the justification for
the amount and the method. The KPSC also noted that the accounting and
other procedures and controls established by Cinergy, CG&E, and ULH&P will
be reviewed periodically, and in ULH&P proceedings as appropriate. KPSC
Order at 13.
In furtherance of its ability to protect the utility's resources,
the KPSC stated the following:
For rate-making purposes, the [KPSC] has jurisdiction over ULH&P's
capital structure, financing, and cost of capital. Through this authority,
the [KPSC] can protect ratepayers from the financial effect of non-utility
activities. No new debt, preferred stock, or common equity can be issued
without its prior approval. This prevents significant deviations from the
approved capital structure, which is the key to ensuring that ULH&P
maintains its financial integrity. Supplementing this financial control,
the [KPSC] must approve any guarantee of debt obligations by ULH&P for
Cinergy and its affiliates.
KPSC Order at 16. Thus, the KPSC's substantial ability to protect the
financial resources of the utility, as discussed in its order, will not be
impaired in any way by the proposal under consideration before this
Commission.
2. Ability to monitor corporate activities of ULH&P, CG&E,
Cinergy and Cinergy's other affiliates: Noting that "the most
indispensable requirement is open access to all books, records, and
personnel of Cinergy and each subsidiary," the KPSC stated that it "will
have access, as necessary in the exercise of its statutory duties, to the
books and records of Cinergy and its other affiliates and subsidiaries as
the books and records may be related to transactions with ULH&P. If the
subsidiaries or affiliates of Cinergy do not transact business with ULH&P,
ULH&P will verify, if necessary, the absence of such transactions through
independent sources." KPSC Order at 17-18.
3. Reporting requirements: The KPSC's order also imposed
substantial reporting requirements "[i]n order to monitor effectively the
activities of ULH&P, Cinergy and its related subsidiaries, and protect
ratepayers . . . ." KPSC Order at 19. Among the reporting required by the
KPSC, ULH&P is to "furnish financial statements of Cinergy including
consolidating adjustments of Cinergy and its subsidiaries with a brief
explanation of each adjustment and all periodic reports filed with the
SEC." KPSC Order at 19.
iv. Conclusion Regarding Ability of State Commissions to
Protect Operating Companies and Their Customers
Clearly, the commissions in the three states in which the Cinergy
utility subsidiaries operate have substantial authority - through continued
control of each utility's operating expenses and capital structure, through
access to the books, records and employees not only of the utility but its
subsidiaries and affiliates, through prior approval rights over affiliate
contracts, through the imposition of accounting procedures and controls,
and through the various reporting requirements - to protect the utility
subsidiaries and their customers, and the proposal before the Commission in
no way impairs that authority.
Item 4. Regulatory Approval
The proposed transactions are not subject to the jurisdiction of
any State commission or any federal commission other than this Commission.
Item 5. Procedure
Applicants request that the Commission issue and publish as soon as
practicable the requisite notice under Rule 23 with respect to the filing
of this amended Application-Declaration, and that after the expiration of
the requisite notice period the Commission promptly issue an order granting
and permitting to become effective this amended Application-Declaration.
Applicants waive a recommended decision by a hearing officer or
other responsible officer of the Commission; consent that the Staff of the
Division of Investment Management may assist in the preparation of the
Commission's order; and request that there be no waiting period between the
issuance of the Commission's order and its effectiveness.
Cinergy proposes to file quarterly certificates pursuant to Rule
24, within 60 days after the end of each calendar quarter (commencing with
the first full quarter following the Commission's order herein), containing
the following information as of the end of the preceding quarter (except as
otherwise noted)/19/:
(i) A computation in accordance with Rule 53(a) of Cinergy's
"aggregate investment";
(ii) Cinergy's "aggregate investment" expressed as a percentage of
consolidated capitalization, consolidated net utility plant, consolidated
assets and market value of outstanding common stock;
(iii) Consolidated capitalization ratios with consolidated debt
to be inclusive of all short-term debt and non-recourse Exempt Project debt
to the extent normally consolidated under GAAP or other applicable
financial reporting rules;
(iv) The market-to-book ratio of Cinergy's common stock;
(v) An analysis of the growth in consolidated retained earnings
which segregates earnings growth attributable to Exempt Projects as a whole
versus all other subsidiaries of Cinergy; and
(vi) A breakdown in revenues and net income of each of the Exempt
Projects for the 12-months then-ended.
Item 6. Exhibits and Financial Statements
(a) Exhibits
F Opinion of Counsel (to be filed by amendment).
G Form of Federal Register Notice (filed herewith).
(b) Financial Statements
FS-1 Cinergy Consolidated Financial Statements, dated December 31,
1996
FS-2 Cinergy Financial Statements, dated December 31, 1996
FS-3 Investments Consolidated Financial Statements, dated
December 31, 1996
FS-4 Cinergy Services Financial Statements, dated December 31,
1996
FS-5 Cinergy Consolidated Financial Data Schedule (included as
part of electronic submission only)
FS-6 Cinergy Financial Data Schedule (included as part of
electronic submission only)
FS-7 Investments Consolidated Financial Data Schedule
(included as part of electronic submission only)
FS-8 Cinergy Services Financial Data Schedule (included as
part of electronic submission only)
Item 7. Information as to Environmental Effects
(a) In light of the nature of the proposed transactions, the
Commission's action in this matter will not constitute any major federal
action significantly affecting the quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the undersigned companies
have duly caused this statement to be signed on their behalf by the
undersigned thereunto duly authorized.
Dated: February 28, 1997
CINERGY CORP.
By: William L. Sheafer
Treasurer
CINERGY INVESTMENTS, INC.
By: William L. Sheafer
Treasurer
CINERGY SERVICES, INC.
By: William L. Sheafer
Treasurer
<PAGE>
ENDNOTES
/1/ The September 1995 EWG/FUCO Order and the March 1996 EWG/FUCO Order
used a different defined term - a "Special Purpose Subsidiary" - to
identify any such special purpose company formed, inter alia, to acquire
and hold the securities of one or more EWGs and/or FUCOs. There is no
substantive difference between that term and "Project Parent." As used
herein, the term "Exempt Project" refers to any EWG, FUCO or Project Parent
in which Cinergy holds a direct or indirect ownership interest.
/2/ The March 1996 EWG/FUCO Order also clarified that if an investment by
Cinergy or Investments in a Project Parent took the form of a guarantee of
a security of a Project Parent denominated in a currency other than U.S.
dollars, the amount of the guarantee, for purposes of determining Cinergy's
"aggregate investment," would be determined by converting the stated amount
of the underlying security into U.S. dollars at currency exchange rates in
effect at the time the guarantee was issued.
/3/ Such $8 million increase in Cinergy's "aggregate investment" resulted
from Cinergy refinancing, with the proceeds of an additional borrowing by
Cinergy under its $600 million Credit Agreement, dated May 6, 1996
("Cinergy Corp. Credit Agreement"), with certain banks named therein and
Barclays Bank plc ("Barclays") as administrative agent, $8 million of
short-term debt originally issued by Cinergy UK, Inc., a wholly-owned
subsidiary of Investments and a Project Parent ("Cinergy UK"), pursuant to
its $40 million Credit Agreement, dated May 6, 1996 ("Cinergy UK Credit
Agreement"), with certain banks named therein and Barclays as
administrative agent, to finance a portion of Cinergy's share of the
purchase price of Midlands Electricity plc ("Midlands"). For further
information with respect to the acquisition financing by Cinergy of its
investment in Midlands reference is made to the text under Item 1.C.2.
/4/ In addition, in connection with the Cinergy merger, Cinergy succeeded
to Resources' minority ownership interest in Central Costanera, S.A.
("Costanera"), an electric generation facility in Argentina, acquired by
Resources pursuant to the Commission's order in PSI Resources, Inc., et
al., Rel. No. 35-25674, November 13, 1992. In late 1995, Cinergy sold all
of its interest in Costanera to various non-affiliated third-party buyers.
See Rule 24 certificate in File No. 70-8589 filed on February 15, 1996.
/5/ See Notification of Foreign Utility Company Status on Form U-57 filed
by Cinergy on behalf of Midlands on July 2, 1996 and Cinergy's Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, June 30 and
September 30, 1996, respectively.
/6/ As of January 31, 1997 Cinergy UK had repaid a total of approximately
$13 million of the funds originally borrowed under the Cinergy UK Credit
Agreement and Cinergy had correspondingly increased its aggregate
investment in Midlands by $13 million.
/7/ Certain members of the opposition British Labor Party have proposed a
windfall profits levy against businesses formerly owned and operated by the
British Government which could significantly reduce the amount of income
received by Cinergy from the Midlands investment in the year in which such
a levy would be enacted. The total amount to be raised by such a levy, the
manner in which the levy would be calculated and paid, as well as which
privatized companies would be included in the levy, remain unclear although
it is almost certain that companies such as Midlands would be included.
The governing Conservative Party led by Prime Minister John Major is
required to hold general elections no later than May 1997, after which more
information will become available on the prospects for enactment of such a
levy.
/8/ In 1995, its first calendar year of operation following the merger,
Cinergy achieved non-fuel operation and maintenance savings of
approximately $42 million, significantly exceeding initial estimates of
first-year merger benefits. Additionally, the merger allowed the Company
to reduce fuel costs and capital spending in 1995 by $13 million and $170
million, respectively. Cinergy is currently undergoing a reengineering
process that it expects will result in the realization of further
significant cost savings.
/9/ This process is by its very nature evolutionary and subject to
change, and the risk mitigation techniques selected are unique to each
project. Therefore, while the description that follows is illustrative of
those processes and techniques employed in the past, they are subject to
change. Similarly, the discussion does not address any similar due
diligence procedures that may be undertaken by any Exempt Projects in which
Cinergy has invested or may invest, and which, obviously, are not parties
to this application.
/10/ The "Operating Companies" consist of PSI, which among other things
provides retail electric service to customers in north central, central and
southern Indiana, and The Cincinnati Gas & Electric Company ("CG&E") and
its utility subsidiaries, The Union Light, Heat and Power Company
("ULH&P"), Lawrenceburg Gas Company, The West Harrison Gas and Electric
Company and Miami Power Corporation, which among other things provide
retail gas and electric service to customers in the southwestern portion of
Ohio and adjacent areas of Indiana and Kentucky.
/11/ For example, in the EDESUR investment, Cinergy teamed with five
large local and international services companies. In the Midlands
transaction Cinergy is partnering with GPU. In addition, Cinergy and GPU
have an important local partner since the acquisition left in place
Midlands' existing management team.
/12/ Cinergy appreciates that should it at any time not remain in
compliance with the requirements of Rule 53(a), other than Rule 53(a)(1),
or should any of the circumstances described in Rule 53(b) occur, the
authorization obtained in connection with this application-declaration,
insofar as it increases Cinergy's permitted aggregate investment to 100% of
consolidated retained earnings, would cease to be effective and Cinergy
would not be authorized to make any further investments in Exempt Projects
in amounts in excess of 50% of consolidated retained earnings without
obtaining a further order of the Commission.
/13/ Source: Regulatory Research Associates, Utility Focus, April 1996
and January 1997.
/14/ Source: Regulatory Research Associates, Utility Focus, April 1996
and January 1997.
/15/ Source: Regulatory Research Associates, Utility Focus, April 1996
and January 1997.
/16/ In December 1994 Cinergy issued and sold over 7 million shares of its
common stock to the public and contributed $160 million of the net proceeds
thereof to the equity capital of PSI (see generally Rule 24 certificate in
File No. 70-8477). PSI used such funds for general corporate purposes,
including repayment of short-term indebtedness incurred for construction
financing.
/17/ See PSI Resources, Inc., et al., Release No. 35-25674, November 13,
1992 (text accompanying notes 21 and 22).
/18/ "Diversified Business" was defined in the Principles to mean (i) a
non-utility business, or (ii) a public utility business outside the United
States of America. "Participation" was defined to mean "an acquisition of
securities, or any interest in a business, which results in either CG&E
becoming a direct owner of a Diversified Business or a Diversified Business
becoming an Affiliate of CG&E." Principles of Diversification Sections II
D and G.
/19/ This quarterly reporting obligation would supersede the Rule 24
reporting obligation presently in effect in this docket.
<PAGE>
Exhibit G
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- ___________)
Cinergy Corp., a registered holding company ("Cinergy"), its
wholly-owned nonutility holding company subsidiary, Cinergy Investments,
Inc. ("Investments"), and Cinergy's wholly-owned service company
subsidiary, Cinergy Services, Inc., all at 139 East Fourth Street,
Cincinnati, Ohio 45202, have filed a post-effective amendment to their
application-declaration ("Application") under sections 6(a), 7, 9(a), 10,
12(b), 13(b), 32 and 33 of the Act and rules 43, 45, 53 and 100(a)
thereunder.
Under the terms of orders and supplemental orders in File Nos. 70-8589
and 70-8521 (collectively, "Prior Orders"), Cinergy and Investments
are presently authorized from time to time through December 31, 1999 (1) to
acquire the securities of special-purpose entities ("Project Parents")
formed to engage exclusively in the business of acquiring and holding,
directly or indirectly, the securities of, and/or providing services to,
exempt wholesale generators ("EWGs") and foreign utility companies
("FUCOs") as defined in sections 32 and 33 of the Act; (2) to make direct
and indirect investments in EWGs and FUCOs and Project Parents (by means of
equity and debt investments including guarantees and other forms of credit
support), provided that Cinergy's "aggregate investment" (as defined in
rule 53(a)) does not at any time exceed 50% of Cinergy's "consolidated
retained earnings" (as defined in rule 53(a)) ("50% Limitation"); and (3)
in the case of Cinergy only: (a) to issue and sell in an aggregate
principal amount at any one time outstanding not to exceed $1 billion,
within certain prescribed parameters, unsecured short-term promissory notes
to banks and other financing institutions, commercial paper to commercial
paper dealers and financing institutions, and unsecured demand promissory
notes to banks evidencing Cinergy's reimbursement obligation in respect of
letters of credit issued on Cinergy's behalf (collectively, "Short-Term
Financings"), and (b) to apply the proceeds of Short-Term Financings, inter
alia, to investments in EWGs and FUCOs subject to the 50% Limitation.
Applicants state that at December 31, 1996 Cinergy's aggregate
investment and consolidated retained earnings were approximately $487
million and $990 million respectively. Applicants further state that as of
January 31, 1997 Cinergy had increased its aggregate investment to
approximately $495 million and consequently at that date had virtually no
available capacity under the 50% Limitation for further investments in EWGs
and FUCOs. Applicants maintain that further investments in EWGs, FUCOs and
Project Parents comprise a critical element of Cinergy's strategy for
providing value to investors and successfully competing in the evolving
energy industry.
Applicants now request an order from the Commission modifying the
Prior Orders (1) to exempt Applicants from the requirements of rule
53(a)(1) to permit Cinergy to increase its aggregate investment to an
amount equal to 100% of consolidated retained earnings, (2) to authorize
Cinergy to apply the proceeds of Short-Term Financings to investments in
EWGs, FUCOs and Project Parents in an aggregate amount equal to 100% of
consolidated retained earnings, and (3) to extend the authorization period
of the Prior Orders through December 31, 2002.
Rule 53(c) provides that if any of the conditions of the financing
"safe harbor" in Rule 53(a) is not satisfied, then an applicant must
affirmatively demonstrate that the proposal (1) will not have a substantial
adverse impact upon the financial integrity of the registered holding
company system, and (2) will not have an adverse impact on any utility
subsidiary of the registered holding company, or its customers, or on the
ability of state commissions to protect any such subsidiary or customers.
In the Application Cinergy has adduced financial and other information for
the purpose of demonstrating that the financing of investments by Cinergy
in EWGs and FUCOs in amounts which, when added to Cinergy's "aggregate
investment" at any point in time in such entities, may be equal to
Cinergy's "consolidated retained earnings" would not have either of the
adverse impacts referred to in Rule 53(c). The Application also summarizes
Cinergy's present ownership of EWGs and FUCOs and the process of project
risk review and mitigation that Cinergy currently undertakes before
committing any funds to potential investments in EWGs and FUCOs. Cinergy
represents that it has provided a copy of the Application to the public
service commissions in Ohio, Indiana and Kentucky and has consulted with
each of those regulators with respect to the instant proposal.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM U-1
CINERGY CORP.
CONSOLIDATED
AS OF DECEMBER 31, 1996
(Unaudited)
Pages 1 through 6
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(in thousands, except per share amounts)
<S> <C> <C> <C>
OPERATING REVENUES
Electric $2,768,706 $- $2,768,706
Gas 474,034 - 474,034
3,242,740 - 3,242,740
OPERATING EXPENSES
Fuel used in electric production 713,250 - 713,250
Gas purchased 249,116 - 249,116
Purchased and exchanged power 158,838 - 158,838
Other operation 598,434 - 598,434
Maintenance 193,908 - 193,908
Depreciation 282,763 - 282,763
Amortization of phase-in deferrals 13,598 - 13,598
Post-in-service deferred operating
expenses - net (1,509) - (1,509)
Income taxes 218,269 (10,563) 207,706
Taxes other than income taxes 257,815 - 257,815
2,684,482 (10,563) 2,673,919
OPERATING INCOME 558,258 10,563 568,821
OTHER INCOME AND EXPENSES - NET
Allowance for equity funds used during
construction 1,225 - 1,225
Post-in-service carrying costs 1,223 - 1,223
Phase-in deferred return 8,372 - 8,372
Equity in earnings of unconsolidated subsidiary 25,430 - 25,430
Income taxes 19,536 - 19,536
Other - net (40,464) - (40,464)
15,322 - 15,322
INCOME BEFORE INTEREST AND OTHER CHARGES 573,580 10,563 584,143
INTEREST AND OTHER CHARGES
Interest on long-term debt 190,617 - 190,617
Other interest 31,169 30,180 61,349
Allowance for borrowed funds used
during construction (6,183) - (6,183)
Preferred dividend requirements of
subsidiaries 23,180 - 23,180
238,783 30,180 268,963
NET INCOME $334,797 $(19,617) 315,180
COSTS OF REACQUISITION OF PREFERRED
STOCK OF SUBSIDIARY (18,391) - (18,391)
NET INCOME APPLICABLE TO COMMON STOCK $316,406 $(19,617) $296,789
AVERAGE COMMON SHARES OUTSTANDING 157,678 157,678
EARNINGS PER COMMON SHARE
Net Income $2.12 $2.00
Costs of reacquisition of preferred stock of subsidiary (0.12) (0.12)
Net Income Applicable to Common Stock $2.00 $1.88
DIVIDENDS DECLARED PER COMMON SHARE $1.74
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
UTILITY PLANT - ORIGINAL COST
In service
Electric $8,809,786 $- $8,809,786
Gas 713,829 - 713,829
Common 185,255 - 185,255
9,708,870 - 9,708,870
Accumulated depreciation 3,591,858 - 3,591,858
6,117,012 - 6,117,012
Construction work in progress 172,614 - 172,614
Total utility plant 6,289,626 - 6,289,626
CURRENT ASSETS
Cash and temporary cash investments 19,327 503,000 522,327
Restricted deposits 1,721 - 1,721
Accounts receivable less accumulated
provision for doubtful accounts of $10,618 199,361 - 199,361
Materials, supplies and fuel
- at average cost
Fuel for use in electric production 71,730 - 71,730
Gas stored for current use 32,951 - 32,951
Other materials and supplies 80,292 - 80,292
Property taxes applicable to subsequent year 123,580 - 123,580
Prepayments and other 37,049 - 37,049
566,011 503,000 1,069,011
OTHER ASSETS
Regulatory Assets
Amounts due from customers - income taxes 377,194 - 377,194
Post-in-service carrying costs and
deferred operating expenses 186,396 - 186,396
Coal contract buyout costs 138,171 - 138,171
Deferred demand-side management costs 134,742 - 134,742
Phase-in deferred return and depreciation 95,163 - 95,163
Deferred merger costs 93,999 - 93,999
Unamortized costs of reacquiring debt 70,518 - 70,518
Other 72,483 - 72,483
Investment in unconsolidated subsidiary 592,660 - 592,660
Other 231,551 - 231,551
1,992,877 - 1,992,877
$8,848,514 $503,000 $9,351,514
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock - $.01 par value;
Authorized shares - 600,000,000
Outstanding shares - 157,679,129 Actual $1,577 - $1,577
Paid-in capital 1,590,735 - 1,590,735
Retained earnings 992,273 (19,617) 972,656
Cumulative foreign currency translation
adjustment (131) - (131)
Total common stock equity 2,584,454 (19,617) 2,564,837
CUMULATIVE PREFERRED STOCK OF SUBSIDIARIES
Not subject to mandatory redemption 194,232 - 194,232
LONG-TERM DEBT 2,534,978 - 2,534,978
Total capitalization 5,313,664 (19,617) 5,294,047
CURRENT LIABILITIES
Long-term debt due within one year 140,000 - 140,000
Notes payable 713,617 503,000 1,216,617
Accounts payable 305,420 - 305,420
Litigation settlement - - -
Accrued taxes 323,059 (10,563) 312,496
Accrued interest 55,590 30,180 85,770
Other 114,653 - 114,653
1,652,339 522,617 2,174,956
OTHER LIABILITIES
Deferred income taxes 1,146,263 - 1,146,263
Unamortized investment tax credits 175,935 - 175,935
Accrued pension and other postretirement
benefit costs 263,319 - 263,319
Other 296,994 - 296,994
1,882,511 - 1,882,511
$8,848,514 $503,000 $9,351,514
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $950,216 $- $950,216
Net income 334,797 (19,617) 315,180
Dividends on common stock (274,358) - (274,358)
Costs of reacquisition of preferred stock
of subsidiary (18,391) - (18,391)
Other 9 - 9
BALANCE DECEMBER 31, 1996 $992,273 ($19,617) $972,656
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
Pro Forma Consolidated Journal Entries to Give Effect to the Issuance of $503 Million
of Short-term Debt for Purposes of Investing in EWGs, FUCOs and Project Parents
<S> <C> <C>
Entry No. 1
Cash and temporary cash investments $503,000,000
Notes payable $503,000,000
To record the issuance of $503,000,000 of notes payable based on an additional
investment which raises Cinergy Corp.'s aggregate investment in EWGs, FUCOs
and Project Parents to 100% of Cinergy Corp.'s retained earnings.
Entry No. 2
Other interest $30,180,000
Accrued interest $30,180,000
To record interest on $503,000,000 of notes payable at 6% per annum.
Entry No. 3
Accrued taxes $10,563,000
Income taxes $10,563,000
To record the reduction in income taxes due to increased interest expense on
notes payable.
($30,180,000 at an assumed tax rate of 35%).
</TABLE>
FINANCIAL STATEMENTS
WASHINGTON, D.C.
FORM U-1
CINERGY CORP.
AS OF DECEMBER 31, 1996
(Unaudited)
Pages 1 through 6
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(in thousands, except per share amounts)
<S> <C> <C> <C>
OTHER INCOME AND EXPENSES - NET
Equity in earnings of subsidiaries $347,556 ($19,617) $327,939
Income taxes 6,857 - 6,857
Other - net (1,501) 30,180 28,679
352,912 10,563 363,475
INCOME BEFORE INTEREST 352,912 10,563 363,475
INTEREST 18,115 30,180 48,295
NET INCOME $334,797 ($19,617) $315,180
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments $3,605 $- $3,605
Notes receivable from affiliated
companies 42 503,000 503,042
Accounts receivable - net 104 - 104
Accounts receivable from affiliated
companies 10,780 - 10,780
Prepayments 1,000 - 1,000
15,531 503,000 518,531
OTHER ASSETS
Investment in subsidiaries 3,101,501 (19,617) 3,081,884
Other 2,071 - 2,071
3,103,572 (19,617) 3,083,955
$3,119,103 $483,383 $3,602,486
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA BALANCE SHEET
AT DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock - $.01 par value;
Authorized shares - 600,000,000
Outstanding shares - 157,679,129 Actual $1,577 $- 1,577
Paid-in capital 1,590,735 - 1,590,735
Retained earnings 992,273 (19,617) 972,656
Cumulative foreign currency translation
adjustment (131) - (131)
Total common stock equity 2,584,454 (19,617) 2,564,837
LONG-TERM DEBT - - -
Total capitalization 2,584,454 (19,617) 2,564,837
CURRENT LIABILITIES
Notes payable 509,000 503,000 1,012,000
Notes payable to affiliated
companies 7 - 7
Accounts payable 2,597 - 2,597
Accounts payable to affiliated
companies 23,196 - 23,196
Accrued taxes (14,439) - (14,439)
Accrued interest 975 - 975
521,336 503,000 1,024,336
OTHER LIABILITIES
Deferred income taxes 13,287 - 13,287
Other 26 - 26
13,313 - 13,313
$3,119,103 $483,383 $3,602,486
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
PRO FORMA STATEMENT OF CHANGES IN RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 $950,216 $- 950,216
Net income 334,797 (19,617) 315,180
Dividends on common stock (274,358) - (274,358)
Costs of reacquisition of preferred stock
of subsidiary (18,391) - (18,391)
Other 9 - 9
BALANCE DECEMBER 31, 1996 $992,273 ($19,617) 972,656
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY CORP.
Pro Forma Journal Entries to Give Effect to the Issuance of $503
Million of Short-term Debt and the Use of Such Proceeds as a Loan
to Cinergy Investments, Inc. for Purposes of Investing in EWGs,
FUCOs and Project Parents
<S> <C> <C>
Entry No. 1
Cash and temporary cash investments $503,000,000
Notes Payable $503,000,000
To record the issuance of $503,000,000 of notes payable based on
additional investment which raises Cinergy Corp.'s aggregate investment
in EWGs, FUCOs and Project Parents to 100% of Cinergy Corp.'s retained
earnings.
Entry No. 2
Interest expense $30,180,000
Accrued interest $30,180,000
To record interest on $503,000,000 of notes payable at 6% per annum.
Entry No. 3
Accrued taxes $10,563,000
Income taxes $10,563,000
To record the reduction in income taxes due to increased interest expense
on notes payable.
($30,180,000 at an assumed tax rate of 35%).
Entry No. 4
Notes Receivable from affiliated companies $503,000,000
Cash and temporary cash investments $503,000,000
To record a $503,000,000 loan to Cinergy Investments, Inc.
Entry No. 5
Accrued interest $30,180,000
Interest income $30,180,000
To record interest at 6% per annum on intercompany loan to Cinergy
Investments, Inc.
Entry No. 6
Income taxes $10,563,000
Accrued taxes $10,563,000
To record the increase in income taxes due to interest income on
intercompany loan to Cinergy Investments, Inc.
($30,180,000 at an assumed tax rate of 35%).
Entry No. 7
Equity in earnings of subsidiaries $19,617,000
Investment in subsidiaries $19,617,000
To record the equity in subsidiary earnings.
</TABLE>
FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM U-1
CINERGY INVESTMENTS, INC.
CONSOLIDATED
AS OF DECEMBER 31, 1996
(Unaudited)
Pages 1 through 6
<PAGE>
<TABLE>
<CAPTION>
CINERGY INVESTMENTS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Actual Pro Forma Pro Forma
Adjustments
(in thousands)
<S> <C> <C> <C>
OTHER INCOME AND EXPENSES - NET
Equity in earnings of unconsolidated subsidiary $25,430 $- $25,430
Income taxes 7,537 10,563 18,100
Other - net (13,994) - (13,994)
18,973 10,563 29,536
INCOME BEFORE INTEREST AND OTHER CHARGES 18,973 10,563 29,536
INTEREST 1,308 30,180 31,488
NET INCOME (LOSS) $17,665 ($19,617) ($1,952)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY INVESTMENTS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments $682 $503,000 $503,682
Accounts receivable less accumulated
provision for doubtful accounts of $171 6,579 - 6,579
Accounts receivable from affiliated
companies 19,005 - 19,005
Other materials and supplies 1 - 1
Prepayments and other 432 - 432
26,699 503,000 529,699
OTHER ASSETS
Investment in unconsolidated subsidiary 592,660 - 592,660
Other 7,391 - 7,391
600,051 - 600,051
$626,750 $503,000 $1,129,750
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY INVESTMENTS, INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock - $.01 par value;
Authorized shares - 100;
Outstanding shares - 100 Actual $- $- $-
Paid-in capital 515,473 - 515,473
Retained earnings (deficit) 15,715 (19,617) (3,902)
Cumulative foreign currency translation
adjustment (131) - (131)
Total common stock equity 531,057 (19,617) 511,440
CURRENT LIABILITIES
Notes payable 27,000 - 27,000
Notes payable to affiliated
companies - 503,000 503,000
Accounts payable 10,459 - 10,459
Accrued taxes (982) (10,563) (11,545)
Accrued interest - 30,180 30,180
Other 65,355 - 65,355
101,832 522,617 624,449
OTHER LIABILITIES
Deferred income taxes (6,678) - (6,678)
Other 539 - 539
(6,139) - (6,139)
$626,750 $503,000 $1,129,750
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY INVESTMENTS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF CHANGES IN RETAINED EARNINGS (DEFICIT)
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 ($1,950) $- ($1,950)
Net income (loss) 17,665 (19,617) (1,952)
BALANCE DECEMBER 31, 1996 $15,715 ($19,617) ($3,902)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY INVESTMENTS, INC.
Pro Forma Consolidated Journal Entries to Give Effect to the
Borrowing of up to $503 Million from Cinergy Corp. for Purposes of
Investing in EWGs, FUCOs and Project Parents
<S> <C> <C>
Entry No. 1
Cash and temporary cash investments $503,000,000
Notes Payable to affiliated companies $503,000,000
To record the issuance of $503,000,000 of notes payable to affiliated companies
based on an additional investment which raises Cinergy Investments, Inc's aggregate
investment in EWGs, FUCOs and Project Parents to 100% of Cinergy Corp.'s retained
earnings
Entry No. 2
Interest expense $30,180,000
Accrued interest $30,180,000
To record interest on $503,000,000 of notes payable to affiliated companies at 6%
per annum.
Entry No. 3
Accrued taxes $10,563,000
Income taxes $10,563,000
To record reduction in income tax expense due to interest on notes payable to
affiliated companies.
($30,180,000 at an assumed tax rate of 35%).
</TABLE>
FINANCIAL STATEMENTS
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM U-1
CINERGY SERVICES
AS OF DECEMBER 31, 1996
(Unaudited)
Pages 1 through 5
<PAGE>
<TABLE>
<CAPTION>
CINERGY SERVICES
PRO FORMA STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(in thousands)
<S> <C> <C> <C>
OPERATING REVENUES $615,348 $- $615,348
OPERATING EXPENSES
Other operation 603,158 - 603,158
Depreciation 157 - 157
Taxes other than income taxes 11,158 - 11,158
614,473 - 614,473
OPERATING INCOME 875 - 875
OTHER INCOME AND EXPENSES - NET
Other - net (93) - (93)
(93) - (93)
INCOME BEFORE INTEREST 782 - 782
INTEREST
Other interest 569 - 569
569 - 569
NET INCOME $213 $- $213
<FN>
Note:
Cinergy Services has no pro forma journal entries relating to this proposed transaction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY SERVICES
PRO FORMA BALANCE SHEET
AT DECEMBER 31, 1996
ASSETS
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and temporary cash investments $7,009 $- $7,009
Accounts receivable 477 - 477
Accounts receivable from affiliated
companies 14,357 - 14,357
21,843 - 21,843
OTHER ASSETS
Other 6,949 - 6,949
6,949 - 6,949
$28,792 $- 28,792
<FN>
Note:
Cinergy Services has no pro forma journal entries relating to this proposed transaction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY SERVICES
PRO FORMA BALANCE SHEET
AT DECEMBER 31, 1996
CAPITALIZATION AND LIABILITIES
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
COMMON STOCK EQUITY
Common stock - $.05 par value;
Authorized shares - 50
Outstanding shares - 50 Actual $- $- $-
Retained earnings - - -
Total common stock equity - - -
CURRENT LIABILITIES
Notes payable to affiliated
companies 18,489 - 18,489
Accounts payable 10,963 - 10,963
Accounts payable to affiliated
companies 1,840 - 1,840
Accrued taxes (2,567) - (2,567)
28,725 - 28,725
OTHER LIABILITIES
Deferred income taxes 67 - 67
67 - 67
$28,792 $- $28,792
<FN>
Note:
Cinergy Services has no pro forma journal entries relating to this proposed transaction.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CINERGY SERVICES
PRO FORMA STATEMENT OF CHANGES IN RETAINED EARNINGS
YEAR ENDED DECEMBER 31, 1996
Pro Forma
Actual Adjustments Pro Forma
(dollars in thousands)
<S> <C> <C> <C>
BALANCE DECEMBER 31, 1995 ($213) $- ($213)
Net income 213 - 213
BALANCE DECEMBER 31, 1996 $- $- $-
<FN>
Note:
Cinergy Services has no pro forma journal entries relating to this proposed transaction.
</TABLE>
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BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
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