File No. 70-8993
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
__________________________________________
AMENDMENT NO. 3 TO
FORM U-1 DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
139 East Fourth Street
Cincinnati, Ohio 45202
(Name of company filing this statement
and address of principal executive office)
Cinergy Corp.
(Name of top registered holding company parent)
William L. Sheafer
Treasurer
Cinergy Corp.
(address above)
(Name and address of agent of service)
Applicant requests that the Commission send copies of all notices, orders
and communications in connection herewith to:
Jerome A. Vennemann James R. Lance
Associate General Counsel Manager - Corporate Finance
Cinergy Corp. & Financial Risk Management
(address above) Cinergy Corp. (address above)
William T. Baker, Jr.
Reid & Priest LLP
40 West 57th Street
New York, New York 10019
The declaration in this proceeding as previously amended is hereby amended
and restated in its entirety as set forth below.
Item 1. Description of Proposed Transactions
A. Summary of Requested Authorization
Cinergy Corp. ("Cinergy"), a registered holding company under the
Public Utility Holding Company Act of 1935, as amended (the "Act"),
requests authorization to issue and sell from time to time through December
31, 2002 unsecured debt securities (the "Debentures") in an aggregate
principal amount not to exceed $400 million at any time outstanding,
subject to an aggregate indebtedness limitation currently applicable to
Cinergy by prior Commission order.
Cinergy proposes to apply the net proceeds from the issue and sale
of the Debentures to repay certain short-term indebtedness - namely, short-term
indebtedness incurred to finance Cinergy's 50% equity interest in
Midlands Electricity plc ("Midlands"), a U.K. regional electricity company
and foreign utility company ("FUCO") within the meaning of section 33 of
the Act - and to refinance Debentures outstanding from time to time.
Cinergy proposes to use various interest rate risk management
instruments in connection with the issuance and sale of the Debentures.
B. Acquisition Debt
At March 31, 1997, Cinergy had outstanding approximately $534
million in aggregate principal amount of short-term indebtedness (Cinergy's
only outstanding indebtedness), comprised exclusively of unsecured bank
loans./1/ Of that figure, approximately $485 million represented short-term
bank debt incurred to finance Cinergy's indirect 50% ownership
interest in Midlands (such short-term debt, "Acquisition Debt").
Cinergy acquired its interest in Midlands in 1996 in a joint
venture transaction with GPU, Inc. Acting through Avon Energy Partners
plc, a jointly-owned special-purpose entity created for such purpose,
Cinergy and GPU commenced their cash tender offer to acquire Midlands in
May 1996 and completed the acquisition in the third quarter of 1996.
Cinergy used unsecured short-term bank debt to finance the
acquisition of its entire approximate $503 million equity investment in
Midlands, with (i) Cinergy originally borrowing $471 million of short-term
funds under a Credit Agreement, dated May 6, 1996 ("Cinergy Corp. Barclays
Credit Agreement"), with certain banks and Barclays Bank plc ("Barclays")
as administrative agent, and (ii) Cinergy UK, Inc., a special-purpose
indirect wholly-owned subsidiary of Cinergy, originally borrowing $32
million of short-term funds under a Credit Agreement, dated May 6, 1996,
with Barclays as administrative agent.
For further information with respect to Cinergy's acquisition and
financing of its interest in Midlands, see Cinergy's application-declaration as
amended in File No. 70-9011.
C. Terms of Debentures
Cinergy proposes to issue and sell from time to time through
December 31, 2002 up to $400 million principal amount of Debentures in one
or more series, subject to the aggregate debt limitation specified in Item
1.D below. The Debentures (a) will not be convertible into any other
securities of Cinergy, (b) will have maturities ranging from two to 40
years, (c) 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, and (d) may be entitled to mandatory or optional sinking fund
provisions. In addition, Cinergy may have the right from time to time to
defer the payment of interest on the Debentures of one or more series
(which may be fixed or floating or "multi-modal" debentures, i.e.,
debentures 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 extension period. The Debentures will be
issued under an indenture (the "Indenture") to be entered into between
Cinergy and The Fifth Third Bank, an Ohio banking corporation, as trustee
(the "Trustee," including any successor trustee appointed pursuant to the
Indenture), with a supplemental indenture to be executed in respect of each
separate offering of one or more series of Debentures (each, a
"Supplemental Indenture"). Forms of Debenture, Indenture and Supplemental
Indenture are filed herewith as Exhibits A-1, A-2 and A-3 respectively.
Cinergy contemplates that the initial series of Debentures would 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 Debentures without registration under
the Securities Act in reliance upon one or more applicable exemptions from
registration thereunder. A form of Purchase Agreement with respect to such
anticipated private offerings of Debentures through investment banking or
underwriting firms is filed herewith as Exhibit B-1. From time to time
Cinergy may also issue and sell the Debentures 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 Debentures of a particular series,
as well as any associated placement, underwriting or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable Supplemental Indenture
and Purchase Agreement or underwriting agreement setting forth such terms;
provided, however, that (1) Cinergy will not issue and sell any Debentures
(a) at a price higher than 102% or lower than 98% of the applicable
principal amount thereof or (b) at interest rates in excess of those
generally obtainable at the time of pricing or repricing of such Debentures
for securities having the same or reasonably similar maturities and having
reasonably similar terms, conditions and features issued by utility
companies or utility holding companies of the same or reasonably comparable
credit quality; and (2) any placement, underwriting and selling agent fees,
commissions and discounts to be paid by Cinergy in connection with the
issue and sale of any series of Debentures will not exceed 3.5% of the
aggregate principal amount thereof.
Finally, Cinergy undertakes that without further Commission
authorization it will not issue any Debentures that are not at the time of
original issuance rated at least investment grade by a nationally
recognized statistical rating organization.
D. Applicability of Aggregate Debt Limitation
The Debentures would be issued and sold in an aggregate principal
amount not to exceed $400 million at any time outstanding, subject to the
aggregate limitation on outstanding Cinergy indebtedness ("Cinergy Corp.
Debt Limitation") imposed by the Commission in its order issued in File No.
70-8521 on March 12, 1996 (Release No. 35-26488), together with any further
order or orders of the Commission that may raise or lower the Cinergy Corp.
Debt Limitation. Currently, the Cinergy Corp. Debt Limitation is $1
billion and applies to certain short-term bank borrowings, commercial
paper, letter of credit transactions and guarantees/2/ issued and sold from
time to time generally through December 31, 1999. Cinergy anticipates that
it will shortly file with the Commission an application seeking to increase
the Cinergy Corp. Debt Limitation and to issue additional shares of common
stock./3/
E. Use of Proceeds/Source of Funds
Cinergy proposes to use the proceeds from the issue and sale of the
Debentures, after deduction of any applicable fees, commissions and
expenses, to repay Acquisition Debt and to refinance Debentures outstanding
from time to time.
Cinergy anticipates that all or a significant portion of the
interest due on the Debentures would be paid from internally generated
funds, including dividends from subsidiaries. Cinergy expects that the
principal of and premium, if any, on the Debentures would be paid from
proceeds of additional series of Debentures or shares of Cinergy common
stock or from internally generated funds, including any combination of the
foregoing.
F. Interest Rate Risk Management
In connection with the issuance and sale of the Debentures, Cinergy
proposes to mitigate interest rate risk through the use of interest rate
management instruments commonly used in today's capital markets, consisting
of interest rate swaps, caps, collars, floors, options, forwards, futures
and similar products designed to manage and minimize interest costs.
Cinergy expects to enter into these agreements with counterparties that are
highly rated financial institutions. The transactions will be for fixed
periods and stated notional amounts.
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 Debentures or
interest rate management agreement. In addition, with respect to options
(such as caps and collars), Cinergy may pay an option fee which would not
exceed 10% of the principal amount of the Debentures covered by the option.
G. Benefits of Proposed Transactions
The proposed Debentures are a prudent financing instrument,
appropriate in the ordinary course of Cinergy's business, and not
detrimental to the interests of Cinergy's shareholders and customers or the
public. This conclusion rests on the following considerations:
1. The sole purpose of the Debentures is to refinance Acquisition
Debt and Debentures outstanding from time to time; therefore, the
consolidated debt level of the Cinergy system, including short-term debt -
which is consistent with that of a BBB' rated utility - will not increase
as a result of the proposed transactions.
2. The Debentures will be investment grade securities.
3. Debentures afford significant financial benefits and are widely
used in the electric utility industry.
4. Cinergy has two direct avenues for long-term refinancing of
Acquisition Debt: common stock and longer-term debt securities such as the
Debentures. Given the specific purpose at hand to refinance short-term
debt incurred to finance Cinergy's ownership interest in an exempt FUCO
investment, Midlands Electricity plc the Debentures are a more
appropriate refinancing vehicle than common stock.
5. Cinergy will be able to meet its interest obligations on the
Debentures and to make payments when due of the principal of and premium,
if any, on the Debentures without adversely affecting Cinergy's domestic
utility subsidiaries.
These factors are discussed in detail below.
1. The Debentures will be issued exclusively to refinance
Acquisition Debt and outstanding series of Debentures and will be subject
to the Cinergy Corp. Debt Limitation.
As stated previously, Cinergy proposes (1) to issue and sell the
Debentures for the sole purpose of refinancing Acquisition Debt and
outstanding series of Debentures and (2) in connection therewith to include
the principal amount of any Debentures in calculating Cinergy's aggregate
indebtedness for purposes of the Cinergy Corp. Debt Limitation. In other
words, Cinergy in the first instance would merely substitute longer term
unsecured debt for an equal amount of outstanding short-term unsecured bank
debt; moreover, on a pro forma basis, Cinergy's outstanding debt would not
increase.
At March 31, 1997, the total debt (including short-term debt)/total
capital ratio of Cinergy on a consolidated basis was 54.4 %. This debt
level is well within the Standard & Poor's ("S&P") average for BBB'-rated
electric utilities, i.e., a total debt/total capital ratio within the range
of 48% to 59%.
2. The Debentures will be investment grade securities.
The Debentures will not be speculative securities. Cinergy has
committed that any Debentures it issues will be rated at least investment
grade at the time of original issuance by a nationally recognized
statistical rating organization.
In that regard, all of the major rating agencies have assigned
investment grade ratings to senior debt obligations of Cinergy, which would
include the Debentures. Specifically, on May 5, 1997, S&P issued a letter
to Cinergy assigning a corporate credit rating of BBB+' to senior debt
obligations of Cinergy. On May 29, 1997, Fitch Investors Service issued a
press release assigning an implied BBB+' senior unsecured rating covering
up to $400 million of Cinergy debt. On May 30, 1997, Moody's Investors
Service issued a letter to Cinergy assigning a Baa2' indicative rating to
Cinergy senior long-term debt. Finally, on June 4, 1997, Duff & Phelps
Credit Rating Co. issued a press release assigning a BBB+' corporate
credit rating for Cinergy.
3. Debentures afford significant financial benefits and are
widely used in the electric utility industry.
As enumerated below, the Debentures will enable Cinergy to realize
important financial benefits unavailable through an exclusive reliance on
short-term bank debt. These relative benefits, which may ultimately
include lower all-in financing costs but extend beyond that single
criterion, help to explain why debentures are a widely used financing
vehicle by electric utilities and electric utility holding companies. Just
in the period from January 1, 1996 through May 31, 1997, electric utilities
and electric utility holding companies issued in excess of $4.5 billion
principal amount of unsecured long-term debt, not including private sales
for which no information is available.
With regard to the asserted benefits of debentures, in the first
place, because Cinergy financed the acquisition of its equity investment in
Midlands solely with short-term debt, and has continued to finance its
investment in Midlands entirely with short-term debt, Cinergy has been and
continues to be exposed to potential fluctuations in short-term interest
rates. Given that Cinergy's equity investment in Midlands amounts to
roughly half a billion dollars, this exposure is significant.
More specifically, under the Cinergy Corp. Barclays Credit
Agreement, as amended, Cinergy may borrow short-term funds priced at
various interest rates at Cinergy's option, including borrowings for terms
of one, two, three or six months priced in each case at the applicable
London Interbank Offered Rate ("LIBOR") plus a spread over LIBOR. In
general, all of the short-term borrowings and reborrowings by Cinergy under
the Cinergy Corp. Barclays Credit Agreement have been priced using the 1-month
LIBOR option (i.e., LIBOR in effect at the time of borrowing
applicable to a one-month maturity plus the agreed-upon spread over LIBOR).
Based on current market conditions, 1-month LIBOR and 6-month LIBOR
(including the additional spread Cinergy is required to pay under the
Cinergy Corp. Barclays Credit Agreement to access either of these borrowing
options) are approximately 6.0% and 6.25 %, respectively. LIBOR rates are
subject to constant fluctuation based on the general level of interest
rates, economic conditions and supply and demand for capital.
To illustrate the variability of applicable LIBOR, and therefore
the exposure that Cinergy has to the ultimate level of interest expense it
pays, noted below is the maximum value for certain LIBOR indices during the
time periods indicated:
Maximum Rate Maximum Rate
Since 1990 Since 1985
1-mo. LIBOR 8.75% 10.0625%
6-mo. LIBOR 8.875% 10.6875%
Cinergy is proposing in this application to address - and
effectively obviate, to the extent of the full amount of any refinanced
Acquisition Debt - this exposure to potentially volatile short-term
interest rates by issuing the Debentures, which Cinergy anticipates would
be priced with fixed rates of interest./4/ Based on current market
conditions, Cinergy estimates that Debentures with 2-40 year maturities
would be priced at a fixed coupon rate of interest between approximately
6.25% and 7.90%, respectively (excluding underwriting fees and
commissions). The lower end of this range is thus quite comparable to the
current rates applicable to 1- or 6-month LIBOR borrowings by Cinergy under
the Cinergy Corp. Barclays Credit Agreement (see above)./5/
The Debentures, then, would permit Cinergy to significantly reduce
its current exposure to short-term interest rate swings, in exchange for
applicable interest rates likely to be somewhat higher than prevailing
short-term interest rates on the date of issuance. Of course, if short-term
rates rise significantly, Cinergy would expect to realize net interest
cost savings through having issued Debentures.
Another important benefit of Debentures is that they are not
subject to the chronic repricing risk of short-term bank debt. The common
practice of continually reborrowing or "rolling-over" short-term bank loans
necessarily subjects the borrower, as each proposed rollover date
approaches, to the risk that, given the supply and demand ebb and flow
conditions of the U.S. capital markets, the rollover or repricing may be
prohibitively expensive or even effectively unavailable. For example, if
the issuer must reprice short-term loans on the same day that huge capital
demand exists (such as days when the U.S. Treasury is issuing securities),
available interest rates offered by bank lenders are likely to be adversely
affected (i.e., to be higher than otherwise would have been the case).
Likewise, the short-term borrower may not be able to satisfy the applicable
conditions of the existing bank credit agreement for a rollover, due to
these or other external events or other circumstances that have arisen
since the original advance of funds, such as adverse developments in the
borrower's industry generally. In short, external or supervening events,
beyond the corporate issuer's control and often difficult or impossible to
anticipate, may jeopardize the ability of the borrower to reprice or
reborrow expiring short-term bank loans.
In contrast, debentures, which by definition lock-in funding rates
for longer maturities, afford a level of financial security unavailable
through short-term debt. It follows that debentures lend themselves to
"maturity management," enabling the issuer to slot or schedule debenture
maturities, at regular or staggered intervals, in a coordinated fashion
consistent with the issuer's expected future capital needs.
Still another relative advantage is that, unlike short-term bank
debt, investment grade U.S. debentures generally are not saddled with
restrictive covenants in the transaction documents (other than the basic
obligation to make timely payments of all amounts due in respect of the
debentures). For example, the Cinergy Operating Companies/6/ issued and
sold over $400 million of debentures in 1995 and 1996, none of which
featured restrictive covenants. This is an important benefit, since
defaults under restrictive bank loan covenants may trigger cross-defaults
under other agreements of the borrower or its affiliates and accelerate
payment obligations under other outstanding securities of the borrower or
its affiliates.
4. Cinergy has two direct avenues for long-term refinancing of
Acquisition Debt: common stock and Debentures. Given the specific
purpose at hand to refinance short-term debt incurred to finance
Cinergy's ownership interest in an exempt FUCO investment, Midlands
Electricity plc the Debentures are a more appropriate refinancing
vehicle than common stock.
Cinergy regards its investment in Midlands as a long-term
investment. The "Acquisition Debt" - the short-term debt that Cinergy
originally incurred in connection with the acquisition of its equity
investment in Midlands, which has been "rolled over" numerous times since
the initial acquisition of shares in May 1996 with the result that such
"short-term" debt effectively has been a continuous feature of Cinergy's
capital structure since May 1996/7/ - was intended to serve only as a
transitory vehicle or bridge pending the arrangement of permanent or long-term
financing. Cinergy's ultimate aim is to finance all or most of this
long-term asset on a similar basis, locking in long-term capital at known
fixed costs.
To accomplish this result, Cinergy can seek to issue either equity
(Cinergy common stock) or longer-term debt securities (Debentures).
Issuance of the Debentures would be preferable to issuing additional shares
of common stock in light of (a) the specific purposes for which Cinergy
currently needs to raise external capital, (b) the added flexibility
Debentures would provide Cinergy in the future to adjust capitalization
ratios depending on the levels of Cinergy's investments in non-core
operations from time to time, and (c) the relative cost of capital and
associated advantages of the Debentures over additional common stock.
The traditional manner of financing the equity needs of a
registered holding company's subsidiaries was through the issuance of
common stock. In the classic utility holding company financing model,
funding equity infusions in public utility subsidiaries by issuing
"permanent" capital (i.e., holding company common stock) was generally
appropriate. For decades, holding company systems experienced rapid
internal growth as a result of construction of new utility plant needed to
fulfill the obligation to serve new electric utility load. Equity
infusions in subsidiaries were permanent, and the assumption was that
equity invested in subsidiaries should be appropriately matched by
"permanent" capital issued at the holding company level./8/
Those conditions no longer exist. Cinergy's current projections
indicate that Cinergy should not have to make any additional equity
investments in the Cinergy Operating Companies through at least 2005.
Cinergy does not currently foresee any need for construction of or
investments in new generating facilities in connection with the utility
business of the Cinergy Operating Companies. Rather, projected
construction expenditures will be applied almost exclusively to capital
improvements and expansions to existing generating facilities. In any
case, the Cinergy Operating Companies will not look to Cinergy to finance
those capital expenditures, but will instead rely upon their own internally
generated funds or external financings.
Cinergy's current and projected external capital needs relate
primarily to investments outside its core utility business, particularly in
exempt wholesale generators ("EWGs") and FUCOs among other nonutility
companies. The present application is one example. And as the Commission
itself has commented with regard to these types of jurisdictional financing
transactions: "Traditional financing standards are not particularly
suitable for EWGs, which are expected to be project-financed and generally
capitalized with large amounts of nonrecourse debt."/9/
In particular, in the context of investments outside the core
utility business, it is important for a registered holding company to have
greater flexibility to manage capitalization levels. Unlike its
investments in domestic utility subsidiaries, a holding company's
investments in nonutility subsidiaries may in fact be reduced over time as
a result of sell-downs of partial interests, releveraging of project
assets, and the like. Further, in the project finance context, investors
typically expect to recover all invested capital through current
distributions over the life of the project, and have no legal or
contractual obligation to fund improvements or plant expansions. Finally,
investments by holding companies in certain nonutility subsidiaries may be
used to fund relatively short-lived assets. A mismatch would result if
such investments were funded exclusively from common stock proceeds.
Moreover, any attempt to retire or reduce outstanding common stock under
circumstances such as those described above, in which the amount thereof is
deemed to be excessive, could be far more costly than the cost to redeem
long-term debt (even with prepayment premiums).
Finally, if Cinergy were limited to issuing common stock rather
than Debentures to refinance the entire amount of the Acquisition Debt,
Cinergy could expect to experience, all other things being equal, (1)
relatively greater after-tax financing costs, (2) a decline in Cinergy's
earnings per share with a potential negative impact on Cinergy's stock
price, (3) an increase in Cinergy's dividend payout ratio due to the higher
dividend requirement for Cinergy common stock, and (4) because equity
financing is more expensive than debt financing, an increase in Cinergy's
overall composite cost of capital.
5. Cinergy will be able to meet its interest obligations on the
Debentures and to make payments when due of the principal of and
premium, if any, on the Debentures without adversely affecting Cinergy's
domestic utility subsidiaries.
As stated above in Item 1.E, Cinergy anticipates that all or a
significant portion of the interest due on the Debentures would be paid
from internally generated funds, including dividends from subsidiaries.
Cinergy expects that the principal of and premium, if any, on the
Debentures would be paid from proceeds of additional series of Debentures
or shares of Cinergy common stock or from internally generated funds,
including any combination of the foregoing.
Just as with the short-term debt that Cinergy is currently
authorized by the Commission to issue in an aggregate principal amount of
$1 billion, Cinergy's ability to meet its interest obligations on the
Debentures will depend on the earnings of its subsidiary companies the
Cinergy Operating Companies and other subsidiaries including Midlands and
their ability to distribute to Cinergy sufficient portions of those
earnings as dividends. As explained above, the proposed Debentures would
be issued to refinance Acquisition Debt and would have no impact on
Cinergy's consolidated debt level. Therefore, the proposed transactions
pose no issues in regard to Cinergy's ability to satisfy its payment
obligations on the Debentures not already effectively addressed by the
Commission in originally authorizing the Acquisition Debt in its March 1996
order (Release No. 35-26488). Since the date of that order there has been
no deterioration in the financial strength of the Cinergy system of
affiliated companies. Quite the contrary, the acquisition of Midlands has
bolstered Cinergy's financial strength - Business Week magazine/10/ ranked
Cinergy's financial performance for 1996 highest among the S&P electric
utilities - without negatively impacting the credit ratings of the Cinergy
Operating Companies or Cinergy itself, all of which is extensively
documented in Cinergy's amended application-declaration in File No. 70-9011.
The foregoing notwithstanding, Cinergy has submitted evidence into
the record (see Exhibit H, filed under claim for confidential treatment)
showing that Cinergy will have sufficient available cash flow generated by
subsidiary dividends to service the interest on the Debentures and any
residual Acquisition Debt without adversely affecting the Cinergy Operating
Companies.
With respect to payments of principal of and premium, if any, on
the Debentures, Cinergy has the financing capability to refinance
outstanding Debentures through additional series thereof or through other
external securities sales, such as of additional common stock. Again, this
issue is no different in substance from that presented by the Acquisition
Debt; as to which, as mentioned, Cinergy has successively "rolled over" the
original borrowings upon the maturity thereof.
H. Rule 54 Analysis
Under Rule 54, in determining whether to approve the issue or sale
of a security by a registered holding company for purposes other than the
acquisition of an EWG or a FUCO, or other transactions by such registered
holding company or its subsidiaries other than with respect to EWGs and
FUCOs, the Commission shall not consider the effect of the capitalization
or earnings of any subsidiary which is an EWG or a FUCO upon the registered
holding company system if the conditions in Rule 53(a), (b) and (c) are
satisfied.
As set forth below, all applicable conditions of Rule 53(a) are
and, upon consummation of the proposed transactions, will be satisfied, and
none of the conditions specified in Rule 53(b) exists or, as a result of
the proposed transactions, will exist.
Rule 53(a)(1): At March 31, 1997, Cinergy had invested, directly
or indirectly, an aggregate of approximately $496 million in EWGs and
FUCOs. The average of the consolidated retained earnings of Cinergy
reported on Form 10-K or Form 10-Q, as applicable, for the four consecutive
quarters ended March 31, 1997 was approximately $1 billion. Accordingly,
based on Cinergy's "consolidated retained earnings" at March 31, 1997, and
taking into account Cinergy's "aggregate investment" as of that date,
Cinergy had available investment capacity under rule 53 of approximately $4
million.
Rule 53(a)(2): Cinergy maintains books and records enabling it to
identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly holds an interest. At present, Cinergy does not
hold any interest in a domestic EWG; Rule 53(a)(2)(i) is therefore
inapplicable.
In accordance with Rule 53(a)(2)(ii), the books and records and
financial statements of each foreign EWG and FUCO which is a "majority-owned
subsidiary company" of Cinergy are kept in conformity with and
prepared according to U.S. generally accepted accounting principles
("GAAP"). Cinergy will provide the Commission access to such books and
records and financial statements, or copies thereof, in English, as the
Commission may request.
In accordance with Rule 53(a)(2)(iii), for each foreign EWG and
FUCO in which Cinergy directly or indirectly owns 50% or less of the voting
securities, Cinergy will proceed in good faith, to the extent reasonable
under the circumstances, to cause each such entity's books and records to
be kept in conformity with, and the financial statements of each such
entity to be prepared according to, GAAP. If such books and records are
maintained, or such financial statements are prepared, according to a
comprehensive body of accounting principles other than GAAP, Cinergy will,
upon request of the Commission, describe and quantify each material
variation from GAAP in the accounting principles, practices and methods
used to maintain such books and records and each material variation from
GAAP in the balance sheet line items and net income reported in such
financial statements, as the case may be. In addition, Cinergy will
proceed in good faith, to the extent reasonable under the circumstances, to
cause access by the Commission to such books and records and financial
statements, or copies thereof, in English, as the Commission may request,
and in any event will make available to the Commission any such books and
records that are available to Cinergy.
Rule 53(a)(3): No more than 2% of the employees of Cinergy's
operating utility subsidiaries will, at any one time, directly or
indirectly, render services to EWGs and FUCOs.
Rule 53(a)(4): Cinergy will simultaneously submit a copy of this
statement and of any Rule 24 certificate hereunder, as well as a copy of
Cinergy's Form U5S and Exhibits H and I thereto, to each public utility
commission having jurisdiction over the retail rates of any Cinergy utility
subsidiary.
Rule 53(b): The provisions of Rule 53(a) are not made inapplicable
to the authorization herein requested by reason of the provisions of Rule
53(b). Specifically:
Rule 53(b)(1): Neither Cinergy nor any 10% subsidiary thereof
(within the meaning of rule 53(b)(1)) is the subject of any pending
bankruptcy or similar proceeding.
Rule 53(b)(2): Cinergy's average consolidated retained earnings
for the four quarters ended March 31, 1997 were approximately $1 billion,
versus approximately $946 million for the four quarters ended March 31,
1996, a difference of $54 million (a 5.7% increase).
Rule 53(b)(3): For the twelve months ended March 31, 1997, Cinergy
did not report operating losses attributable to its direct and indirect
investments in EWGs and FUCOs aggregating in excess of 5% of consolidated
retained earnings.
Item 2. Fees, Commissions and Expenses
Applicant estimates that in addition to the fees, commissions, margins
and expenses ("Fees") described in Item 1, the following Fees will be
incurred directly or indirectly by it or any associate company thereof in
connection with the proposed transactions:
Legal Fees $60,000
Trustee Fees $20,000
Printing Fees $40,000
Rating agency Fees $186,000
Fees of Cinergy Services $15,000
Blue sky Fees $5,000
Accountant Fees $30,000
TOTAL $356,000
Item 3. Applicable Statutory Provisions
A. Introduction
The proposed issuance and sale and application of the proceeds of
the Debentures is subject to sections 6(a) and 7 of the Act and rule 54
thereunder.
Compliance with rule 54 is addressed above.
Section 6(a) provides in relevant part that except in accordance
with a declaration under section 7 and with the order under such section
permitting such declaration to become effective, it shall be unlawful for
any registered holding company to issue or sell any security.
B. The proposed transactions satisfy the standards of section 7.
Section 7 sets forth a number of standards that must be met as a
precondition to issuance by the Commission of an order thereunder
permitting the subject declaration to become effective. The proposed
transactions satisfies each of these standards.
1. The proposed transactions satisfy the relevant criteria of
section 7(c).
Section 7(c) provides in relevant part, in paragraph (2) thereof,
that the Commission shall not permit a declaration regarding the issue or
sale of a security to become effective unless it finds that:
such security is to be issued or sold solely (A) for the purpose of
refunding, extending, exchanging, or discharging an outstanding
security of the declarant ; and/or (D) for necessary and urgent
corporate purposes of the declarant where the requirements of the
provisions of paragraph (1)/11/ would impose an unreasonable
financial burden upon the declarant and are not necessary or
appropriate in the public interest or for the protection of
investors or consumers.
Cinergy proposes to issue and sell the Debentures solely to
refinance outstanding securities of Cinergy - short-term bank notes issued
to finance Cinergy's interest in Midlands and Debentures. Accordingly, the
proposed transactions fall squarely within the literal language of section
7(c)(2)(A).
Alternatively, the proposed transactions also meet the test of
section 7(c)(2)(D). In the first place, as already discussed, the proposed
issuance and sale of the Debentures is for "necessary and urgent corporate
purposes": refinancing short-term funds with long-term funds in respect of
a long-term investment - Midlands. As already discussed (see subsections 3
and 4 of Item 1.G), it is financially inappropriate for Cinergy to continue
indefinitely to finance its interest in Midlands with roll-overs of short-term
funds.
Second, Cinergy would bear "an unreasonable financial burden,"
within the meaning of section 7(c)(2)(D), if it were limited to refinancing
Acquisition Debt solely with common stock, rather than with Debentures or a
mix of Debentures and common stock. This matter has been specifically
addressed in Item 1.G.4.
Finally, the proposed Debentures are not detrimental to the public
interest or the interests of investors or consumers within the meaning of
section 7(c)(2)(D). As to investors, Cinergy has committed that it would
only issue investment grade Debentures; on the basis of that factor alone,
the Debentures should be deemed prima facie if not conclusively consistent
with the interests of investors./12/ The other proposed terms and
parameters of the Debentures (see Item 1.C) are not unfair or onerous to
investors, but instead are consistent with or more conservative - such as
with respect to use of proceeds - than those applicable to similar
securities of electric companies approved by the Commission in recent
orders./13/ As to consumers, Exhibit H establishes that the proposed
transactions will not negatively impact the Cinergy Operating Companies or
their customers. Finally, as to the public interest, if, as here, the
proposed financing transactions are concededly consistent with the
interests of Cinergy's investors and customers and industry financing
practices, it follows that the subject financing transactions are
consistent with the public interest as well.
2. The proposed transactions satisfy each of the tests of
section 7(d).
Section 7(d) provides, in relevant part, that if the requirements
of subsections (c) and (g) are satisfied,/14/ the Commission shall permit a
declaration regarding the issue or sale of a security to become effective
unless it finds that:
(1) the security is not reasonably adapted to the security
structure of the declarant and other companies in the same holding company
system;
(2) the security is not reasonably adapted to the earning power
of the declarant;
(3) financing by the issue and sale of the particular security
is not necessary or appropriate to the economical and efficient operation
of a business in which the applicant lawfully is engaged or has an
interest;
(4) the fees, commissions, or other remuneration, to whomsoever
paid, directly or indirectly, in connection with the issue, sale, or
distribution of the security are not reasonable; or
(5) the terms and conditions of the issue or sale are
detrimental to the public interest or the interest of investors or
consumers.
a. Section 7(d)(1): The Debentures are reasonably adapted to the
security structure of Cinergy and its associate companies.
Because the Debentures will only be issued to refund outstanding
Cinergy debt, the pro forma effect of the proposed transactions will not
affect the existing total debt/total capital ratio of Cinergy. As noted
above, Cinergy's pro forma consolidated debt ratio is consistent with that
of a BBB' electric utility.
The Commission has authorized registered electric utility holding
companies to issue intermediate and long-term debt only in limited
instances. The foregoing notwithstanding, within the past two years the
Commission has authorized GPU, Inc. to issue $300 million of 40-year
debentures and The Southern Company to issue $2 billion of 7-year
term-notes./15/ Most of the relevant, generally more restrictive cases were
decided decades ago./16/ The factual underpinnings of these earlier
decisions - major ongoing construction programs for new baseload generating
facilities together with significant external financing needs including at
the parent holding company level are not relevant in the present case.
What is relevant is that the Debentures will be investment grade
securities and that the Cinergy Operating Companies and their customers
will not be adversely affected. Many other electric utilities and electric
utility holding companies are issuing similar debt securities in today's
capital markets. Like Cinergy, they recognize the financing benefits of
these securities.
It is also relevant, for purposes of the specific statutory
analysis under section 7, that the Debentures will be issued solely to
refund outstanding securities of Cinergy. The transaction thus falls
within the literal language of section 7(c)(2)(A) and accordingly, based on
a plain reading of the disjunctive "and/or" clauses of section 7(c)(2),
should not need to satisfy any of the other alternate bases for approval
set forth therein./17/ This reading does no violence to section 7: the
subject transaction must still pass muster under all the other criteria
specified therein, e.g., section 7(d) (with its multiple standards) and
(g). These other criteria - such as the very criterion the satisfaction of
which is being addressed now - ensure a full assessment of the
"appropriateness" of the subject financing transaction.
b. Section 7(d)(2): The Debentures are reasonably adapted to the
earning power of . . . . . . . . . .Cinergy
Because it is a holding company, the ability of Cinergy to meet its
interest obligations on the Debentures hinges on the earnings of its
subsidiaries, including the Cinergy Operating Companies and Midlands. As
previously discussed (see Item 1.G.5), Cinergy will have the financial
capacity to discharge all of its payment obligations on the Debentures
without adversely affecting the Cinergy Operating Companies.
c. Section 7(d)(3): Financing by the issue and sale of the Debentures
is necessary or appropriate to the economical and efficient operation of
Cinergy's business
Cinergy financed the acquisition of its interest in Midlands solely
with short-term debt which Cinergy has reborrowed or rolled over numerous
times since the acquisition was completed in the third quarter of 1996.
Cinergy's intent was that this short-term financing would only serve as a
bridge until permanent financing was arranged. In any case, the current
arrangement cannot be continued indefinitely. For the reasons already
discussed, Cinergy believes that it is financially appropriate and
consistent with the standards of the Act that it refinance Acquisition Debt
with Debentures.
d. Section 7(d)(4): The fees for the proposed transactions are
reasonable.
The fees, commissions, expenses and margins estimated or referenced
in Item 2 are in Cinergy's view on their face reasonable and are consistent
with recent electric company debenture orders issued by the Commission./18/
e. Section 7(d)(6): The terms and conditions of the issue and
sale of the Debentures are not detrimental to the public interest or the
interest of investors or consumers.
Cinergy has already addressed at length why the proposed
transactions are not detrimental to the "protected interests."
Item 4. Regulatory Approval
No state or federal regulatory agency other than the Commission
under the Act has jurisdiction over the proposed transactions.
Item 5. Procedure
The applicable public notice period having expired with no requests
for intervention having been filed, Cinergy requests that the Commission
issue an order authorizing the proposed transactions as soon as possible.
Cinergy requests that there be no waiting period between the issuance of
the Commission's order and its effective date.
Cinergy waives a recommended decision by a hearing officer or other
responsible officer of the Commission and consents that the Staff of the
Division of Investment Management assist in the preparation of the
Commission's order.
Item 6. Exhibits and Financial Statements
(a) Exhibits:
A-1 Form of Debenture (included as part of Exhibit A-2 and
Exhibit A-3)
A-2 Form of Indenture (previously filed)
A-3 Form of Supplemental Indenture (previously filed)
B-1 Form of Purchase Agreement (previously filed)
C Not applicable
D Not applicable
E Not applicable
F-1 Preliminary opinion of counsel (filed herewith)
G-2 Further revised form of notice of proposed
transactions for publication in Federal Register (previously filed)
H Certain Financial Projections (filed in paper format
only pursuant to rule 104 under claim for confidential treatment).
(b) Financial Statements:
FS-1 Cinergy Pro Forma Consolidated Financial Statements
dated December 31, 1996 (previously filed)
FS-2 Cinergy Pro Forma Financial Statements dated December
31, 1996 (previously filed)
FS-3 Cinergy Consolidated Financial Data Schedule (included
as part of electronic submission only)
FS-4 Cinergy Financial Data Schedule (included as part of
electronic submission only)
Item 7. Information as to Environmental Effects
(a) The Commission's action in this matter will not constitute
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 company
has duly caused this statement to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: June 25, 1997
CINERGY CORP.
By: /s/ William L. Sheafer
Vice President and Treasurer
ENDNOTES
/1/ Since registering as a holding company in October 1994, Cinergy has
not issued any commercial paper.
/2/ For information with respect to the guarantee authority, see Release
No. 35-26723, May 30, 1997.
/3/ Pursuant to prior Commission orders (Release Nos. 35-26477, February
23, 1996; 35-26159, November 18, 1994), Cinergy may currently issue and
sell less than one million shares of common stock (apart from common stock
issued in connection with Cinergy stock-based benefit plans), representing
the balance of authorized shares originally totaling eight million.
/4/ As previously discussed, from time to time Cinergy may also determine
to issue and sell Debentures with floating rates of interest as well as
multi-modal Debentures, i.e., Debentures that through a periodic reset
feature may alternately carry both fixed and floating rates of interest.
/5/ Currently there exists a relatively flat Treasury yield curve in which
the yield differential between 2-year Treasury notes and 30-year Treasury
bonds is below 70 basis points.
/6/ The "Cinergy Operating Companies" are Cinergy's two direct domestic
utility subsidiaries, PSI Energy, Inc. ("PSI") and The Cincinnati Gas &
Electric Company ("CG&E"), together with CG&E's wholly-owned 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. The three principal Cinergy Operating Companies,
based on total assets and operating revenues (see Item 10 of Cinergy's 1996
Annual Report on Form U5S), are CG&E, PSI and ULH&P.
/7/ See the quarterly rule 24 certificates in File No. 70-8521,
commencing with the rule 24 certificate covering the second quarter of
1996, for a detailed chronology of these successive borrowings and
reborrowings.
/8/ See generally U.S. Securities and Exchange Commission, Division of
Investment Management, "The Regulation of Public-Utility Holding
Companies," at 41-46 (June 20, 1995) ("1995 Report").
/9/ Release No. 35-25886, 55 SEC Docket at 106, 109 (September 23,
1993)(adopting rule 53), aff'd sub nom. National Ass'n of Regulatory
Utility Commissioners v. SEC, 63 F. 3d 1123 (D.C. Cir. 1995).
/10/ March 24, 1997, at 148-149.
/11/ Paragraph (1) of Section 7(c) provides that:
(1) such security is (A) a common stock having a par value and
being without preference as to dividends or distribution over, and
having at least equal voting rights with, any outstanding security
of the declarant; (B) a bond (i) secured by a first lien on
physical property of the declarant, or (ii) secured by an
obligation of a subsidiary company of the declarant secured by a
first lien on physical property of such subsidiary company, or
(iii) secured by any other assets of the type and character which
the Commission by rules and regulations or order may prescribe as
appropriate in the public interest or for the protection of
investors; (C) a guaranty of, or assumption of liability on, a
security of another company; or (D) a receiver's or trustee's
certificate duly authorized by the appropriate court or courts.
/12/ In the 1995 Report, the Commission's Division of Investment
Management noted that "[t]he SEC looks to the existence of investment grade
ratings by nationally recognized statistical rating organizations as a
factor in the administration of some securities statutes, and the use of
ratings is an important component of the SEC's regulatory program.' " Id.
at 57 (footnotes omitted; quoting Securities Act Release No. 7085
("Nationally Recognized Statistical Rating Organizations"), at 8 (Aug. 31,
1994). The Division added that although it believes ratings should not be
the single determinative factor in considering whether to approve a
proposed financing transaction, "they may be useful in considering such
transactions," and "recommend[ed] that the SEC consider securities ratings
in making determinations under the Act in connection with the consideration
of applications relating to financing, acquisitions, dividends and
diversification." Ibid.
/13/ Cf. Central and South West Corporation, et al., Release No. 35-26687,
March 17, 1997; Alabama Power Company, et al., Release No. 35-26560, August
26, 1996; General Public Utilities Corporation, Release No. 35-26559,
August 23, 1996; Jersey Central Power & Light Company, Release No. 35-26246,
March 6, 1995.
/14/ Cinergy has established the proposed transactions' compliance with
section 7(c). Section 7(g), which applies where a state commission has
jurisdiction over the proposed transactions, is irrelevant (see Item 4).
/15/ See General Public Utilities Corporation, Release No. 35-26559,
August 23, 1996 (authorizing issuance of $300 million aggregate principal
amount of 1-40 year debentures for various corporate purposes including
investments in subsidiaries); The Southern Company, Release No. 35-26489,
March 13, 1996 (authorizing issuance of $2 billion aggregate principal
amount of, among other securities, 7-year term-loan notes for various
corporate purposes including investments in subsidiaries); The Southern
Company, Release No. 35-26346, August 1, 1995 (modifying prior financing
order to permit 7-year term notes, subject to $1 billion ceiling). Unlike
in the instant case, Southern and GPU did not propose to issue their
intermediate or longer term debt securities solely to refinance outstanding
securities or solely to fund non-core operations.
/16/ For a comparatively recent example, see Northeast Utilities, Release
No. 35-19519, May 7, 1976 (authorizing issuance of $50 million principal
amount of 10-year unsecured promissory notes for purpose of making equity
investment in subsidiary and retiring short-term debt).
/17/ In any event, Cinergy has shown herein that it would issue the
Debentures for "necessary and urgent corporate purposes of the declarant"
within the meaning of section 7(c)(2)(D).
/18/ See Central and South West Corporation, et al., Release No. 35-26687,
March 17, 1997; Alabama Power Company, et al., Release No. 35-26560, August
26, 1996; General Public Utilities Corporation, Release No. 35-26559,
August 23, 1996; Jersey Central Power & Light Company, Release No. 35-26246,
March 6, 1995.
EXHIBIT F-1
June 25, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cinergy Corp./ File No. 70-8993
Ladies and Gentlemen:
I am Associate General Counsel of Cinergy Corp. ("Cinergy"), a
Delaware corporation and registered holding company under the Public
Utility Holding Company Act of 1935, as amended (the "Act") and am
furnishing this opinion as an exhibit to Cinergy's Declaration on Form U-1
in the above docket, as previously amended and as proposed to be further
amended by Amendment No. 3 thereto filed herewith (such amended statement,
including any further amendments, if any, thereto, the "Application").
In the Application, Cinergy requests authority, among other things,
(1) to issue and sell from time to time through December 31, 2002 unsecured
debt securities with maturities ranging from one to 40 years (the
"Debentures") in an aggregate principal amount not to exceed $400 million
at any time outstanding, subject, however, to an aggregate indebtedness
limitation applicable to Cinergy by prior Commission order; and (2) to
apply the net proceeds therefrom to refinance (a) outstanding short-term
debt incurred by Cinergy in connection with its investment in Midlands
Electricity plc and (b) Debentures outstanding from time to time.
In connection with this opinion, I have reviewed the Application and
such other documents, records and other materials as I have deemed
necessary or appropriate in order to render this opinion.
I am a member of the Bar of the State of Ohio and do not purport to be
an expert on the laws of any other jurisdiction. I have also examined the
Delaware General Corporation Law ("DGCL") to the extent necessary to
express the opinions set forth herein. The opinions expressed below are
limited solely to matters governed by the laws of the State of Ohio and the
DGCL.
Based upon and subject to the foregoing, and assuming that the
Proposed Transactions are carried out (i) in accordance with the
Application and the Commission's order to be issued permitting the
Application to become effective and (ii) in accordance with all other
requisite approvals and authorizations, regulatory, corporate or otherwise,
I am of the opinion that:
(a) Cinergy is validly incorporated and duly existing under the laws of the
State of Delaware.
(b) All state laws applicable to the Proposed Transactions will have been
complied with.
The Debentures will be valid and binding obligations of Cinergy
enforceable in accordance with the terms thereof, except to the extent such
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other similar laws affecting the enforcement
of creditors' rights generally or by applicable principles of equity
(regardless of whether such enforceability is sought in a proceeding at law
or in equity).
(d) The consummation of the proposed transactions will not violate the
legal rights of the holders of any securities issued by Cinergy or any
associate company thereof.
I hereby consent to the use of this opinion in connection with the
Application.
Very truly yours,
/s/ Jerome A. Vennemann
Associate General Counsel
