File No. 70-9011
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________________________
AMENDMENT NO. 2 TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
Cinergy Investments, 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
Vice President and 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
The application-declaration as previously amended is hereby restated in its
entirety to read as follows:
Item 1. Description of Proposed Transactions
Cinergy Corp. ("Cinergy" or the "Company") is a combination electric
and gas public utility holding company, engaged through its utility
subsidiaries in the generation, transmission, distribution and sale of
electric energy and the transportation and sale of natural gas to
approximately 1.4 million customers in Ohio, Indiana and Kentucky. As used
herein, the term "Operating Companies" refers to Cinergy's direct and
indirect utility subsidiaries, namely, PSI Energy, Inc. ("PSI"), a direct
wholly-owned subsidiary of Cinergy which provides retail electric service
in north central, central and southern Indiana, and The Cincinnati Gas &
Electric Company, also a direct wholly-owned subsidiary of Cinergy
("CG&E"), and its four wholly-owned utility subsidiaries - The Union Light,
Heat and Power Company ("ULH&P"), Lawrenceburg Gas Company
("Lawrenceburg"), The West Harrison Gas and Electric Company ("West
Harrison") and Miami Power Corporation ("Miami") - and electric service in
the southwestern portion of Ohio and adjacent areas of Indiana and
Kentucky. The principal Operating Companies are CG&E, PSI and ULH&P./1/
Cinergy has a number of direct and indirect nonutility subsidiary
companies, including interests in foreign utility companies ("FUCOs") as
hereinafter described. Cinergy also has a service company subsidiary,
Cinergy Services, Inc. All of the foregoing companies collectively
comprise the "Cinergy system."
Cinergy was created in 1994 through the merger of CG&E and PSI's then-
parent company, PSI Resources, Inc. ("Resources"), each of which prior to
the merger was an exempt holding company under the Public Utility Holding
Company Act of 1935 (the "Act"). As discussed below, and in the Securities
and Exchange Commission's ("SEC" or "Commission") October 1994 order
authorizing the Cinergy merger and ancillary transactions (Release No. 35-26146
in File No. 70-8427), Cinergy and the Operating Companies made
various commitments to Cinergy's state regulators - the Public Utilities
Commission of Ohio ("PUCO"), which regulates the retail electric and gas
rates of CG&E; the Indiana Utility Regulatory Commission ("IURC"), which
regulates the retail electric rates of PSI, the retail gas rates of
Lawrenceburg and the retail electric rates of West Harrison; and the
Kentucky Public Service Commission ("KPSC"), which regulates the retail
electric rates of ULH&P - and other interested parties to allay concerns
with respect to the effectiveness of state regulation in consequence of the
holding company structure utilized in the Cinergy merger. Cinergy
registered as a holding company on October 25, 1994.
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 Commission, among other
things, authorized Cinergy and Cinergy's wholly-owned nonutility
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"/2/) 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 FUCOs; 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)(1)
under the Act./3/
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
(the "50% Limitation")./4/
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.
5. November 1994 Common Stock Order
By order dated November 18, 1994 in File No. 70-8477 (Release No. 35-26159)
(the "November 1994 Cinergy Common Stock Order"), the Commission
authorized Cinergy:
* to issue and sell up to eight million shares of common stock,
$.01 par value, from time to time through December 31, 1995; and
* to use the proceeds thereof to make a cash capital contribution
to Cinergy's Indiana utility subsidiary PSI, with any remaining proceeds,
if any, to be applied to general corporate purposes. The order provided
that Cinergy would not apply any such residual proceeds to investments in
EWGs and FUCOs without a separate order from the Commission.
6. February 1996 Common Stock Order
By order dated February 23, 1996 in File No. 70-8477 (Release No. 35-26477)
("February 1996 Common Stock Order"), the Commission modified the
November 1994 Common Stock Order in certain respects including:
* extending the expiration date of the authorization period to
December 31, 1997; and
* permitting Cinergy to apply the proceeds from sales of the
remaining shares of common stock (867,385 at October 1, 1995 and at March
31, 1997) to investments in EWGs and FUCOs, subject to the September 1995
EWG/FUCO Order.
The September 1995 EWG/FUCO Order, the March 1996 EWG/FUCO Order, the
January 1995 Cinergy Debt Financing Order, the March 1996 Cinergy Debt
Financing Order, the November 1994 Common Stock Order and the February 1996
Common Stock Order are sometimes hereinafter collectively referred to as
the "Prior Orders."
B. Proposed Modifications to Prior Orders
At March 31, 1997, Cinergy's aggregate investment and consolidated
retained earnings were approximately $496 million and approximately $1
billion, respectively.
Accordingly, under the 50% Limitation, as of March 31, 1997 Cinergy
could have invested only an additional $4 million in Exempt Projects. By
contrast, if Cinergy had authority to invest in Exempt Projects in an
amount equal to 100% of consolidated retained earnings, as of March 31,
1997, Cinergy could have invested an additional $504 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 significant
available capacity under the 50% Limitation, and Cinergy's satisfaction of
the applicable standards under the Act for removal of the 50% Limitation,
Cinergy hereby requests that the Commission issue an order pursuant to Rule
53 under the Act appropriately modifying the Prior Orders.
Specifically, Cinergy proposes to apply proceeds from the issue and
sale of shares of common stock and short-term debt securities as authorized
in the Prior Orders, and to issue guarantees of securities of EWGs, FUCOs
and Project Parents as authorized in the Prior Orders, to direct or
indirect investments (including through Project Parents) in EWGs and FUCOs,
provided that Cinergy's aggregate investment shall not at any time exceed
its consolidated retained earnings./6/
C. Existing Interests in Exempt Projects
To date, Cinergy has invested exclusively in foreign Exempt Projects.
As of March 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, equated to an aggregate
investment at March 31, 1997 of approximately $11 million. PSI Energy
Argentina, Inc., 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 Resources, the then parent holding company
of PSI,/6/ 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./7/
2. Midlands
Cinergy indirectly owns 50% of Midlands Electricity plc ("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.
As previously reported,/8/ Cinergy acquired its interest in Midlands
in a 50-50 joint venture transaction with GPU, Inc. ("GPU") ("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
generally accepted accounting principles in the United States ("U.S.
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 combined $1 billion equity
investment in Avon Energy, with the remainder obtained by Avon Energy from
funds borrowed under a 1.5 billion pounds sterling 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 short-term bank debt to finance its entire $503 million
equity investment in Midlands, with Cinergy borrowing $471 million under a
$600 million Credit Agreement, dated as of May 6, 1996 ("Cinergy Corp.
Credit Agreement"), with certain banks and Barclays Bank plc, as
administrative agent ("Barclays"), and Cinergy UK borrowing $32 million
under its $40 million Credit Agreement, dated as of May 6, 1996 ("Cinergy
UK Credit Agreement"), with certain banks and Barclays as administrative
agent. The lenders under the Cinergy UK Credit Agreement have recourse
solely to Cinergy UK and its assets for repayment of borrowings thereunder.
At March 31, 1997, Cinergy's aggregate investment in Midlands was
approximately $485 million./9/
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 and continue making a positive contribution to
Cinergy's revenues and earnings in the future. 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./10/
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. This belief stems from
Cinergy's proven record in achieving projected merger-related savings as
well as Cinergy's ongoing reengineering efforts./11/ 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
competitive power marketing efforts in the U.S./12/ Third, the electricity
sector in the U.K. may experience further consolidations, a process that in
itself should produce attractive returns for investors by virtue of the
potential for achieving merger-related savings. Also, due to the limited
number of operating electric utilities in the U.K., investors desiring to
include such an investment in their portfolio will be exposed to the
purchase premiums afforded by the economic laws of supply and demand. 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./13/
1. The Project Review Process
Every Exempt Project investment opportunity pursued by Cinergy is
subjected to a series of formal reviews to ensure the project's soundness.
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, regulatory and tax
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, often prepared by investment bankers and/or
accounting/consulting firms, 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, regulatory, tax 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, as discussed below, 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's project development efforts focus on
technologies/industries with which it is familiar such as electric
generation and the transmission and distribution of electricity and gas.
Due diligence of operating assumptions is carried out by experienced
Cinergy engineers and other employees and by outside technical consultants.
The risk of changes in the price of fuel would typically be passed through
to the purchaser of electricity under the negotiated terms of a long-term
power sales agreement. Other 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 day-to-day operation or administration of an Exempt Project in which
it holds an ownership interest, the Company enhances its ability to
identify and address developing and existing problems.
* Commercial risks. Many independent power projects rely on the
"off-take" commitment of a single power purchaser, usually the local
utility company, to eliminate all or most of the risk of variation in
revenues. In such cases, Cinergy would take steps to assess the
creditworthiness of the power purchaser over the life of the project and/or
seek to have a contingency plan in the event of off-take defaults.
With other projects, particularly in competitive power markets outside the
U.S., long-term off-take contracts are generally not available and
electricity prices are determined by the economic laws of supply and
demand. Cinergy conducts extensive investigations of the electricity
markets to determine the viability of long-term demand in these
environments. In general, Cinergy seeks to ensure that the investment will
be capable of producing electricity at or below the long-run 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. For example, the Company might seek
permanent debt financing which is non-recourse to Cinergy or any associate
company (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 any associate company (other than to the Exempt Project).
This method of financing ensures that Cinergy's exposure to direct losses
from investment in any particular project is limited to the amount of its
equity and guarantee commitment and that the Operating Companies and their
customers bear no risk of direct losses from the risk of an investment's
financial distress. Other examples of ways Cinergy might address financial
risk are securing fixed-rate debt and seeking a partner(s) for a particular
project.
* Interest rate risk. Interest rate variability/14/ is 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 is designed to limit or
remove exposure to risk. In this case, interest rate hedging could be in
the form of purchasing U.S. Treasury securities before the issuance of debt
to lock-in most of the pricing spread on an ensuing sale of long-term debt
(the position is unwound at pricing and the gain/loss on the hedge offsets
any change in the general level of interest rates on the debt). After an
issuance, hedging could be effected through the purchase of interest rate
caps, which limit the rate payable on floating rate debt to a certain
prescribed maximum, or swaps, which would fix the rate at a known level for
a period of time. Diversification involves spreading liabilities among
short- and long-term debt instruments and 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./15/
* 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, as discussed
above, 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./16/ Such partners can be
a very important element in mitigating the risk of expropriation or unfair
regulatory treatment. Cinergy may also obtain the participation of
official or multilateral agencies in the project./17/
* 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./18/ Increased investment liquidity enhances the ability to
maximize economic performance and the ability to optimize returns./19/ 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. To date, Cinergy's investments in EWGs and
FUCOs (i.e., Costanera, EDESUR, and Midlands) have involved existing
utility systems and established utility companies. Were Cinergy to
consider investing in a "green field" project, Cinergy could seek to
address construction risks under fixed-price contracts with milestones and
performance guarantees (e.g., guaranteed heat rates, availability factors),
backed by appropriate levels of liquidated damages. The creditworthiness
and "track record" of the construction contractor would be a very important
consideration in this regard. In a case where a Cinergy affiliate might
serve as general contractor, it could look to pre-negotiated cost and
damage provisions from subcontractors to protect against performance
short-falls, cost overruns and schedule delays.
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 (discussed above), 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, given
Cinergy's current level of investments, this important avenue for
delivering value to Cinergy's shareholders and customers is effectively
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 proposed transactions 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, 12(b), 32 and 33 of the Act and Rules 45, 53 and 54
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 applicable and no associate EWG or FUCO has ever
defaulted on its financing obligations.
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
transactions proposed 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) Cinergy's
success in obtaining appropriate levels of Exempt Project non-recourse debt
financing, and (d) 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 represent a relatively small commitment of capital
based on various key financial ratios at March 31, 1997. A total
investment in this amount (assumed to be $1 billion) would be equal to 16%
of Cinergy's consolidated capitalization ($6.2 billion), 16% of
consolidated net utility plant ($6.3 billion), 11% of total consolidated
assets ($8.8 billion), and 19% of the market value of Cinergy's outstanding
common stock ($5.4 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. These increases represent percentage increases of 8.3% in
1995 and 4.4% in 1996, a compound average annual increase of 6.4%
Cinergy's consolidated capitalization ratios at March 31, 1997, 46%
equity and 54% debt (including short-term debt of $705 million), are within
the existing company averages published by Standard & Poor's for "BBB"
rated utilities (48% to 59%). Cinergy's dividend payout ratio was 77.5% in
1995 and 82.1% in 1996./20/ The average electric industry payout ratios
for 1995 and 1996 were 76% and 75%, respectively.
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 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./21/
b. Market Expectations
The equity market's expectations of Cinergy's future growth and
earnings evidence exceedingly strong investor confidence in Cinergy's
ability to deliver shareholder value relative to Cinergy's competitors.
Cinergy's market-to-book ratio of 204% 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.
Pre-Midlands Post-Midlands
Investment Investment
(3/96) (12/96)
Market-to-Book Ratio:
Cinergy 183% 204%
Price/Earnings Ratio:
Cinergy 13.2 15.7/22/
In addition, for the year 1996, Cinergy's common stock price increased
9% compared to a decrease of 6% for the S&P Electric Utility Index./23/
As of April 30, 1997 Cinergy had posted a year-to-date total
shareholder return of 2.35% while the S&P Electric Utility Index and the
Philadelphia Utility Index both posted negative returns. From October 24,
1994 (the date of consummation of the Cinergy merger) through April 30,
1997, Cinergy's total shareholder return was 72.02% while the S&P Electric
Utility Index returned 29.04%. Cinergy's market-to-book ratio as of April
30, 1997 of 203% was nearly twice the S&P Electric Utility Index market-to-book
ratio of 128%/24/.
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 that transaction. On the day the offer to
acquire Midlands was announced, Cinergy common stock appreciated 3% while
the industry's most generally referenced indices/25/ 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 common stock
produced a total return to shareholders of 15.42%, third highest among the
25 largest electric utilities. On the basis of measures like these,
Business Week magazine ranked Cinergy's financial performance highest among
electric utilities in the S&P 500 for 1996./26/
Below is provided three years of market-to-book ratio, price/earnings
ratio, and return on equity information for Cinergy (in each case, as of
year-end), as well as averages for the period.
1994 - 1996
1994 1995 1996 3-Year Avg.
Market-to-Book Ratio:
Cinergy 151% 189% 204% 181%
Price/Earnings Ratio:
Cinergy 18.08 13.80 15.74 15.90
Return on Equity: 2-Year Avg.
Cinergy 14.0% 12.3% 13.2%
c. 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. Cinergy's success in placing non-recourse debt of that
magnitude, secured exclusively by the borrowers' interests in Midlands,
attests to the lenders' views of the merits of the Midlands transaction.
d. 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 proven financially beneficial to
Cinergy and enhanced Cinergy's short-term earnings growth, adding 10 cents
to Cinergy's 1996 earnings per share, further demonstrating Cinergy's
ability to prudently make these types of investments.
Applicants expect such investments to continue making a positive
contribution to Cinergy's revenues and earnings in the future./27/
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 insulation of the Operating Companies and their customers
from potential direct adverse affects of investments in Exempt Projects;
b. the Operating Companies' financial integrity;
c. the absence in the foreseeable future of any anticipated need on
the part of the Operating Companies for additional capital from Cinergy;
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 in 1994.
Prior to filing the original application in this proceeding, senior
officers and other personnel of Cinergy met with representatives of the
PUCO, the IURC and the KPSC to discuss Cinergy's proposal and to address
the concerns of the state commissions. Pursuant to those discussions, and
the filing of Cinergy's application, the state commissions submitted
letters to this Commission in late March and early April regarding
Cinergy's proposal, copies of which are filed as Exhibits D-1, D-2 and D-3,
respectively. Those letters buttress Cinergy's assertion that the proposed
transactions satisfy the requirements of rule 53(c)(2). In particular, the
PUCO in its letter stated that "[t]his Commission is of the view that
Cinergy's proposal will not impair the ability of this Commission to
regulate CG&E or protect its retail customers in Ohio." The IURC stated
that "[t]his Commission is of the view that Cinergy's proposal will not
impair the ability of this Commission to protect PSI or its retail
customers in Indiana." Likewise, the KPSC's view is "that Cinergy's
proposal will not impair the ability of this Commission to regulate ULH&P
or protect its retail customers in Kentucky." In reaching their
conclusions, each of the state commissions referred to, among other
factors, the agreements and commitments made by Cinergy and the Operating
Companies to the state commissions in 1994 in connection with the Cinergy
merger, which agreements and commitments are described in relevant detail
below. Another factor cited by the state commissions was Cinergy's
commitment, set forth below, not to encumber Operating Company assets in
connection with investments in EWGs and FUCOs.
a. Insulation of Operating Companies and Their Customers from
Potential Direct Adverse Effects of Investments in Exempt Projects
The Operating Companies are, and will remain, insulated from the
direct effects of EWG and FUCO investments. In the first place, any losses
in connection with EWGs and FUCOs would have no direct effect on the
wholesale or retail electric or gas rates of the Operating Companies.
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.
Second, in accordance with sections 33(f) and (g) of the Act, to date
(1) no Operating Company has issued any security for the purpose of
financing the acquisition, ownership or operation of any Exempt Project in
which Cinergy has invested; (2) no Operating Company has assumed any
obligation or liability as guarantor, endorser, surety or otherwise in
respect of any security issued by any Exempt Project in which Cinergy has
invested; and (3) no Operating Company has pledged or encumbered any part
of its utility assets for the benefit of an associate Exempt Project.
Cinergy represents that it will not cause or permit any Operating Company
in the future to take any such proscribed action referred to in the
preceding clauses "(1)", "(2)" or "(3)", whether with respect to any
existing Exempt Project in which Cinergy already has an interest - Midlands
and EDESUR - or any additional Exempt Project in which Cinergy may acquire
an interest pursuant to the authority requested herein.
In addition, Cinergy has complied and will continue to comply with the
other 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.
Cinergy has provided copies of the original application and each amendment
thereto to the PUCO, the IURC and the KPSC, among others.
b. Operating Company Financial Integrity
The Operating Companies are in excellent financial health, as
indicated by such factors as debt/equity ratios, interest coverages and
securities ratings.
Debt (including short-term debt) ratios of the Operating Companies are
consistent with industry averages for "A" rated electric utilities.
Debt as % of Capitalization
1994 1995 1996
CG&E/28/ 50% 52% 52%
ULH&P 51% 46% 39%
PSI 51% 47% 49%
A-rated utilities/29/ 49% 49% 49%
The Operating Companies' mortgage bond indentures and corporate
charters require them to comply with certain interest coverage requirements
to issue new bonds and/or preferred stock. Mortgage indenture interest
coverage ratios for 1996 for the Operating Companies were 6.15 times for
CG&E, 4.84 times for PSI, and 17.42 times for ULH&P, in each case well
above the required coverage of 2.00 times. Currently, the Operating
Companies anticipate having more than adequate interest coverages for
financing requirements in the foreseeable future.
The Operating Companies' interest 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).
Securities of CG&E, PSI and ULH&P are highly rated by the major rating
agencies. Among other things, secured debt of each of these companies is
rated "A-" (or its equivalent) or better./30/ The Operating Company ratings
in effect as of June 1, 1997 provided by the major credit ratings agencies
- - Duff & Phelps Credit Rating Co. ("D&P"), Fitch Investors Service, LP
("Fitch"), Moody's, and S&P - are included in the following table:
D&P Fitch Moody's S&P
CG&E
Secured Debt A- A- A3/31/ A-
Senior Unsecured Debt BBB+ Not rated Baa1 BBB+
Junior Unsecured Debt BBB Not rated Baa2 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
PSI
Secured Debt A- A A3 A-
Unsecured Debt BBB+ A- Baa1 BBB+
Preferred Stock BBB BBB+ baa1 BBB+
ULH&P
Secured Debt A- Not rated A3 A-
Unsecured Debt Not rated Not rated Baa1 BBB+
The secured debt and preferred stock ratings of each of CG&E, PSI and
ULH&P have experienced upgrades since the Cinergy merger./32/ 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. The following table
sets forth Operating Company bond ratings from the rating agencies for the
period 1994 through 1996 (at year-end):
S&P Bond Ratings
1994 1995 1996
CG&E BBB+ A- A-
ULH&P BBB+ A- A-
PSI BBB+ A- A-
<PAGE>
Duff & Phelps Bond Ratings
1994 1995 1996
CG&E BBB+ A- A-
ULH&P N/A A- A-
PSI BBB+ A- A-
Fitch Bond Ratings
1994 1995 1996
CG&E A- A- A-
ULH&P N/A N/A N/A
PSI A- A- A
Moody's Bond Ratings
1994 1995 1996
CG&E Baa1 A3 A3
ULH&P Baa1 A3 A3
PSI Baa1 A3 A3
The following table sets forth preferred stock ratings for CG&E and
PSI/33/ from the rating agencies for the period 1994 through 1996 (at year-end):
S&P Preferred Stock Ratings
1994 1995 1996
CG&E BBB BBB+ BBB+
PSI BBB BBB+ BBB+
Duff & Phelps Preferred Stock Ratings
1994 1995 1996
CG&E BBB BBB BBB
PSI BBB BBB BBB
Fitch Preferred Stock Ratings
1994 1995 1996
CG&E BBB+ BBB+ BBB+
PSI BBB+ BBB+ BBB+
Moody's Preferred Stock Ratings
1994 1995 1996
CG&E baa2 baa1 baa1
PSI baa2 baa1 baa1
Finally, Cinergy's investment in Exempt Projects has not had an
adverse effect on the financial ratings of the Operating Companies. For
example, all four rating agencies affirmed their ratings for Operating
Company debt and preferred stock following announcement of the Midlands
acquisition./34/
c. 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
given the basic fact that 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,/35/ 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 through 2005.
d. 1994 Merger Settlement Agreements and Commitments
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. The letters
submitted by Cinergy's state commissions (Exhibits D-1 to D-3) are
testimony to this fact: each of those letters cites the 1994 arrangements
as a basis for the state commission's position that the proposed
transactions will not impair its ability to regulate the applicable
Operating Company or protect its customers.
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).
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
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/36/ 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 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./37/
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 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, as they themselves have emphasized in Exhibits D-1, D-2 and
D-3, 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 an order as soon as
practicable 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
(superseding the Rule 24 reporting obligation presently in effect in File
No. 70-8589), 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):
(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 U.S. 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
D-1 Conformed copy of Letter, dated March 26, 1997, from IURC to
SEC (filed herewith)
D-2 Conformed copy of Letter, dated April 3, 1997, from PUCO to
SEC (filed herewith)
D-3 Conformed copy of Letter, dated April 4, 1997, from KPSC to
SEC (filed herewith)
F Preliminary Opinion of Counsel (filed herewith)
G Form of Federal Register Notice (previously filed)
H Earnings Projections with respect to Exempt Projects (filed
pursuant to rule 104(b) in paper format only under a request for
confidential treatment)
(b) Financial Statements
FS-1 Cinergy Consolidated Financial Statements, dated December
31, 1996 (previously filed)
FS-2 Cinergy Financial Statements, dated December 31, 1996
(previously filed)
FS-3 Investments Consolidated Financial Statements, dated
December 31, 1996 (previously filed)
FS-4 Cinergy Consolidated Financial Data Schedule (previously
filed as part of electronic submission only)
FS-5 Cinergy Financial Data Schedule (previously filed as
part of electronic submission only)
FS-6 Investments Consolidated Financial Data Schedule (previously
filed 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: July 24, 1997
CINERGY CORP.
By: /s/ William L. Sheafer
Vice President and Treasurer
CINERGY INVESTMENTS, INC.
By: /s/ William L. Sheafer
Treasurer
ENDNOTES
/1/ At and for the year ended December 31, 1996, CG&E reported total assets
and total operating revenues of approximately $4.8 billion and $1.8
billion, respectively; PSI reported total assets and total operating
revenues of approximately $3.3 billion and $1.3 billion, respectively;
ULH&P reported total assets and total operating revenues of approximately
$290 million and $268 million, respectively; Lawrenceburg reported total
assets and total operating revenues of approximately $14 million and $7.6
million, respectively; West Harrison reported total assets and total
operating revenues of approximately $514,000 and $540,000, respectively;
and Miami reported total assets and total operating revenues of
approximately $77,000 and $39,000, respectively. See generally Cinergy's
1996 Annual Report on Form U5S, Item 10.
/2/ The September 1995 EWG/FUCO Order and the March 1996 EWG/FUCO Order
(see below) 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.
/3/ As used throughout this application-declaration, the terms "aggregate
investment" and "consolidated retained earnings" have the respective
meanings assigned to such terms under Rule 53(a)(1).
/4/ 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.
/5/ Other than to accommodate the proposed removal of the 50% Limitation
and the increased aggregate investment authority up to the full amount of
consolidated retained earnings, Cinergy does not seek herein to modify any
of the terms or conditions of the Prior Orders.
/6/ Resources financed the purchase of its interest in EDESUR entirely with
funds borrowed by Resources under a line-of-credit. No non-recourse debt
was issued by Resources or any subsidiary thereof in connection with the
purchase of Resources' interest in EDESUR.
/7/ 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.
/8/ 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.
/9/ Since consummating the acquisition of its interest in Midlands,
Cinergy has increased its aggregate investment therein by approximately $14
million as of March 31, 1997 (to a total of approximately $485 million) as
a result of (a) several transactions in which Cinergy UK repaid borrowings
totaling $13 million under the Cinergy UK Credit Agreement and Cinergy
concurrently incurred an equal amount of additional borrowings under the
Cinergy Corp. Credit Agreement, and (b) Cinergy having paid certain fees
and expenses totaling approximately $1 million on behalf of Cinergy UK
under the Cinergy UK Credit Agreement.
/10/ On May 1, 1997, general elections were held in Great Britain which
resulted in the Labour Party gaining control of the government. Included
in the Labour Party's manifesto was a windfall profits levy against certain
businesses which had previously been owned and operated by the government.
Upon announcement of the Budget Statement on July 2, 1997, it was confirmed
that Midlands will be included in the group of companies subject to this
levy.
As expected, the Budget Statement contained the total amount to be raised
by the levy (5.2 billion pounds sterling), the sectors to be included
within the scope of the levy (2.1 billion pounds sterling of the 5.2
billion pounds sterling total to be applied to the electric sector), the
methodology by which the tax will be assessed, and the payment schedule
(half of the tax to be paid December 1, 1997; half to be paid December 1,
1998). Though the legislation must proceed through a number of
administrative steps prior to becoming law (expected in the third quarter
of 1997), it is believed the final bill will not differ in any significant
respect from that outlined in the Budget Statement.
Cinergy estimates the windfall profits tax liability as proposed will be
135 million pounds sterling for Midlands, which falls within the range of
Cinergy's earlier public projections. Under U.S. GAAP, the levy will
result in a charge against earnings (approximately $112 million) in
Cinergy's consolidated financial statements in the period legislation
related to the levy is enacted, currently thought to be likely by the end
of the third calendar quarter of 1997.
/11/ In 1995, Cinergy achieved non-fuel operation and maintenance savings
of approximately $42 million, significantly exceeding its initial public
estimates of first-year merger benefits. Additionally, the merger allowed
the Operating Companies to reduce fuel costs and capital spending in 1995
by $13 million and $170 million, respectively. Cinergy is undergoing a
reengineering process, involving the development and application of
innovative approaches to controlling costs and operating efficiently, that
it expects will result in the realization of further significant long-term
cost savings.
/12/ As of March 31, 1997 Cinergy was participating in competitive retail
customer choice programs in New Hampshire, Illinois, Massachusetts, New
York, Idaho and Washington.
/13/ This process is by its very nature evolutionary and subject to
change, and the specific risk mitigation techniques actually employed are
appropriate to the particular project. Therefore, while the description
that follows is illustrative of those processes and techniques as employed
in the past, they are necessarily subject to
/14/ Interest rate variability and volatility are closely related in that
both describe uncertainty arising from exposure to floating rates of
interest. Variability usually relates to longer-term exposure, measured in
months or years, especially as regards existing obligations. For example,
to minimize exposure to interest rate variability on debt borrowed to fund
a long-lived asset, Cinergy might "match-fund" with a significant amount of
fixed-rate debt. Exposure to risk on amounts kept floating (for
flexibility of redemption) could be minimized through various derivative
instruments. Volatility, on the other hand, usually describes exposure
that is much shorter in duration, such as daily swings in interest rates or
indices. In addition, it relates to risk exposure on existing obligations
and planned issuances. Therefore, to minimize interest rate volatility on
the day of pricing a new bond, various hedging techniques are available as
described in the text. Cinergy's Treasury Department has responsibility to
analyze the cost and desirability of using various hedging instruments to
mitigate interest rate risk exposure, and to purchase and monitor such
instruments as necessary.
/15/ As noted below, the Applicants view the presence of local partners
and official or multilateral agencies as an important way to mitigate the
risk of expropriation or unfair regulatory treatment.
/16/ For example, in the EDESUR investment, Cinergy teamed with five
large local companies, most of which also provided international services.
In the Midlands transaction Cinergy is partnering with GPU which has
international experience. In addition, Cinergy and GPU have an important
local partner since the acquisition left in place Midlands' existing
management team.
/17/ When funds for a project are supplied by government-sponsored export
credit agencies or other governments or institutions, such as the World
Bank through its International Finance Corporation affiliate, the host
country has strong incentives not to take actions which would harm the
project's viability. Political and currency convertibility risk can often
be addressed through insurance obtained from the Overseas Private
Investment Corporation, a United States agency, or the Multilateral
Investment Guaranty Agency, a World Bank affiliate, or in the commercial
insurance market. Political risk insurance is available to insure the
project debt or the return of an investor's equity and can also protect
against outright, expropriation, acts of civil violence or even "creeping"
nationalization brought about by punitive regulation. Cinergy typically
analyzes the perceived political risk of a project and the costs associated
therewith and obtains insurance when the costs associated with such risk
exceed the costs of insurance coverage therefor. In the case of Cinergy's
Argentine investments (EDESUR and, formerly, Costanera), political risk
(i.e., expropriation and currency conversion) insurance was purchased from
Lloyds of London and OPIC.
/18/ For example, companies that have complementary businesses (e.g., an
electric distribution company which owns another electric distribution
business or a water or gas distribution business) are said to be
horizontally integrated. Vertical integration encompasses a spectrum of
functionally distinct business operations or processes within a particular
industry, such as the generation, transmission and distribution of
electricity.
/19/ The ability to "cash-out" of an investment expeditiously and on
advantageous terms represents an important value of that investment. A
company may no longer desire to own an investment perhaps because the
investment is perceived to be at its maximum market value or it is not
achieving its pre-defined goals. Likewise, an alternative investment may
be preferred, or there may simply be a need to raise cash. In any of these
hypotheticals, the ability to achieve such a disposition is critical.
/20/ The 1996 dividend payout ratio for Cinergy excludes a $.12 per share
non-recurring charge for the cost of reacquiring 90% of CG&E's preferred
stock through a tender offer. (See Release No. 35-26569, September 11,
1996, and Rule 24 Certificate in File No. 70-8881.) Including the one-time
charge, the resulting dividend payout ratio for 1996 would have been 86.7%.
/21/ 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.
/22/ Does not include $.12 per share for cost of reacquiring 90% of CG&E's
preferred stock through a tender offer.
/23/ Bloomberg Financial Services.
/24/ Bloomberg Financial Services.
/25/ S&P Electric Utility Index, Dow Jones Utilities Index, and
Philadelphia Utility Index.
/26/ Business Week Magazine, March 24, 1997, at 148-49.
/27/ See Exhibit H.
/28/ CG&E percentages are consolidated.
/29/ Source: Utility Focus, Regulatory Research Associates, Inc., June 6,
1997.
/30/ The average rating for utility company senior debt is A- from S&P and
A3 from Moody's.
/31/ An "A3" rating from Moody's is equivalent to an "A-" rating from any
of the other three agencies.
/32/ The average pre-merger rating for the secured debt of these Operating
Companies was BBB+.
/33/ ULH&P hs no preferred stock outstanding for this period.
/34/ In addition to Operating Company ratings, (1) all the major agencies
have assigned investment grade ratings to Cinergy debt (for further
information on such ratings, see Cinergy's amended application in File No.
70-8993) and (2) on May 5, 1997 S&P assigned an A- long-term credit rating
to each of Midlands, Avon Energy and Avon Holdings. Further, following
the July 2, 1997 announcement of the Budget Statement, as discussed
earlier, an S&P report listed 13 British utilities, but not Midlands, on
"CreditWatch with negative implications." Midlands' rating remained
unchanged " because of [its] relative strength within the rating category."
/35/ 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
to the equity capital of PSI (see 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.
/36/ See PSI Resources, Inc., et al., Release No. 35-25674, November 13,
1992 (text accompanying notes 21 and 22).
/37/ "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 Section II D
and G.
EXHIBIT D-1
March 26, 1997
Honorable Arthur Levitt
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
RE: Cinergy Corp., Docket No. 70-9011
Dear Chairman Levitt:
PSI Energy, Inc. ("PSI"), a subsidiary of Cinergy Corp. ("Cinergy"), a
registered public utility holding company, has advised this Commission that
Cinergy has applied to your Commission (Docket Number 70-9011) to increase
its authority to acquire or otherwise invest in foreign utility companies
("FUCOs") and exempt wholesale generators ("EWGs"). Cinergy has requested
that the Indiana Utility Regulatory Commission certify to you that such
increased investment authority in FUCOs and EWGs will not impair the
ability of this Commission to protect PSI or its retail electric customers
in Indiana.
As the State commission having jurisdiction over the retail electric
rates of Cinergy's public utility subsidiary, PSI, please be advised that
based on:
1. this Commission's statutory authority to supervise and regulate
electric utilities and all matters relating to the performance of
their public duties and their charges therefor, and to correct
any abuses of such utilities, and
2. the settlement agreement approved by this Commission in 1994 in
connection with the Cinergy merger conferring additional
oversight on this Commission over PSI and Cinergy,
3. the representations set forth in Cinergy's application to your
Commission referenced above, including, but not limited to, the
representation that assets of PSI will not be encumbered,
this Commission is of the view that Cinergy's proposal will not impair the
ability of this Commission to protect PSI or its retail electric customers
in Indiana.
The foregoing is expressly conditioned on and is subject to being
revised or withdrawn by this Commission, if it deems that action to be
appropriate. PSI has represented that it will timely inform this
Commission when Cinergy actually acquires ownership in FUCOs or EWGs
pursuant to its proposal.
Sincerely,
/s/ John F. Mortell
Chairman
cc: Commissioner Mary Jo Huffman
Commissioner Camie Swanson-Hull
Commissioner G. Richard Klein
Commissioner David Ziegner
Robert C. Glazier, Director of Utilities
EXHIBIT D-2
April 3, 1997
Honorable Arthur Levitt
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Chairman Levitt:
RE: Application-Declaration of Cinergy Corporation. File No. 70-9011.
The Cincinnati Gas & Electric Company ("CG&E"), a subsidiary of
Cinergy Corp. ("Cinergy"), a registered public utility holding company, has
advised this Commission that Cinergy is considering applying to your
Commission to increase its authority to acquire or otherwise invest in
foreign utility companies ("FUCOs") and exempt wholesale generators
("EWGs"). Cinergy has requested that the Public Utilities Commission of
Ohio certify to you that such increased investment authority in FUCOs and
EWGs will not impair the ability of this Commission to regulate CG&E or
protect its retail customers in Ohio.
As the State commission having jurisdiction over the retail electric
and gas rates of Cinergy's public utility subsidiary, CG&E, please be
advised that based on:
(1) this Commission's statutory authority, which is unaffected by
this application, to supervise and regulate electric and gas
utilities and all matters relating to the performance of their
public duties and their charges therefore, and to correct any
abuses of such utilities; and
(2) the settlement agreement approved by this Commission in 1994 in
connection with the Cinergy merger conferring additional
oversight on this Commission over CG&E and Cinergy; and
(3) the representation that the assets of CG&E will not be
encumbered.
This Commission is of the view that Cinergy's proposal will not impair
the ability of this Commission to regulate CG&E or protect its retail
customers in Ohio.
The foregoing opinion of this Commission on Cinergy's proposal is
expressly conditioned on the provisions 1,2 and 3 above as well as the
representation set forth in Cinergy's Application and is subject to being
revised or withdrawn by this Commission, if it deems that action to be
appropriate. Cinergy has represented that it will timely inform this
Commission when Cinergy actually acquires ownership in FUCOs or EWGs
pursuant to its proposal.
Sincerely,
/s/ Craig A. Glazer
Chairman
CAG:jc
EXHIBIT D-3
April 4, 1997
Hon. Arthur Levitt
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Dear Chairman Levitt:
The Union Light, Heat &Power Company ("ULH&P"), a subsidiary of
Cinergy Corp. ("Cinergy"), a registered public utility holding company, has
advised this Commission that Cinergy is considering applying to your
Commission to increase its authority to acquire or otherwise invest in
foreign utility companies ("FUCOs") and exempt whole sale generators
("EWGs"). Cinergy has requested that the Kentucky Public Service
Commission certify to you that such increased investment authority in FUCOs
and EWGs will not impair the ability of this Commission to regulate ULH&P
or protect its retail customers in Kentucky.
As the State commission having jurisdiction over the retail electric
and gas rates of Cinergy's public utility subsidiary, ULH&P, please be
advised that based on:
1. this Commission's statutory authority to supervise and regulate
electric and gas utilities and all matters relating to the
performance of their public duties and their charges therefor,
and to correct any abuses of such utilities,
2. the commitments of and conditions accepted by Cinergy and ULH&P
in connection with this Commission's 1994 order authorizing
Cinergy's acquisition of ULH&P, and
3. the representations set forth in Cinergy's application to your
Commission, including, but not limited to, the representations in
Item 3.B2.d. that the assets of ULH&P will not be encumbered and
utility customers will be held harmless for any investment losses
or inadequate returns arising from exempt projects,
this Commission is of the view that Cinergy's proposal will not impair the
ability of this Commission to regulate ULH&P or protect its retail
customers in Kentucky.
The foregoing opinion of this Commission on Cinergy's proposal is
expressly conditioned on and is subject to being revised or withdrawn by
this Commission, if it deems that action to be appropriate. Cinergy has
represented that it will timely inform this Commission when Cinergy
actually acquires ownership in FUCOs or EWGs pursuant to its proposal.
Sincerely,
/s/ Linda K. Breathitt
Chairman
cc: Edward Holmes, Vice Chairman
B. J. Helton, Commissioner
EXHIBIT F
July 23, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: Cinergy Corp. et. al., - Application-Declaration on Form U-1
(File No. 70-9011)
Ladies and Gentlemen:
In my capacity as 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, I am furnishing
this opinion as an exhibit to the amended Application-Declaration in the
above docket ("Application"), in which Cinergy, and Cinergy's wholly-owned
nonutility holding company subsidiary, Cinergy Investments, Inc.
("Investments") request action therein which, if granted, would allow
Cinergy to utilize the proceeds of certain financings authorized in
separate proceedings to make investments directly or indirectly in "exempt
wholesale generators" and "foreign utility companies" in amounts which,
when added to Cinergy's "aggregate investment" (as defined in Rule 53) at
any time in all such entities would not exceed Cinergy's "consolidated
retained earnings" (also defined in Rule 53).
In connection with this opinion, I have reviewed the Application and
such other documents, records and other materials as I deemed necessary or
appropriate in order to render this opinion.
I am of the opinion that each of Cinergy and Investments is a validly
organized and duly existing corporation under the laws of the State of
Delaware and that, upon the issuance of the Commission's order herein and
the receipt of any requisite corporate or other approvals and
authorizations not heretofore received, and in the event that the issuance
and sale of securities by Cinergy for the purpose of acquiring any "exempt
wholesale generator" or "foreign utility company" are made in accordance
with the terms of the applicable statement or statements on Form U-1 and
the Commission's related order or orders (as well as in accordance with the
terms of all other applicable rules, regulations and orders):
1. all state laws applicable to the proposed transactions will
have been complied with; and
2. 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 am a member of the bar of the State of Ohio and do not hold
myself out as an expert on the laws of any other state. As to matters
involving the laws of the State of Delaware, my opinion is limited to the
Delaware General Corporation Law. I hereby consent to the use of this
opinion as an exhibit to the Application.
Very truly yours,
/s/ Jerome A. Vennemann
Associate General Counsel
