File No. 70-8427
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
__________________________________________
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
139 East Fourth Street
Cincinnati, Ohio 45202
(Name of company filing this statement
and address of principal executive offices)
Cinergy Corp.
(Name of top registered holding company parent)
William L. Sheafer
Vice President and Treasurer
Cinergy Corp.
(address above)
(Name and address of agent of service)
Applicant requests that the Commission send copies of all notices, orders
and communications in connection herewith to:
Jerome A. Vennemann William T. Baker, Jr.
Associate General Counsel Reid & Priest LLP
Cinergy Corp. 40 West 57th Street
(address above) New York, New York 10019
This post-effective amendment supersedes in its entirety the post-effective
amendment in this docket filed on October 17, 1997.
Item 1. Description of Proposed Transactions
A. Requested Authorization
By order dated October 21, 1994 in this file (Release No. 35-26146)
("Merger Order"), the Commission authorized a proposed business combination
and related transactions between The Cincinnati Gas & Electric Company, an
Ohio gas and electric utility company and exempt holding company ("CG&E"),
and PSI Resources, Inc., an Indiana exempt holding company ("PSI"),
resulting in the creation of Cinergy Corp., a Delaware corporation
("Cinergy"), as a new registered holding company under the Public Utility
Holding Company Act of 1935, as amended ("Act").
Upon consummation of the Cinergy merger, PSI was merged out of
existence and Cinergy became the direct owner of all the outstanding common
stock of CG&E and PSI Energy, Inc. ("PSI Energy"), PSI's Indiana electric
utility subsidiary. As a result of its ownership of CG&E, Cinergy became
the indirect owner of the retail gas distribution assets held by CG&E and
its subsidiaries, The Union Light, Heat and Power Company and Lawrenceburg
Gas Company. Cinergy also succeeded to indirect ownership of the
nonutility subsidiaries and interests held by CG&E and PSI; in connection
with the merger, most of these nonutility interests were transferred to a
new company, Cinergy Investments, Inc. ("Cinergy Investments"), all of
whose outstanding common stock is directly held by Cinergy. (See the
corporate chart filed as Exhibit H-1.) The Merger Order reserved
jurisdiction over Cinergy's retention of the gas properties of CG&E and the
nonutility interests of CG&E and PSI for a three-year period expiring
October 21, 1997.
Prior to the three-year expiration date, Cinergy submitted a filing
addressing the retainability of the remaining nonutility properties and
requesting a one-year extension in the pending reservation of jurisdiction
over the gas properties.
Cinergy now supersedes that earlier filing with the instant filing. In
this filing Cinergy requests a release of the jurisdiction reserved in the
Merger Order and authority to retain the gas properties of CG&E and such of
the remaining nonutility interests (i.e., not sold or otherwise divested
since the Merger Order) that do not qualify as "energy-related companies"
as defined in rule 58 under the Act. (The remaining nonutility interests
are identified in Item 1.C.1.)
Cinergy also requests authority to make additional cash investments
totaling $570,000, from time to time through December 31, 2002, in two of
the retained limited partnership nonutility interests - Blue Chip
Opportunity Fund, L.P. (not more than $50,000) and CID Equity Capital III,
L.P. (not more than $520,000) - in order to honor capital commitments made
by CG&E and PSI prior to the Cinergy merger.
B. CG&E Gas Properties
CG&E owns all the outstanding common stock of The Union Light, Heat and
Power Company, a combination gas and electric utility company ("ULH&P"),
Lawrenceburg Gas Company, a gas utility company ("Lawrenceburg"), The West
Harrison Gas and Electric Company, an electric utility company, and Miami
Power Corporation, an electric utility company by virtue of its ownership
of a transmission line in Indiana. CG&E also owns 9% of the outstanding
voting securities of Ohio Valley Electric Corporation, the owner of a
generating station that supplies energy to a Department of Energy project
at Portsmouth, Ohio.
CG&E and its utility subsidiaries provide retail electric and natural
gas service in southwestern Ohio and contiguous areas in Kentucky and
Indiana. The area served with electricity, gas or both covers
approximately 3,000 square miles and has an estimated population of 1.8
million. At and for the 12 months ended September 30, 1997, the original
cost of CG&E's consolidated utility plant (excluding common facilities) was
approximately $5.42 billion (consisting of electric utility plant of
approximately $4.684 billion and gas utility plant of approximately $738
million), and CG&E's consolidated operating revenues were approximately
$2.346 billion (consisting of electric operating revenues of approximately
$1.851 billion and gas operating revenues of approximately $495 million).
As of the same dates for Cinergy and its subsidiaries as a whole, gas
utility plant comprised approximately 8 % of consolidated electric and gas
utility plant, and gas operating revenues comprised approximately 12 % of
total electric and gas operating revenues. At September 30, 1997, CG&E and
its subsidiaries provided electric service to approximately 733,000 retail
customers and natural gas service to approximately 449,000 retail
customers.
CG&E is engaged in the production, transmission, distribution and sale
of electricity and the sale and transportation of natural gas in the
southwestern portion of Ohio, serving an estimated population of 1.5
million people in 10 of the state's 88 counties including the cities of
Cincinnati and Middletown. CG&E has provided gas service to citizens of
Cincinnati and surrounding communities since 1837 and electric service
since 1893. At and for the 12 months ended September 30, 1997, the
original cost of CG&E's utility plant (excluding common facilities) was
approximately $5.04 billion (consisting of electric utility plant of
approximately $4.48 billion and gas utility plant of approximately $562
million) and CG&E's operating revenues were approximately $2.21 billion
(consisting of electric operating revenues of approximately $1.80 billion
and gas operating revenues of approximately $408 million). At September
30, 1997 CG&E had approximately 615,000 retail electric customers and
approximately 367,000 retail gas customers.
ULH&P is engaged in the production, transmission, distribution and sale
of electricity and the sale and transportation of natural gas in northern
Kentucky, serving an estimated population of 299,000 people in a 500
square-mile area encompassing six counties and including the cities of
Newport and Covington. At and for the 12 months ended September 30, 1997,
the original cost of ULH&P's utility plant (excluding common facilities)
was approximately $356 million (consisting of electric utility plant of
approximately $203 million and gas utility plant of approximately $153
million) and ULH&P's operating revenues were approximately $275 million
(consisting of electric operating revenues of approximately $195 million
and gas operating revenues of approximately $80 million). ULH&P's gas
plant constitutes approximately 21% of CG&E's consolidated gas plant, and
ULH&P's gas operating revenues approximately 16% of CG&E's consolidated gas
operating revenues. At September 30, 1997, ULH&P had approximately 117,000
retail electric customers and approximately 77,000 retail gas customers.
Lawrenceburg is engaged in the sale and transportation of natural gas
to approximately 20,000 people in a 60 square-mile area in southeastern
Indiana. At and for the 12 months ended September 30, 1997, the original
cost of Lawrenceburg's utility plant was approximately $15 million and
Lawrenceburg's operating revenues were approximately $9 million.
Lawrenceburg's gas plant constitutes approximately 2% of CG&E's
consolidated gas plant, and Lawrenceburg's operating revenues approximately
2% of CG&E's consolidated gas operating revenues. At September 30, 1997,
Lawrenceburg had approximately 6,000 retail gas customers.
The gas properties of CG&E and its utility subsidiaries consist
primarily of approximately 5,891 miles of distribution mains. To meet peak
system demand, CG&E and ULH&P own and operate three propane-air peak
shaving facilities, at which natural gas is mixed with propane air to
provide pipeline quality gas. Two of these facilities, the Dicks Creek and
Eastern Avenue facilities, are located north of the Ohio River and are used
solely to serve CG&E's peak needs. CG&E and ULH&P jointly utilize the
Erlanger facility, which is located below the Ohio River, toward the
southern extremity of CG&E's and ULH&P's combined properties. The total
production capacity of the Dicks Creek and Eastern Avenue facilities at
1,350 Btu's is 140,600 Mcf per day, equivalent to 161,740 Mcf per day of
natural gas. The production capacity of the Erlanger facility at 1,350
Btu's is 17,000 Mcf per day, or the equivalent of 19,550 Mcf per day of
natural gas. In the Lawrenceburg system an underground natural gas well is
used to supplement delivery during peak periods.
The CG&E and ULH&P distribution properties are physically
interconnected. The Lawrenceburg properties (153 miles of main) are not
interconnected with those of CG&E and ULH&P. CG&E's and ULH&P's combined
properties are directly connected to four interstate pipelines: Columbia
Gas Transmission, ANR Pipeline, Texas Eastern Transmission Corporation and
Texas Gas Transmission Corporation. Through their interstate pipeline
affiliate, KO Transmission Company, which owns an interest in certain
pipeline facilities located in Kentucky, CG&E and ULH&P are connected to
two additional interstate pipelines, Columbia Gulf Transmission and
Tennessee Gas Pipeline. Lawrenceburg, which is organized into two
divisions (Lawrenceburg and Brookville), is connected to two interstate
pipelines: Texas Gas Transmission serves the Lawrenceburg Division and
Texas Eastern Transmission serves the Brookville Division.
A central organization within Cinergy purchases natural gas supplies on
behalf of CG&E, ULH&P and Lawrenceburg from producers and marketers and
arranges transportation on one or more of the interstate pipelines. The
gas is transported on interstate pipelines either directly to CG&E's and
its subsidiaries' distribution systems or is injected into pipeline storage
facilities for withdrawal and delivery in the future. Most of CG&E's and
its subsidiaries' gas supplies are obtained from the Gulf of Mexico coastal
area. CG&E and its subsidiaries have also obtained limited supply sourced
from the Appalachian region and the mid-continent (Arkansas-Oklahoma)
basin, and from methane gas recovered from an Ohio landfill.
The gas properties of CG&E, ULH&P and Lawrenceburg are centrally
managed by Cinergy and, to assure system reliability and economic dispatch,
are centrally monitored and operated from Cinergy's dispatch center in
Cincinnati. In addition, the integrity of CG&E's system reliability is
dependent upon maintaining a level of service supply through the ULH&P
pipeline facilities. CG&E currently receives approximately 23% of its
total supply requirements through ULH&P facilities.
In addition to regulation by the Commission under the Act, CG&E, ULH&P
and Lawrenceburg are regulated as to retail gas and/or electric rates and
other matters by, respectively, the Public Utilities Commission of Ohio
("PUCO"), the Kentucky Public Service Commission ("KPSC") and the Indiana
Utility Regulatory Commission ("IURC"). CG&E and ULH&P are also subject to
regulation by the Federal Energy Regulatory Commission ("FERC") under both
the Federal Power Act and the Natural Gas Act.
Prior to the Cinergy merger in 1994, CG&E for many years was an exempt
holding company pursuant to section 3(a)(2) of the Act and rule 2
thereunder. The Commission at no time during that period questioned CG&E's
exemption from registration on the basis of its common ownership of gas and
electric properties, or on any other grounds.
C. 1994 Nonutility Interests of CG&E and PSI
1. Requested Action
Subsequent events have partially mooted the issues associated with the
reservation of jurisdiction in the Merger Order over the nonutility
interests of CG&E and PSI. Certain of those interests have been sold or
dissolved/1/; certain others are "energy-related companies" under rule 58
(each, a "rule 58 company") and Cinergy has made the requisite filings with
the Commission claiming that status for those companies./2/
Cinergy now requests that the Commission release its jurisdiction and
grant Cinergy authority to retain the remaining nonutility interests
covered by the Merger Order ("Remaining Nonutility Interests").
Specifically, Cinergy requests authorization to retain the following
companies or interests: (1) Tri-State Improvement Company, (2) KO
Transmission Company, (3) Enertech Associates, Inc. (formerly Enertech
Associates International, Inc.), (4) certain CG&E "good citizen" limited
partnership investments (namely, North Rhine I Limited Partnership, North
Rhine II Limited Partnership, Franciscan Homes II Limited Partnership, Blue
Chip Capital Fund, L.P. and Blue Chip Opportunity Fund, L.P.), (5) South
Construction Company, Inc., (6) PSI Power Resource Development, Inc., (7)
Cinergy International, Inc. (formerly PSI International, Inc.), (8) PSI
Sunnyside, Inc., (9) Cinergy Technology, Inc. (formerly PSI Environmental
Corp.), (10) PSI T&D International, Inc., (11) PSI Yacyreta, Inc. and (12)
certain PSI Energy "good citizen" limited partnership investments (namely,
Cambridge Ventures, L.P., three private equity funds organized by CID
Partners - CID Partnership, L.P., CID Ventures, L.P., and CID Equity
Capital III, L.P. - and Circle Centre Partners L.P.).
In addition, with regard to the limited partnership investments in the
Blue Chip Opportunity Fund, L.P. and CID Equity Capital III, L.P., Cinergy
requests authorization to make additional investments in those funds
totaling $570,000 ($50,000 as to the former, $520,000 as to the latter),
from time to time through December 31, 2002, in order to fulfill capital
commitments made prior to consummation of the Cinergy merger.
Cinergy will not seek recovery through higher rates to Cinergy system
utility customers to compensate Cinergy for any losses or inadequate
returns it may experience on capital invested in the Remaining Nonutility
Interests. Therefore, the investment risks associated with the Remaining
Nonutility Interests will continue to be borne exclusively by Cinergy's
shareholders.
With respect to any of the Remaining Nonutility Interests that are
presently inactive,/3/ Cinergy will not "activate" any of these companies
("Activation Commitment") without further express Commission authorization,
except for the exclusive purpose of engaging in any of the activities noted
below:
(a) an "exempt telecommunications company" (an "ETC") as defined in
the Act;
(b) a rule 58 company;
(c) a "Special Purpose Subsidiary" for EWG /FUCO activities - i.e.,
a company dedicated, directly or indirectly, and exclusively, to the
business of acquiring and holding the securities of, or providing services
to, exempt wholesale generators (each, an "EWG") and foreign utility
companies (each, a "FUCO") as contemplated by, and subject to the
restrictions of, the Commission's orders dated May 8, 1996 and September
21, 1995 in File No. 70-8589 (Release Nos. 35-26486 and 35-26367,
respectively); or
(d) a direct or indirect subsidiary of Cinergy Solutions, Inc., a
Delaware corporation ("Solutions"), to engage in any of the activities that
the Commission in its February 7, 1997 order in File No. 70-8933 (Release
No. 35-26662) authorized Solutions to engage in, either directly or
indirectly through one or more subsidiaries created from time to time.
2. Background: Merger Order /Nonutility Interests of CG&E and PSI
The Merger Order reserved jurisdiction for three years over the then-
existing nonutility interests held directly or indirectly by CG&E and PSI.
On the CG&E side, these nonutility interests were:
*Tri-State Improvement Company ("Tri-State"), an Ohio corporation
devoted to acquiring and holding property in Ohio, Kentucky and Indiana for
substations, electric and gas rights of way, office space, and other uses
in connection with the utility business of CG&E and its utility
subsidiaries;
*KO Transmission Company ("KO"), a Kentucky corporation formed in early
1994 to acquire an interest in an interstate natural gas pipeline system
located in Kentucky to which CG&E was entitled under a settlement agreement
with Columbia Gas Transmission Corporation;
*Enertech Associates International, Inc. ("Enertech"), an Ohio
corporation formed as a vehicle for CG&E to offer utility management
consulting services and to pursue investment opportunities in energy-related
areas, including demand-side management services, consulting,
energy and fuel brokering, engineering services, construction and/or
operation of generation, cogeneration, independent power production ("IPP")
facilities, and project development; prior to the Cinergy merger, Enertech
had acquired Bruwabel and its two Czech subsidiaries, Power Development
s.r.o. and Power International s.r.o., to pursue design, engineering, and
development work involving energy privatization projects, primarily in the
Czech Republic;
*CG&E Resource Marketing, Inc. ("CG&E Resource Marketing"), a Delaware
corporation formed to hold CG&E's one-third general partnership interest in
U.S. Energy Partners, a gas marketing partnership;
*CGE ECK, Inc. ("CGE ECK"), a Delaware corporation organized to hold
CG&E's one-third interest in a Czech electric utility company, ECK s.r.o.;
and
*CGE Corp., a Delaware corporation formed to serve as a holding company
for certain of CG&E's nonutility investments.
In addition, CG&E had a number of small, "good citizen" investments in
various local entities - North Rhine I Limited Partnership, North Rhine II
Limited Partnership, Franciscan Homes II Limited Partnership, Blue Chip
Capital Fund, L.P. and Blue Chip Opportunity Fund, L.P.
The Commission noted that for the year ended December 31, 1993, CG&E's
nonutility subsidiaries accounted for less than 1% of CG&E's consolidated
revenues.
The Commission also reserved jurisdiction over the nonutility interests
then held directly or indirectly by PSI (other than certain subsidiaries
established to facilitate investments in certain privatized Argentine
electric utility companies and as to which, prior to the Cinergy merger,
PSI had received unqualified exemption orders from the Commission under
section 3(b) of the Act/4/), namely:
*PSI Recycling, Inc. ("Recycling"), an Indiana corporation dedicated to
recycling paper, metal and other materials from PSI Energy and other
sources;
*Power Equipment Supply Company ("PESCO"), an Indiana corporation that
sold equipment and parts from a canceled PSI Energy generating plant, the
Marble Hill nuclear project; PESCO also purchased equipment for resale,
brokered equipment, and sold equipment on consignment for others;
*Wholesale Power Services, Inc. ("Wholesale Power Services"), an
Indiana corporation formed to broker power, emissions allowances,
electricity futures and related products and services and to provide
consulting services in the wholesale power-related markets; through its
"IPEX" (International Power Exchange) division, Wholesale Power Services
also created, marketed and maintained an electronic bulletin board for the
bulk power market;
*South Construction Company, Inc. ("South Construction"), an Indiana
corporation devoted to holding legal title to interests in real estate not
used and useful in the conduct of PSI Energy's business or having some
defect in title unacceptable to PSI Energy; and
*PSI Investments, Inc. ("PSI Investments"), an Indiana corporation
formed to hold certain nonutility interests of PSI, including a number of
then-inactive companies formed under Indiana law - specifically, PSI Power
Resource Development, Inc. ("PSI Power Resource Development"), PSI Power
Resource Operations, Inc. ("PSI Power Resource Operations"), PSI
International, Inc. ("PSI International") and PSI Sunnyside, Inc. ("PSI
Sunnyside"), each of which was formed to develop, operate and maintain IPP
or cogeneration projects; PSI Environmental Corp. ("PSI Environmental"),
formed to provide energy-related environmental services; and, finally, PSI
T&D International, Inc. ("PSI T&D International") and PSI Yacyreta, Inc.
("PSI Yacyreta"), each of which was formed to acquire, directly or
indirectly, interests in FUCOs. In connection with its Argentine utility
investments (see above), PSI also had established Energy Services Inc. of
Buenos Aires ("Energy Services of Buenos Aires"), a then inactive Indiana
corporation, to provide operating and consulting services to foreign
utilities, initially in Argentina.
Finally, like CG&E, PSI Energy held "good citizen" investments in
various local funds or partnerships - Cambridge Ventures, L.P. and three
private venture capital funds organized by CID Equity Partners, all of
these entities having been formed to raise capital for investments in
start-up or early stage Indiana and other midwestern companies, and Circle
Centre Partners L. P., a Delaware limited partnership formed to invest in
Circle Centre, a retail shopping mall then under construction in downtown
Indianapolis.
The Commission noted that PSI's nonutility investments were
insubstantial, accounting for less than 1% of PSI's 1993 operating
revenues.
3. Status of 1994 Nonutility Interests
The following updates information for each of the nonutility interests
over which the Commission reserved jurisdiction in the Merger Order. At
and for the 12 months ended September 30, 1997, the balance of the
nonutility companies and interests still under Cinergy ownership (including
rule 58 companies) comprised less than 1% of Cinergy's consolidated assets
and revenues.
a. CG&E Nonutility Interests: Tri-State Improvement Company
Tri-State is a direct subsidiary of CG&E and its business remains the
acquisition and holding of property in Ohio, Kentucky and Indiana for
substations, electric and gas rights of way, office space, and other uses
in connection with the utility business of CG&E and its utility
subsidiaries. At September 30, 1997 and for the 12 months then ended,
Tri-State had total assets of approximately $37 million and operating
revenues of approximately $1.5 million./5/
b. CG&E Nonutility Interests: KO Transmission Company
KO, a FERC-regulated pipeline subsidiary of CG&E, was formed in early
1994 for the specific purpose of acquiring an interest in an interstate gas
pipeline system located in Kentucky to which CG&E was entitled under a
litigation settlement with Columbia Gas Transmission Corp. ("Columbia
Gas").
Pursuant to a 1989 FERC-approved "global" offer of settlement, and the
FERC's February 1996 order granting KO a certificate of public convenience
and necessity under the Natural Gas Act together with a blanket certificate
to offer firm and interruptible transportation service,/6/ KO acquired from
Columbia Gas (1) an undivided approximate one-third interest (equivalent to
221,000 Dekatherms per day ("Dth/d")) in certain natural gas facilities of
Columbia Gas known as the "Kentucky System," consisting of various
pipeline, looping and related equipment, which extends northward about 90
miles from an interconnection with Columbia Gulf Transmission Company in
Menifee County, Kentucky to a terminus at the Cold Spring Station
interconnection with ULH&P in northern Kentucky; and (2) a 100% interest in
another, much shorter interstate gas pipeline facility of Columbia Gas,
Line AM-4, which extends northwesterly about 3 miles from the Cold Spring
Station interconnection to an interconnection with CG&E's natural gas
facilities at the Kentucky-Ohio border on the Ohio River.
On June 1, 1996, KO commenced its business of transporting natural gas
in interstate commerce over the facilities acquired from Columbia Gas. To
date, all of KO's entitlement to capacity on the Kentucky System has been
contracted to CG&E and ULH&P on a firm basis to help meet their gas supply
obligations. At September 30, 1997 and for the 12 months then ended, KO
had total assets of approximately $1.6 million and operating revenues of
approximately $946,000./7/
c. CG&E Nonutility Interests: Enertech Associates, Inc.
(formerly Enertech Associates International, Inc.)
On October 25, 1995, a suit was filed in the Federal District Court for
the Southern District of Ohio by three former employees of Enertech, naming
as defendants Enertech, Cinergy, Cinergy Investments and certain senior
officers of those companies. The lawsuit, which stems from the termination
of employment of the three former employees, alleges that they entered into
employment contracts with Enertech based on the opportunity to participate
in potential profits from future investments in energy projects in central
and eastern Europe. The suit alleges causes of action based on, among
other theories, breach of contract related to the events surrounding the
termination of their employment and fraud and misrepresentation related to
the level of financial support for future projects. The suit alleges
compensatory and punitive damages. The defendants are vigorously defending
the suit. The matter is pending.
In June 1996, Cinergy Investments sold what remained of Enertech's
investment in Bruwabel and its subsidiaries to a non-affiliated buyer.
In 1997, Enertech changed its name to "Enertech Associates, Inc."
Except in connection with the Enertech lawsuit, Enertech is inactive.
At September 30, 1997 and for the 12 months then ended, Enertech had
total assets of approximately $5 million and net income loss of
approximately $2 million.
d. CG&E Nonutility Interests: Cinergy Resources, Inc.
(formerly CG&E Resource Marketing)
In the summer of 1995, CG&E Resource Marketing withdrew from its gas
marketing partnership with Public Service Electric & Gas Company, conducted
under the name U.S. Energy Partners, in which CG&E held a one-third
interest. Renamed Cinergy Resources, Inc. ("Cinergy Resources"), this
company has continued in the gas marketing business on a stand-alone basis,
serving residential, commercial and industrial customers in Ohio, Indiana
and Kentucky. In connection with its retail gas marketing business,
Cinergy Resources acquires gas supplies and related transportation
capacity.
Recently, Cinergy Resources expanded its business to include retail
marketing of electricity. Cinergy Resources is participating in the pilot
program in Pennsylvania under which electric customers throughout the state
will have the right to choose their electricity supplier. Cinergy
Resources began delivering power to Pennsylvania customers in December
1997.
Cinergy Resources is a rule 58 company and direct subsidiary of Cinergy
Investments. For further information concerning Cinergy Resources,
including financial information, see Cinergy's quarterly reports on Form
U-9C-3.
e. CG&E Nonutility Interests: CGE ECK, Inc.
As noted above, CGE ECK was created to hold CG&E's one-third interest
in a Czech electric utility company, ECK s.r.o. After the Cinergy merger
CGE ECK reduced its ownership interest in ECK s.r.o. In mid 1997 CGE ECK
sold what remained of its interest in ECK s.r.o and was dissolved effective
December 31, 1997.
f. CG&E Nonutility Interests: CGE Corp.
As contemplated in the Merger Order, CGE Corp. was merged with and into
Cinergy Investments on October 24, 1994, the date the Cinergy merger was
consummated. The separate corporate existence of CGE Corp. thereupon
ceased and Cinergy Investments succeeded to ownership of the nonutility
interests held by CGE Corp.
g. CG&E Nonutility Interests: "Good Citizen" Limited
Partnership Investments
The Merger Order reserved jurisdiction over five small "good citizen"
limited partnership investments of CG&E: three investments in limited
partnerships dedicated to investing in, owning, rehabilitating and
maintaining apartment buildings for low-income people within the CG&E
service territory: North Rhine I Limited Partnership ("North Rhine I");
North Rhine II Limited Partnership ("North Rhine II"); and Franciscan Homes
II Limited Partnership ("Franciscan Homes"). In addition, CG&E held small
minority interests in two limited partnerships formed to invest in small
and minority- or female-owned businesses in the service territories of CG&E
and its subsidiaries: Blue Chip Capital Fund, L.P. ("Blue Chip Capital")
and Blue Chip Opportunity Fund, L.P. ("Blue Chip Opportunity").
As of September 30, 1997, CG&E's aggregate investments and
corresponding limited partnership interests in these funds were
approximately as follows: North Rhine I - $9,000 investment, 2% interest;
North Rhine II - $86,000 investment, 6% interest; Franciscan Homes - $2,000
investment, 2% interest; Blue Chip Capital - $509,000 investment, 2%
interest; and Blue Chip Opportunity - $400,000 investment, 4% interest.
At the end of January 1998, pursuant to CG&E's original $500,000
capital commitment which predated the Cinergy merger, Cinergy made an
additional investment in Blue Chip Opportunity on CG&E's behalf, raising
CG&E's total investment therein to $450,000.
Cinergy requests authority, through December 31, 2002, to fund the
balance of CG&E's remaining capital commitment to the Blue Chip Opportunity
fund - $50,000.
Any further investments by Cinergy or CG&E or any associate company in
this or any other of the funds described above would only be made pursuant
to a separate order or orders from the Commission or as permitted by rule
40(a)(5).
h. PSI Nonutility Interests: PSI Recycling, Inc.
In August 1996, Cinergy Investments sold substantially all the assets
of Recycling to a non-associate company. In December 1997, Recycling was
dissolved.
i. PSI Nonutility Interests: Power Equipment Supply Company
In late 1995, PESCO sold the assets of its North American Machinery
Division to a nonaffiliated buyer. PESCO discontinued operations in 1996
and was dissolved effective December 31, 1997.
j. PSI Nonutility Interests: Cinergy Capital & Trading, Inc.
(formerly Wholesale Power Services, Inc.)
In 1995, Wholesale Power Services received authorization from the FERC
to sell electricity to non-associates at market-based rates, but was
otherwise inactive./8/ In 1996, Wholesale Power Services discontinued its
IPEX Division, established to operate an electronic bulletin board for the
bulk power market. In January 1997, Wholesale Power Services was renamed
"Cinergy Capital & Trading, Inc." ("Cinergy Capital & Trading").
In June 1997, Cinergy Capital & Trading acquired the assets of
Greenwich Energy Partners, a limited partnership based in Connecticut
engaged in the business of trading and marketing natural gas and oil and
derivative commodity instruments. With the acquisition of Greenwich
Energy, Cinergy Capital & Trading resumed limited active operations. At
year-end 1997, Cinergy Capital & Trading had not yet commenced power
trading activities. Cinergy Capital & Trading will market and trade
electricity and natural gas and other energy commodities, together with
derivative commodity instruments, on a nationwide basis. Cinergy Capital &
Trading also markets related technical consulting services.
Cinergy Capital & Trading is a rule 58 company and direct subsidiary of
Cinergy Investments. For further information on Cinergy Capital & Trading,
including financial information, see Cinergy's quarterly reports on Form
U-9C-3.
k. PSI Nonutility Interests: South Construction Company, Inc.
South Construction is a direct subsidiary of PSI Energy and
functionally similar to Tri-State, CG&E's real estate subsidiary. Like
Tri-State, South Construction is devoted to holding title to interests in
real estate in connection with the utility business of PSI Energy.
However, in its case, it holds title to interests in real estate either not
used and useful in the conduct of PSI Energy's business or having some
defect in title unacceptable to PSI Energy. At September 30, 1997 and for
the 12 months then ended, South Construction had no assets and no net
income or loss.
l. PSI Nonutility Interests: PSI Investments, Inc.
In connection with the formation of Cinergy Investments, this former
nonutility subholding company of PSI was merged out of existence, with
Cinergy Investments succeeding to its nonutility interests. See discussion
above of CGE Corp.
m. PSI Nonutility Interests: PSI Power Resource Development, Inc.
This company, a direct subsidiary of Cinergy Investments, remains
inactive.
n. PSI Nonutility Interests: Cinergy-Cadence, Inc.
(formerly PSI Power Resource Operations, Inc.)
This formerly inactive subsidiary was activated and renamed
Cinergy-Cadence, Inc. ("Cinergy Cadence") to hold Cinergy's one-third equity
interest in Cadence Network LLC ("Cadence Network"), a joint venture
company formed in September, 1997 by Cinergy, New Century Energies and
Florida Progress to market a variety of energy-related products and
services - including billing, information and pricing services, energy
management services, and commodity procurement - to commercial customers
that operate in multiple locations across the country. The sole purpose
and activity of Cinergy Cadence, which is a direct subsidiary of Cinergy
Investments, is to hold Cinergy's interest in Cadence Network, a rule 58
company. Accordingly, Cinergy Cadence itself is a rule 58 company. For
financial and additional information concerning Cinergy Cadence and Cadence
Network, see Cinergy's quarterly reports on Form U-9C-3.
o. PSI Nonutility Interests: Cinergy International, Inc.
(formerly PSI International, Inc.)
This company, a direct subsidiary of Cinergy Investments, remains
inactive. In 1997 its name was changed to Cinergy International, Inc.
("Cinergy International").
p. PSI Nonutility Interests: PSI Sunnyside, Inc.
This company, a direct subsidiary of Cinergy Investments, remains
inactive.
q. PSI Nonutility Interests: Cinergy Technology, Inc.
(formerly PSI Environmental Corp.)
This company, a direct subsidiary of Cinergy Investments, was activated
in 1995 to pursue business opportunities in the United States relating
primarily to the commercialization of electrotechnologies. These are
activities that, but for the Enertech litigation, Enertech would have
pursued.
Cinergy Technology is a party to a marketing arrangement with a
manufacturer pursuant to which Cinergy Technology receives royalty payments
from the manufacturer's sale of certain portable electronic meters (whose
technology Cinergy Technology personnel helped to develop) that record a
variety of energy-related measurements which can be downloaded to a
personal computer for analysis. In the third quarter of 1997, Cinergy
Technology made a minor investment pursuant to rule 58 in a small,
privately held company established to patent and commercially develop
non-polluting energy production technologies, including those involving the
generation of electricity from low energy induced reactions in solids.
Cinergy Technology has also been working with outside parties to develop
and commercialize stationary electric power generation systems employing
fuel cell technology, as well as a silicon transfer switch capable of
transferring a customer's normal electric service to an alternate circuit
in a small number of milliseconds. In 1997 Cinergy Technology also
investigated the possibility of investing in another small, privately-held
company that holds a patented technology relating to power conversion and
control.
Cinergy Technology is also a party to several contracts, all of which
predate the Telecommunications Act of 1996, relating to the provision of
telecommunications services and products in the Cincinnati area. These
contracts are in the process of being assigned to an affiliate, Cinergy
Communications, Inc., which was certified in 1996 by the Federal
Communications Commission as an ETC.
In 1996 Cinergy Technology made an investment pursuant to rule 40(a)(5)
under the Act in the Cincinnati Equity Fund, a private fund established to
assist in efforts to rejuvenate and promote the downtown Cincinnati area
through real estate development.
At September 30, 1997 and for the 12 months then ended, Cinergy
Technology had total assets of approximately $1.2 million and operating
revenues of approximately $500,000.
r. PSI Nonutility Interests: PSI T&D International, Inc./PSI
Yacyreta, Inc.
Both of these companies, originally formed to acquire, directly or
indirectly, interests in FUCOs, remain inactive. PSI Yacyreta is a direct
subsidiary of PSI T&D International, which is a direct subsidiary of
Cinergy Investments.
s. PSI Nonutility Interests: Energy Services Inc. of Buenos Aires
This inactive company was dissolved in January 1995.
t. PSI Nonutility Interests: "Good Citizen" Limited Partnership
Investments
Like CG&E, PSI Energy held a number of small "good citizen" limited
partnership investments over which the Commission reserved jurisdiction in
the Merger Order.
PSI Energy had invested in Cambridge Ventures, L.P. ("Cambridge
Ventures"), a private fund licensed by the U.S. Small Business
Administration as a small business investment company, dedicated to making
investments in start-up Indiana companies. PSI Energy also had invested in
three private equity funds organized by CID Equity Partners - CID
Partnership, L.P. ("CID Partnership"), CID Ventures, L.P. ("CID Ventures"
and CID Equity Capital III, L.P. ("CID Equity Capital") - dedicated to
venture capital investments in start-up and early stage companies with an
exclusive focus on the Midwest. CID Partnership invested in start-ups,
expansion financings and buy-outs of a total of 20 Indiana companies in the
medical technology, manufacturing, business services and information
technology industries before concluding new investment activity in 1992.
CID Ventures was created to provide equity capital for growth companies
located throughout the Midwest and invested in 14 companies before
concluding new investment activity in 1993. Its industry concentrations
were similar to those of CID Partnership, but with slightly different
emphases. CID Ventures made follow-on investments in existing portfolio
companies through 1995. CID Equity Capital was formed in 1992 to provide
equity capital for Midwest growth companies. It invested in 16 companies
before concluding new investment activity in 1995. CID Equity Capital
continues to make follow-on investments in existing portfolio companies.
The fund's investments are concentrated in information technology
companies.
Finally, the Commission reserved jurisdiction over PSI Energy's limited
partnership investment in Circle Centre Partners L.P. ("CCP"), a Delaware
limited partnership formed to invest in Circle Centre, a retail shopping
mall in downtown Indianapolis, Indiana, then under construction. The 19
limited partners of CCP collectively have a 63% equity interest in CCP; the
remaining 37% equity interest is held by Circentre Incorporated, as general
partner. The CCP limited partners include some of the largest businesses
in Indiana. In addition to PSI Energy, investors include Ameritech
Indiana, Banc One Indiana Corporation, Bankers National Life Insurance
Company (a subsidiary of Canseco, Inc.), LRP Master Trust (a retirement
plan trust for Eli Lily and Company), MPP Development Company (an affiliate
of Marsh Supermarkets, Inc. Retirement Plan Trust) and IPALCO Enterprises,
Inc. CCP has an 85% interest in Circle Centre Development Company
("CCDC"), an Indiana general partnership that is the official developer and
operator of Circle Centre and leases the realty and buildings from the City
of Indianapolis. Simon Property Group, L.P. has the remaining 15% interest
in CCDC and acts as the managing general partner of CCDC.
Opened in September 1995, Circle Centre is an 800,000 square foot
retail shopping mall located one block south of Monument Circle, the center
of downtown Indianapolis. It has two anchor department stores, 85 smaller
shops, and an entertainment component that includes a multi-screen cinema,
nightclubs and restaurants. The mall incorporates and preserves nine
historic facades and parts of two other historic structures.
Conceived in the 1980s to stem declining retail sales in downtown
Indianapolis, Circle Centre reflects a public/private partnership between
the City of Indianapolis and the Indianapolis business community. The site
was assembled by the City and included several historic structures. It sat
vacant for much of the 1980s while financing alternatives were canvassed
and discussions with potential tenants proceeded. Ultimately, the City
provided over half the project's financing through "tax-increment" bonds,
the Indianapolis business community supplied one-quarter of the financing,
and a construction loan furnished the balance of the needed funds.
Specifically, the City provided approximately 60% ($187 million) of the
$307.5 million cost of the project through the sale of tax-increment bonds;
almost a quarter of the overall financing cost ($75 million) was furnished
through equity raised by CCDC ($40 million of which was supplied by the 19
limited partners of CCP); and the remainder of the project cost
(approximately $45 million) was raised with the proceeds of a bank
construction loan.
Since opening, Circle Centre has proved a success for the developer and
the City of Indianapolis. In the first year of commercial operations,
retail sales exceeded $400 per square foot. Circle Centre has sparked new
development in the downtown area, and downtown hotel occupancy rates and
convention center bookings have increased./9/
As of September 30, 1997, PSI Energy's aggregate investments and
corresponding limited partnership interests in Circle Centre and the other
partnerships described above was approximately as follows: Cambridge
Ventures - $525,000 investment, 9% interest; CID Partnership - $314,000
investment, 3% interest; CID Ventures - $656,000 investment, 3% interest;
CID Equity Capital - $2.6 million, 8% interest; and Circle Centre Partners
- - $3,015,000 investment, 5% interest.
Cinergy requests authority, through December 31, 2002, to fund the
balance of PSI Energy's remaining commitment to CID Equity Capital -
$520,000. This commitment was made in connection with PSI Energy's initial
investment in the fund prior to the Cinergy merger.
Any further investments by Cinergy or PSI Energy or any associate
company in this or the other funds described above would only be made
pursuant to a separate order or orders from the Commission or as permitted
by rule 40(a)(5).
D. Rule 54 Analysis
Rule 54 provides that in determining whether to approve the issue or
sale of a security by a registered holding company for purposes other than
the acquisition of an EWG or a FUCO, or other transactions by such
registered holding company or its subsidiaries other than with respect to
EWGs or FUCOs, the Commission shall not consider the effect of the
capitalization or earnings of any subsidiary which is an EWG or FUCO upon
the registered holding company system if paragraphs (a), (b) and (c) of
rule 53 are satisfied. Cinergy satisfies all of these conditions.
Rule 53(a)(1): At September 30, 1997, Cinergy had invested, directly
or indirectly, an aggregate of approximately $475 million in EWGs and
FUCOs. The average of the consolidated retained earnings of Cinergy
reported on Form 10-K or Form 10-Q, as applicable, for the four consecutive
quarters ended September 30, 1997 was approximately $992 million.
Accordingly, based on Cinergy's "consolidated retained earnings" at
September 30, 1997, and taking into account Cinergy's "aggregate
investment" as of that date, Cinergy had available investment capacity
under rule 53 of approximately $21 million.
Rule 53(a)(2): Cinergy maintains books and records enabling it to
identify investments in and earnings from each EWG and FUCO in which it
directly or indirectly holds an interest. At present, Cinergy does not
hold any interest in a domestic EWG; Rule 53(a)(2)(I) is therefore
inapplicable.
In accordance with Rule 53(a)(2)(ii), the books and records and
financial statements of each foreign EWG and FUCO which is a "majority-owned
subsidiary company" of Cinergy are kept in conformity with and
prepared according to U.S. generally accepted accounting principles
("GAAP"). Cinergy will provide the Commission access to such books and
records and financial statements, or copies thereof, in English, as the
Commission may request.
In accordance with Rule 53(a)(2)(iii), for each foreign EWG and FUCO in
which Cinergy directly or indirectly owns 50% or less of the voting
securities, Cinergy will proceed in good faith, to the extent reasonable
under the circumstances, to cause each such entity's books and records to
be kept in conformity with, and the financial statements of each such
entity to be prepared according to, GAAP. If such books and records are
maintained, or such financial statements are prepared, according to a
comprehensive body of accounting principles other than GAAP, Cinergy will,
upon request of the Commission, describe and quantify each material
variation from GAAP in the accounting principles, practices and methods
used to maintain such books and records and each material variation from
GAAP in the balance sheet line items and net income reported in such
financial statements, as the case may be. In addition, Cinergy will
proceed in good faith, to the extent reasonable under the circumstances, to
provide access to the Commission to such books and records and financial
statements, or copies thereof, in English, as the Commission may request,
and in any event will make available to the Commission any such books and
records that are available to Cinergy.
Rule 53(a)(3): No more than 2% of the employees of Cinergy's operating
utility subsidiaries, at any one time, directly or indirectly, render
services to EWGs and FUCOs.
Rule 53(a)(4): Cinergy will promptly submit a copy of this statement
and of any Rule 24 certificate hereunder, as well as a copy of Cinergy's
Form U5S and Exhibits H and I thereto, to each public utility commission
having jurisdiction over the retail rates of any Cinergy utility
subsidiary.
Rule 53(b): The provisions of Rule 53(a) are not made inapplicable to
the authorization herein requested by reason of the provisions of Rule
53(b). Specifically:
Rule 53(b)(1): Neither Cinergy nor any 10% subsidiary thereof (within
the meaning of rule 53(b)(1)) is the subject of any pending bankruptcy or
similar proceeding.
Rule 53(b)(2): Cinergy's average consolidated retained earnings for
the four quarters ended September 30, 1997 were approximately $992 million,
as compared to approximately $1.01 billion for the four quarters ended June
30, 1997, a decrease of about $18 million or 2%.
Rule 53(b)(3): For the year ended December 31, 1996, Cinergy did not
report operating losses attributable to its direct and indirect investments
in EWGs and FUCOs in an amount greater than 5% of consolidated retained
earnings.
Item 2. Fees, Commissions and Expenses
Total estimated fees, commissions and expenses ("Fees") payable by
Cinergy or any associate company in connection with the proposed
transactions are $525,000, comprised of Fees of Reid & Priest LLP of
$25,000 and Fees of McKinsey & Company, Inc. United States ("McKinsey") of
$500,000.
Item 3. Applicable Statutory Provisions
The proposed transactions are or may be subject to sections
2(a)(29)(B), 8, 9(a)(1), 9(c)(3), 10(c)(1) and 11(b)(1) of the Act and
rules 40(a)(5), 54 and 58 thereunder.
A. Legal Analysis: Retention of CG&E Gas Properties
1. Statutory Framework
Cinergy's acquisition and retention of CG&E's gas properties is or may
be subject to sections 2(a)(29)(B), 8, 9(a)(1), 10(c)(1) and 11(b)(1) of
the Act. Section 8 prohibits registered holding companies from acquiring
interests in combination utilities serving substantially the same territory
unless the acquisition is consistent with applicable state law. Section
9(a)(1) requires prior Commission approval for acquisitions of securities
or utility assets. Section 10(c)(1) bars Commission approval of an
acquisition that would be "detrimental to the carrying out of the
provisions of section 11." Section 11(b)(1) generally limits the utility
properties of a registered holding company to a "single integrated public
utility system," either gas or electric. Section 2(a)(29)(B) defines an
integrated gas public utility system as:
a system consisting of one or more gas utility companies which
are so located and related that substantial economies may be
effectuated by being operated as a single coordinated system confined
in its operations to a single area or region, in one or more States,
not so large as to impair the advantages of localized management,
efficient operation, and the effectiveness of regulation[;] Provided,
That gas utility companies deriving natural gas from a common source
of supply may be deemed to be included in a single area or region.
The general rule notwithstanding, a registered holding company may own
one or more additional integrated systems if each additional system
satisfies clauses (A) through (C) of section 11(b)(1) (the "ABC Clauses").
The Commission must find that:
(A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial economies which can be
secured by the retention of control by such holding company of such system;
(B) All of such additional systems are located in one State, or in
adjoining States, or in a contiguous foreign country; and
(C) The continued combination of such systems under the control of
such holding company is not so large (considering the state of the art or
the area or region affected) as to impair the advantages of localized
management, efficient operation, or the effectiveness of regulation.
2. Characterization of CG&E Gas Properties
As a threshold matter, it must be determined whether the gas properties
of CG&E and its gas utility subsidiaries, ULH&P and Lawrenceburg,
constitute a single integrated gas system. As discussed earlier, the gas
properties of CG&E and ULH&P are physically interconnected with each other
(although not with those of Lawrenceburg); each of the three sets of
properties is connected to at least two common interstate pipelines - Texas
Gas Transmission Corporation and Texas Eastern Transmission Corporation;
the combined properties are centrally managed, with a single organization
within Cinergy purchasing gas supplies (sourced primarily from the Gulf of
Mexico coastal area) and arranging interstate transportation for all three
companies; finally, the combined properties are centrally monitored and
operated from Cinergy's dispatch center in Cincinnati. These facts suggest
that the combined properties may constitute a single integrated gas system
within the ambit of the statutory definition.
3. Satisfaction of Statutory Standards for Retention of Gas
Properties
As discussed below, because it meets each of the tests prescribed in
the ABC Clauses, Cinergy should be permitted to retain the gas properties
of CG&E and its subsidiaries. Cinergy has submitted an analysis showing
that a divestiture would burden the new stand-alone gas company with severe
lost economies, approximately $52 million annually. Applied against
historical operating results, these divestiture costs yield loss ratios
exceeding each of the Engineers benchmarks enumerated below. The lost
economies here are greater than those cited in the Commission's recent
merger order approving the creation of New Century Energies as a new
combination registered holding company. Divestiture of Cinergy's gas
business would also impose substantial increased operating costs on
Cinergy's remaining electric business - approximately $34 million per
year./10/
Beyond these technical and mathematical considerations, however,
important policy concerns buttress Cinergy's position. Separation of the
gas and electric businesses and even relatively minor operating cost
increases would jeopardize the ability of each entity - the new gas company
and the remnant CG&E - to compete effectively in today's environment.
Furthermore, the basic premise underlying the Commission's traditional view
favoring separate ownership of gas and electric properties - that
competition between independent suppliers of gas and electricity in the
same territory is the only viable form of customer choice - has little
bearing on CG&E's own situation, whatever its continuing relevance as a
general proposition. In November 1997, CG&E inaugurated a pilot program
giving residential and small commercial customers the right to chose their
natural gas supplier, with CG&E providing local delivery service. The
pilot extends to CG&E's remaining customers the choice that has been
available for several years to large volume commercial and industrial
customers. Thus, today more than 80% of Cinergy's gas customers can chose
their supplier.
a. ABC Clauses
Cinergy readily meets the requirements of Clauses B and C of section
11(b)(1).
CG&E's and its subsidiaries' gas properties are located in adjoining
states - Ohio, Kentucky and Indiana - and therefore satisfy the
geographical restrictions of Clause B. Regarding the size restrictions of
Clause C, Cinergy's gas properties are only moderately large compared to
other regional gas utilities (see Exhibit 7 to Exhibit I). As to other
electric registered holding companies, New Century Energies' gas properties
are larger than those of Cinergy, both on an absolute and relative basis.
Cinergy's gas properties are centrally managed and operated from Cinergy's
headquarters and dispatch center in downtown Cincinnati; thus there is no
impairment of the advantages of "localized management" or "efficient
operation." Finally, Cinergy's retention of the gas properties neither has
impaired nor will impair "effectiveness of regulation." CG&E, ULH&P and
Lawrenceburg continue to be subject to regulation as to retail gas and/or
electric rates and other matters by the PUCO, the KPSC and the IURC.
Moreover, in connection with the Cinergy merger in 1994 and Cinergy's
registration as a holding company, Cinergy, CG&E and PSI Energy entered
into comprehensive settlement arrangements and commitments conferring
additional oversight and other rights on the Ohio, Kentucky and Indiana
commissions to ensure effectiveness of regulation.
The remaining question is whether Cinergy's divested gas properties
would incur a "loss of substantial economies" as contemplated by Clause A.
In addressing this question in previous cases, the Commission and the
courts generally have looked to studies submitted by registered companies
estimating the magnitude of increased operating costs to be borne by the
divested gas properties./11/ The Commission's practice has been to apply
various ratios to assess the estimates of increased costs contained in
these divestiture studies - specifically, the ratios resulting from a
comparison of the increased costs to the divested system's (I) total
operating revenues, (ii) operating revenue deductions, (iii) gross income,
and (iv) net income before federal taxes./12/ In an influential case from
the 1940's involving Engineers Public Service Co., the Commission stated
that cost increases resulting in a 6.78% loss of operating revenues, a
9.72% increase in operating revenue deductions, a 25.44% loss of gross
income and a 42.46% loss of net income would afford an "impressive basis
for finding a loss of substantial economies."/13/ The Engineers benchmarks
were applied most recently by the Commission in its 1997 orders authorizing
New Century Energies and Ameren to retain their gas properties.
In the present case, Cinergy retained McKinsey to prepare a study
identifying the increased operating costs that would apply to the divested
gas properties. The study postulates the spin-off of the gas properties
into a new stand-alone company and the operation of those properties after
divestiture as a single integrated system. The study shows that severance
of Cinergy's gas business would result in increased annual operating costs
for the new stand-alone gas company of approximately $52 million, stemming
primarily from the termination of shared services, the need to replicate
functions, and certain one-time transition costs. In the absence of rate
relief, the lost economies would result in a negative 0.75% rate of return
on rate base for the stand-alone gas company./14/ In terms of the
Engineers tests, and based on CG&E operating results for the 12 months
ended September 30, 1997, these lost economies translate to 10.59% of gas
operating revenues, 11.29% of gas operating revenue deductions, 171.24% of
gas gross income, and 285.41% of gas net income./15/
The ratios of increased costs in the present case, then, surpass each
of the corresponding loss ratios in the Engineers case, and thus
presumptively afford an "impressive basis"/16/ for finding that Cinergy
satisfies Clause A. By contrast, in cases where the Commission has ordered
divestiture, the highest estimated loss of operating revenues was 6.58%,
considerably lower than the corresponding ratio here./17/ Finally, the
lost economies here are significantly higher, in total and on a percentage
basis, than those relied upon by the Commission in permitting New Century
Energies to retain its gas business. For all these reasons, Cinergy's
retention of the gas properties is clearly authorized under Clause A.
In addition to the projected increased annual operating costs for the
stand-alone gas company, a divestiture of Cinergy's gas business would also
have a significant adverse impact on the remaining electric business,
resulting in approximately $34 million in annual lost economies. (See
Section V of Exhibit I.) The primary sources of this detrimental impact on
the remaining electric business are similar to those driving the increased
costs for the stand-alone gas business, namely (1) loss of economies from a
termination of shared services between the gas and electric businesses, (2)
the need to hire and train new employees, and (3) increased revenue taxes,
assuming that the lost economies are recoverable through increased rates.
In short, since it meets all the standards of the ABC Clauses, Cinergy
should be entitled to retain its gas business on that basis alone.
However, additional considerations serve to make this an especially
compelling case for retention.
b. CG&E Customer Choice
As the Commission emphasized in the New Century Energies merger order,
recent industry developments, such as the trend toward gas/electric
convergence and the advent of retail competition, are germane to the
Commission's analysis under Clause A. These qualitative factors may serve
to "compound" or exacerbate dollar projections of lost economies. As the
Commission stated:
The gas and electric industries are converging, and, in
these circumstances, separation of gas and electric businesses
may cause the separated entities to be weaker competitors than
they would be together. This factor adds to the quantifiable
loss of economies caused by increased costs./18/
Likewise, the Commission observed that
in a competitive utility environment, any loss of economies
threatens a utility's competitive position, and even a small' loss of
economies may render a utility vulnerable to significant erosion of its
competitive position. The Commission's emphasis, in many early cases, upon
evidence of a severe, crippling effect upon the separated system may be
outmoded in a changing utility industry ... ./19/
These important new features - convergence and increasing competition -
prompted the Commission to reexamine its historic rationale for separate
ownership of gas and electric properties:
In the 1960s, when the NEES case was decided, utilities were
primarily franchised monopolies with captive ratepayers, and
competition between suppliers of gas and electricity, however limited,
was virtually the only source of customer choice and was thus deemed
beneficial to energy consumers. The empirical basis for these
assumptions, however, is rapidly eroding. Although franchised
monopolies are still the rule, competition is increasing. Increased
expenses of separate operation may no longer be offset, as they were
in New England Electric System, by a gain of qualitative competitive
benefits, but rather may be compounded by a loss of such benefits, as
the Commission finds in this matter./20/
But whereas these general observations had only limited application to
the specific facts of that case - there is no indication that New Century's
residential customers were free to choose their natural gas supplier - they
are highly pertinent here. All of Cinergy's Ohio customers - the great
majority of the total number of customers served by Cinergy - have the
right to choose their natural gas supplier. Here then the facts at hand
provide direct empirical support for the Commission's evolving view.
On July 2, 1997, the PUCO approved implementation of a pilot program
allowing CG&E's residential and small commercial (< 2000 Mcf/year) natural
gas customers to choose their gas supplier and have CG&E provide local
transportation of the gas, beginning November 1, 1997. The pilot extends
to all CG&E's customers the choice that has been available since September
1994 to large volume commercial and industrial customers. Under the
program, residential and small commercial customers may elect to have any
qualified natural gas supplier provide its gas supply into CG&E's system,
and CG&E will deliver that gas supply to the residence/commercial building.
A customer can also elect (or do nothing) to remain a CG&E gas customer.
A supplier becomes qualified under the program by completing a Gas
Supply Aggregation/Customer Pooling Agreement with CG&E and providing the
utility with certain documentation demonstrating the supplier's financial
ability to perform its responsibilities under the program. Suppliers must
also agree to comply with a Suppliers' Code of Conduct which, among other
things, requires the supplier to communicate in clear, understandable
language to customers the terms under which natural gas will be supplied
and billed. For the duration of the pilot program, all suppliers must
submit their advertising and contract language to the PUCO for review and
approval to ensure clarity in communication.
The pilot program has a minimum duration of two years (i.e., until
October 31, 1999). The PUCO will make an interim assessment of the
program's effectiveness. Cinergy anticipates that at the end of the pilot,
the program will convert to a permanent arrangement.
As of January 2, 1998, 4,304 residential customers had selected one of
six qualified residential natural gas suppliers and 2,406 small commercial
customers had selected one of thirteen commercial natural gas suppliers.
B. Legal Analysis: Retention of 1994 Nonutility Interests
Cinergy's proposed acquisition and retention of the Remaining
Nonutility Interests is or may be subject to sections 9(a)(1), 9(c)(3),
10(c)(1) and 11(b)(1) of the Act and rules 40(a)(5), 54 and 58 thereunder.
Section 9(a)(1) requires prior Commission approval for a registered
holding company acquisition of an interest in any "other business."
Section 10(c)(1) precludes approval of an acquisition "detrimental to the
carrying out of the provisions of section 11." Section 11(b)(1) limits the
nonutility interests of a registered holding company to those that are
"reasonably incidental, or economically necessary or appropriate" to the
company's utility operations, including interests the Commission finds
"necessary or appropriate in the public interest or for the protection of
investors or consumers and not detrimental to the proper functioning of
such [integrated public utility] system." The Commission has construed
these standards to require a "functional" relationship between the
nonutility interests and the utility business.
Section 9(c)(3) exempts from sections 9(a)(1) and 10 acquisitions of
"such commercial paper and other securities, within such limitations as the
Commission may by rules and regulations or order prescribe as appropriate
in the ordinary course of business of a registered holding company or
subsidiary company thereof and as not detrimental to the public interest or
the interest of investors or consumers."
Pursuant to section 9(c)(3), the Commission has adopted Rule 58,
exempting from sections 9(a)(1) and 10 acquisitions of interests in
"energy-related companies," subject to certain investment limitations and
reporting requirements.
Rule 40(a)(5) was also adopted pursuant to section 9(c)(3) and exempts
small investments in local economic development or other nonutility
enterprises where no affiliate relationship results. Under the rule, in
any calendar year a registered holding company or its subsidiary may
acquire (I) up to $5 million of the securities of local economic
development corporations created under specific state laws promoting
economic development, and (ii) up to $1 million of the securities of local
industrial or nonutility enterprises.
Cinergy's acquisition and retention of the Remaining Nonutility
Interests (including the rule 58 companies) satisfies the standards just
described. In each case retention is supported by previous orders of the
Commission approving similar nonutility activities or investments and/or by
the express terms of rule 58 or rule 40(a)(5).
B. Legal Analysis: Retention of CG&E Remaining Nonutility Interests
1. Tri-State
Tri-State's function is to acquire and hold real estate to support the
utility business of CG&E and its subsidiaries. Tri-State is therefore
"functionally" related to CG&E's utility business and retainable. The
Commission recently authorized New Century Energies to retain a
functionally similar nonutility company called "1480 Welton, Inc."/21/
2. KO
If the Commission authorizes Cinergy to retain CG&E's gas business,
Cinergy should also be permitted to retain KO - a CG&E gas pipeline
subsidiary whose facilities physically interconnect with those of both CG&E
and ULH&P, and which transports natural gas for both of those companies in
connection with their gas supply businesses. The Commission recently
authorized New Century Energies to retain a functionally similar
subsidiary, West Gas Interstate, Inc./22/
3. Enertech
Enertech is a named defendant in the pending lawsuit described above
and is otherwise inactive. Cinergy requests authorization to retain
Enertech, subject to the Activation Commitment.
4. Cinergy Resources
Cinergy Resources derives substantially all of its revenues from the
retail marketing of natural gas or electricity to residential, commercial
and industrial customers in Ohio, Indiana and Kentucky and Pennsylvania.
Cinergy Resources is a rule 58 company./23/
5. CG&E "Good Citizen" Limited Partnership Investments
The Commission retained jurisdiction over five small "good citizen"
limited partnership investments of CG&E: North Rhine I, North Rhine II and
Franciscan Homes (dedicated to owning, rehabilitating and maintaining
apartment buildings for low-income people within the CG&E service
territory) and the two "Blue Chip" partnerships (investments in small and
minority- or female-owned businesses in the service territories of CG&E and
its subsidiaries). CG&E is a small (often very small) investor in these
partnerships: North Rhine I - $9,000, 2% limited partnership interest;
North Rhine II - $86,000 investment, 6% interest; Franciscan Homes - $2,000
investment, 2% interest; Blue Chip Capital - $721,000 investment, 2%
interest; and Blue Chip Opportunity - $450,000 investment, 4% interest. In
all these investments, CG&E is a passive investor; day-to-day management
and control is vested exclusively in the general partner. Any approval
rights held by CG&E as a limited partner concern only those fundamental
matters affecting the partnership (such as changes in investment policy or
replacement of the general partner) over which limited partners customarily
retain consent rights.
In short, the foregoing investments intended to boost economic
development in the communities CG&E serves; small in amount; and not
involving the creation of any affiliate relationship are classic "good
citizen" investments of the type previously approved by order under section
9(c)(3)/24/ and, depending on the aggregate amount of annual investments,
eligible for the exemption afforded by rule 40(a)(5).
C. Legal Analysis: Retention of PSI Remaining Nonutility Interests
1. Cinergy Capital & Trading
Cinergy Capital & Trading derives or will derive substantially all of
its revenues from the marketing and trading of energy commodities and
associated derivatives throughout the United States as well as through
related technical consulting services (such as with respect to economic
restructuring of long-term power purchase arrangements). Cinergy Capital &
Trading is a rule 58 company./25/
2. South Construction
South Construction is retainable on the same basis as Tri-State: the
primary purpose of each company is to acquire and hold realty in connection
with the utility businesses of their operating company affiliates.
3. PSI Power Resource Development
PSI Power Resource Development is presently inactive. Cinergy requests
authorization to retain PSI Power Resource Development, subject to the
Activation Commitment.
4. Cinergy-Cadence, Inc.
The sole activity of Cinergy Cadence (formerly an inactive subsidiary,
PSI power Resource Operations) is to hold Cinergy's one-third equity
interest in the Cadence Network joint venture with New Century Energies and
Florida Progress. As discussed, Cadence Network will market a variety of
energy-related products and services including billing, information and
pricing services, energy management services, and commodity procurement
to retail commercial customers that operate in multiple locations across
the country. Since Cadence Network is a rule 58 company,/26/ Cinergy
Cadence is also a rule 58 company./27/
5. Cinergy International
Cinergy International is presently inactive. Cinergy requests
authorization to retain Cinergy International, subject to the Activation
Commitment.
6. PSI Sunnyside
PSI Sunnyside is presently inactive. Cinergy requests authorization to
retain PSI Sunnyside, subject to the Activation Commitment.
7. Cinergy Technology
The primary focus of this company is to commercialize and market
electrotechnologies. For example, as previously discussed, Cinergy
Technology receives royalty payments from a third-party manufacturer for
sales of certain portable electronic meters that can be used to record a
variety of energy-related measurements, and has been working with certain
other outside parties on commercializing certain stationary or
"distributed" electric generation systems based on fuel cell technology.
Following completion of the pending transfer to Cinergy Communications,
Cinergy's ETC, of the telecomm contracts to which Cinergy Technology is now
a party, Cinergy anticipates that it will claim rule 58 status for Cinergy
Technology./28/ In any event, existing precedent confirms that Cinergy
Technology is functionally related and retainable./29/
8. PSI T&D International/PSI Yacyreta
These companies are presently inactive. Cinergy proposes to retain
each of them, subject to the Activation Commitment.
9. PSI Energy "Good Citizen" Limited Partnership Investments
As with the CG&E "good citizen" investments, these corresponding
investments of PSI Energy are small and intended to benefit the local
community: Cambridge Ventures and the CID Equity funds were established to
provide venture financing for start-up and early stage Indiana and other
Midwestern-based companies; Circle Centre Partners was formed to invest in
the Circle Centre mall in downtown Indianapolis. PSI Energy is a passive
investor in these funds; day-to-day operations and control are exercised
exclusively by the general partners.
The Commission has approved a number of similar passive investments in
local venture capital funds comparable to PSI Energy's investments in
Cambridge Ventures and the CID Equity funds./30/
As discussed earlier, Circle Centre mall represents an important
public/private partnership between the City of Indianapolis and the local
business community to boost economic development in downtown Indianapolis.
PSI Energy's service territory encircles the City, it has a vested interest
in the City's economic fortunes. This investment is comparable to Ameren's
investment in the Kiel Center in St. Louis and the St. Louis Blues Hockey
Club./31/
Item 4. Regulatory Approval
No state or federal regulatory agency other than the Commission under
the Act has jurisdiction over the proposed transactions.
Item 5. Procedure
Cinergy requests that the Commission issue a public notice of and order
authorizing the proposed transactions as soon as practicable. Cinergy
requests that there be no waiting period between the issuance of the
Commission's order and its effective date. Cinergy waives a recommended
decision by a hearing officer or other responsible officer of the
Commission and consents that the Staff of the Division of Investment
Management assist in the preparation of the Commission's order.
Item 6. Exhibits and Financial Statements
(a) Exhibits:
A The constituent instruments of the Remaining Nonutility
Interests (including rule 58 companies) either have already been or will be
filed as exhibits to Cinergy's Registration Statement on Form U5B and
Cinergy's Annual Reports on Form U5S for the years ended December 31, 1995,
1996 and 1997, respectively, and are hereby incorporated by reference.
B Not applicable
C Not applicable
D Not applicable
E Map showing Cinergy gas properties (incorporated by
reference from Exhibit E-1 to original application-declaration in File No.
70-8427 as amended through date of Merger Order (as so amended, the "1994
Application"))
F-1 Preliminary opinion of counsel (to be filed by amendment)
G Withdrawn
H-1 Revised Cinergy system corporate chart (as of December
31, 1997)
I Analysis of the Economic Impact of a Divestiture of the Gas
Operations of Cinergy Corp., dated January 19, 1998 (supersedes Exhibit J-1
to 1994 Application)
Item 7. Information as to Environmental Effects
(a) The Commission's action in this matter will not constitute major
federal action significantly affecting the quality of the human
environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Act, the undersigned company has
duly caused this statement to be signed on its behalf by the undersigned
thereunto duly authorized.
Dated: February 6, 1998
CINERGY CORP.
By: /s/ William L. Sheafer
Vice President and Treasurer
/1/ Specifically, (1) the subsidiary companies of Enertech Associates,
Inc. (formerly Enertech Associates International, Inc.) namely, Beheer-En
Beleggingsmaatschappij Bruwabel B.V., a Dutch company ("Bruwabel"), and its
two Czech subsidiaries, Power Development s.r.o. and Power International
s.r.o., (2) CGE ECK, Inc. and its Czech subsidiary, ECK s.r.o., (3) CGE
Corp., (4) PSI Recycling, Inc., (5) Power Equipment Supply Company, (6) PSI
Investments, Inc. and (7) Energy Services Inc. of Buenos Aires.
/2/ Specifically, (1) Cinergy Resources, Inc. (formerly CG&E Resource
Marketing, Inc.), (2) Cinergy Capital & Trading, Inc. (formerly Wholesale
Power Services, Inc.) and (3) Cinergy-Cadence, Inc. (formerly PSI Power
Resource Operations, Inc.).
/3/ Specifically, (1) Enertech Associates, Inc., (2) PSI Power Resource
Development, Inc., (3) Cinergy International, Inc., (4) PSI Sunnyside,
Inc., (5) PSI T&D International, Inc. and (6) PSI Yacyreta, Inc.
/4/ PSI Resources, et al., Release No. 35-25570, July 2, 1992 (granting
section 3(b) exemptions to, inter alia, PSI Energy Argentina, Inc., an
Indiana corporation and wholly-owned subsidiary of PSI, in connection with
proposed investment in Edesur, S.A., an Argentine electric transmission and
distribution company); PSI Resources, Inc., et al., Release No. 35-25674,
November 13, 1992 (granting section 3(b) exemptions to, inter alia, PSI
Argentina, Inc. and Costanera Power Corporation, each Indiana corporations
and direct or indirect wholly-owned subsidiaries of PSI, in connection with
proposed investment in Central Costanera, S.A., an Argentine electric
generating company).
/5/ For financial information covering 1996 and 1995 for Tri-State (and
any other nonutility interest still retained by Cinergy over which the
Commission reserved jurisdiction in the Merger Order), see Item 10 of
Cinergy's Annual Reports on Form U5S for the years ended December 31, 1996
and 1995; see also the financial statements included with Cinergy's various
1997 quarterly reports on Form U-9C-3 (for more recent financial
information concerning those of the 1994 nonutility interests that
constitute rule 58 companies).
/6/ KO Transmission Co., 74 FERC P61,101 (1996).
/7/ In August 1997, pursuant to a separate 1995 rate settlement with
Columbia Gas approved by the FERC in early 1997, KO applied to the FERC for
a certificate of public convenience to acquire and operate certain
additional undivided interests in discrete portions of Columbia Gas's
Kentucky gas pipeline system. The application is pending. See FERC
Docket No. CP97-720-000.
/8/ Wholesale Power Services, Inc., 72 FERC P61,284 (1995)
/9/ For further information regarding Circle Centre, see The Urban Land
Institute, Project Reference File, Vol. 26, No. 12 (July-September 1996).
/10/ Cinergy's ownership of the gas properties presents no issues under
section 8. The laws of Ohio and Kentucky no more prohibit Cinergy's than
they did CG&E's ownership of both electric and gas properties serving the
same territory. In 1994 the Kentucky commission approved Cinergy's
acquisition of ULH&P, and the Ohio and Indiana commissions approved global
settlement arrangements relating to the Cinergy merger.
/11/ See, e.g., New England Electric System, 41 SEC 888 (1964), rev'd SEC
v. New England Electric System, 346 F.2d 399 (1st Cir. 1966), rev'd and
remanded, 384 U.S. 176 (1965), on remand, 376 F. 2d 107 (1st Cir. 1967),
rev'd, 390 U.S. 2 (1968) ("NEES"); New Century Energies, Inc., Release No.
35-26748 (1997) ("New Century Energies"); UNITIL Corp., Release No. 35-25524
(1992) ("UNITIL"); Ameren Corp., Release No. 35-26809 (1997)
("Ameren").
/12/ See, e.g., New Century Energies, supra.
/13/ Engineers Public Service Company, 12 SEC 41, 59 (1942), rev'd on
other grounds and remanded, 138 F.2d 936 (D.C. Cir. 1943), vacated as moot,
332 U.S. 788 (1947) ("Engineers").
/14/ Cf. UNITIL, supra, (authorizing retention where the rate of return
for the divested gas properties was projected to be 2.01%).
/15/ The McKinsey study is based on the most recent public information for
Cinergy and its subsidiaries then available, i.e., the 12 months ended
September 30, 1997. Separate sections of the study establish that the
study's findings based on September 1997 data are not an aberration. The
stand-alone gas company's incremental operating costs also exceed the four
Engineers benchmarks when (1) using operating results for Cinergy for any
of the past five years, 1992 through 1996, and (2) when results for the 12
months ended September 30, 1997 are adjusted to reflect normalized weather
conditions. See Sections I.A.2&3 of Exhibit I.
/16/ Engineers, supra, 12 SEC at 59.
/17/ See Engineers, supra, 12 SEC 41, cited in NEES, supra, 41 SEC at 898
n.22; see also General Public Utilities Corp., 32 SEC 807, 836 (1951)
(4.87%; divestment required); NEES, supra, 41 SEC at 897-98 (4.83%;
divestment required).
/18/ New Century Energies, supra, 1997 SEC Lexis 1583 at 52 (footnotes
omitted).
/19/ Id., 1997 SEC Lexis 1583 at n.56 (citing 1995 Report by the Division
of Investment Management entitled "The Regulation of Public-Utility Holding
Companies" at 75).
/20/ Id., 1997 SEC Lexis 1583 at 54.
/21/ New Century Energies, supra, Appendix A.
/22/ Ibid.
/23/ Rule 58(b)(1)(v).
/24/ See, e.g., Ameren, supra, Appendix A (St. Louis Equity Fund; Housing
Missouri LLC; Illinois Equity Fund Limited Partnerships); Georgia Power
Co., Release No. 35-26220 (1995); East Ohio Gas Co., Release No. 35-25046
(1990) (securities of affordable housing partnerships); see also Georgia
Power Co., Release No. 35-25949 (1993); Hope Gas, Inc., Release No. 35-25739
(1993) (securities of local venture capital companies).
/25/ Rule 58(b)(1)(v) & (vii).
/26/ Rule 58(b)(1)(I), (v) & (vii).
/27/ Rule 58(b)(1)("energy-related company" defined as any company that
directly "or indirectly, through one or more affiliates" engages in
permitted activities).
/28/ Rule 58(b)(1)(ii) (development and commercialization of
electrotechnologies related to energy conservation, storage and
conservation, energy efficiency, waste treatment, greenhouse gas reduction,
and similar innovations).
/29/ See, e.g., GPU International, Inc., Release No. 35-26631 (1996)
(investment in alliance to develop, manufacture and market stationary
electric power systems employing fuel cell technology); Cinergy Corp.,
Release No. 35-26562 (1996) (acquisition of limited partnership interest in
fund formed to invest in companies wherever located engaged in developing
and commercializing electric and gas technologies relating to electricity
generation and storage; electric power quality; energy-related
communications, control and information technologies; energy-saving end-use
products; and transmission and distribution).
/30/ See Ameren, supra, Appendix A (Civic Ventures LLC); Georgia Power
Co., Release No. 35-25949 (1993); Hope Gas, Inc., Release No. 35-25739
(1993); Northeast Utilities, Release No. 35-24585 (1988) (securities of
local venture capital funds or companies).
/31/ Ameren, supra, Appendix A (Kiel Investments).
Exhibit H-1
CINERGY SYSTEM CORPORATE STRUCTURE AT 12/31/97
Cinergy Corp. (Delaware, 6/30/1993)/1/
Cinergy Services, Inc. (Delaware, 2/23/1994)
The Cincinnati Gas & Electric Company (Ohio, 4/3/1837)
The Union Light, Heat and Power Company (Kentucky, 3/20/1901)
Tri-State Improvement Company (Ohio, 1/14/1964)
Lawrenceburg Gas Company (Indiana, 5/5/1868)
The West Harrison Gas and Electric Company (Indiana, 8/19/1942)
Miami Power Corporation (Indiana, 3/25/1930)
KO Transmission Company (Kentucky, 4/11/1994)
PSI Energy, Inc. (Indiana, 9/6/1941)
PSI Energy Argentina, Inc. (Indiana, 6/5/1992)
South Construction Company, Inc. (Indiana, 5/31/1934)
Cinergy Investments, Inc. (Delaware, 10/24/1994)
(subsidiaries listed below)
Cinergy Foundation, Inc. (Indiana, 12/7/1988)
Cinergy Investments, Inc. (Delaware, 10/24/1994)/2/
Cinergy-Cadence, Inc. (Indiana, 12/27/1989; formerly PSI Power
Resource Operations, Inc.)
Cadence Network LLC (Delaware, 9/3/1997)/3/
Cinergy Capital & Trading, Inc. (Indiana, 10/8/1992; formerly
Wholesale Power Services, Inc.)
CinCap IV, LLC (Delaware, 12/3/1997)
Cinergy Communications, Inc. (Delaware, 9/20/1996)
Cinergy Engineering, Inc. (Ohio, 3/28/1997)
Cinergy International, Inc. (Indiana, 12/9/1991; formerly PSI
International, Inc.)
Cinergy Investments MPI, Inc. (Delaware, 9/4/1997)
Cinergy MPI I, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI II, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI III, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI IV, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI V, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI VI, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI VII, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI VIII, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI IX, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI X, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI XI, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI XII, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI XIII, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI XIV, Inc. (Cayman Islands, 9/4/1997)
Cinergy MPI XV, Inc. (Cayman Islands, 9/4/1997)
MPII (Zambia) B.V. (The Netherlands, 11/18/1985)
Copperbelt Energy Corporation (Republic of Zambia,
9/19/1997)/4/
MPI International Limited (London, England, 8/14/1997)
Cinergy Resources, Inc. (Delaware, 1/10/1994; formerly CG&E
Resource Marketing, Inc.)
Cinergy Solutions, Inc. (Delaware, 2/11/1997)
Trigen-Cinergy Solutions LLC (Delaware, 2/18/1997)/5/
Trigen-Cinergy Solutions of Cincinnati LLC (Ohio,
7/29/1997)/6/
Trigen-Cinergy Solutions of Illinois L.L.C. (Delaware,
4/17/1997)/7/
Cinergy Technology, Inc. (Indiana, 12/12/1991; formerly PSI
Environmental Corp.)
Cinergy UK, Inc. (Delaware, 5/1/1996)
Avon Energy Partners Holdings (London, England,
5/3/1996)/8/
Avon Energy Partners PLC (London, England, 4/30/1996)
Midlands Electricity plc (London, England)
Enertech Associates, Inc. (Ohio, 10/26/1992)/9/
PSI Argentina, Inc. (Indiana, 4/10/1992)
Costanera Power Corp. (Indiana, 4/10/1992)
PSI Power Resource Development, Inc. (Indiana, 1/23/1990)
PSI Sunnyside, Inc. (Indiana, 12/6/1990)
PSI T&D International, Inc. (Indiana, 8/3/1994)
PSI Yacyreta, Inc. (Indiana, 9/8/1994)
ENDNOTES
/1/ Parenthetical information identifies place and date of incorporation.
Subsidiary status indicated by indentation. Unless otherwise indicated,
all subsidiaries are wholly-owned.
/2/ Certain of Investments' subsidiaries are not engaged in active
business operations.
/3/ Jointly owned 33-1/3% each with Florida Progress Corporation and New
Century Energies.
/4/ Jointly owned 40% by MPII (Zambia) B.V., 40% by National Grid Holland
B.V., and 20% by Zambia Consolidated Copper Mines Limited.
/5/ Jointly owned 50% each with Trigen Solutions, Inc., a subsidiary of
Trigen Energy Corporation.
/6/ Successor by merger to Cinergy Cooling Corp.
/7/ Jointly owned 49% by Cinergy Solutions, Inc. and 51% by Trigen
Solutions, Inc.
/8/ Jointly owned 50% each with EI UK Holdings, Inc., a subsidiary of EI
Energy, Inc., which is a subsidiary of GPU, Inc.
/9/ Formerly Power International, Inc. and formerly Enertech Associates
International, Inc.
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS
OF CINERGY CORP.
January 26, 1998
<PAGE>
<TABLE>
<CAPTION>
Table of Contents
Table of Contents
<S> <C>
<C>
Section I. Executive Summary 1
A. Impact on NewGasCo 3
1. Lost Economies Analysis 3
2. Adjusting for Year-to-Year Differences 5
3. Adjusting for Normalized Weather Conditions 5
4. Adjusting for Changed Business Realities: Change
in Gas Supply Cost as a Percentage of Total
Operating Expenses from 1940 to 1997 6
B. Impact on Customers of NewGasCo 7
C. Impact on the Remaining Electric Business and its
Customers 8
Section II. Assumptions and Approach 9
A. General Study Assumptions 9
B. Approach 11
Section III. Impact on NewGasCo 13
A. Lost Economies Analysis by Category 13
1. Accounting 13
2. Audit 14
3. Board of Directors 15
4. Budgets and Forecasts 15
5.Corporate Communications and Community Affairs 16
6. Customer Services 17
7. Environmental 17
8. Executive Pay 18
9. Facilities and Site Services 19
10. Gas Operations 20
11. Gas Supply 20
12. Government and Regulatory Affairs 21
13. Human Resources 22
14. Information Technology 22
15. Investor Relations and Shareholder Services 23
16. Legal 24
17. Materials Management 25
18. Rates 26
19. Real Estate Right of Way 26
20. Sales and Marketing 27
21. Strategic Planning and Corporate Development 28
22. Treasury 28
B. One-Time Transition Costs 30
1. Hiring, Job Placement, and Training Transition Costs 30
2. IT Systems Architecture Transition Costs 30
3. Financial Services Transition Costs 31
4. Legal Transition Costs 32
5. Other One-Time Divestiture Costs 33
C. Foregone Savings 33
D. Capitalized Labor 34
E. Revenue Taxes 34
F. Payroll Taxes 35
G. Increased Cost of Debt 35
Section IV. Impact on Customers of NewGasCo 36
Section V. Impact on the Remaining Electric Business and
its Customers 36
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibits
Exhibits
<S> <C> <C>
Exhibit 1. Cinergy Gas Operating Expenses vs. NewGasCo
Operating Expenses 4
Exhibit 2. Lost Economies Ratios 4
Exhibit 3. Projected Lost Economies as a Percentage of
Operating Results in 1997 Dollars for the
Past Five Years 5
Exhibit 4. Projected Lost Economies as a Percentage of
Operating Results, Adjusted for Normalized
Weather Conditions 6
Exhibit 5. Adjusting for Change in Gas Supply Cost as a
Percentage of Total Operating Expenses 7
Exhibit 6. Lost Economies by Category 13
Exhibit 7. Comparison of NewGasCo to Regional Gas Utilities 38
Exhibit 8. NewGasCo Organization Structure 39
Exhibit 9. Lost Economies Subtotals by Category 40
</TABLE>
<PAGE>
ANALYSIS OF THE ECONOMIC IMPACT
OF A DIVESTITURE OF THE GAS OPERATIONS
OF CINERGY CORP.
McKinsey & Company, Inc. United States (McKinsey) has been engaged by
Cinergy Corp. (Cinergy) counsel to assist them with an analysis of the
economic impact of divesting the natural gas business and assets of its
wholly-owned subsidiary, The Cincinnati Gas & Electric Company (CG&E), in
connection with Cinergy's application to the Securities and Exchange
Commission (SEC or Commission) to retain its gas business and assets.
McKinsey is a global management consulting firm whose Energy Practice
provides management consulting services to oil, natural gas, and electric
utility companies around the world. McKinsey has served many of the
largest utilities over the past 10 years on issues such as operational
effectiveness, organizational design, the role and structure of the
corporate center, industry restructuring, incentive regulation strategies,
and marketing strategies. McKinsey's qualifications for conducting a gas
divestiture lost economies analysis for Cinergy include: 1) an
understanding of Cinergy's organization and business; 2) an understanding
of the categories of savings and benefits that would be expected from the
combination of gas and electric businesses; and 3) extensive knowledge of
the energy industry.
Section I. Executive Summary
The purpose of this study is to identify the projected economic impact of
divesting Cinergy of its retail gas distribution business and assets, owned
and operated by CG&E and its subsidiaries, The Union Light, Heat & Power
Company (ULH&P) and Lawrenceburg Gas Company (Lawrenceburg). Cinergy is a
registered public utility holding company under the Public Utility Holding
Company Act of 1935 (PUHCA), providing electric and natural gas services to
customers through separate operating companies in Ohio, Kentucky, and
Indiana. PUHCA generally limits a registered holding company to a single
integrated utility system (i.e., either an electric or a gas system).
However, PUHCA would permit a registered holding company (e.g., Cinergy) to
control additional integrated public utility systems (e.g., gas business in
addition to the electric business) if the requirements were satisfied in
PUHCA Section 11 (b)(1) Clauses A, B, and C.
* Clause A requires that the additional system cannot be operated
as an independent system without the loss of substantial
economies which can be secured by retention of control of the
additional system by the holding company.
* Clause B requires the additional system to be located in one
state, adjoining states, or in a contiguous foreign country.
* Clause C requires the continued combination of the systems under
the control of the holding company to be not so large as to
impair the advantages of localized management, efficient
operation, or effectiveness of regulation, considering the state
of the art and the region affected.
This study primarily addresses the requirements of Clause A. It quantifies
the economic impact of divesting the retail gas distribution business and
assets of CG&E and its subsidiaries, UHL&P and Lawrenceburg, into a single,
new stand-alone company serving customers in the states currently served by
CG&E's consolidated operations, namely, Ohio, Kentucky, and Indiana. This
single, new stand-alone gas business ("NewGasCo") would provide levels of
service and quality comparable to Cinergy's existing gas business./1/
As a guide to determining whether the projected lost economies incurred by
NewGasCo would be "substantial" under PUHCA Section 11(b)(1) Clause A, the
Commission historically has looked to certain loss ratios from Engineers
Public Service Co., 12 SEC 41 (1942), rev'd on other grounds and remanded,
138 F. 2d 936 (DC Cir. 1943), vacated as moot, 332 US 788 (1947)
(Engineers). In Engineers, the Commission emphasized the consideration of
four ratios that measure the projected increased costs associated with a
gas divestiture as a percentage of four operating results: 1) gas operating
revenues; 2) gas operating expenses or "operating revenue deductions"; 3)
gas gross income; and 4) gas net income.
The Engineers guidelines suggest that cost increases that equate to 6.78%
of gas operating revenues, 9.72% of gas operating revenue deductions,
25.44% of gas gross income, and 42.46% of gas net income comprise an
"impressive basis for finding a loss of substantial economies" associated
with a gas divestiture. See Ameren Corp., Release No. 35-26809 (December
30, 1997); New Century Energies, Inc., Release No. 35-26748 (August 1,
1997) (citing Engineers).
A. Impact on NewGasCo
1. Lost Economies Analysis
Severance of Cinergy's gas business and assets would result in increased
annual operating costs for the resulting stand-alone gas company of
approximately $52,423,000, as shown in Exhibit 1. These lost economies
would primarily result from the replication of key functions, the loss of
economies from shared services, and certain one-time transition costs
associated with the divestiture of Cinergy's gas business and assets and
the establishment of NewGasCo.
In the absence of rate relief, the $52,423,000 in lost economies would
result in a negative 0.75% rate of return on rate base for NewGasCo. This
negative impact is significantly more detrimental than the 2.01% projected
rate of return for the divested gas property in Unitil Corp., Release No.
35-25524 (Apr. 24, 1992), where retention of the gas property was
authorized.
The projected $52,423,000 in lost economies would satisfy, and in all
instances exceed, the thresholds established in Commission precedent.
These lost economies, as demonstrated in Exhibit 2, would represent 10.59%
of gas operating revenue, 11.29% of gas operating revenue deductions,
171.24% of gas gross income, and 285.41% of gas net income. The four
operating results that represent the denominators in these ratios are
defined as follows:
* "Gas operating revenue" refers to the sum of rate revenue and other
revenue for the 12 months ended September 30, 1997 (i.e.,
$494,936,000).
* "Gas operating revenue deductions" refer to all gas operating expenses,
including operating and maintenance expenses, administrative and
general expenses, provisions for depreciation and amortization,
appropriations to retirement and depletion reserves, rents, royalties,
uncollectible customers' accounts, taxes, and $9 million in one-time
adjustments (i.e., $464,323,000).
* "Gas gross income" refers to the difference between gas operating
revenue and gas operating revenue deductions (i.e., $30,613,000).
* "Gas net income" refers to gas gross income absent interest on mortgage
bonds and other long term debt, other interest charges, and
amortization of acquisition adjustment and premium, discount and
expense on debt (i.e., $18,368,000).
Exhibit 1. Cinergy Gas Operating Expenses vs. NewGasCo Operating Expenses
$ million
THIS CHART IS NOT AVAILABLE IN EDGAR
* Allocated annual gas O&M expenses, depreciation, and taxes for the
twelve months ended September 30, 1997, excluding $9 million in one-time
adjustments (e.g., gas rate case write-offs and employee severance costs)
** Certain planned reengineering initiatives contemplate the further
integration of Cinergy's gas and electric operations, with resultant
additional annual savings. See Section III-C.
Source: Cinergy Consolidated Statements of Gas Operating Income for the
12 Months Ended September 30, 1997; Cinergy manager interviews;
McKinsey analysis
<PAGE>
<TABLE>
<CAPTION>
Exhibit 2. Lost Economies Ratios
Exhibit 2. Lost Economies Ratios
<S> <C> <C> <C> <C> <C>
Lost
Lost economics Lost Lost
Lost economics as a economics economics
economics as a percent of as a as a
to percent of gas percent percent
divested gas operating of gas of gas
gas operating revenue gross net
business revenue deductions income income
Engineers 6.78% 9.72% 25.44% 42.46%
Cinergy $52,423,000 10.59% 11.29% 171.24% 285.41%
</TABLE>
Source: Engineers Public Service Co., 12 SEC 41 (1942), cited in New
Century Energies; Cinergy Consolidated Statements of Gas
Operating Income for the 12 Months Ended September 30, 1997.
2. Adjusting for Year-to-Year Differences
The $52,423,000 in lost economies associated with the severance of
Cinergy's gas business and assets would satisfy the Engineers guidelines
even when adjusted to reflect year-to-year differences in Cinergy's
operating results over the past five years. When the ratios are calculated
using the different operating results over the past five years in 1997
dollars, as shown in Exhibit 3, the resultant ratios vary from year to
year, but they exceed the Engineers guidelines in every year. Different
operating results would affect the ratios by increasing or reducing the
revenue and expense figures, which would alter the denominators in the
ratios.
<PAGE>
<TABLE>
<CAPTION>
Projected Lost Economics as a Percentage of Operating Results in 1997
Dollars for the Past Five Years
Exhibit 3. Projected Lost Economies as a Percentage of Operating Results in
1997 Dollars for the Past Five Years
<S> <C> <C> <C> <C> <C> <C>
Year Projected Consumer Percent of Percent of Percent Percent
lost Price operating operating of gross of net
economies Index revenue expense income income
1997* $52,423,000 161.2 10.59 11.29 171.24 285.41
1996 $52,423,000 156.9 10.76 11.70 134.28 223.79
1995 $52,423,000 152.4 12.06 13.32 127.08 211.80
1994 $52,423,000 148.2 10.90 11.64 172.13 286.88
1993 $52,423,000 144.5 10.02 10.78 142.40 237.33
1992 $52,423,000 140.3 11.58 12.30 198.37 330.26
</TABLE>
* 12 Months Ended September 30, 1997. Net income is assumed to be 60%
of operating income.
Source: Bureau of Labor Statistics; Cinergy Consolidated Statements of Gas
Operating Income for 12 Months Ended September 30, 1997; Cinergy
Annual Reports.
3. Adjusting for Normalized Weather Conditions
A number of factors could contribute to changes in year-to-year operating
results in the gas business. One of these factors would be different
weather conditions in different years (e.g., cold versus mild winters),
which can be taken into account by adjusting the operating results for a
given year to reflect normalized weather conditions. This analysis is
demonstrated in Exhibit 4.
As Exhibit 4 shows, NewGasCo's lost economies ratios would still exceed the
four Engineers benchmarks even when results for the 12 months ended
September 30, 1997 are adjusted to reflect normalized weather conditions.
Factors driving the variance would include a slightly colder than usual
winter in 1997, which would affect the lost economies ratios by causing
increased revenue and expense figures. Consequently, the resultant ratio
values in 1997 would be lower than the normalized values because higher
revenues and expenses would lead to higher denominators in the ratios.
<PAGE>
<TABLE>
<CAPTION>
Projected Lost Economies as a Percent of Operating Results, Adjusted for
Normalized Weather Conditions*
Exhibit 4. Projected Lost Economies as a Percent of Operating Results,
Adjusted for Normalized Weather Conditions*
<S> <C> <C> <C> <C> <C> <C>
Percent Percent Percent Percent
Projected of of of of Billing
lost operating operating operating net Degree
economies revenue expense income income Days
Actual* $52,423,000 10.59% 11.28% 171.24% 285.41% 5383
Normalized** $52,423,000 10.67% 11.34% 180.28% 300.47% 5248
</TABLE>
* 12 Months Ended September 30, 1997. Net income assumed to be 60% of
operating income.
** Adjusting 12 Months Ended September 30, 1997 actual deliveries to
reflect normalized degree days for the same period
Source: National Oceanic and Atmospheric Administration; Cinergy
Consolidated Statements of Gas Operating Income for 12 Months
Ended September 30, 1997.
4. Adjusting for Changed Business Realities: Change in Gas Supply Cost as
a Percentage of Total Operating Expenses from 1940 to 1997
As demonstrated above in Exhibit 2, Cinergy would clearly satisfy the
Engineers benchmark ratios, which are commonly reviewed by the Commission
when evaluating whether projected lost economies would be "substantial."
Cinergy would further exceed these benchmarks when adjustments are made to
account for changed business realities that have occurred since the ratios
were established in the 1940s.
A fundamental difference between Cinergy's gas business today compared with
the Engineers gas business over 50 years ago is that gas supply cost as a
percent of total operating expenses was approximately 11% for Engineers in
1940, compared with 59% for Cinergy in 1997. This change in gas supply
cost as a percent of total operating expense is relevant because it
represents a significant change in the fixed-variable cost structure of the
business. As utilities have increased in size over the past 57 years
(Cinergy's 1997 revenues are 300 times larger than Engineers 1940
revenues), scale has dramatically increased the variable costs (e.g., gas
supply cost) as a proportion of total operating costs and decreased the
percentage of fixed costs. In other words, the Engineers benchmarks are
intended to provide a standard tool for evaluating the relative impact of
lost economies on a divested gas business, but a 1997 company incurring
equal or greater relative impact to its fixed costs as Engineers may have
significantly different ratios due to the dramatic change in fixed-variable
cost structure since the 1940s.
The standard Engineers analysis would compare the Cinergy of today with
benchmarks established in the early 1940s (see Exhibit 5, rows 1 and 3),
which biases the resulting ratios by not accounting for the significant
changes in cost structure between 1940 and 1997. In order to adjust the
lost economies ratios to reflect these changed business realities, one
could adjust the Engineers benchmarks to what they would have been if
Engineers had a cost structure comparable to Cinergy's current cost
structure. Using this comparison (see Exhibit 5, row 2) it is clear that
Cinergy would exceed the guidelines by an even wider margin.
<PAGE>
<TABLE>
<CAPTION>
Adjusting for Changes in Gas Supply Cost as a Percentage of Total Operating
Expenses
Exhibit 5. Adjusting for Changes in Gas Supply Cost as a Percentage of
Total Operating Expenses
<S> <C> <C> <C> <C>
Lost Lost Lost Lost
economies economies economies economies
as as as as
percent percent of percent percent
of operating of of
operating revenue gross net
revenue deductions income income
1. Engineers (1940) 6.78 9.72 25.44 42.46
2. Engineers (1997)* 2.85 4.48 10.69 17.84
3. Cinergy (1997) 10.59 11.29 171.24 285.41
</TABLE>
* Adjusts Engineers benchmarks to reflect Cinergy's current gas supply
expenses as a percentage of total O&M expenses (59%).
Source: Energy Information Administration; Engineers Public Service
Company, 12 SEC 41 (1942); Cinergy Consolidated Statements of Gas
Operating Income for the 12 Months Ended September 30, 1997.
B. Impact on Customers of NewGasCo
Customer impact: Assuming that NewGasCo's lost economies are recoverable
through rate relief, the customers of NewGasCo would incur an increased
annual cost of $54,247,000 as a result of the divestiture of Cinergy's gas
business and assets. This negative customer impact would result in average
cost increases of 11.7% ($9.73 per month) for gas-only customers and 4.4%
($10.11 per month) for combination gas and electric customers.
Sources: The primary source of customer impact would be rate increases
from the pass-through of recoverable lost economies ($52,423,000). In
addition, 89% of NewGasCo's 449,000 customers (400,000) are combination gas
and electric customers. These 400,000 combination customers would incur an
additional annual cost increase of $1,824,000 as a result of making monthly
payments to two energy providers instead of a single payment to a
combination energy provider.
* Increased Rates: $52,423,000. Assuming that NewGasCo's lost economies
are recoverable through rate relief, NewGasCo would need to increase the
rates paid by its 449,000 customers by 10.59%, ($52,423,000) in order to
provide the same return on rate base.
* Increased Payment Costs: $1,824,000. In addition, 89% of NewGasCo's
449,000 customers (400,000) are combination gas and electric customers of
Cinergy utility operating company subsidiaries. These 400,000 combination
customers would incur an annual payment cost increase totaling $1,824,000
from having two monthly payments instead of a single payment per month.
The additional postage would result in an annual increased cost of
$1,536,000, and the additional check-writing would result in an annual cost
of $288,000.
Assumptions
* Postage costs $0.32 per customer payment.
* Check costs $0.06 per customer payment.
C. Impact on the Remaining Electric Business and its Customers
In addition to the projected increased annual operating costs for NewGasCo,
a divestiture of Cinergy's gas business and assets would also have an
economic impact on the remaining electric business, totaling approximately
$33,879,000 in annual lost economies. The primary sources of this
detrimental impact on the remaining electric company would be 1) the loss
of economies from shared services between the gas and electric businesses,
2) the hiring, placement, and training of new employees, and 3) the
increase in revenue taxes, assuming that lost economies are recoverable
through increased rate revenue.
Assuming that the lost economies incurred by the remaining electric company
are fully recoverable through rate relief, the remaining electric customers
would incur a negative annual impact of $33,879,000. This customer impact
would represent a cost increase cost of 2.6% ($3.87 monthly per customer),
assuming that the increased rates would apply to the 729,000 electric
customers of CG&E, ULH&P, and Lawrenceburg, but not the 649,000 PSI Energy,
Inc. customers.
Section II. Assumptions and Approach
A. General Study Assumptions
The study quantifies the economic impact of divesting the retail gas
distribution business and assets of CG&E and its subsidiaries, UHL&P and
Lawrenceburg, into a single, new stand-alone company, NewGasCo.
* NewGasCo would operate in Ohio, Kentucky, and Indiana and serve CG&E's
existing 449,000 gas customers.
* NewGasCo would be capable of surviving as a stand-alone gas local
distribution company (LDC) in a competitive energy market. Therefore,
NewGasCo would require a board of directors, executives, management,
employees, computer systems, facilities, equipment, materials, and supplies
appropriate to operate as a competitive gas LDC.
* NewGasCo would compete in gas transmission and distribution in Cinergy's
current three-state service territory. The primary strategic imperatives
for NewGasCo in the study would be to protect its existing 449,000
customers, remain a competitive energy source for commercial, industrial,
and residential gas users in its service area, and make advances to convert
users of other forms of energy within the service area to gas. These
strategic imperatives would make NewGasCo and Cinergy competitors.
* NewGasCo would have a total market value of approximately $706,000,000.
This assumption is roughly consistent with Cinergy's 1997 P/E ratio (15.5)
multiplied by gas earnings per share. Based on an analysis of comparable
gas-only LDC capital structures, the study assumes that NewGasCo would be
capitalized with 59% equity and 41% debt financing. The $417,000,000 in
equity financing would be achieved through an initial public offering of
NewGasCo shares. Proceeds from the issue would be paid to Cinergy
shareholders as a special dividend. Competition between Cinergy and
NewGasCo after a divestiture order would suggest that selling shares to new
shareholders, rather than existing Cinergy shareholders, would be a
reasonable assumption. The $289,000,000 in debt financing would be
achieved by issuing bonds with an average maturity of 10 years.
* NewGasCo would be staffed to provide the same level of service and
quality as Cinergy's gas business. As a result of this assumption, certain
services currently shared between Cinergy's gas and electric businesses
would require significantly increased staffing levels and resource
allocations to perform functions that are currently accomplished by
combination employees and systems that serve both the electric and gas
businesses. The study assumes that Cinergy's gas customers would expect a
consistent level of service, reliability, and performance. NewGasCo would
maintain these standards through sufficient staffing and systems.
* NewGasCo would be bound by collective bargaining agreements similar to
those between Cinergy and its employee unions.
* NewGasCo would continue to outsource functions with existing third party
contracts for services. NewGasCo would continue to perform in-house most of
the services that Cinergy keeps in-house for considerations of cost,
quality, efficiency, strategy, or contractual commitment.
* NewGasCo would initially have the same product and service offerings as
Cinergy's existing gas business. NewGasCo sales and marketing personnel
would be dedicated to development of gas products and services, instead of
sharing new product development with the electric business.
* NewGasCo would develop and maintain an information technology system
architecture comparable to Cinergy's existing gas-only and gas-electric
shared systems. NewGasCo, as a competitor to Cinergy, would no longer
share Cinergy's information technology systems. As a result, the study
assumes that a significant one-time investment in system design and
development would be required to transition NewGasCo to its own systems.
In addition, on-going annual costs associated with system development and
maintenance would be incurred.
* NewGasCo would maintain a headquarters facility in downtown Cincinnati in
an office with comparable quality to Cinergy's existing headquarters.
* One-time transition costs associated with divestiture (e.g., the costs of
hiring and training, information technology systems, financial and legal
advisory fees, and other costs to separate Cinergy and NewGasCo) would be
amortized over 10 or 30 years depending on the cost category and in
accordance with GAAP.
* When calculating customer impact, the study assumes that full pass-through
of lost economies would be allowed in formal rate proceedings.
* Average salaries, wages, and benefits at NewGasCo would be the same as
those provided by Cinergy. Average salary, wage, and benefit O&M expenses
are estimated using fully-loaded O&M labor costs by function for the 12
months ended September 30, 1997 and dividing by the number of employees
assigned to the function.
* NewGasCo would be subject to regulation by the same state and federal
agencies (other than the SEC under PUHCA) that presently regulate Cinergy's
gas operations.
* For the purpose of evaluating the impact of gas divestiture, the study
uses the gas operating statement for the twelve months ended September 30,
1997 to provide the base case. Cinergy's current organization and staffing
levels as of September 30, 1997 are also used to provide a base case in
calculating lost economies due to different staffing requirements.
B. Approach
The study has projected lost economies based on gas-allocated operations
and maintenance (O&M) expenses for the twelve months ended September 30,
1997. The O&M expenses were used as baseline costs to analyze each
function. The study applied a systematic approach of analyzing the
functional costs of NewGasCo using zero-baseline budgeting.
Information was gathered from both internal and external sources to support
the analysis. 107 interviews were conducted with Cinergy executives and
function managers. 45 public information sources were used to gain a
thorough understanding of each function and the impact of a gas divestiture
on the organization. In addition, professionals from 8 external
organizations supported the analysis with input, including certified public
accountants, employee benefits consultants, insurance brokers, investment
banks, and law firms.
The study analyzed NewGasCo's function-by-function staffing requirements to
develop a hypothetical NewGasCo organization and annual operating expense
estimates. During the internal function-by-function interviews with
Cinergy managers, the study determined appropriate staffing levels and O&M
expenses for NewGasCo, in view of the stated general assumptions.
Based on the general assumptions underlying the study and McKinsey's
experience in organizational design in the utility industry, the study
reduced certain projected staffing levels and expense estimates provided by
Cinergy managers to reflect NewGasCo's hypothetical organization
requirements. Also, where no collective bargaining contracts or other
agreements were binding on Cinergy, and where it would be more efficient to
purchase a service for NewGasCo than it would be to provide the service
internally, the study chose the more economical alternative. By comparing
the "bottom-up" NewGasCo expenses to the Cinergy baseline costs for each
function, the study calculated annual lost economies related to O&M
expenses. In addition to increased O&M expenses associated with a gas
divestiture, lost economies in the following categories were also analyzed
with input from the appropriate function managers:
* Capitalized Costs: With the exception of certain one-time transition
costs, the study assumes that NewGasCo capital expenditures would be the
same as current allocations for Cinergy's gas operations. As a result,
annual depreciation expense would be unchanged. Certain lost economies
associated with increased staffing levels would result in additional
capitalized labor. Using actual Cinergy capitalized labor for the nine
months ended September 30, 1997, the study estimated the amount of total
capitalized labor lost economies and calculated the annualized depreciation
expense over 30 years.
* Customer Payment Costs: Customers would incur increased costs as a
result of a gas divestiture, assuming that the lost economies would be
fully recoverable through increased rate revenue. In addition, combination
electric and gas customers would incur increased payment costs associated
with making an additional monthly payment to a second energy provider
(i.e., NewGasCo), whereas today one payment is made to a single combination
provider (i.e., Cinergy).
* Foregone Savings: Certain planned reengineering initiatives contemplate
the further integration of Cinergy's gas and electric operations. Based on
interviews with functional managers and employees involved with the
reengineering efforts, the study quantified foregone savings that would be
associated with discontinuing certain gas-electric integration initiatives.
* Payroll Taxes: Salary and wage lost economies were multiplied by a 7.5%
payroll tax rate to quantify payroll tax lost economies.
* Revenue Taxes: Assuming lost economies would be fully recoverable
through rate revenue, additional revenue taxes would be incurred from the
State of Ohio Excise Tax, Public Utilities Commission of Ohio Maintenance
Tax, Ohio Consumer Counsel Maintenance Tax, Kentucky Public Service
Commission Maintenance Tax, Indiana Utility Regulation Commission Fee, and
Indiana Gross Receipts.
* One-Time Transition Costs: One-time transition costs would be associated
with divesting Cinergy's gas business and assets and establishing NewGasCo.
Various types of transition and divestiture costs were identified and
quantified during the analysis. The study has attempted to corroborate
projections with external sources where possible.
Section III. Impact on NewGasCo
A. Lost Economies Analysis by Category
NewGasCo would incur projected annual lost economies totaling $52,423,000
as a result of the divestiture of Cinergy's gas business and assets.
Exhibit 6, below, indicates the 15 largest categories of lost economies,
each as a percentage of the total projected lost economies that would be
incurred by NewGasCo. Exhibit 7 lists every category of lost economies
analyzed, and the amount of lost economies that would be incurred in each.
Exhibit 6. Lost Economies by Category
Percent of total lost economies
THIS CHART IS NOT AVAILABLE IN EDGAR
Transition Costs 17
Customer Services 9
Information Technology 9
Materials Management 7
Facilities & Site Services 6
Legal 6
Treasury 6
Human Resources 5
Revenue Taxes 4
Accounting 4
Corporate Communications 4
Foregone Savings 4
Board of Directors 3
Environmental 2
Payroll Taxes 2
Other* 12
100% = $52,423,000
* "Other" includes audit, budgets & forecasts, executive pay, gas
operations, gas supply, government and regulatory affairs, investor
relations and shareholder services, rates, real estate right of way, sales
& marketing, strategic planning and corporate development, capitalized
labor, and increased cost of debt.
1. Accounting
Lost Economies: Total annual lost economies associated with establishing
an accounting function for NewGasCo would be $1,944,000. The accounting
function would consist of general accounting, external reporting, plant
accounting, payroll, accounts payable, miscellaneous accounts receivable,
and tax.
Sources: The primary sources of lost economies are 1) the loss of labor
savings from providing accounting services for both the electric and gas
businesses and 2) replicating the annual external audit. The $1,944,000 in
lost economies would result from:
* Incremental Labor: $1,689,000. NewGasCo would require 40 full-time
equivalent employees ("employees") in Accounting, which would be 22 more
employees than are currently allocated to Cinergy's existing gas business.
Additional employees in general accounting and external reporting (6), tax
(4), payroll, accounts payable, and miscellaneous accounts receivable (7),
plant accounting (4), and management (2) would be required to provide the
same level of service currently provided by employees trained to perform
accounting services for both the gas and electric businesses. Certain
employees involved in research, systems, and process redesign would not be
required by NewGasCo (1).
* Annual Financial Statement Audit Fees: $225,000. NewGasCo would require
an annual audit and additional accounting and tax research services.
* Other expenses: $30,000 The remaining accounting lost economies relate
to duplicate storage of accounting records, check fees, and publications.
Assumption
* NewGasCo would retain all current accounting functions in-house. This
assumption includes retaining payroll and accounts payable services in-house.
2. Audit
Lost Economies: Total annual lost economies associated with establishing
an audit function for NewGasCo would be $890,000. Audit consists of
internal controls audits, IT systems audits, contract audits, operations
audits and special projects (e.g., due diligence).
Sources: The primary source of lost economies would be the loss of labor
savings from performing audit services for both gas and electric
businesses. The $890,000 in lost economies would result from:
* Incremental Labor: $800,000. NewGasCo would require 13 employees in
Audit. Additional employees in internal controls (3), systems (2),
contracts (2), operations (2), and management (1) would be needed to
provide the same level of audit services.
* Other expenses: $90,000. The remaining lost economies relate to
replicated travel and training expenses.
Assumptions
* Internal audit services would be performed in-house by NewGasCo.
* The current scope of audit services provided by Cinergy would be
continued by NewGasCo.
3. Board of Directors
Lost Economies: Total annual lost economies associated with establishing
the Board of Directors for NewGasCo would be $1,515,000. The Board of
Directors would provide oversight for NewGasCo's executive management and
act as the fiduciary for NewGasCo's shareholders. The Board would consist
of business and civic leaders both from within and outside of the utility
industry.
Sources: The major sources of lost economies for the Board of Directors
are: 1) replicated personnel (which are currently shared between Cinergy's
gas and electric businesses), and 2) the funding of a pension plan for
NewGasCo's Board. The associated lost economies for these items are as
follows:
* Board Fees and Expenses: $772,000. NewGasCo's Board of Directors would
consist of 12 directors. These directors would not be employees of the
company, and would not overlap with the directors of the remaining electric
business.
* Pension Plan: $743,000. Pension plans comparable to Cinergy's current
Directors' pension plans would be established for NewGasCo's Directors.
Assumptions
* Directors insurance would be funded by the treasury department, and the
associated lost economies would be accounted for in that department.
* NewGasCo's Board would meet with the same frequency (4 quarterly
meetings plus 1 off-site) as Cinergy's current Board.
* Directors' compensation would be equivalent to Cinergy's directors'
compensation (including $1,500 for each meeting attended, $3,000 for each
committee, and expenses).
4. Budgets and Forecasts
Lost Economies: Total annual lost economies associated with establishing a
budgets and forecasts function for NewGasCo would be $116,000.
Sources: The primary source of lost economies would be the loss of labor
savings from performing budgeting and forecasting services for both gas and
electric businesses. The $116,000 in lost economies would result from:
* Incremental Labor: $116,000. NewGasCo would require six employees in
Budgets and Forecasts. One additional manager and one additional employee
in forecasting beyond the current gas allocation would be required for a
consistent level of service.
Assumption
NewGasCo would perform the same scope and frequency of budgeting and
forecasting procedures.
5. Corporate Communications and Community Affairs
Lost Economies: Total annual lost economies associated with establishing a
corporate communications and community affairs function for NewGasCo would
be $2,156,000. The corporate communications and community affairs
department would: 1) coordinate all community outreach programs, 2) manage
all donations, 3) oversee the creation and distribution of all internal and
external communications, including advertising, and 4) create and manage
the corporate website. The Corporate Communications and Community Affairs
department of NewGasCo would require 14 full-time employees.
Sources: The major sources of lost economies for the Corporate
Communications and Community Affairs department are: 1) replicated
personnel (which are currently shared between Cinergy's gas and electric
businesses), 2) separate advertising, and 3) duplicated expenses
associated with production and distribution of internal and external
communications. The associated lost economies for these items are as
follows:
* Incremental Labor: $375,000. NewGasCo would establish a Corporate
Communications and Community Affairs department with two divisions. The
corporate communications division would have a staff of 10, including 4
managers (external/internal communications, creative services, paid media,
and website), 4 staff, and 2 administrative assistants. The community
affairs division would have a staff of 3 (2 staff, and 1 administrative
assistant). Both divisions would report to the General Manager of
Corporate Communications and Community Affairs.
* Advertising: $1,519,000. NewGasCo would advertise within its service
territory to create brand awareness for the newly created company in the
face of deregulation and increased customer choice.
* Other Expenses: $262,000. Expenses resulting from the separate
production of internal and external communications for NewGasCo would be
incurred.
Assumptions
* Creative services would remain an in-house function for NewGasCo.
* No joint community affairs projects would occur between NewGasCo and the
remaining electric business.
* NewGasCo would continue the same high level of involvement in community
affairs as Cinergy, including a commitment to fund donations at a rate of
1% of pre-tax income. These continued charitable donations, then, would
not constitute a lost economy.
6. Customer Services
Lost Economies: Total annual lost economies associated with establishing a
customer services function for NewGasCo would be $4,973,000. Customer
Services consists of call center, customer contact, customer relations,
billing, credit and collections, meter reading, and service.
Sources: The primary source of lost economies would be replicating
customer services for Cinergy's 400,000 combination gas and electric
customers.
* Incremental Labor: $3,303,000. NewGasCo would require 369 employees in
Customer Services, 77 more employees than are currently allocated to the
gas business. Additional employees in meter reading (47), billing (14),
credit and collections (11), customer relations (3), district offices (2),
and management (2) would be required to provide the same level of service
currently provided by workers cross-trained to serve Cinergy's 400,000
combination customers. The study assumes the NewGasCo call center and
customer contact would remain in-house, but it would have more flexible
staffing ability, allowing 2 fewer employees.
* Other expenses: $1,670,000. The additional customer services lost
economies would include non-labor costs from duplicated postage and
supplies ($695,000), leased call center equipment ($434,000), meter reading
equipment and vehicles ($179,000), customer surveys and customer programs
($156,000), credit reporting fees ($126,000), and service vehicles
($80,000).
Assumptions
* NewGasCo would be bound by collective bargaining agreements similar to
those between Cinergy and its employee unions.
* Existing customer services provided in-house by Cinergy (e.g., call
center, billing) would remain in-house at NewGasCo.
7. Environmental
Lost Economies: Total annual lost economies associated with establishing
an environmental function for NewGasCo would be $817,000. The
environmental department would be responsible for compliance with all
applicable environmental regulations as well as oversight of several
issues: hazardous waste and spill response, PCBs, water issues and permits,
air issues and permits, auditing, Corps of Engineers, environmental
stewardship, regulatory development, and manufactured gas plants. In order
to accomplish these functions, the environmental department of NewGasCo
would require 12 full-time employees and 1 part-time employee and report
directly to the Chief Operating Officer.
Sources: The major sources of lost economies for the environmental
department would include the loss of economies from employees who are
currently shared between Cinergy's gas and electric businesses. The
associated lost economies would include the following:
* Incremental Labor: $505,000. NewGasCo's environmental department would
consist of 1 general manager, 10 full-time scientists (one each for the
issues mentioned above, plus a gas specialist), 1 half-time scientist, and
1 administrative assistant. This would amount to 6 more full-time
equivalent employees than are currently allocated to Cinergy's gas
business.
* Other Expenses and Systems O&M: $312,000. Maintenance and upkeep of
the Environmental Compliance Assurance Program would need to be replicated
by NewGasCo. Travel expenses for staff personnel would also be incurred by
NewGasCo.
Assumptions
* NewGasCo would pursue the same level of environmental stewardship as
Cinergy.
* NewGasCo would assume Cinergy's gas-related environmental liabilities.
* NewGasCo would take the same proactive approach as Cinergy regarding
environmental awareness of its personnel.
8. Executive Pay
Lost Economies: Total annual lost economies associated with establishing
executive officer functions for NewGasCo would be $696,000. Executive pay
would consist of remuneration of a CEO, COO, CFO, and their respective
administrative staffs.
Sources: The primary source of lost economies would be the loss of shared
executive positions that currently perform duties for both the gas and
electric businesses.
* Incremental Labor: $696,000. NewGasCo would require CEO, COO and CFO
functions. Nine additional employees would be required to staff these
three executive functions including their administrative support.
NewGasCo's executive functions would require significantly fewer employees
than Cinergy currently requires for the larger combination company, but
NewGasCo would still incur lost economies associated with these functions
because the required staffing would exceed Cinergy's current gas
allocation.
Assumption
Compensation paid to NewGasCo executives would approximate salary and
incentives paid to other comparably sized gas-only LDC executives.
9. Facilities and Site Services
Lost Economies: The annual lost economies incurred by the facilities and
site services function for NewGasCo would be $3,245,000. The facilities
and site services department would: 1) lease, operate, and maintain
NewGasCo's corporate headquarters and district facilities, 2) oversee the
contracting of housekeeping and security services for NewGasCo's
facilities, 3) provide word processing and xerographic support, and 4)
archive all company records, including real estate documents. NewGasCo's
facilities and site services department would have a total of 52 employees
to perform this function.
Sources: The major sources of lost economies for the Facilities and Site
Services department would be: 1) replication of employees who are currently
shared between Cinergy's gas and electric businesses, 2) duplicated
contract services (security and housekeeping services), and 3) additional
leasing, operation, and maintenance expenses associated with NewGasCo's
separate corporate headquarters and district facilities. The associated
lost economies for these items are as follows:
* Incremental Labor: $1,046,000. NewGasCo's Site Services department
would require a staff of 51, 23 more than are currently allocated to
Cinergy's gas business. A general manager (plus executive secretary) would
oversee the following areas: corporate facilities (1 manager, 17 staff),
district facilities (1 supervisor, 10 staff), word processing (1
supervisor, 6 staff), mail, xerographic services, and office supplies (1
manager, 1 coordinator, 11 staff).
* Facilities O&M Expenses: $1,658,000. Additional leases for both a
corporate headquarters and seven district facilities would be required, as
well as associated operating and maintenance expenses.
* Contract Services: $533,000. Additional security and housekeeping
services would be required for the new facilities.
Assumptions
* NewGasCo would lease all facilities.
* NewGasCo's gas control center would be housed in the corporate
headquarters and therefore not need a separate facility.
* Each district facility would require approximately 8,000 square feet of
space and would serve as both operational facilities and customer service
offices.
10. Gas Operations
Lost Economies: Total annual lost economies associated with establishing
gas operations for NewGasCo would be $477,000. The Gas Operations would
consist of: 1) gas control, 2) system operation and production, 3)
construction and maintenance, 4) engineering, 5) subdivision design and
joint trench group, and 6) safety, administration, and training. In order
to accomplish these functions, the Gas Operations department of NewGasCo
would require 522 full-time employees and report directly to the Chief
Operating Officer.
Sources: The major source of lost economies for the Gas Operations
department would be replicated personnel (which are currently shared
between Cinergy's gas and electric businesses) in the Subdivision Design
Group. NewGasCo's Subdivision Design and Joint Trench Group would consist
of 1 manager, 2 supervisors, 4 staff, 7 project coordinators, and 3
administrative assistants. The loss of economies from employees currently
shared between the gas and electric businesses would result in increased
costs of $477,000.
Assumptions
* The remaining electric business would be the lead company in the joint
trench group.
* NewGasCo would be able to continue joint trenching with the remaining
electric business.
* NewGasCo could negotiate a contract with the joint trench group at an
inconsequential premium above the current cost to Cinergy's gas operations.
11. Gas Supply
Lost Economies: Total annual lost economies associated with establishing a
gas supply function for NewGasCo would be $114,000. The Gas Supply
department would be responsible for: 1) negotiation of transportation
agreements and contracts with gas transportation pipeline companies, 2)
managing NewGasCo's commodity risk, and 3) providing services to
transportation customers such as purchasing, transporting, balancing,
billing, load forecasting, and gathering of market information. In order to
accomplish these functions, the Gas Supply department of NewGasCo would
require 22 full-time employees and report directly to the Vice President of
Gas Operations.
Sources: The major sources of lost economies for Gas Supply department are
replicated personnel (which are currently shared between Cinergy's gas and
electric businesses). The associated lost economies for these items are as
follows:
* Incremental Labor: $114,000. NewGasCo's Gas Supply department would
require a staff of 22. A vice president, supported by an administrative
assistant and a consultant, would oversee regulated gas supply and upstream
capacity (1 manager, 7 staff), risk management (1 manager), and regulatory
affairs and transportation administration (1 manager, 9 staff).
Assumption
NewGasCo would continue to be able to procure gas purchases at the same
prices available to Cinergy today.
12. Government and Regulatory Affairs
Lost Economies: Total annual lost economies associated with establishing
government and regulatory affairs function for NewGasCo would be $332,000.
The Government and Regulatory Affairs department would monitor all federal
and state legislative and regulatory actions, especially those involving
gas supply matters. The Government and Regulatory Affairs department of
NewGasCo would require 9 full-time employees.
Sources: The major sources of lost economies would include: 1) the loss of
economies from personnel that are currently shared between Cinergy's gas
and electric businesses, 2) expenses for professional staff, and 3)
separate office space in Columbus, Ohio and Washington, DC. These factors
would result in the following lost economies:
* Incremental Labor: $200,000. NewGasCo would maintain 1 general manager,
3 regulatory managers (1 for Ohio/Kentucky/Indiana, 1 for national, 1 for
FERC), 3 lobbyists (1 each in Ohio, DC, and Kentucky), and 2 administrative
personnel.
* Other Expenses: $132,000. Expenses for these additional professional
staff would be $25,000 per professional.
Assumptions
* NewGasCo would continue to support a regulatory presence in Columbus and
Washington, DC.
* Lost economies associated with the additional office leases in Columbus
and DC would be shared with NewGasCo's legal department employees located
in these cities. These lost economies would be accounted for in the
Facilities and Site Services department.
13. Human Resources
Lost Economies: Total annual lost economies associated with establishing a
human resources function for NewGasCo would be $2,670,000. The Human
Resources department would provide services in the following areas:
staffing and employment compliance, labor relations, benefits and
compensation, Employee Information System (EIS), safety, and human
organizational development. In order to accomplish these functions, the
Human Resources department of NewGasCo would require 16 full-time
employees.
Sources: The major sources of lost economies incurred by NewGasCo's Human
Resources department would include: 1) the loss of economies from employees
who are currently shared between Cinergy's gas and electric businesses, 2)
incentive plan funding for new employees, and 3) employee program expenses.
These factors would result in the following lost economies:
* Incremental Labor: $842,000. NewGasCo's Human Resources department
would require a staff of 16, 6 more than are currently allocated to
Cinergy's gas business. A vice president (with an administrative assistant)
would oversee the following areas: staffing and employment compliance (2
staff), labor relations (2 staff), benefits and compensation design and
administration (4 staff), safety (2 staff), diversity (2 staff), and human
organization and development (2 staff).
* Human Resources Program Expenses: $1,440,000. The Human Resources
department would manage various employee programs (e.g., compensation
surveys, drug testing, Occupational Safety and Health Administration,
workers compensation, tuition reimbursement).
* Incentive Plan for New Hires: $388,000. A separate incentive plan would
be funded to provide year-end performance bonuses for new hires.
Assumptions
* Approximately 223 of the projected 1,276 employees in NewGasCo would be
new hires, while 1,053 would be ex-Cinergy employees.
* The current level of employee benefits at Cinergy would be maintained at
NewGasCo.
* Benefits administration would remain an in-house function.
14. Information Technology
Lost Economies: Total annual lost economies associated with establishing
an information technology function for NewGasCo would be $4,678,000. The
Information Technology department would: 1) support all application systems
and packages necessary for gas operations and corporate functions, 2)
maintain and support the telecommunications, radio, and microwave systems
used for gas operations, 3) oversee the contracting of system development
and implementation, and 4) develop systems in-house that are too small or
too specialized to be contracted out. In order to accomplish these
functions, the Information Technology department of NewGasCo would require
45 full-time employees.
Sources: The major sources of lost economies for the Information
Technology department are: 1) replicated personnel (which are currently
shared between Cinergy's gas and electric businesses), and 2) duplicated
operational and maintenance expenses. The associated lost economies for
these items are as follows:
* Incremental Labor: $3,878,000. NewGasCo would have an IT department to
support the systems mentioned above, requiring a total of 45 employees (29
more than are currently allocated to Cinergy's gas business). A Vice
President of Information and Technology (with 1 administrative assistant)
would oversee the department which would be organized into three areas: 1)
corporate systems (1 manager, 3 supervisors, 22 analysts), 2) gas
operations (1 manager, 8 full-time and 1 part-time analyst), and 3)
network, telecommunications, and radio (1 manager, 6 analysts).
* System Maintenance Expenses: $800,000. NewGasCo's Information
Technology department would perform annual maintenance and upkeep of its
systems at a level consistent with current Cinergy practices.
Assumptions
* All information and electronic records regarding gas facilities and/or
their support will be turned over to NewGasCo.
* Cinergy's current billing system (CSS) would be transferred to NewGasCo
and modified for gas-only operations. The development costs of CSS
(calculated for Cinergy's gas rate base) would be charged to NewGasCo, less
the amortized amount as of September 1997.
15. Investor Relations and Shareholder Services
Lost Economies: Total annual lost economies associated with establishing
an investor relations and shareholder servicing function for NewGasCo would
be $495,000. The Investor Relations and Shareholder Services department
would: 1) prepare and distribute annual and quarterly reports, 2) list the
corporation's stock, 3) facilitate analyst meetings, 4) build and maintain
relationships with key investors and buy- and sell-side securities
analysts, and 5) service existing shareholder requests. In order to
accomplish these functions, the Investor Relations and Shareholder Services
department of NewGasCo would require 5 full-time employees.
Sources: The major sources of lost economies for the Investor Relations
and Shareholder Services department would be: 1) replicated personnel
(which are currently shared between Cinergy's gas and electric businesses),
2) increased reliance on contracted services (specifically in shareholder
services), 3) duplicated fees associated with listing the stock of NewGasCo
and providing information services to the new IR/SS department, 4)
duplicated analyst meetings, and 5) production and distribution of annual
and quarterly reports to shareholders and other interested parties. The
associated lost economies for these items are as follows:
* Incremental Labor: $160,000. NewGasCo's investor relations and
shareholder servicing department would require a staff of 5 (1 manager, 1
analyst, 1 staff, and 2 administrative assistants) to handle both investor
relations and the oversight of shareholder service contractors.
* Annual and Quarterly Reports: $146,000. NewGasCo would be required to
produce and distribute annual and quarterly reports to its shareholders.
* Contract Services: $122,000. The cost to outsource shareholder
servicing would be approximately $6.50 per shareholder account, in addition
to other contract fees. NewGasCo would have approximately 18,000
shareholder accounts.
* Analyst Meetings: $39,000. NewGasCo would continue to conduct analyst
meetings at the same frequency as Cinergy in order to communicate the
inherent worth of the company.
* Fees: $28,000. On-line information services (e.g., Bloomberg, First
Call, Xpedite) and stock listing fees would be replicated for NewGasCo.
Assumptions
* NewGasCo would outsource the shareholder servicing function at a cost of
$6.50 per account. If shareholder servicing were retained in-house, lost
economies for NewGasCo would increase by $40,000.
* The cost of obtaining Bloomberg on-line services would be shared between
NewGasCo's investor relations, corporate treasury, and corporate finance
departments.
16. Legal
Lost Economies: Total annual lost economies associated with establishing a
legal department for NewGasCo would be $3,072,000. The legal department
would be responsible for: 1) regulatory filings, 2) contract
administration, 3) labor relations, 4) litigation matters, and 5) all other
legal affairs. In order to accomplish these functions, the legal
department of NewGasCo would require 32 full-time employees.
Sources: The major sources of lost economies for the legal department
would include: 1) the loss of economies from employees who are currently
shared between Cinergy's gas and electric businesses, 2) reliance on
outside legal counsel, and 3) costs associated with maintaining a separate
legal library. These factors would result in the following lost economies.
* Incremental Labor: $1,297,000. NewGasCo's legal department would require
a staff of 32, 20 more than are currently allocated to Cinergy's gas
business. A general counsel (with a staff of 4) would oversee the following
areas: contracts and litigation (3 attorneys, 2 paralegals, 2 assistants),
human resources and labor relations (2 attorneys, 1 law clerk, 1
assistant), regulatory, environmental, and FERC (3 attorneys, 2 paralegals,
2 assistants), corporate (2 attorneys, 1 paralegal, 2 assistants), and
satellite staff (2 attorneys and 2 assistants split between Columbus, Ohio
and Washington, DC).
* Outside Counsel: $1,435,000. Given that NewGasCo would have a smaller
legal staff relative to Cinergy's current legal department, the need for
outside counsel would likely increase due to the lost opportunity to
distribute the workload across shared gas and electric legal staff
employees.
* Legal Library: $340,000. On-line information services (e.g.,
Lexis/Nexis, Westlaw) and hard-copy holdings would be replicated for
NewGasCo.
Assumptions
* NewGasCo would continue to maintain legal staff in Columbus, OH and
Washington, DC. Lost economies associated with leasing this office space
would be accounted for in the Facilities and Site Services department.
17. Materials Management
Lost Economies: Total annual lost economies associated with establishing a
purchasing and materials management function for NewGasCo would be
$3,910,000. NewGasCo's Materials Management department would source and
buy all goods and services, and manage the materials inventory. In order to
accomplish these functions, the Materials Management department would
require 25 employees.
Sources: The major sources of lost economies for the Materials Management
department would be: 1) lost purchasing power, and 2) duplicated
warehousing and storage. The associated lost economies for these items
would be as follows:
* Loss of Purchasing Power: $3,582,000. Decreased volume across NewGasCo
for purchased goods and services would result in purchasing penalties of 5
to 25%.
* Warehousing and Storage: $328,000. Separate warehousing and storage
facilities would require 8400 square feet of office and warehousing space,
7,400 square yards of outside storage area, 1 tractor/trailer, and 3 stake
bed trucks.
Assumptions
* NewGasCo would engage in strategic sourcing of its purchased goods and
services.
* NewGasCo would have warehousing and storage space for its materials
inventory separate from that of Cinergy.
NewGasCo would suffer significant penalties when sourcing its materials
(those that are currently shared with the electric business) as a result of
the decreased volume of those purchases.
18. Rates
Lost Economies: Total annual lost economies associated with establishing a
rates function for NewGasCo would be $437,000. The rates department would
be responsible for: 1) rate case planning, 2) cost of service studies, and
3) rate analysis, design, and implementation. In order to accomplish these
functions, the rates department of NewGasCo would require 8 employees.
Sources: The major source of lost economies for the rates department is
replicated personnel (which are currently shared between Cinergy's gas and
electric businesses). NewGasCo's rates department would consist of 1
general manager, 2 managers, 4 staff, and 1 administrative assistant. The
loss of shared personnel would result in a lost economy of $437,000.
Assumption
* A minimum of two staff in each section of the rates department would be
required to allow for independent auditing.
19. Real Estate Right of Way
Lost Economies: Total annual lost economies associated with establishing a
real estate and right of way function for NewGasCo would be $405,000. The
Real Estate Right of Way department would be responsible for supporting
negotiated rights-of-way and providing general real estate services
necessary for gas operations. In order to accomplish these functions, the
Real Estate Right of Way department of NewGasCo would require 7 full-time
employees.
Sources: The major source of lost economies for the Real Estate and Right
of Way department would be the duplication of employees who are currently
shared between Cinergy's gas and electric businesses. NewGasCo's Real
Estate and Right of Way department would consist of 1 manager, 5 staff, and
1 administrative assistant. The loss of shared employees would result in a
lost economy of $384,000. Other duplicated expenses account for the
remaining $21,000 of lost economies.
Assumption
All real estate rights-of-way pertaining to gas operations would be
transferred from Cinergy to NewGasCo.
20. Sales and Marketing
Lost Economies: Total annual lost economies associated with establishing a
sales and marketing function for NewGasCo would be $509,000. Sales and
Marketing consists of key account sales, business development, economic
development, municipal sales, middle-market sales, market research, load
research and forecasting, product and service development, promotion, and
advertising.
Sources: The primary source of lost economies would be 1) the loss of
economies from sales and marketing employees who are currently shared by
the gas and electric businesses and 2) the replication of certain
promotion, event planning, sales material and training expenses.
* Incremental Labor: $259,000. NewGasCo would require 63 employees in
Sales and Marketing, increasing the staffing level currently allocated by
Cinergy to the gas business by 3 employees. These three additional
employees would be required by NewGasCo to provide a business development
function, which Cinergy currently allocates entirely to the electric
business. Combining NewGasCo's sales and marketing functions saves 2
employees, which offsets NewGasco's need for 2 additional employees due to
the loss of economies from employees who are currently shared between the
gas and electric businesses.
* Other expenses: $250,000. The remaining lost economies would result
from 1) promotion, event planning, sales material, and training expenses
($90,000) and 2) market research, market projections, and load forecasting
software ($160,000).
Assumptions
* Sales and Marketing would be managed as one department instead of
separate sales and marketing departments.
* The sale and marketing of non-regulated products and services are not
contemplated by the study and are not included in the staffing
requirements. If non-regulated product and services were considered, lost
economies in sales and marketing would significantly exceed $509,000.
* A business development function would be required by NewGasCo to manage
prospective new businesses and growth opportunities.
21. Strategic Planning and Corporate Development
Lost Economies: Total annual lost economies associated with establishing a
strategic planning and corporate development function for NewGasCo would be
$668,000. The function consists of integrated business planning,
competitive intelligence, market intelligence, mergers and acquisitions
support, and communications support (e.g., annual report).
Sources: The primary source of lost economies would be 1) the loss of
labor savings from performing strategic planning and corporate development
for both the gas and electric businesses and 2) additional consulting
services. The $668,000 in lost economies would include the following
components.
* Incremental Labor: $368,000. NewGasCo would require a total of six
employees in Strategic Planning and Corporate Development. Three of these
six employees would be new hires, including two new hires involved in
integrated business planning and one management position to provide the
same level of services as the existing gas business.
* Consulting services: $300,000. The remaining lost economies relate to a
larger share of strategic planning services being performed by outside
consultants at NewGasCo.
Assumption
A larger share of strategic planning at NewGasCo would be performed by
outside consultants to allow full employee utilization of fewer employees.
22. Treasury
Lost Economies: Total annual lost economies associated with establishing a
treasury function for NewGasCo would be $3,031,000. Treasury consists of
corporate cash management, corporate finance, insurance and claims, and
pension administration.
Sources: The primary sources of lost economies would be: 1) property,
liability, and other insurance coverage, 2) loss of labor savings from
providing treasury services for both gas and electric businesses, 3)
replicated lockbox fees for combination customers, and 4) replication of
other fees (e.g., trustees, rating agencies, Bloomberg). The $3,031,000 in
lost economies would include the following:
* Incremental Labor: $511,000. NewGasCo would require a total of 10
employees in Treasury. NewGasCo would require 5 more employees than
currently allocated to the gas business. Additional employees in
management (1), insurance and claims (1), cash management/corporate finance
(2), and clerical (1) would be needed to provide Treasury services. The
lost economies would result despite eliminating an Assistant Treasurer and
combining the cash management and corporate finance functions. In addition,
based on NewGasCo's smaller size, the study assumed NewGasCo would not
replicate Cinergy's sale of receivables and commercial paper programs or
the associated employees.
* Additional Insurance: $1,964,000. NewGasCo would need property,
liability and other (e.g., directors and officers, machinery, vehicle,
self-insurance reserves) insurance coverage. The study estimates that
NewGasCo insurance expenses would exceed the current gas allocation by
$1,964,000. The primary reason would be the lost diversification and scale
provided by Cinergy's electric business causing NewGasCo's premiums and
reserves to significantly exceed the current gas allocation.
* Lockbox Fees: $401,000. NewGasCo would have to establish duplicate
lockboxes.
* Other Fees: $155,000. Replicating fees paid to rating agencies, bond
trustees, and corporate finance publications and services would amount to
$155,000 in lost economies.
Assumptions
* NewGasCo would not have a sale of receivables or commercial paper
program.
* All other treasury functions performed by Cinergy would also be
performed by NewGasCo.
B. One-Time Transition Costs
1. Hiring, Job Placement, and Training Transition Costs
Lost Economies: The one-time cost of hiring and placing the additional
employees for NewGasCo would be approximately $3,110,000. Amortized over a
10-year period, these hiring and job placement transition costs would
result in annual lost economies of $311,000.
Sources: The major source of these lost economies would be: 1) recruiting,
interviewing, and hiring the new employees, and 2) job testing and
placement of the new hires.
* Job placement: $133,000. NewGasCo would test new hires to ensure
placement in appropriate positions for their qualifications. This job
placement testing would costs approximately $1,330,000. Amortized over 10
years, these job placement costs would result in annual lost economies of
$133,000.
* Recruiting and hiring: $89,000. NewGasCo would spend approximately
$890,000 to recruit and hire 222 new employees in addition to the existing
1,053 employees that Cinergy currently allocates to its existing gas
business. Amortized over 10 years, these hiring costs would result in
annual lost economies of $89,000.
* Training: $89,000. NewGasCo would spend $890,000 training its new
employees. Amortized over 10 years, these training costs would result in
annual lost economies of $89,000.
Assumptions
* Recruiting expenses of $4,000 per new hire.
* Job placement testing expenses of $6,000 per new hire.
* Hiring, recruiting, job placement, and training expenses would be
amortized over 10 years.
* NewGasCo would hire 222 new employees in addition to receiving 1,053
ex-Cinergy employees.
2. IT Systems Architecture Transition Costs
Lost Economies: One-time information technology systems transition costs
associated with a gas divestiture would be approximately $73,680,000.
Assuming amortization of these costs over 10 years, these IT systems
transition costs would result in annual lost economies of $7,368,000.
Sources: The source of these lost economies would be the cost of new IT
systems installation and development. NewGasCo would establish separate IT
systems including radio, microwave, telecommunications, network, and
mainframe systems. Application packages specific to gas operations would
also be required.
Assumptions
* One-time IT systems transition costs would be amortized over 10 years.
* All information and electronic records regarding gas facilities and/or
their support would be turned over to NewGasCo.
* Cinergy's current billing system (CSS) would be modified for gas-only
operations and provided to NewGasCo. The development costs of CSS
(calculated for Cinergy's gas rate base) would be charged to NewGasCo,
minus the amortized amount.
* NewGasCo would not be able to utilize the remaining electric company's
telecommunications, microwave, or radio infrastructure, and therefore would
need to establish its own separate systems.
3. Financial Services Transition Costs
Lost Economies: One-time financial services costs associated with the
divestiture of Cinergy's gas business and assets would be $22,900,000.
Amortized over 10 or 30 years depending on the category, these financial
services transition costs would result in annual lost economies of
$1,023,000.
Sources: The primary sources of lost economies would be: 1) financial
advisory fees, 2) equity underwriting costs, 3) debt issue costs, and 4)
costs to appraise gas assets to be used as loan collateral.
* Financial advisory fees: $100,000. Investment banking fees of $3
million for providing valuation and advisory services for a gas
divestiture. Fees amortized over 30 years.
* Equity underwriting costs: $533,000. Underwriting cost of $16 million
represents the low-end of a 4%-5% of equity offering estimate for initial
public offerings. Cinergy has averaged 3.7% of recent equity issues.
Underwriting costs amortized over 30 years.
* Debt issue costs: $290,000. Debt issue costs of $2.9 million represents
1% of NewGasCo debt. Costs amortized over 10 years.
* Gas collateral appraisal costs: $100,000. Appraisal fees of $1 million
associated with an appraisal of gas plant by an engineering firm to secure
NewGasCo debt issuance. Fees amortized over 10 years.
Assumptions
* NewGasCo would have a firm value of $705 million.
* NewGasCo would be capitalized with $415 million in equity (59%) and $289
million in debt (41%).
* Equity would be issued in an initial public offering. A sale to
existing shareholders would be ruled out because future competition between
Cinergy and NewGasCo would be inconsistent with common ownership.
* $289 million in debt would be issued with an average maturity of 10
years and 7.5% marginal cost of debt.
* All equity-related costs would be amortized over 30 years. All debt-related
costs would be amortized over 10 years.
4. Legal Transition Costs
Lost Economies: One-time fees for outside legal counsel to assist with the
divestiture of Cinergy's gas business and assets would be approximately
$800,000. Amortized over 30 years, these legal fees for divestiture would
result in annual lost economies of $27,000. The divestiture of gas assets
and the establishment of NewGasCo as a stand-alone company operating in
three states would involve a level of complexity that would require
additional assistance from outside legal counsel.
Sources: The source of these lost economies would be the legal fees
associated with the reliance on outside counsel for assistance with two
offerings: 1) an initial public offering of NewGasCo shares to achieve the
$417 million in equity financing, and 2) issuing bonds to achieve the $289
million in debt financing. The outside counsel would support the two
offerings through the following activities:
* Due diligence.
* Preparing and negotiating the underwriting agreement and secured debt
indenture.
* Developing the prospectus and registration statement, and providing
support during the comment process with the SEC.
* Providing legal support for Cinergy corporate executives and investment
bankers during the marketing of the new securities.
* Representation at the closing.
Assumptions
* Cinergy would rely on outside legal counsel to assist with the
complexity of divesting the gas assets from Cinergy and creating NewGasCo.
* These one-time legal fees for divestiture would be amortized over a 30-year
period.
5. Other One-Time Divestiture Costs
Lost Economies: Other one-time divestiture costs would total $7,450,000.
Amortized over 10 or 30 years depending on the category, these additional
divestiture costs would result in annual lost economies of $412,000.
Sources: These additional one-time divestiture costs would include the
following components.
* Moving and Office Set-up: $166,000. The one-time cost of moving the
gas business and setting up the offices for NewGasCo would be approximately
$5,000,000, amortized over a 30 year period.
* Legal Library Set-up: $125,000. The activities related to setting up
NewGasCo's legal library would cost approximately $1,250,000, amortized
over a 10 year period.
* Real Estate Right of Way: $81,000. The cost of separating gas right of
way documents from the rest of Cinergy's right of way documents would cost
approximately $800,000, amortized over a 10 year period.
* Environmental Systems: $40,000. The Environmental department would
incur a one-time divestiture cost of $400,000, amortized over a 10 year
period.
Assumptions
* Moving and office set-up costs would be amortized over 30 years.
* One-time divestiture costs relating to legal library set-up, real estate
right of way, and environmental systems would be amortized over 10 years.
C. Foregone Savings
Lost Economies: The loss of projected savings opportunities due to the
divestiture of Cinergy's gas business and assets would result in annual
lost economies of $2,000,000.
Sources: The primary source of these lost savings opportunities would
include the inability to benefit from further integration of the gas and
electric businesses.
* Streamline Design & Close: $1,500,000. Cinergy has planned savings from
development and application of common design standards for non-complex
portions of projects, streamlined project close-out, and common joint
trench design teams. Annual savings are expected to be $7.0 million. The
lost economies that would result from a gas divestiture would be $1.5
million.
* Construction and Engineering Management: $500,000. Cinergy has plans to
combine management of electric and gas engineering and construction.
Annual foregone savings would be $0.5 million.
Assumptions
* Planned reengineering savings will be achieved by Cinergy.
* As a result, divestiture of the gas business would cause a portion of
the expected savings to be lost.
D. Capitalized Labor
Lost Economies: Capitalized labor would represent annual lost economies of
$54,000.
Sources: The primary source of these lost economies would be
construction-related incremental labor requirements for NewGasCo.
The construction-related incremental labor requirements would be $1,624,000.
Amortized over a 30 year period, the increased capitalized labor
would result in annual lost economies of $54,000.
Assumption
Capitalized labor would be amortized over the average 30 year useful life
of gas construction projects.
E. Revenue Taxes
Lost Economies: Assuming that lost economies are recoverable through
increased rate revenue, the resulting increased revenue following
divestiture would result in additional revenue taxes. These additional
revenue taxes would total $2,288,000 annually.
Sources: The lost economies associated with these additional revenue taxes
would be:
* State of Ohio excise tax (4.98%), multiplied by the incremental taxable
receipts (i.e., lost economies recoverable through increased rate revenue)
* PUCO and Ohio Consumer Counsel maintenance tax
* KPSC maintenance tax
* Indiana URC gross receipts tax
Assumption
All lost economies incurred by NewGasCo would be recovered in rate base and
would result in additional taxable revenue.
F. Payroll Taxes
Lost Economies: Annual payroll taxes would increase by $1,067,000.
Sources: The primary source of lost economies would be payroll taxes
related to incremental labor costs.
Assumption
Payroll tax rate of 7.5%.
G. Increased Cost of Debt
Lost Economies: Cost of debt annual lost economies would be $723,000.
Sources: The primary source of lost economies would be the increased
interest cost associated with reissuing $289 million in NewGasCo debt. The
study estimates the marginal cost of debt for NewGasCo would be .25% higher
than Cinergy's current marginal cost of debt.
Assumptions
* Cinergy's current marginal pre-tax cost of debt is 7.25% with an 18 year
average maturity.
* NewGasCo debt would have an average maturity of 10 years and a pre-tax
cost of debt of 7.5%.
Section IV. Impact on Customers of NewGasCo
Customer impact: Assuming that NewGasCo's lost economies are recoverable
through rate relief, the customers of NewGasCo would incur an increased
annual cost of $54,247,000 as a result of the divestiture of Cinergy's gas
business and assets. This negative customer impact would result in average
cost increases of 11.7% ($9.73 per month) for gas-only customers and 4.4%
($10.11 per month) for combination gas and electric customers.
Sources: The primary source of customer impact would be rate increases
from the pass-through of recoverable lost economies ($52,423,000). In
addition, NewGasCo's combination customers would incur an additional annual
cost increase of $1,824,000 as a result of making monthly payments to two
energy providers instead of a single payment to a combination energy
provider. This increased payment cost would include an additional
$1,536,00 in additional postage costs and $288,000 in additional
check-writing costs.
* Increased Rates: $52,423,000. Assuming that NewGasCo's lost economies
are recoverable through rate relief, NewGasCo would need to increase the
rates paid by its 449,000 customers by 10.59%, ($52,423,000) in order to
provide the same return on rate base.
* Increased Payment Costs: $1,825,000. In addition, 89% of NewGasCo's
449,000 customers (400,000) are combination gas and electric customers of
Cinergy utility operating company subsidiaries. These 400,000 combination
customers would incur an annual payment cost increase totaling $1,824,000
from having two monthly payments instead of a single payment per month.
The additional postage would result in an annual increased cost of
$1,536,000, and the additional check-writing would result in an annual cost
of $288,000.
Assumptions
* Postage costs $0.32 per customer payment.
* Check costs $0.06 per customer payment.
Section V. Impact on the Remaining Electric Business and its Customers
Lost Economies: In addition to the increased annual operating costs
incurred by NewGasCo as a result of the divestiture of Cinergy's gas
business and assets, the remaining electric business would also suffer
annual lost economies in the amount of $33,879,000.
Sources: The primary sources of this impact on the remaining electric
company would be 1) the loss of economies from shared services between the
gas and electric businesses, 2) the hiring, placement, and training of new
employees, and 3) the increase in revenue taxes, assuming that the lost
economies are recoverable through increased rate revenue.
* Increased Labor: $32,098,000.
* Hiring, Placement, and Training of New Employees: $316,000.
* Increased Revenue Taxes: $1,465,000.
Assumptions
* Lost economies incurred by the remaining electric business would be
recoverable through rate relief, which would increase taxable receipts.
* Hiring, placement, and training would be one-time transition costs
amortized over 10 years.
ENDNOTES
/1/ For the sake of simplicity, this study posits NewGasCo as a single,
stand-alone gas company. However, in an actual divestiture, NewGasCo would
likely be structured in a similar manner to the current CG&E - an exempt
holding company under Section 3 (a) (2) of PUCHA, with separate operating
company subsidiaries in Kentucky and Indiana. This holding company
structure would be chosen for substantially the same reasons, including
state incorporation requirements, dictating CG&E's existing structure as an
exempt holding company.
<PAGE>
<TABLE>
<CAPTION>
Comparison of NewGasCo to Regional Gas Utilities
Exhibit 7. Comparison of NewGasCo to Regional Gas Utilities
Million cubic feet, $ million
<S> <C> <C> <C> <C> <C> <C>
Gas Sales to Gas
Ultimate Gas Operating Gas Gas Net
Number of Gas Customers Operating Revenues Operating Utility Plant
Company Customers (MCFs) Revenues ($/MCF) Income 12/31/96
Northern Illinois Gas Company 1,824,109 321,134 $1,610 $5.01 $152 $1,609
Columbia Gas of Ohio 1,286,350 193,672 1,319 6.81 84 753
Consumers Energy Company 1,485,205 265,136 1,275 4.81 101 918
Michigan Consolidated Gas Company 1,157,314 216,774 1,223 5.64 118 1,286
East Ohio Gas Company 1,110,001 195,798 1,119 5.72 96 739
Peoples Gas Light & Coke Company 829,354 155,082 1,098 7.08 116 1,180
Northern Indiana Public Service Company 644,730 121,003 732 6.05 72 547
Indiana Gas Company 473,320 90,984 549 6.03 51 583
NewGasCo 445,614 75,354 476 6.31 40 494
Illinois Power Company 392,535 72,407 348 4.81 35 361
Citizens Gas & Coke Utility 251,731 53,796 283 5.26 25 364
Dayton Power & Light Company 297,613 47,045 240 5.09 18 169
Louisville Gas & Electric Company 275,083 44,816 214 4.78 14 210
Central Illinois Light Company 199,536 34,624 203 5.86 18 199
North Shore Gas Company 136,073 26,940 172 6.37 20 190
Western Kentucky Gas Company 166,283 31,277 157 5.00 12 96
Central Illinois Public Service Company 168,739 25,306 155 6.14 11 147
Michigan Gas Utilities 138,997 25,911 142 5.47 12 129
Columbia Gas of Kentucky 136,441 20,184 137 6.77 13 115
Michigan Gas Company 98,116 19,466 103 5.31 8 86
Southern Indiana Gas & Electric Company 104,737 18,567 96 5.18 6 79
Southeastern Michigan Gas Company 96,088 17,759 91 5.12 8 98
West Ohio Gas Company 62,100 9,295 62 6.65 2 42
Battle Creek Gas Company 34,816 6,328 39 6.12 5 48
Northern Indiana Fuel & Light Company 31,514 5,971 36 6.06 2 45
Delta Natural Gas Company 35,102 4,648 33 7.11 5 76
Ohio Valley Gas Corporation 23,497 4,779 24 5.07 2 18
Citizens Gas Fuel Company 13,750 3,286 17 5.32 2 13
Illinois Gas Company 10,294 1,695 10 5.61 .4 6
Suburban Natural Gas Company 6,212 933 7 7.07 .3 4
Pike Natural Gas Company 6,219 1,051 6 5.60 .3 0
Consumers Gas Company 6,001 882 5 6.00 .4 2
Ohio Valley Gas 5,136 810 4 5.00 .3 3
Peninsular Gas Company 3,780 715 3 4.67 .1 2
Mt. Carmel Public Utility Company 3,645 538 2 4.42 0 1
Ohio Cumberland Gas Company 900 142,252 1 9.15 .1 1
Source: OPRI Natural Gas Database; EIA 176
</TABLE>
Exhibit 8. NewGasCo Organization Structure*
CEO Board of
3 Directors 12
Legal CFO COO Audit
32 4 2 13
Govt. Affairs Accounting 40 Customer
9 Services 369
Budget & Environmental 13
Forecasts 6
Gas
Communications 14 Operations 522
Facilities 52 Gas Supply 22
Human Sales and
Resources 16 Marketing 63
Information
Technology 45
Materials
Management 25
Rates 8
Real Estate
Right of Way 7
Shareholder
Services 5
Strategic
Planning 6
* NewGasCo would have a total of 1,275 full-time equivalent employees,
including 1,053 former Cinergy employees and 222 new hires.
<PAGE>
<TABLE>
<CAPTION>
Lost Economies Subtotals by Category
Exhibit 9. Lost Economies Subtotals by Category
<S> <C>
$ million NewGasCo
Category Lost Economies
A. Major Functions
1. Accounting $1,944
2. Audit 890
3. Board of Directors 1,515
4. Budgets & Forecasts 116
5. Corporate Communications and Community Affairs 2,156
6. Customer Services 4,973
7. Environmental 817
8. Executive Pay 696
9. Facilities and Site Services 3,245
10. Gas Operations 477
11. Gas Supply 114
12. Government and Regulatory Affairs 332
13. Human Resources 2,670
14. Investor Relations/Shareholder Servicing 495
15. Information Technology 4,678
16. Legal 3,072
17. Materials Management 3,910
18. Rates 437
19. Real Estate/Right of Way 405
20. Sales and Marketing 509
21. Strategic Planning/Corporate Development 668
22. Treasury 3,031
B. One-time Transition Costs 9,142
C. Foregone Savings 2,000
D. Capitalized Labor 54
E. Revenue Taxes 2,288
F. Payroll Taxes 1,067
G. Increased Cost of Debt 723
Total: $52,423
</TABLE>
