File No. 70-9577
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET
WASHINGTON, D.C. 20549
__________________________________________
AMENDMENT NO. 1 TO FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
____________________________________________
Cinergy Corp.
Cinergy Global Resources, Inc.
Cinergy Capital & Trading, Inc.
139 East Fourth Street
Cincinnati, Ohio 45202
(Name of companies filing this statement
and address of principal executive offices)
Cinergy Corp.
(Name of top registered holding company)
Andrew M. Turk
Vice President & Treasurer
Cinergy Corp.
(address above)
(Name and address of agent for service)
Applicants request the Commission to send notices, orders and
communications to the following (at the address listed above for
individuals affiliated with Cinergy Corp.):
William J. Grealis Madeleine W. Ludlow
Vice President/Cinergy Corp. Vice President/Cinergy Corp.
Chief Strategic Officer/Cinergy Chief Financial Officer/Cinergy
Corp. Corp.
Cheryl M. Foley Michael J. Cyrus
Vice President/Cinergy Corp. Vice President/Cinergy Corp.
President/Cinergy Global Resources, President/Cinergy Capital &
Inc. Trading, Inc.
William C. Weeden William T. Baker, Jr.
Skadden Arps Slate Meagher & Flom Thelen Reid & Priest LLP
1400 New York Avenue, N.W. 40 West 57th Street
Washington, D.C. 20005 New York, New York 10019
<PAGE>
TABLE OF CONTENTS
TABLE OF CONTENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . .1
Item 1. Description of Proposed Transactions. . . . . . . . . . . . .3
A. Introduction . . . . . . . . . . . . . . . . . . . . . . . . .3
1. Growth Cap/Restructuring Cap; Business Imperatives . . . . . . .3
2. Satisfaction of Applicable Standards . . . . . . . . . . . . . .8
B. Industry Dynamics/Company Growth Strategy. . . . . . . . . . .9
1. State Restructuring/Generation Divestitures. . . . . . . . . . 10
2. Foreign Utility Privatizations & Acquisitions. . . . . . . . . 12
3. Cinergy's Growth Strategy/5 in 5 on 5 Goals. . . . . . . . . . 14
C. Proposed Financing Authority . . . . . . . . . . . . . . . . 14
1. Existing Authority . . . . . . . . . . . . . . . . . . . . . . 15
2. Proposed Authority . . . . . . . . . . . . . . . . . . . . . . 15
D. Cinergy and Subsidiaries/Overview. . . . . . . . . . . . . . 23
E. EPAct Projects/Domestic/ECBU . . . . . . . . . . . . . . . . 25
1. Background; Industry Trends Impacting EWG Projects . . . . . . 25
2. Cinergy's Energy Commodities Business Unit . . . . . . . . . . 27
3. Power Marketing & Physical Assets: Risk Mitigation . . . . . . 30
4. Transfer to EWG Status of CG&E/PSI Generation. . . . . . . . . 31
F. EPAct Projects/Foreign/IBU . . . . . . . . . . . . . . . . . 39
1. Cinergy's International Business Unit. . . . . . . . . . . . . 39
2. IBU Investments/December 31, 1999 . . . . . . . . . . . . . . 42
3. Future IBU Investments . . . . . . . . . . . . . . . . . . . . 49
Item 2. Fees, Commissions and Expenses. . . . . . . . . . . . . . . 52
Item 3. Applicable Statutory Provisions . . . . . . . . . . . . . . 52
A. Project Review Procedures/Risk Mitigation Techniques . . . . 55
1. Strategic Planning Process . . . . . . . . . . . . . . . . . . 55
2. Global Risk Management Function. . . . . . . . . . . . . . . . 56
3. Capital Investment Review Process/Project Safeguard. . . . . . 57
4. International Project Review and Performance Management. . . . 59
5. Risk Mitigation/Specific Project Risks . . . . . . . . . . . . 60
6. General Factors Mitigating Project Risks . . . . . . . . . . . 65
B. Financial Results & Other Benefits/Prior Investments . . . . 67
C. Current Financial Condition of Cinergy & Operating Companies 68
1. Cinergy. . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
2. Operating Companies. . . . . . . . . . . . . . . . . . . . . . 69
D. Financing Plan for New Investments; Merrill Lynch Letter . . 71
E. Protection of Operating Companies; State Commission Letters. 74
F. Merger Commitments/Ohio Electric Deregulation . . . . . . ..76
1. Indiana. . . . . . . . . . . . . . . . . . . . . . . . . . . . 77
2. Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
3. Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
4. Conclusion/Merger Commitments & Ohio Deregulation . . . . . . 84
Item 4. Regulatory Approval . . . . . . . . . . . . . . . . . . . . . 84
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . . . . . 84
Item 6. Exhibits and Financial Statements . . . . . . . . . . . . . . 86
(a) Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . 86
(b) Financial Statements . . . . . . . . . . . . . . . . . . . . 87
Item 7. Information as to Environmental Effects . . . . . . . . . . . 88
SIGNATURE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89
<PAGE>
Item 1. Description of Proposed Transactions
A. Introduction
By order dated March 23, 1998 (HCAR No. 26848) ("100% Order"), the
Commission amended certain prior orders issued to Cinergy Corp. ("Cinergy"
or the "Company"), a registered holding company under the Public Utility
Holding Company Act of 1935, as amended ("Act" or "1935 Act"), authorizing
Cinergy to apply the proceeds of certain financing transactions to an
aggregate investment in exempt wholesale generators ("EWGs") and foreign
utility companies ("FUCOs" and collectively with EWGs, "EPAct Projects")
not to exceed 100% of Cinergy's consolidated retained earnings ("100%
Cap"), subject to various conditions. (As used herein, "aggregate
investment" and "consolidated retained earnings" have the meanings assigned
in Rule 53(a)(1).)
1. Growth Cap/Restructuring Cap; Business Imperatives
Cinergy now requests greater financing authority for its general
business activities, including expanded investment authority for EPAct
Projects bounded by two separate investment ceilings.
First, Cinergy proposes a new investment cap (referred to below as
the "Growth Cap"), intended to permit growth in its wholesale supply and
international businesses, equal to the sum of Cinergy's consolidated
retained earnings from time to time plus $2 billion. Cinergy's existing
investments in EPAct Projects would count toward this cap, as well as new
investments going forward. On a pro forma basis at December 31, 1999,
Cinergy would have had approximately $2.44 billion available for further
investments, had this new cap then been in place.
Second, in light of comprehensive electric industry restructuring
legislation recently enacted in Ohio and anticipated within the next
several years for Indiana, Cinergy proposes a separate investment cap to
accommodate a purely internal reorganization of utility assets that Cinergy
already owns, by which its utility subsidiaries, The Cincinnati Gas &
Electric Company, an Ohio electric and gas utility ("CG&E"), and PSI
Energy, Inc., an Indiana electric utility ("PSI"), would transfer their
electric generating facilities to one or more newly created EWG affiliates.
This second cap (referred to below as the "Restructuring Cap") would be
equal to the net book value of the assets transferred. This "investment"
category, then, covers not new or incremental investments, but merely an
intrasystem reorganization of assets that the Cinergy system has owned for
many years. The Commission's staff has formally recommended that
restructuring transactions such as these be exempted from the Act./1/
More specifically, over a five-year period beginning with issuance
of the Commission's order ("Five-Year Period"), Cinergy seeks to apply
proceeds from the proposed financing transactions described later in this
application to make additional investments in EPAct Projects, provided
that:
1. Growth Cap. Cinergy's aggregate investment shall not exceed
the sum of (a) an aggregate investment equal to 100% of consolidated
retained earnings plus (b) $2,000,000,000 (collectively, "Growth Cap"),
exclusive of any investments by Cinergy in one or more EWG affiliates
formed to acquire CG&E's and PSI's generating assets.
2. Restructuring Cap. With respect solely to the transfer of CG&E's
and PSI's generating assets to one or more EWG affiliates, Cinergy's
aggregate investment in such EWGs shall not exceed the net book value of
such generating assets at the time of transfer (the "Restructuring Cap").
The current net book value of CG&E's and PSI's generating assets is
approximately $2.9 billion.
At December 31, 1999, Cinergy's aggregate investment and
consolidated retained earnings were approximately $580 million and $1,023
million, respectively, leaving available investment capacity under the 100%
Order of approximately $443 million. Cinergy's International and Energy
Commodities Business Units have budgeted additional investments in EPAct
Projects for the year 200 in excess of $700 million (exclusive of
the Duke transaction described below).
The remaining capacity is thus inadequate for Cinergy to grow its
business even in the near-term, let alone over the next five years. Even
if Cinergy's investment balance were zero, and all the capacity under the
100% Order were available, this would still be the case.
The problem is readily illustrated. In September 1999, nonregulated
affiliates of Cinergy and Duke Energy Corporation announced a 50-50 joint
venture to develop, construct, own and operate 1400 megawatts ("MW") of
gas-fired, merchant peaking EWG facilities in Ohio and Indiana. In July
1999, Cinergy sold its ownership in Midlands Electricity plc., a British
regional electric company ("Midlands"). Without this sale, freeing up over
$450 million in capacity, the 100% Cap would have precluded Cinergy's
participation in the joint venture with Duke, given the sizable capital
commitments required. This transaction is very important to Cinergy. The
new peaking facilities will mitigate the Company's near-term supply risks,
arising from growing summer peak demand in the Midwest and related price
volatility. As this transaction exemplifies, with deregulation of the
electric industry expanding throughout the United States, giving retail
customers the right to choose their supplier and requiring incumbent
utilities to exit the generation business, new generating facilities are
increasingly being built for nonutility ownership. At the same time,
traditional utilities are increasingly selling existing generation assets
to nonutility owners. The 100% Cap does not accommodate this fundamental
shift in ownership of electric generating facilities, from franchised
utilities to competitive EWG suppliers.
More broadly, Cinergy's proposal is driven by the following
industry developments, strategic goals and regulatory imperatives:
Industry Changes; "Utility"/"Nonutility:" Utility markets throughout
the world continue to be restructured, moving away from government
regulation and ownership toward deregulated, competitive market
structures. In the United States, wholesale electricity markets are
already competitive, and most states have adopted or are considering
proposals granting retail customers the right to choose their electric
supplier, often requiring incumbent utilities to reduce market power
by divesting generating assets. Abroad, countries are revising their
laws to encourage foreign investment and private ownership of utility
assets; many are "privatizing" state-owned utility systems, auctioning
all or part of those systems to private investors including American
utilities. Spurred by these reforms, the industry has become
increasingly global in scope, with foreign utilities acquiring U.S.
utilities and power plants - witness the recent acquisitions of U.S.
utilities by ScottishPower, National Grid and most recently PowerGen -
just as many U.S. utilities expand their operations abroad.
As the Commission itself aptly observed in its recent concept release
concerning foreign registered holding companies, the utility business
is "rapidly evolving into a global industry," characterized by "a
large demand for American utility expertise and significant investment
opportunities abroad for U.S. companies."/2/
In the U.S., competition and deregulation are rede fining the utility
business. The prototype "utility company" - vertically integrated,
operating entirely on a local or regional basis, deriving
substantially all earnings from regulated, monopoly sales - is or soon
will be defunct. To prepare for the onset of fully competitive
markets, utilities are "reinventing" themselves - restructuring their
businesses, including through asset sales (whether voluntarily or as a
result of state or other regulatory mandates), pursuing mergers and
acquisitions including "convergence" gas/electric transactions, and
diversifying into non-traditional businesses, such as wholesale energy
marketing and foreign utility acquisitions. To compete effectively in
this new environment, Cinergy must have the opportunity to build scale
and scope in these non-traditional - but now not only commonplace, but
integral and vital - "nonutility" businesses.
Cinergy's 5 in 5 on 5 Growth Strategy: Against this backdrop of
growing competition and restructuring, Cinergy is striving to
transform itself into a growth energy company. In 1997, Cinergy
announced its goal of competing with and becoming one of the
industry's top five companies within five years based on five
performance measures. The "top five" performance measures are market
capitalization, number of customers, productivity, and - directly
relevant here - wholesale energy marketing and international
operations. The success of these two platforms hinges on Cinergy's
ability to invest in EPAct Projects at levels sufficient to create
superior earnings growth.
Generation Divestitures; Foreign Privatizations/Acquisitions: One of
the most significant industry dynamics is the growing divestiture of
generating assets in the U.S. by traditional electric utilities, in
many cases under legislative or regulatory mandates. Since 1997, U.S.
investor-owned electric utilities have sold approximately 70 gigawatts
("GW") of generating assets. The combination of these completed
sales, together with pending sales transactions at December 31, 1999,
cover 24 % of the total installed generation capacity owned by U.S.
investor-owned electric utilities at December 31, 1997. If transfers
or proposed transfers to unregulated affiliates are also included, the
total rises to 31.6 %./3/
Another key dynamic is the privatization of state-owned utility
systems by foreign governments together with strategic investments in
privatized utilities or their assets by U.S. companies.
Privatizations emerged as an import ant trend early in the 1990s, but
the pace of transactions, including secondary sales of privatized
companies or their assets, has accelerated in the last several years.
In 1997 and 1998, over a hundred transactions closed for electric
assets alone, with a total dollar value of approximately $56 billion,
substantially in excess of the total dollars invested in the preceding
six years./4/ By year-end 1998 forty countries had privatized all or
part of their power sectors, with nine selling off assets for the
first time in 1998./5/ U.S. utilities have played an increasingly
large role as acquirers of privatized facilities, in connection with
both the initial privatizations and secondary offerings. Exhibit L-1
lists over 30 investments by U.S. utilities of at least $400 million
since 1995.
The 100% Cap, covering investments in both U.S. wholesale generating
facilities and foreign utility assets, prevents Cinergy from actively
participating as a buyer or bidder in even one of these markets, much
less both. The reason is the lar ge dollar investments required to
close major transactions, as compared to the investment capacity
available under the 100% Cap. The capability to bid on the full range
of available opportunities in both markets - including especially the
larger, more significant transactions - is vital to Cinergy's growth
strategies, just as it is with Cinergy's competitors. To survive in
the restructured utility industr y, Cinergy needs to compete on an
equal footing with other participants.
Transfer to EWG Affiliates of CG&E/PSI Generation: Beyond growing its
business through new projects, Cinergy needs greater investment
authority so that it can transfer its operating companies' generating
assets to EWG affiliates, to accommodate state deregulation of its
franchised electric businesses.
Together CG&E and PSI own all of or partial interest s in 17 mostly
coal-fired, electric generating stations located in Ohio, Indiana and
Kentucky, having a total installed capacity allocable to these
ownership interests of approximately 11,200 MW and a current net book
value of approximately $2.892 billion ($1.75 billion of which
represents CG&E's share).
Recently enacted electricity deregulation legislation in Ohio permits
all retail customers in the state to choose their electric supplier
beginning January 1, 2001. The legislation promotes divestiture or
restructuring of generating assets held by incumbent utilities.
Thus the legislation deregulates electric generation and supply and
requires incumbent utilities to "unbundle" the competitive retail sale
of generation function from the electric transmission and distribution
functions, moving the former into a separate corporation. After
January 1, 2001, Cinergy may not market or supply competitive electric
services to retail customers in Ohio through CG&E, but only through an
affiliated power marketer to which CG&E has transferred its
competitive retail sale of generation function pursuant to a corporate
separation plan and affiliate code of conduct approved by the Public
Utilities Commission of Ohio ("P UCO"). The new law also requires
incumbent utilities to develop incentives encouraging 20 percent of
the load in each customer class to switch providers by the midpoint of
the five-year market development period, but in any event by December
31, 2003.
CG&E filed its proposed transition plan with the PUCO in December,
1999. As part of that filing, CG&E has requested approval (and is
seeking related approvals from the Indiana and Kentucky commissions)
to transfer all of its generat ing facilities to one or more EWG
affiliates. The PUCO must issue an order on the proposed transition
plan by October 31, 2000.
Although Indiana has not yet enacted electric industry restructuring
legislation, nor is proposed legislation currently pending, Indiana's
"alternative utility regulation" statute, enacted in 1995 in
recognition of increasing competiti on for energy services in Indiana
and the United States, confers considerable flexibility on the Indiana
Utility Regulatory Commission ("IURC") to approve jurisdictional
transactions upon a showing of public interest. Pursuant to this "alt
reg" statute, or subsequently enacted customer choice legislation,
Cinergy anticipates that during the Five-Year Period it may also
determine to transfer all or a substantial portion of PSI's generating
assets to EWG affiliates, consistent with applicable state law,
including any requirement for IURC approval.
2. Satisfaction of Applicable Standards
In the second half of this application, Cinergy will show that its
proposal satisfies all relevant standards under the Act. In particular,
with respect to Rule 53(c), investing at the higher level proposed herein:
"will not have a substantial adverse impact upon the financial
integrity of [Cinergy's] holding company system;" and
"will not have an adverse impact on any utility subsidiary of
[Cinergy], or its customers, or on the ability of any affected
state commission to protect such utility or its customers."
As a preliminary matter, Cinergy respectfully submits that a basic
distinction must be drawn between investments in new assets and assets that
Cinergy already owns. The Restructuring Cap concerns solely an internal
transfer of generating assets, from the regulated to the nonregulated side
of Cinergy's business, in response to or anticipation of state
deregulation. The underlying transactions do not in substance involve any
new or incremental "investment." Cinergy wholeheartedly supports the view
earlier expressed by the Division of Investment Management that in order
not to impede industry restructuring and the transition to competitive
markets, the Commission "should consider rules to exempt a corporate
restructuring that does not result in the addition of new utility
operations."/6/ That is precisely the case here. In any event, Cinergy
anticipates no material increase in its consolidated debt to finance these
restructuring transactions. Any incremental debt at the Cinergy level will
be largely offset by reduced debt at CG&E/PSI. Cinergy will transfer the
assets at the lowest transaction cost practicable. The internal transfers
and associated financings should not themselves have any material adverse
impact on the credit ratings of Cinergy, CG&E or PSI. Any potential
reduction would result rather from the fundamental event underlying the
reorganization - state deregulation and loss of monopoly supplier status.
Regarding the Growth Cap, Cinergy retained Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch") to advise it as to the
expected impact of the financing of an incremental $2 billion of recourse
investments (in addition to the current authority capped at retained
earnings) on the credit ratings of Cinergy, CG&E and PSI. On the basis of
and subject to the matters set forth or referred to in its letter dated
February 16, 2000, Merrill Lynch was of the view that, as of such date, the
credit ratings of Cinergy, CG&E and PSI would not be expected to fall below
investment grade due to investments in EPAct Projects covered by the Growth
Cap as outlined in this application. The foregoing notwithstanding,
Cinergy will not issue any additional debt to finance investments in EPAct
Projects covered by the Growth Cap if Cinergy's senior debt is not rated
investment grade by at least two of the major ratings agencies.
All three of the state commissions that regulate Cinergy's franchised
utility businesses - the PUCO, the IURC and the Kentucky Public Service
Commission ("KPSC")- have submitted letters to this Commission stating
that, based on the commitments of Cinergy referred to in such letters, and
subject to the qualifications stated therein, the proposed transactions
will not have an adverse impact on their ability to protect Cinergy's
utility subsidiaries or retail customers.
Beyond these factors, other important considerations support Cinergy's
assertion that the statutory standards are met here. Among these are
Cinergy's project review procedures. Cinergy submits proposed investments
to a series of pre-investment screens and reviews; and after the decision
is made to commit funds, the Company closely monitors project performance,
using effective measures to reduce risks. Cinergy's track record for EPAct
Projects has been developed entirely in the international arena, and
attests to the Company's skill in selecting and developing projects,
mitigating risks, and extracting maximum value.
In 1998 and 1999, Cinergy incurred losses in its wholesale power
marketing business, but these losses were not associated with EPAct
Projects. Rather, the losses arose in part from the very fact that the
Company did not have sufficient physical assets to meet all of its
wholesale supply obligations during periods of extraordinary demand. A
central purpose of this application is to secure sufficient authority to
invest in such assets.
B. Industry Dynamics/Company Growth Strategy
Fundamental industry dynamics impel Cinergy's proposal, specifically:
1. the growing divestiture of power plants in the
U.S. by traditional utilities, often due to
state restructuring mandates, and
2. the increase in privatizations or other sales
to private investors of foreign utility
companies and assets.
The 100% Cap - which covers investments in domestic wholesale electric
generating facilities as well as foreign utilities - effectively precludes
Cinergy from being able to compete for major opportunities within both
categories of projects. The basic reason is the large size of
representative transactions relative to the investment cap. In fact, even
within just one of these areas - generation divestitures or privatizations
- - Cinergy is hamstrung in its ability to pursue major transactions.
Cinergy's wholesale energy marketing and international businesses are
central to the Company's corporate strategy for success in a competitive
environment. Neither can succeed if both are foreclosed from making the
necessary investments in physical assets.
Cinergy is competing against both U.S. and foreign companies for EPAct
Projects, and the great majority of these companies are not saddled
with artificial investment constraints.
Asset investments of this type offer more than the opportunity to
earn a return in the market. They also provide a necessary risk mitigation
alternative which in many cases cannot be replicated financially. This is
especially important for Cinergy's wholesale power marketing business.
All of these points are elaborated immediately below.
1. State Restructuring/Generation Divestitures
Divestiture of generating assets by vertically integrated utilities
is a hallmark of the ongoing restructuring of the U.S. electric industry.
Industry restructuring was set in motion by federal initiatives dating back
to the late 1970s. Only in the last several years, by contrast, have the
states begun phasing in electric competition at the retail level.
These federal initiatives - the Public Utility Regulatory Policies
Act of 1978 ("PURPA"), the Energy Policy Act of 1992 and Orders 888 and 889
issued by the Federal Energy Regulatory Commission ("FERC") in 1996,
requiring utilities to provide non-discriminatory, open-access transmission
service upon request - have introduced competition into wholesale power
markets. While FERC Orders 888 and 889 required "functional" unbundling of
transmission from generation by vertically integrated utilities, they did
not mandate legal separation.
The states have taken the lead in promoting competition at the
retail level. Their efforts began in earnest following Orders 888 and 889.
As of March 1, 2000, 24 states had implemented legislation or regulatory
orders that will permit retail customers to choose their electricity
supplier, and nearly all of the remaining states were actively considering
similar "retail access" or "customer choice" proposals./7/ Although each
state's plan differs in details, all have certain common features,
including granting all customers the right to choose their supplier by a
date certain (ranging between 1998 and 2003) and allowing incumbent
utilities recovery of at least some portion of "stranded assets" (the
remaining costs of uneconomic generating or regulatory assets), while
obligating them to provide distribution service to competing suppliers./8/
In addition, many of the plans compel local utilities to sell their power
plants, often but not always to nonaffiliates, in order to reduce market
power and bring in new competitors. (Restructuring initiatives in the
three states in which Cinergy's utility subsidiaries provide retail service
are discussed later.)
Pursuant to these state restructuring mandates, conditions imposed
by the FERC in merger proceedings, and/or voluntary, strategic decisions,
increasing numbers of traditional utilities are auctioning off their
generating assets in complete or partial divestitures. This important
trend began to emerge only in late 1997, well after Cinergy filed with the
Commission to invest at the 100% level.
For the three-year period ending December 31, 1999, largely under
the impetus of state restructuring mandates, U.S. investor-owned utilities
sold generating assets with total installed capacity of approximately 69
GW. The total sales price was $24.8 billion, as against a total book value
of $11.7 billion, or over twice book value./9/ The great majority of the
buyers have been nonutility affiliates of investor-owned electric
utilities. Quite often, sellers of assets in one region have been buyers
in another. For example, while PG&E Corp. was divesting power plants on
the West Coast, US Generating Co. ("US Gen"), its affiliated independent
power developer, was purchasing generation being divested by utilities in
the East, such as NEES. Foreign companies or their U.S. affiliates have
also been major buyers. Examples include Sithe Energies and Amergen, the
joint venture between British Energy and PECO Energy formed to acquire and
operate nuclear generation facilities worldwide.
Of the total installed generating capacity of investor-owned
utilities in place on December 31, 1997 (by which date a number of
significant divestitures had already occurred), 4.5 percent was sold during
1998; an additional 13 percent, including fossil, hydro and
nuclear-powered facilities, was sold in 1999; and a further 6.5 percent was
under contract for sale, but had not yet closed, at year-end 1999. The
combination of the completed and pending sales involves 24 percent of the
total generation capacity in place just two years ago. In addition, at
least nine investor-owned electric utilities have announced their intention
to transfer generation assets to affiliated unregulated subsidiaries. If
these generating assets are included with those divested outright, a total
of 31.6 percent of the total installed capacity held by investor-owned
utilities at year-end 1997 has been or will be soon transferred to
nonutility ownership, as a result of transactions in just the last two
years. This trend - increasing nonutility ownership of U.S. electric
generating assets - will only become more widespread, as more states enact
comprehensive legislation requiring separation of the competitive
generation business from the regulated transmission and distribution
business./10/
As noted, in general assets have been sold at a premium over book
value. Reasons include the competitiveness of the auctions and the quality
and size of the assets sold, often in bundles of multiple power plants. In
March 1999, for example, Unicom, the holding company for Commonwealth
Edison, agreed to sell 16 power plants in Illinois to Edison Mission, an
affiliate of California-based Edison International, for $4.8 billion. In
November 1998, GPU agreed to sell 23 plants to Sithe Energies, a New
York-based affiliate of the French company, Vivendi S.A., for $1.72
billion. Consolidated Edison of New York sold its New York City electric
generating plants in three packages, an 1,855 MW bundle to Orion Power
Holdings (a joint venture including affiliates of Baltimore Gas and
Electric Co. and Goldman Sachs) for $550 million, a 2,168 MW bundle to
Brooklyn-based KeySpan Energy for $597 million, and a third bundle,
representing 1,456 MW, to NRG Energy, Inc., a subsidiary of Northern States
Power Co., for $505 million. In August 1998, Edison Mission agreed to buy
a single 1,896 MW plant from GPU and New York State Electric & Gas for $1.8
billion. And in one of the first significant auctions, NEES agreed in
August 1997 to sell 18 power plants to a subsidiary of US Gen for $1.59
billion. Exhibit K-1 lists more than 20 generation divestitures or
secondary sales announced since August 1997 with sales prices greater than
$250 million.
As discussed below, Cinergy is committed to growing its wholesale
electricity marketing business to "top five" status. To accomplish this
goal, Cinergy must have the flexibility both to acquire existing generating
facilities and/or to develop and construct new generating facilities in key
regions of the U.S., which would be operated as EWGs. Ownership of
physical assets bolsters Cinergy's wholesale energy commodity business both
by hedging price risks and permitting growth into new regions, with an
asset base to anchor the wholesale trading operations. Conversely,
Cinergy's power marketing business, with its trading expertise and
knowledge of the marketplace, serves to maximize the value of EWG
facilities that Cinergy acquires, while mitigating associated risks.
Given the importance to the Company of developing its wholesale
energy marketing business, the ability to bid on large generation
divestitures by other utilities is an important strategic option. The 100%
Cap severely limits this option, because of the size of many representative
transactions. This constraint - one not confronting Cinergy's
non-registered competitors - is compounded by the fact that the cap covers
foreign utility acquisitions as well. These too are essential to Cinergy's
corporate goals. But just as with generation divestitures in the U.S.,
major foreign privatizations and secondary offerings typically require the
ability on the part of the purchaser to make sizable recourse investments
to close the deal.
2. Foreign Utility Privatizations & Acquisitions
Restructuring and deregulation of energy markets is hardly an
American phenomenon; many nations have moved quicker in introducing
competition. All over the world countries are rewriting legal codes to
foster competition and permit private ownership of utility assets. Foreign
governments are "privatizing," or selling off, state-owned utility systems,
seeking to raise cash, reduce prices to customers, and improve operations.
Deregulation and privatization of energy markets, together with worldwide
growth in energy demand, presents Cinergy with unprecedented investment
opportunities. As the Commission recently declared, the utility business
is "rapidly evolving into a global industry," marked by "a large demand for
American utility expertise and significant investment opportunities abroad
for U.S. companies."/11/ And in his last State of the Union Address,
President Clinton called the trend toward globalization "the central
reality of our time."
For the period 1991 through 1998, international power privatization
activity (including secondary sales of privatized companies and assets)
comprised over 220 separate transactions valued at approximately $93
billion. The pace of activity has been accelerating. From 1991 through
1996 approximately $36.4 billion changed hands in 120 transactions,
compared to $56.5 billion in 104 transactions in 1997 and 1998. Total
dollars invested for 1997 alone nearly matched that of the preceding
six-year period./12/ As of December 31, 1998, 40 countries had privatized
electric assets, nine selling off assets for the first time in 1998.
Although privatizations have become increasingly widespread, a small number
of countries have accounted for the bulk of the activity. More than
two-thirds of the total dollars invested in electric privatizations over
the period 1991 through 1998 have been invested in six countries -
Argentina, Australia, Brazil, Columbia, Spain and the United Kingdom
("U.K.")./13/
Just as privatization activity has been concentrated, so have major
transactions required large dollar investments. The average size for
transactions closed in 1997-1998 was over $500 million. Exhibit L-1 lists
acquisitions by U.S. utilities of privatized or publicly-traded foreign
utilities, including subsequent "sell-downs" by initial purchasers, dating
back to 1995, when the pace of transactions markedly increased. The chart
lists over 40 acquisitions where the purchase price (or the identified
company's allocable share of the total purchase price, for joint venture
acquisitions) was at least $400 million. The transactions include
Cinergy's and GPU Inc.'s joint acquisition in 1996 of Midlands Electricity
plc, as well as Cinergy's sale of its 50 percent share to GPU in July 1999.
As noted above, Cinergy has completed one major foreign utility
acquisition, acquiring 50% of Midlands in 1996 for approximately $1.3
billion, including an equity investment of $500 million. Since then,
Cinergy has also bought privatized electric utility assets in Zambia and
Estonia, in significantly smaller transactions. The Midlands acquisition
was accomplished under the Commission's "safe harbor" for EWG and FUCO
investments, where the total investment does not exceed an amount equal to
50% of consolidated retained earnings.
The Midlands acquisition exhausted Cinergy's capacity under the
safe harbor, however. In 1997 Cinergy applied to the Commission for
greater investment authority, and in 1998 the Commission authorized Cinergy
to invest recourse funds equal to 100% of consolidated retained earnings.
But in practical terms this increase resulted in only $500 million in
additional investment capacity. Cinergy's July 1999 sale of its interest
in Midlands to GPU temporarily freed up significant investment capacity,
but most of that has now been exhausted by the Duke transaction.
3. Cinergy's Growth Strategy/5 in 5 on 5 Goals
Cinergy's wholesale marketing and international businesses are
critical elements of Cinergy's overall strategy to compete in a deregulated
environment.
With the advent of electric industry restructuring, Cinergy has
taken aggressive steps to accommodate change. The Company is focused on
transitioning from a mid-sized regulated utility to a large-cap growth
energy company. The Company believes that over time only the larger
companies will prevail and that it must generate superior and sustainable
earnings growth from its nonutility businesses, given modest sales growth
(2-3%) in its retail utility businesses and the inevitable loss of
customers and revenues when those businesses are fully open to competition.
In this context, Cinergy announced in 1997 its goal of becoming one
of the top five U.S. utilities by 2002 on five criteria - market
capitalization, total U.S. retail electric and gas customers, productivity,
wholesale electric and gas marketing, and net income from international
operations./14/
To date, Cinergy has made limited progress toward achieving "top
five" status. Although Cinergy's generating plants rank in the top five in
productivity (based on 1998 data),/15/ the energy marketing operations do
not rank among the industry's top ten when measured by volume of sales.
Cinergy's international operations ranked ninth in percentage contribution
to earnings (7.8%) and fifth in percentage contribution to total revenues
(25%), based on 1997 data (excluding extraordinary items). With respect to
market capitalization and customers, ongoing fundamental changes occurring
within the industry have given rise to increasing consolidation, which has
widened the gap separating Cinergy from top five status.
A merger or business combination is necessary for Cinergy to reach
the desired scale in market cap and customers. That is not necessarily the
case for attaining top tier status in energy marketing and international
operations. Success in these areas hinges on the ability to make
investments in physical assets at a level sufficient to build scale and lay
the foundation for sustained growth. The present application is essential
for this purpose and the larger goal of enabling the Company to succeed in
a competitive, deregulated environment.
C. Proposed Financing Authority
In connection with the request herein for increased EPAct Project
investment authority, Cinergy requests revisions to outstanding financing
orders, as explained below.
1. Existing Authority
Under the terms of the following orders, the Commission authorized
Cinergy to issue common stock, debt securities and guarantees for general
corporate purposes including, among other things, investing in EPAct
Projects up to the 100% Cap:
1. Short-term debt/$2 billion overall debt cap/common stock. Order
dated January 20, 1998, HCAR No. 26819 ("January 1998 Order"), in
which the Commission authorized Cinergy to issue and sell, from
time to time through December 31, 2002, (a) short-term notes and
commercial paper in an aggregate principal amount not to exceed -
together with the principal amount of the debentures referred to
below and (prior to the March 1999 Order) certain guarantees - $2
billion at any time outstanding, and (b) up to 30,867,385
additional shares of Cinergy common stock, $.01 par value per
share (i.e., 30 million new shares plus the remaining shares
authorized for issuance under a prior order).
2. Long-term debentures. Order dated August 21, 1998, HCAR No.
26909 ("August 1998 Order"), in which the Commission authorized
Cinergy to issue and sell, from time to time through December 31,
2002, unsecured debentures with maturities of two to 15 years in
an aggregate principal amount at any time outstanding not to
exceed $400 million, subject to the overall debt cap of $2
billion just noted.
3. Guarantees; $1 billion cap. Order dated March 1, 1999, HCAR No.
26984 ("March 1999 Order"), in which the Commission (a)
consolidated authority granted to Cinergy under prior orders to
issue guarantees of obligations of system companies, while (b)
imposing an overall cap of $1 billion (separate from the $2
billion debt cap) on the amount of Cinergy guarantees issued and
outstanding from time to time through December 31, 2003. This
order modified the January 1998 Order by removing guarantees from
the coverage of the $2 billion debt cap.
Among other things, the March 1999 Order also expanded Cinergy's
existing authority to create intermediate subsidiaries to hold
interests in nonutility businesses, including EPAct Projects.
2. Proposed Authority
Cinergy now proposes to replace the January and August 1998 Orders
in their entirety, and to supersede the March 1999 Order solely to the
extent of the guarantee authority granted therein, by new financing
authority the terms of which are set forth below. As with the existing
authority, the new authority would be used for general corporate purposes,
not merely to fund investments in EPAct Projects (see "use of proceeds"
below)./16/
The requested authority is intended to enable Cinergy to respond
quickly and efficiently to the Company's financing needs and available
conditions in capital markets. The general approach embodied in this
request is consistent with similarly broad financing authority granted to
other registered holding companies in recent orders./17/
Subject to the terms and conditions described below, from time to
time through the Five-Year Period, Cinergy proposes (A) to increase its
total capitalization (excluding retained earnings and accumulated other
comprehensive income/18/) by $7,000,000,000 through issuance and/or sale of
any combination of debt or equity securities, whether directly or through
one or more special-purpose subsidiaries ("Aggregate Financing Limit"), and
(B) to increase the level of its guarantees outstanding at any time to an
aggregate of $2,000,000,000 ("Guarantees Limit"), all without further
authorization from the Commission, including with respect to the terms of
sale or issuance. At December 31, 1999, Cinergy's total capitalization
(excluding retained earnings and accumulated other comprehensive loss)
totaled approximately $2 billion, and Cinergy's subsidiaries and affiliates
had debt or other obligations outstanding totaling $515 million backed by
Cinergy guarantees.
In addition to the other terms and conditions hereinafter specified,
the following restrictions will govern the proposed financing transactions:
(i) Except in the case of the transactions covered by the
Restructuring Cap, common equity will comprise at least 30
percent of Cinergy's consolidated capitalization (based upon
the financial statements included in Cinergy's most recent
quarterly report on Form 10-Q or annual report on Form 10-K);
(ii) the interest rate on any series of debt security with a
maturity of one year or less will not exceed the greater of
(a) 300 basis points over the comparable term London interbank
offered rate, or (b) a rate that is consistent with similar
securities of comparable credit quality and maturities issued
by other companies;
(iii)the interest rate on any series of debt security with a
maturity greater than one year will not exceed the greater of
(a) 300 basis points over the comparable term U.S. Treasury
securities or other market-accepted benchmark securities, or
(b) a rate that is consistent with similar securities of
comparable credit quality and maturities issued by other
companies;
(iv) the distribution rate on any series of preferred security will
not exceed the greater of (a) 400 basis points over the
comparable term U.S. Treasury securities or other market-accepted
benchmark securities, or ( b) a rate that is consistent with
similar securities of comparable credit quality and structure
issued by other companies;
(v) the underwriting fees, commissions or similar remuneration
paid in connection with the issue, sale or distribution of any
securities authorized hereunder (excluding interest rate risk
management instruments, as to which separate provisions
governing fees and expenses are proposed below) will not
exceed 700 basis points of the principal or face amount of the
securities issued or gross proceeds of the financing; and
(vi) solely with respect to investments in EPAct Projects pursuant
to the Growth Cap, Cinergy will not issue any additional debt
securities to finance such investments if upon original
issuance thereof Cinergy's senior debt obligations are not
rated investment grade by at least two of the major ratings
agencies, i.e., Standard & Poor's Corporation ("S&P"), Fitch
Investor Service ("Fitch"), Duff & Phelps Credit Rating Co.
("D&P") and Moody's Investor Service ("Moody's").
The following additional terms and conditions apply to the proposed
financing transactions.
a. Debt Securities
i. Short-term notes
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
proposes to make short-term borrowings from banks or other financial
institutions. Such borrowings will be evidenced by (1) "transactional"
promissory notes to be dated the date of such borrowings and to mature not
more than one year after the date thereof or (2) "grid" promissory notes
evidencing all outstanding borrowings from the respective lender, to be
dated as of the date of the first borrowing evidenced thereby, with each
such borrowing maturing not more than one year thereafter. Any such note
may or may not be prepayable, in whole or in part, with or without a
premium in the event of prepayment.
ii. Commercial paper
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
also proposes to issue and sell commercial paper through one or more
dealers or agents or directly to a limited number of purchasers if the
resulting cost of money is equal to or less than that available from
commercial paper placed through dealers or agents.
Cinergy proposes to issue and sell the commercial paper at market
rates with varying maturities not to exceed 270 days. The commercial paper
will be in the form of book-entry unsecured promissory notes with varying
denominations of not less than $25,000 each. In commercial paper sales
effected on a discount basis, no commission or fee will be payable in
connection therewith; however, the purchasing dealer will re-offer the
commercial paper at a rate less than the rate to Cinergy. The discount
rate to dealers will not exceed the maximum discount rate per annum
prevailing at the date of issuance for commercial paper of comparable
quality and the same maturity. The purchasing dealer will re-offer the
commercial paper in such a manner as not to constitute a public offering
within the meaning of the Securities Act of 1933, as amended ("Securities
Act").
iii. Long-term notes
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
also proposes to issue and sell long-term debt securities ("Notes") in one
or more series.
Notes of any series may be either senior or subordinated
obligations of Cinergy. If issued on a secured basis, Notes would be
secured solely by common stock, or other assets or properties, of one or
more of Cinergy's nonutility subsidiaries (exclusive of any nonutility
subsidiary held by CG&E or PSI). Notes of any series (a) will have
maturities greater than one year, (b) may be subject to optional and/or
mandatory redemption, in whole or in part, at par or at various premiums
above the principal amount thereof, (c) may be entitled to mandatory or
optional sinking fund provisions, and (d) may be convertible or
exchangeable into common stock of Cinergy. Interest accruing on Notes of
any series may be fixed or floating or "multi-modal" (where the interest is
periodically reset, alternating between fixed and floating interest rates
for each reset period, with all accrued and unpaid interest together with
interest thereon becoming due and payable at the end of each such reset
period). Notes will be issued under one or more indentures to be entered
into between Cinergy and financial institution(s) acting as trustee(s);
supplemental indentures may be executed in respect of separate offerings of
one or more series of Notes.
Notes may be issued in private or public transactions. With
respect to the former, Notes of any series may be issued and sold directly
to one or more purchasers in privately negotiated transactions or to one or
more investment banking or underwriting firms or other entities who would
resell the Notes without registration under the Securities Act in reliance
upon one or more applicable exemptions from registration thereunder. From
time to time Cinergy may also issue and sell Notes of one or more series to
the public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent
or as principal for resale to the public either directly or through
dealers.
The maturity dates, interest rates, redemption and sinking fund
provisions, if any, with respect to the Notes of a particular series, as
well as any associated placement, underwriting, structuring or selling
agent fees, commissions and discounts, if any, will be established by
negotiation or competitive bidding and reflected in the applicable
indenture or supplement thereto and purchase agreement or underwriting
agreement setting forth such terms.
iv. Interest rate risk management
In connection with the issuance and sale of the short- and long-term
debt securities described above, Cinergy proposes to manage interest
rate risk through the use of various interest rate management instruments
commonly used in today's capital markets, such as interest rate swaps,
caps, collars, floors, options, forwards, futures and similar products
designed to manage interest rate risks.
Cinergy will enter into such derivative transactions pursuant to
agreements with counterparties that are highly rated financial institutions
i.e., whose senior secured debt, at the date of execution of the
agreement with Cinergy, is rated at least "A-" by S&P, Fitch or D&P or "A3"
by Moody's. The derivative transactions will be for fixed periods and in
no case will the notional principal amount exceed the principal amount of
the underlying debt security. Cinergy will not engage in "leveraged" or
"speculative" derivative transactions.
Fees, commissions and annual margins in connection with any interest
rate management agreements will not exceed 100 basis points in respect of
the principal or notional amount of the related debt securities or interest
rate management agreement. In addition, with respect to options such as
caps and collars, Cinergy may pay an option fee which, on a net basis
(i.e., when netted against any other option fee payable with respect to the
same security), would not exceed 10% of the principal amount of the debt
covered by the option.
b. Equity Securities
i. Common stock (including Stock Purchase Contracts/Units)
At December 31, 1999, Cinergy had 600 million shares of common
stock authorized for issuance, 158,923,399 shares of which were issued and
outstanding. Cinergy has issued 771,258 shares of common stock pursuant to
the January 1998 Order.
From time to time over the Five-Year Period, subject to the Aggregate
Financing Limit and the other conditions specified above, Cinergy proposes
to issue and sell additional shares of its common stock (i) through
solicitations of proposals from underwriters or dealers, (ii) through
negotiated transactions with underwriters or dealers, (iii) directly to a
limited number of purchasers or to a single purchaser, and/or (iv) through
agents. The price applicable to additional shares sold in any such
transaction will be based on several factors, including the current market
price of the common stock and prevailing capital market conditions.
Cinergy also proposes to issue and sell from time to time stock
purchase contracts ("Stock Purchase Contracts"), including contracts
obligating holders to purchase from Cinergy, and/or Cinergy to sell to the
holders, a specified number of shares or aggregate offering price of
Cinergy common stock at a future date. The consideration per share of
common stock may be fixed at the time the Stock Purchase Contracts are
issued or may be determined by reference to a specific formula set forth in
the Stock Purchase Contracts. The Stock Purchase Contracts may be issued
separately or as part of units ("Stock Purchase Units") consisting of a
stock purchase contract and debt and/or preferred securities of Cinergy
and/or debt obligations of nonaffiliates, including U.S. Treasury
securities, securing holders' obligations to purchase the common stock of
Cinergy under the Stock Purchase Contracts. The Stock Purchase Contracts
may require holders to secure their obligations thereunder in a specified
manner.
Further, Cinergy requests authorization to issue common stock as
consideration, in whole or part, for acquisitions by Cinergy or any
nonutility subsidiary thereof of securities of businesses, the acquisition
of which (a) is exempt under the Act or the rules thereunder or (b) has
been authorized by prior Commission order issued to Cinergy or any
nonutility subsidiary thereof, subject in either case to applicable
limitations on total investments in any such businesses. The shares of
Cinergy common stock issued in any such transaction would be valued at
market value based on the closing price on the day before closing of the
sale, on average high and low prices for a period prior to the closing of
the sale, or on some other method negotiated by the parties.
ii. Preferred securities
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
also proposes to issue and sell preferred securities in one or more series.
Preferred securities of any series (a) will have a specified par or
stated value or liquidation value per security, (b) will carry a right to
periodic cash dividends and/or other distributions, subject among other
things, to funds being legally available therefor, (c) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at
various premiums above the par or stated or liquidation value thereof, (d)
may be convertible or exchangeable into common stock of Cinergy, (e) and
may bear such further rights, including voting, preemptive or other
rights, and other terms and conditions, as set forth in the applicable
certificate of designation, purchase agreement and/or similar instruments
governing the issuance and sale of such series of preferred securities.
Preferred securities may be issued in private or public transactions.
With respect to private transactions, preferred securities of any series
may be issued and sold directly to one or more purchasers in privately
negotiated transactions or to one or more investment banking or
underwriting firms or other entities who would resell the preferred
securities without registration under the Securities Act in reliance upon
one or more applicable exemptions from registration thereunder. From time
to time Cinergy may also issue and sell preferred securities of one or more
series to the public either (i) through underwriters selected by
negotiation or competitive bidding or (ii) through selling agents acting
either as agent or as principal for resale to the public either directly or
through dealers.
The liquidation preference, dividend or distribution rates, redemption
provisions, voting rights, conversion or exchange rights, and other terms
and conditions of a particular series of preferred securities, as well as
any associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable certificate of
designation, purchase agreement or underwriting agreement, and other
relevant instruments setting forth such terms.
c. Financing Conduits
In addition to issuing any of the foregoing debt or equity
securities directly, Cinergy requests approval (to the extent such approval
may be required under the Act) to form one or more subsidiaries for the
sole purpose of issuing and selling any of the foregoing securities,
lending, dividending or otherwise transferring the proceeds thereof to
Cinergy or an entity designated by Cinergy, and engaging in transactions
incidental thereto, subject to the Aggregate Financing Limit and the other
conditions previously specified.
The proposed subsidiaries will comprise one or more financing
subsidiaries (each, a "Financing Subsidiary") and one or more
special-purpose entities (each, a "Special-Purpose Entity," and together
with Financing Subsidiaries, "Financing Conduits"). In either case the
subsidiaries' businesses will be limited to issuing and selling securities
on behalf of Cinergy; the subsidiaries will have no substantial physical
assets or properties. Any securities issued by the Financing Conduits will
be fully guaranteed by Cinergy, either directly or ultimately.
Cinergy would acquire all of the outstanding shares of common stock
or other equity interests of the Financing Subsidiary for an amount not
less than the minimum required by applicable law. The business of the
Financing Subsidiary will be limited to effecting financing transactions
with third parties for the benefit of Cinergy and its subsidiaries. As an
alternative in a particular instance to Cinergy directly issuing debt or
equity securities, or through a Special-Purpose Entity, Cinergy may
determine to use a Financing Subsidiary as the nominal issuer of the
particular debt or equity security. In that circumstance, Cinergy would
provide a full guarantee or other credit support with respect to the
securities issued by the Financing Subsidiary, the proceeds of which would
be lent, dividended or otherwise transferred to Cinergy or an entity
designated by Cinergy. The primary strategic reason behind the use of a
Financing Subsidiary would be to segregate financings for the different
businesses conducted by Cinergy, distinguishing between securities issued
by Cinergy to finance its investments in nonutility businesses from those
issued to finance its investments in the core utility business. A separate
Financing Subsidiary may be used by Cinergy with respect to different types
of nonutility businesses.
Cinergy would use Special-Purpose Subsidiaries in connection with
certain financing structures for issuing debt or equity securities, in
order to achieve a lower cost of capital, or incrementally greater
financial flexibility or other benefits, than would otherwise be the case.
d. Guarantees
Cinergy also proposes to supersede its existing guarantee authority,
capped at $1 billion as provided in the March 1999 Order, with greater
authority intended to accommodate growth in its business.
Specifically, from time to time through the Five-Year Period, Cinergy
requests authority to guarantee, obtain letters of credit and otherwise
provide credit support (each, a "Guarantee") in respect of the debt or
other securities or obligations of any or all of Cinergy's subsidiary or
associate companies (including any thereof formed or acquired at any time
over the Five-Year Period), and otherwise to further the business of
Cinergy, provided that the total amount of Guarantees at any time
outstanding does not exceed the Guarantees Limit, and provided further,
that (i) any Guarantees of EPAct Projects shall also be subject to the
Growth Cap or Restructuring Cap, as applicable; and (ii) any Guarantees of
energy-related companies within the meaning of rule 58 ("Rule 58
Companies") shall also be subject to the aggregate investment cap of rule
58. The terms and conditions of any Guarantees would be established at
arm's length based upon market conditions.
Cinergy wishes to propose how the Guarantees Limit would operate
relative to Financing Conduits. As described above, in the event that
Cinergy issues any debt or equity securities authorized hereunder by means
of any Financing Conduits, Cinergy would provide a full Guarantee in
respect of the payment and other obligations of the Financing Conduit under
the securities issued by it. Given that any securities nominally issued by
any such Financing Conduit are in substance securities issued by Cinergy
itself, any securities issued by a Financing Conduit would count
dollar-for-dollar against the Aggregate Financing Limit. However, Cinergy
submits that any Guarantees of securities of Financing Conduits should be
excluded entirely from the Guarantees Limit, since inclusion thereof would
amount to "double counting," in effect penalizing Cinergy for using
Financing Conduits.
e. Use of proceeds
Cinergy proposes to issue the debt and equity securities authorized
herein for general corporate purposes, including without limitation (i)
payments, redemptions, acquisitions, and refinancings of outstanding
securities issued by Cinergy, (ii) acquisitions of and investments in EPAct
Projects, provided that Cinergy's aggregate investment therein does not
exceed the Growth Cap or Restructuring Cap, as applicable, (iii)
acquisitions of and investments in Rule 58 Companies, provided that
Cinergy's aggregate investment therein does not exceed the aggregate
investment limitation of Rule 58, (iv) loans to and investments in other
system companies, including through the Cinergy system money pool, and (v)
other lawful corporate purposes.
As previously described, in the event Cinergy utilizes Financing
Conduits to issue securities authorized herein, such entities would apply
the proceeds of securities nominally issued by them to make loans,
dividends or other transfers thereof to Cinergy or an entity designated by
Cinergy, which would then be applied for any of the purposes enumerated in
the preceding paragraph.
D. Cinergy and Subsidiaries/Overview
The following is an overview of Cinergy's holding company system.
Cinergy is a combination holding company, with five direct
subsidiaries (see Exhibit I-1 showing Cinergy and all of its subsidiaries
at December 31, 1999):
1. CG&E, an Ohio electric and gas utility;
2. PSI, an Indiana electric utility;
3. Cinergy Investments, Inc. ("Cinergy Investments"), which holds
most of Cinergy's domestic nonregulated businesses and
investments;
4. Cinergy Global Resources, Inc. ("Cinergy Global Resources" or
"CGR"), which holds all of Cinergy's foreign businesses and
investments (as well as certain investments in U.S. EWGs and
qualifying facilities, or "QFs," under PURPA); and
5. Cinergy Services, Inc. ("Cinergy Services"), which provides
Cinergy's utility and nonregulated subsidiaries with a variety of
centralized administrative, management and support services.
Cinergy was created in 1994 through the merger of CG&E and PSI's
then-parent company, PSI Resources, Inc. ("PSI Resources"), both of which
prior to the merger had been exempt holding companies./19/ Cinergy
registered under the Act on October 25, 1994. At and for the twelve months
ended December 31, 1999, Cinergy had total consolidated assets of
approximately $9.6 billion and operating revenues of approximately $5.9
billion.
Together PSI and CG&E generate, transmit, distribute and sell
electricity and transport and sell natural gas to approximately 1.5 million
electric and 478,000 gas customers in Ohio, Indiana and Kentucky. The term
"Operating Companies" refers to PSI and CG&E, including CG&E's utility
subsidiaries.
PSI produces, transmits, distributes and sells electricity in north
central, central and southern Indiana, serving an estimated population of
2.2 million people located in 69 of the state's 92 counties including the
cities of Bloomington, Columbus, Kokomo, Lafeyette, New Albany and Terre
Haute. At and for the twelve months ended December 31, 1999, PSI had total
consolidated assets of approximately $3.8 billion and operating revenues of
approximately $2.1 billion.
CG&E and its four wholly-owned utility subsidiaries - The Union
Light, Heat and Power Company, a Kentucky electric and gas utility
("ULH&P"), Lawrenceburg Gas Company, an Indiana gas utility
("Lawrenceburg"), The West Harrison Gas and Electric Company, an Indiana
electric utility ("West Harrison"), and Miami Power Corporation ("Miami"),
an electric utility (solely by virtue of its ownership of certain
transmission assets) - provide electric and gas service in the southwestern
portion of Ohio and adjacent areas in Kentucky and Indiana. The area
served with electricity, gas or both covers approximately 3,200 square
miles and has an estimated population of two million. CG&E produces,
transmits, distributes and sells electricity and sells and transports
natural gas in the southwestern portion of Ohio, serving an estimated
population of 1.6 million people in 10 of the state's 88 counties including
the cities of Cincinnati and Middletown. ULH&P transmits, distributes and
sells electricity and sells and transports natural gas in northern
Kentucky, serving an estimated population of 328,000 people in a 500
square-mile area encompassing six counties and including the cities of
Newport and Covington./20/ At and for the twelve months ended December 31,
1999, CG&E had total consolidated assets of approximately $4.9 billion and
operating revenues of approximately $2.6 billion.
The PUCO regulates the retail electric and gas rates of CG&E; the
IURC regulates the retail electric rates of PSI (as well as the retail gas
and electric rates of Lawrenceburg and West Harrison); and the KPSC
regulates the retail electric and gas rates of ULH&P. In connection with
the 1994 merger, Cinergy and the primary Operating Companies (CG&E, PSI and
ULH&P) made extensive commitments to these three commissions, as well as
other interested parties, addressing concerns regarding potential
impediments to effective state regulation of the Operating Companies
arising from Cinergy's holding company structure and regulation under the
Act as a registered holding company.
For reasons of internal management, efficiency and accountability,
Cinergy manages its business through four "business units." The initial
functional reorganization into business units took place in 1996. Since
then, the business unit structure has undergone further changes to better
reflect and focus the Company's business strategies, taking into account
ongoing industry developments.
As of March 1, 2000, there are four business units: the Energy
Commodities Business Unit ("ECBU"), the Energy Delivery Business Unit
("EDBU"), the Cinergy Investments Business Unit ("CIBU") and the
International Business Unit ("IBU"). All of the business units are
supported by Cinergy's "Corporate Center," another functional designation,
comprising various departments or functions, or portions thereof, within
Cinergy Services. The Corporate Center provides strategic direction,
performance measurement, and shared services to Cinergy's business units.
The traditional, vertically-integrated utility functions are
managed by the ECBU and EDBU. The ECBU operates and maintains virtually
all of Cinergy's domestic electric generation facilities, as further
described below.
The EDBU manages Cinergy's domestic transmission and distribution
operations. It plans, designs, builds, operates and maintains wire and
pipe systems to deliver energy commodities to customers. The EDBU operates
approximately 45,000 circuit miles of electric lines to provide regulated
distribution service to 1.5 million electric customers. It also operates
approximately 7,500 miles of gas mains and service lines to provide
regulated distribution service to approximately 478,000 gas customers. The
EDBU is also responsible for Cinergy's relationships with retail customers,
including electric and gas sales and marketing to both native load and
other retail customers, meter reading, order completion, billing, credit
collection services, and account problem solving. In addition, the EDBU
manages Cinergy's participation in the Midwest Independent System
Operator./21/ The EDBU's operations are conducted through the Operating
Companies.
The CIBU is responsible for the management and performance of
Cinergy's domestic nonutility businesses that market services to retail
customers. The CIBU is not responsible for nonutility businesses that
focus on wholesale energy markets; the responsibility for these resides in
the ECBU. (In terms of corporate structure, as noted above the great
majority of Cinergy's domestic nonutility subsidiaries - including those
under the responsibility of the CIBU and ECBU, respectively - are held
underneath Cinergy Investments.)
The IBU is responsible for Cinergy's international investments
which are held by Cinergy Global Resources and its subsidiaries. The IBU
is described in detail below.
For more information on Cinergy's business and operations, see
Cinergy's reports on Forms 10-Q and 10-K filed under the Securities
Exchange Act of 1934 (Commission File No 1-11377). See also Cinergy's
reports on Forms U-9C-3, U5S and U-13-60 filed under the Act.
E. EPAct Projects/Domestic/ECBU
At December 31, 1999 Cinergy had ownership interests in five
domestic EWG generating facilities - 100 percent ownership of a 30 MW
merchant peaking facility in Pennsylvania and a 25 MW wind-powered facility
in Wyoming and, through the joint venture with Duke Energy Corporation, 50
percent ownership of three merchant peaking facilities under development in
Ohio and Indiana with approximately 1400 MW of total capacity.
1. Background; Industry Trends Impacting EWG Projects
Prior to 1999, all of Cinergy's EPAct Projects were located outside
the United States. For several years, this was due entirely to the large
size of the Midlands investment. Completed in mid-1996 and involving an
aggregate investment of roughly $500 million, that transaction consumed all
of Cinergy's available capacity under the Commission's investment
limitation which then applied, capping Cinergy's aggregate investment in
EWGs and FUCOs at 50 percent of consolidated retained earnings. This lower
investment cap remained in place until March 1998, when the Commission
issued its order to Cinergy raising the ceiling to 100 percent of
consolidated retained earnings. Accordingly, for nearly two years after
the Midlands acquisition, Cinergy was foreclosed from any further recourse
investments, whether in the U.S. or abroad.
More fundamentally, opportunities in domestic power markets were
significantly less attractive and less available several years ago than
today. In 1996 the FERC issued Orders 888 and 889, introducing competition
into U.S. wholesale power markets. In the past several years, many states
have enacted, and most of the rest are considering legislation providing
for competitive supply of electricity to retail consumers, in many cases
requiring franchised utilities to divest generating assets. Only about
half the states have enacted restructuring legislation, so many important
auctions are yet to occur. In addition, some initial buyers, like Sithe
Energies, are reselling assets acquired in these utility divestitures.
Finally, peak demand for electricity has been steadily growing, and in
several regions capacity margins have been decreasing. The U.S. and Canada
are projected to require more than 186 GW of new generating capacity by
2010, according to a 1998 report by Resource Data International, the
strategic information firm. The new growth represents about $90 billion
worth of projects./22/
These factors help explain both the buoyant sellers' market for
auctions of fossil-fueled power plants, and the boom in new power plant
construction. In 1998, U.S. power plant developers made reservations for
about $12 billion in new plants, or nearly 40 percent of global orders, for
plants with total output of 40 GW. In the next decade, about $80 billion
will be invested in new power plants in North America, according to the
energy consulting firm Hagler Bailly./23/
Many of these new plants will be operated in whole or in part on a
"merchant," or market, basis. By definition, merchant plants produce
energy to sell on the competitive wholesale market. Unlike independent
power production, or "IPP," facilities, merchant plants are not supported
by long-term offtake contracts, but rather by their ability to produce
power at market clearing prices. In September 1996, the E.J. Stoneman
plant, a 53 MW coal-fired facility in Cassville, Wisconsin, became the
first plant to sell its electricity entirely on a merchant basis./24/
Notwithstanding the lack of long-term power sales and other "offtake"
agreements, merchant plants have been able to secure investment grade
ratings, based on low marginal cost position and other relevant
factors./25/
Planned merchant plant capacity in the United States more than
doubled over a recent twelve-month span, from 56,500 MW in October 1998 to
121,733 MW in October 1999, according to the Electric Power Supply
Association, a trade group for independent power producers and power
marketers ("EPSA")./26/ Development is occurring all over the country,
with about 40,000 MW under construction or development in New England and
the Pennsylvania-New Jersey-Maryland region; 27,000 MW in the Southeast;
24,000 MW in the Midwest; and 29,000 MW in the West./27/ Additional
merchant capacity is emerging through divestitures as buyers convert
previously regulated plants into open market participants. According to
the executive director of EPSA:
Overall, what we've seen in the past three years is
a total sea change in the structure of the industry,
which has marked the beginning of a totally competitive
generation sector. In the future, we'll continue to see
this trend of dramatically increasing merchant plant
capacity./28/
2. Cinergy's Energy Commodities Business Unit
Within Cinergy, the ECBU is exclusively responsible for investments
in and operation of all U.S. domestic EPAct Projects, except for those
falling under the IBU's renewable energies strategy described below./29/
As set forth in Exhibit J-1, at December 31, 1999, CG&E and PSI
owned electric generating facilities, or portions thereof in the case of
jointly-owned facilities, having approximately 11,200 MW of total
generating capacity - 5,200 MW owned by CG&E (net book value at December
31, 1999 of approximately $1.755 billion) and 6,000 MW owned by PSI (net
book value at December 31, 1999 of approximately $1.137 billion). The
generating facilities are located exclusively in Ohio and Indiana, except
for one plant in Kentucky, and are primarily coal-fired. ULH&P, the
largest of the Operating Companies after CG&E and PSI, owns no electric
generating facilities, but purchases substantially all the electricity
required to supply its retail franchise customers from CG&E at wholesale.
The following provides more detailed information on CG&E's and PSI's
power plants:
<PAGE>
<TABLE>
<CAPTION> CG&E AND PSI POWER PLANTS
<S> <C> <C> <C> <C> <C> <C>
Station/30/ Coal/MW Natural Oil/ Hydro/ Total
Gas/MW MW MW MW
CG&E 9 4,186 736 323 -- 5,245
PSI 8 5,550 120 261 45 5,976
CG&E/PSI 17 9,736 856 584 45 11,221
</TABLE>
The ECBU operates and maintains CG&E's and PSI's generating plants
(other than certain of the jointly-owned plants), producing electricity for
CG&E, PSI and ULH&P retail franchise ("native load") customers. It
dispatches those plants and, when economic or necessary, purchases power
for native load customers. It also coordinates the purchase of coal and
other fuel supplies by the Operating Companies for their electric utility
businesses and natural gas by CG&E and its subsidiaries to support their
gas utility businesses. (The EDBU is responsible for the subsequent
delivery of electricity and purchased gas to native load customers and for
billing and other transactions with native load customers.) As previously
noted, the Operating Companies' electric generating plants are among the
most efficient in the country.
In addition to its activities supporting Cinergy's electric and gas
utility businesses, the ECBU also engages in nonutility businesses -
specifically, wholesale energy marketing (involving primarily electricity
and natural gas), the acquisition of domestic EWGs and other physical
assets to support the marketing business, and the provision to
nonaffiliated utilities and IPPs of transactional or restructuring services
focusing on power purchase agreements, or "PPAs"./31/ The ECBU's EWG
facilities are held under Cinergy Capital & Trading, Inc., a direct
subsidiary of Cinergy Investments ("Cinergy Capital & Trading" or "CC&T").
The president of CC&T is also president of the ECBU.
Following the 1994 merger, Cinergy's initial activities in
wholesale electricity marketing centered in the Midwest where the Company's
generating facilities are located. Beginning in 1996, under the belief
that deregulation would proceed quickly and prices for electricity would
decline, Cinergy moved rapidly to expand the business nationwide, but
without owning power plants in these new regions. For example, Cinergy
initiated marketing operations in several Western states including
California. Based on these early efforts, however, Cinergy came to the
view that without ownership in these regions of energy-related assets
(power plants, etc.), a national business could not succeed. Accordingly,
in 1998 the ECBU retrenched, realigning the wholesale operations around the
Midwest and select adjoining markets, close to Cinergy's fleet of
generating assets. The ECBU could thereby capitalize on the residual, or
"second call," availability of 11,200 MW of installed generation in Ohio,
Indiana and Kentucky (i.e., capacity available after satisfaction of
obligations to native load customers).
Recent acquisitions have expanded the ECBU's wholesale marketing
business beyond electricity. In June 1998, Cinergy, through CC&T, acquired
Producers Energy Marketing, LLC (subsequently renamed Cinergy Marketing &
Trading, LLC, "CMT") from Apache Corporation and Oryx Energy Company. CMT
has exclusive marketing rights to certain natural gas production owned or
controlled by Apache and Oryx, representing approximately 1.1 billion cubic
feet per day of dedicated natural gas supply. These supplies, combined
with the active marketing of third-party gas, are geographically diverse,
located throughout the Southwest, Rocky Mountains, Gulf Coast, Gulf of
Mexico, and Michigan. The acquisition of CMT complemented Cinergy's June
1997 acquisition, through CC&T, of the assets of Greenwich Energy Partners,
L.P., which specializes in energy risk management and trading in derivative
commodity instruments covering a range of energy commodities, especially
natural gas.
In February 1999, CC&T took a first step toward expanding its power
marketing business through acquisitions of physical assets, purchasing a 30
MW plant located in Schuylkill County, Pennsylvania from Westwood Energy
Properties L.P. CC&T subsidiaries operate the facility as a merchant
plant, selling its output primarily into the Pennsylvania-New
Jersey-Maryland Power Pool in times of peak demand./32/ The plant uses a
circulating, fluidized-bed combustion boiler that burns waste coal, readily
available in the region, reducing environmental impacts. The purchase has
given Cinergy a foothold in an important, neighboring region. As the
president of Cinergy's ECBU stated:
This acquisition is part of our stated and continuing goal of
owning generating assets in key markets. Westwood is both
environmentally attractive and strategically located in an area where
electric markets are open to competition./33/
At December 31, 1999, Cinergy's aggregate investment in the two EWG
subsidiaries that together own and operate the Pennsylvania plant was
approximately $9.5 million.
As discussed previously, CC&T and Duke Energy North America
consummated a joint venture in September 1999, by which they will jointly
own, on a 50-50 basis, three gas-fired EWG facilities currently under
development in Indiana and Ohio totaling about 1400 MW of capacity. CC&T
will also operate the stations, which are located in Cinergy's service
area. The plants will be run as merchant facilities, selling power into
the Midwest wholesale markets in periods of peak demand. Pursuant to the
joint venture, Cinergy and Duke have established and each has 50 percent
ownership of VMC Generating Co., a Texas general partnership ("VMC"). VMC
in turn owns all of the three project companies that directly hold title to
the generating assets and will qualify for EWG status: (1) CinCap VII,
LLC, which owns a 132 MW peaking plant located in Cadiz, Henry County,
Indiana; (2) Duke Energy Madison, LLC, which owns a 640 MW peaking plant
located in Madison Township, Butler County, Ohio; and (3) Duke Energy
Vermillion, LLC, which owns a 640 MW peaking plant located in Cayuga,
Vermillion County, Indiana. The target date for commencement of commercial
operation of the facilities is June 2000. Cinergy has invested
or committed to invest a total of approximately $365 million in connection
with these facilities.
In 1998 and 1999, Cinergy incurred losses related to its wholesale
supply business. These losses and Cinergy's strategy to avoid future
losses are discussed in an exhibit accompanying this application.
As discussed above, important industry trends are driving the
growing significance generally of EWGs and to Cinergy in particular - the
emergence of competitive power markets, plant divestitures by franchised
utilities, growing nationwide electric demand, increasing ownership of
power plants outside the regulated utility. The ECBU anticipates that its
future investments in EWGs will be a mix of greenfield projects and
acquisitions of existing assets, including potentially generation divested
by utilities. Most of the investments will likely be in the eastern half
of the country. CC&T will operate the facilities as independent power
plants (i.e., supported by long-term off-take contracts) or as full or
partial merchant plants (i.e., selling power into the spot wholesale
markets or pursuant to short-term contracts).
Investments in power plants are necessary not only for growth, but
to mitigate risks. As explained in the next section, ownership of
generating facilities provides an important hedge, in the event power
cannot be purchased at economic prices from third parties.
Apart from investments in new EWG assets, the ECBU is preparing to
oversee the repositioning of Cinergy's existing regulated generation to EWG
status, in response to electric industry restructuring already enacted in
Ohio and anticipated within the next several years for Indiana. This too
is discussed below.
3. Power Marketing & Physical Assets: Risk Mitigation
Centered in the Midwest and select adjoining markets, where the
Company's 11,200 MW of regulated generating assets are located or can
practicably reach, Cinergy's wholesale supply business can draw upon the
residual capacity of this 11,200 MW of regulated generation, after meeting
native load obligations. This "second call" supplements capacity from the
ECBU's EWG facilities. Thus, Cinergy's wholesale marketing business is
"asset-backed," since Cinergy-controlled generation assets are available to
support the bulk trades.
Owning electric generating facilities to support, or anchor, the
wholesale power marketing business is important for several reasons. In
the first place, having electric generation assets in the region can serve
to minimize or avoid transmission charges and mitigate delivery risks for
trades in that region. Second, physical assets hedge risks inherent in the
marketing business, notably price risk. The basic purpose of the Duke
transaction is to hedge risks in Cinergy's wholesale supply business; it
fulfills both of the important functions just noted.
If a company has agreed to sell power sometime in the future, it
can hedge its price risk by simultaneously or subsequently buying power to
cover its obligations. However, if it chooses a "no-hedge" strategy, it is
exposed to the full price risk for power in any given hour. Ownership of
power plants limits this exposure to price risk, by always giving the
seller the option to run the power plant rather than buying power to meet
its obligations.
Price risk can grow because of the fact that U.S. wholesale markets
today, while competitive, are not yet fully liquid. In some geographic
markets at some times there are not sufficient numbers of buyers and
sellers to allow significant trading activity at marketing clearing levels.
In that situation, a marginal increase in demand can produce a dramatic
increase in price.
This beneficial relationship between power marketing and physical
assets works in both directions. For example, the activities and expertise
of the ECBU serve to mitigate commercial risks inherent in selling power
from the assets. In competitive markets, where supply and demand dictate
the price for energy, an essential "tool" to manage such asset risks is to
maintain a skilled trading organization involved in the markets day to day.
The ECBU's traders can identify trends and manage risks on a daily, monthly
and year-forward basis. It is also imperative to maintain, as Cinergy
does, an active supply and demand analysis of each market as well as a
forward price curve (expectation) for energy markets. The ECBU continually
analyzes market dynamics and the cost to operate generating facilities. In
short, Cinergy's ECBU mitigates risks posed by EWG assets, just as the
assets themselves backstop the power trading.
To conduct a successful U.S. generation business in a competitive
environment, participation in all segments of the "value chain" is
essential - from production through wholesale marketing on to structured
transactions. Asset ownership not only is a key component in itself, but
underpins the other components. Conversely, a marketing and trading
organization can enhance returns on and reduce the risks of the physical
assets.
4. Transfer to EWG Status of CG&E/PSI Generation
The proposed transactions are also necessary for Cinergy to adapt
to state restructuring impacting its own regulated utility operations.
Pursuant to these developments, Cinergy needs sufficient investment
flexibility under the Act to accommodate a transfer of CG&E and eventually
PSI generating assets to EWG affiliates.
As noted earlier, CG&E and PSI have significant ownership of
electric generating facilities. The generating assets are either
wholly-owned by CG&E or PSI or jointly-owned with other utilities, and are
located in Ohio and Indiana, with the exception of one plant in Kentucky
owned by CG&E. The installed capacity and net book value of the generation
assets allocable to CG&E's and PSI's ownership interests are 11,221 MW and
$2.892 billion, respectively, at December 31, 1999, with 5,245 MW of
installed capacity having a net book value of $1.755 billion allocable to
CG&E, and 5,976 MW of installed capacity having a net book value of $1.137
billion allocable to PSI. None of Cinergy's other utility subsidiaries own
any electric generating facilities.
The recently enacted Ohio electric customer choice legislation
provides a strong impetus to move generating assets, built to serve
monopoly loads, out of the regulated utility. The legislation deregulates
generation and requires utilities to transfer the competitive retail sale
of generation function into a separate corporation and to fashion
incentives designed to induce 20 percent of the loads by customer class to
switch providers. When compared to ongoing native retail load requirements
in Ohio, customer switching is expected to result in excess generating
capacity held by CG&E. Although comprehensive restructuring legislation
has not yet been enacted in Indiana, Cinergy expects that such legislation
will be enacted well before expiration of the five-year investment period
proposed in this application. Moreover, existing statutory provisions in
the Indiana Code for "alternative" regulation of utilities provide a basis
for Cinergy to seek approval from the IURC to transfer PSI's generating
facilities to EWG affiliates, prior to the adoption of state-wide
restructuring.
Cinergy needs to be able to reposition its existing regulated
generation to maximize the value of those assets in a competitive
environment. Like a number of other utilities in states undergoing
restructuring, Cinergy is seeking to achieve asset flexibility and
optimization by transferring the assets to EWG affiliates, where they can
be used for electric sales back to the remnant affiliated "T&D" utility or
marketed for sale to off-system buyers, either with respect to all or some
of the particular assets. Cinergy's current intention is to convert all or
a substantial number of its Operating Companies' power plants to EWG
status, since the Company believes that corporate disaggregation ultimately
will be required for the entire fleet, not merely CG&E's plants.
Therefore, Cinergy has requested the separate investment ceiling (the
"Restructuring Cap") with a view to restructuring both CG&E's and PSI's
generating assets.
Although as discussed below, Cinergy likely would not make
permanent recourse investments equal to the full amount of the book value
of the transferred assets, the Company could be required to make
investments of that magnitude on a short-term basis if "bridge" financing
becomes necessary. The overriding purpose of the Restructuring Cap is to
afford Cinergy sufficient financial flexibility under the Act to pursue a
variety of alternatives in an uncertain and changing regulatory
environment.
a. Indiana
In January 1999, electric deregulation legislation was introduced
into the Indiana General Assembly. Proposed and supported by a group of
large industrial customers, this legislation did not pass in the 1999
session of the Indiana General Assembly. Due to a "short" session in 2000,
the Indiana General Assembly is not expected to consider any electric
deregulation initiatives in 2000.
In 1995, the Indiana Legislature enacted an Alternative Utility
Regulation statute/34/ which, among other subjects, recognized "that
competition is increasing in the provision of energy services in Indiana
and the United States"/35/ and required annual reports to the Regulatory
Flexibility Committee of the General Assembly to allow that Committee to
monitor changes and competition in the energy utility industry./36/ The
Alternative Utility Regulation statute provides the IURC with considerable
flexibility including the authority, notwithstanding other laws or rules,
to authorize jurisdictional transactions (or to decline to exercise its
jurisdiction) upon a showing of public interest./37/
b. Ohio
Comprehensive electric restructuring legislation was passed in Ohio
in July 1999./38/ Under the new law, all retail customers in Ohio can
choose their electric supplier commencing January 1, 2001.
The legislation deregulates electric generation and supply, with
electric transmission and distribution continuing as regulated utility
functions. While not expressly requiring restructuring or divestiture of
generating assets, the new Ohio legislation encourages that result, to
foster generation supplier diversity and curb potential market power of
incumbent utilities. Thus, as an incumbent Ohio electric utility, CG&E is
required to separate its existing functions pertaining to competitive
retail sale of generation service from those pertaining to transmission and
distribution service, transferring the generation services into a separate
legal entity. Moreover, the legislation requires that utilities devise
incentives to induce 20 percent of their electric loads by customer class
to switch providers by halfway through the market development period, but
in no event later than December 31, 2003.
Other provisions of the law include:
A 5 percent cut in the generation component of rates for every
residential customer beginning January 1, 2001.
The establishment of a "market development period" (i.e., the
transition period to full competition) beginning January 1, 2001 and
ending no later than December 31, 2005.
Utility rates otherwise are frozen for non-switching customers
through the market development period.
An opportunity to recover PUCO-approved transition costs over the
market development period.
An opportunity to recover PUCO-approved regulatory assets through
December 31, 2010.
The transfer of either ownership or control of transmission assets to
an independent transmission entity before December 31, 2003.
A requirement that incumbent utilities provide retail electric service
to native load customers who decline to switch to different suppliers
or who desire to return to service from the incumbent utility.
The filing of a proposed transition plan by year-end 1999. The
transition plan must include a rate unbundling plan, a corporate
separation plan, an operational support plan, an employee assistance
plan and a consumer education plan. The transition plan may also
include a quantification of utility transition costs and an
application to receive transition revenues. The PUCO is required to
issue its order on the transition plan no later than October 31, 2000.
As required by the legislation, CG&E filed its proposed transition
plan with the PUCO on December 28, 1999. The transition plan is comprised
of eight component plans: a rate unbundling plan, corporate separation
plan, operational support plan, employee assistance plan, consumer
education plan, application for receipt of transition revenues, independent
transmission plan and shopping incentive plan. (See Cinergy's 1999 Annual
Report on Form 10-K for more information on the transition plan.)
In its transition plan, CG&E has proposed to meet its corporate
separation obligations in part by legally separating the generation from
the transmission and distribution businesses, transferring all of its
generating assets to one or more affiliated EWGs. The generation assets
would be moved as soon as practicable after receipt of PUCO approval. The
asset transfer is contingent on various other factors, including receipt
from the Ohio, Indiana and Kentucky commissions of the findings required
under section 32(c) of the Act. Coincident with the transfer of the
generation assets, CG&E would enter into a FERC approved power purchase
agreement with the EWG. The PPA would grant CG&E a first call on all power
produced by the EWG at embedded cost through the end of the market
development period, ensuring CG&E sufficient power to meet its electric
supply obligations to customers who do not switch or who return. Cinergy
has no current intention of establishing an affiliate of CG&E to market
competitive generation services to retail customers in Ohio, as permitted
by the new legislation.
As noted above, the Ohio statute provides that a utility's proposed
transition plan may include an application to receive transition revenues.
Transition revenues are collected in two ways: (1) through the payment of
the generation component of unbundled rates by customers who do not switch
generation suppliers, and (2) through payment of non-bypassable transition
charges by customers who switch generation suppliers. Transition costs
must meet the following criteria:
1. the cost was prudently incurred;
2. the cost is legitimate, net, verifiable, and directly assignable
or allocable to Ohio retail electric generation customers;
3. the cost is unrecoverable in a competitive market; and
4. CG&E would otherwise be entitled an opportunity to recover the
cost in rates as a regulated utility.
The legislation requires that the PUCO establish non-bypassable transition
charges, affording Ohio electric utilities an opportunity to collect
transition revenues from customers that choose alternate suppliers during
the market development period.
As part of its proposed transition plan, CG&E filed a request to
recover transition costs comprised of (1) generation-related regulatory
assets in the total amount of $364 million (excluding carrying charges) and
(2) above-market generation costs in the total amount of $563 million
(excluding carrying charges), in each case beginning January 1, 2001. The
total carrying costs, for which CG&E has also requested recovery, are
estimated at $311 million.
Regarding the generation-related regulatory assets, CG&E is
requesting recovery of the balance of its Ohio retail-jurisdictional,
generation-related regulatory assets on its books and records as of
December 31, 2000, including a return on the unamortized balance. At
December 31, 1999, the balance of the generation-related regulatory assets
was approximately $436 million. The projected jurisdictional balance at
December 31, 2000 is approximately $364 million. CG&E is requesting
recovery to continue until the earlier of December 31, 2010, or until the
balance, including carrying costs, is fully amortized. CG&E has proposed
to recover this amount utilizing the total amount that is currently
included in rates for the recovery of regulatory assets.
In addition, CG&E is requesting recovery of other transition costs
during the market development period consisting primarily of above-market
generation costs. The projected balance of these above-market generation
costs at December 31, 2000 is approximately $563 million. The transition
costs associated with any above-market generation assets represent the
difference between the net investment in such assets on CG&E's books and
records as of December 31, 2000 and its market value, including carrying
costs. CG&E has proposed to recover this amount through an adjustment
mechanism that includes a periodic update of other transition costs,
revenues and charges for changes in the market price of electricity./39/
b. Financing plan for Genco transactions
i. Preliminary considerations
As noted, in connection with electric deregulation in Ohio and
Indiana, Cinergy's current intention is to form one or more EWG
subsidiaries, to which it will transfer some or all of the existing
generation assets of CG&E and eventually PSI, the current net book value of
which is approximately $2.9 billion. The assets would be transferred in
one or more transactions, as soon as practicable after receipt of necessary
regulatory approvals and satisfaction of other conditions. Cinergy has
engaged Donaldson, Lufkin & Jenrette ("DLJ") to provide financial advice in
connection with these transactions.
The following discusses the financing plan that Cinergy is
developing in conjunction with DLJ. The financing plan and related
transaction structures by which the assets would actually be transferred to
the EWGs have not been finalized, and therefore the discussion below posits
a number of alternatives and is subject to corresponding contingencies and
qualifications. The level of associated investment authority requested in
this application (the "Restructuring Cap") is intended to be sufficiently
large to permit implementation of a range of financing transactions, with a
view to ensuring flexibility in pursuit of the optimal financing strategy.
Cinergy intends to transfer the assets at the lowest transaction cost
practicable.
In addition to these preliminary considerations, the following
general observations apply. Regardless of which particular structure is
used, there should be no material increase in Cinergy's consolidated debt.
Any incremental debt at the Cinergy or EWG level will be largely offset
by reduced debt at the CG&E/PSI level. This reflects the basic fact that
Cinergy already owns these assets, and is simply transferring direct title
from the utility to the nonutility side of its business. Cinergy and DLJ
believe that the asset transfers and associated financings would not
themselves have any material adverse impact on the credit ratings of
Cinergy, CG&E or PSI; rather, any such potential impact is a consequence of
state deregulation and loss of monopoly supplier status.
ii. Transaction structures
There are two basic transaction structures by which CG&E and PSI
(collectively, "Utility") would transfer their generating assets to the EWG
affiliates (collectively, "Genco"):
1. Under the "Sale Scenario," Utility sells its generating assets,
for cash and/or promissory notes or other consideration, directly
to one or more newly created subsidiaries of Cinergy
(collectively, "Genco"), held either directly by Cinergy or
indirectly by one or more newly created, special-purpose
intermediate holding companies directly held by Cinergy
(collectively, "Genco Holdco").
2. Under the "Spin-Off Scenario," Utility contributes its generating
assets to Genco for shares of stock or other equity securities of
Genco. Utility then distributes its investment in Genco to
Cinergy by dividend or otherwise, which thereupon contributes
such stock or other equity to Genco Holdco. Genco might further
drop down its generating assets into one or more special-purpose
subsidiaries; for example, a separate subsidiary might be
established for each power plant.
Under both scenarios, the assets would likely be transferred at net
book value. The decision to use a particular transaction structure will
depend, among other factors, on whether the transaction can be structured
on a tax-deferred basis and other transaction costs. Under either
scenario, Genco will have an initial capitalization equal to the value of
the transferred generating assets, approximately $2.9 billion (assuming
transfer of all the generating assets at year-end 1999 book value). The
Company is considering both potential structures discussed above, as well
as variations of each.
If a Sale Scenario is used, debt will most likely be issued by
Cinergy or Genco or a combination of the two. The proceeds from the debt
issued by Cinergy could be contributed to Genco as an intercompany loan or
equity. Genco could also issue debt for the debt portion of its
capitalization. Such debt would most likely be nonrecourse to Cinergy and
Utility, supported entirely by the assets and cash flows of Genco. The
Utility would most likely use any cash proceeds from the sale to Genco to
redeem or retire outstanding debt. Cinergy's equity investment in Genco
will largely be offset by a decreased equity investment in Utility.
Therefore, the overall consolidated capital structure of Cinergy is not
expected to be significantly impacted by implementation of a Sale Scenario.
The exact amount of issuances by Cinergy and/or Genco will depend
on the targeted capitalization (see below). Given the target debt/equity
capitalization discussed below, Cinergy would likely contribute equity in
the range of $1.16-$1.74 billion, assuming total capitalization of Genco of
$2.9 billion. Therefore, the amount of debt included in the capital
structure of Genco is estimated to be between $1.74-$1.16 billion.
If a Spin-Off Scenario is used, the associated financing is
expected to be generally similar to that described under the Sale Scenario.
Debt issued by Cinergy or Genco would be largely offset by the redemption
or retirement of debt at the Utility. Likewise, Cinergy's equity
investment in Genco would be largely offset by a decreased equity
investment in Utility. Finally, just as with the Sale Scenario, the
overall consolidated capital structure of Cinergy is not expected to be
significantly impacted.
iii. Bridge financing
Regardless of the ultimate structure adopted, the Company and DLJ
believe that it will be possible to effect the transfer of the generating
assets coincident with the closing and funding of the various associated
financing transactions. However, there can be no guarantee that this will
prove to be the case. In that event the Company may need to effect interim
or "bridge" financing, which could be in an aggregate amount equal to the
transferred value of the generating assets. This is one important reason
why Cinergy has requested an investment level for these
restructuring-related financing transactions equal to the net book value of
the generating assets of CG&E and PSI.
The Company expects that bridge financing will be used only if
essential to the successful consummation of the proposed transaction. For
example, it is possible that the liens associated with the generation
assets being transferred will need to be released before any such transfer
can take place. However, proceeds from any financings by Genco to
discharge the liens may not be available until the transfer of assets has
taken place. Accordingly, it is possible that bridge financing would be
required in order to facilitate the transfer of assets. A second
possibility is that prevailing financing market conditions at the time of
the transfer may be unattractive or even unavailable. A bridge financing
commitment would allow the transfer of assets to proceed without being
subject to the vagaries of the financial markets. Finally, other
considerations, including regulatory, legal, tax or accounting constraints,
might dictate use of bridge financing, as an interim expedient.
Regardless of the circumstances that might cause Cinergy to effect
bridge financing, the Company would expect to replace such financing with
more permanent financing as soon as practicable, reducing the debt at the
Cinergy level and correspondingly increasing nonrecourse debt at the Genco
level. Any impact of bridge financing on the overall consolidated
capitalization is thus expected to be only temporary.
iv. Genco and Utility capitalization/credit profile
Cinergy intends to capitalize Genco using equity and debt capital
in amounts that will ensure investment grade debt ratings at Genco. Given
the greater volatility in revenues that is expected for a deregulated
generation company, this will require greater levels of equity than would
be the case for an integrated utility. Mitigating this greater volatility
in revenues will be the duration and terms of the power purchase
agreements, or PPA, with the Utility.
The PPA between Genco and Utility is expected to have a minimum
term accommodating the transition from regulation to full deregulation
(i.e., the 5-year market development period, under the Ohio electricity
deregulation law). During this period, Utility will purchase power from
Genco as provided in the PPA. The PPA will have the effect of moderating
the volatility in revenues that would otherwise be experienced in the early
stages of a newly deregulated market. By the end of the scheduled term of
the PPA, the Company expects that much of the volatility associated with a
nascent deregulated market will have dissipated.
Also bolstering the credit profile of Genco will be the
diversification benefits accruing from its large portfolio of generating
assets, that is, the 11,200 MW of power plants today held by CG&E and PSI.
There is inherently less operating risk in a large group of
non-interdependent plants, than in a single plant or a smaller group. In
addition, the different types of plants in the portfolio (i.e., base load
vs. peaking units) provide further diversification benefits.
Given the PPA, the diversified nature of the generation portfolios
and the targeted investment grade ratings, Cinergy believes that
Genco will require 40%-60% equity capital, based on currently published
standards or benchmarks.
The credit profile of the Utility following the transfer of its
generation assets should be improved as compared to the former integrated
Utility. The reason for this is that as a pure transmission and
distribution company continuing to hold regulated monopoly status, the
Utility effectively shields itself from many of the risks generally
associated with generating assets, including inadequate recovery of
construction costs in rates. Also, under the PPA, the Utility will be
assured a supply of electricity at a specified rate. Given a targeted
credit rating of Baa2 and BBB, Cinergy believes the Utility will require
30%-50% of equity capital.
Under certain circumstances, the Utility may incur stranded costs
in connection with state deregulation. In the event that the resulting
stranded costs exceed minimal amounts and are not recovered through the
regulatory process, there will be a negative impact on the credit profile
of the Utility and ultimately Cinergy. These potential impacts are a
function of the transition to competition, not the ancillary transactions
just discussed.
v. Conclusion
Based on current information, the Company and its advisor, DLJ,
believe that the financing plan outlined above provides the most efficient
manner of financing the proposed transfer of generation assets. At the
same time, the Company needs the flexibility to modify its financing plan
as unforeseen contingencies arise. The investment authority being sought
ensures this flexibility.
F. EPAct Projects/Foreign/IBU
1. Cinergy's International Business Unit
Cinergy's investments in foreign EPAct Projects are made under the
strategic direction of the IBU. (Pursuant to its renewable energies
strategy, the IBU also has responsibility for clean energy projects in the
U.S.) Cinergy's investments in foreign EPAct Projects are held under
Cinergy Global Resources, which is a direct subsidiary of Cinergy. The
president of CGR is also the president of the IBU.
Set forth below is a brief overview of the development of Cinergy's
international business. A detailed summary of the specific projects held
by CGR at December 31, 1999 is provided later.
Cinergy's international investments pre-date the creation of
Cinergy. In 1992, in connection with privatization of the electric utility
industry by the Argentine government, and pursuant to Commission orders
under Section 3(b) of the Act, PSI Resources acquired minority equity
interests in two Argentine FUCOs for approximately $20 million Central
Costanera, S.A., a 1260 MW electric generating facility located in Buenos
Aires, Argentina, and Edesur, S.A., an electric distribution network
serving approximately 2.1 million customers in the southern half of Buenos
Aires, Argentina./40/ Cinergy succeeded to these interests upon
consummation of the Cinergy merger in October 1994, in which PSI Resources
was merged out of existence. Cinergy no longer holds either of these
investments, selling the investment in Central Costanera in late 1995 and
the investment in Edesur in late 1998, in each case at a profit.
Cinergy made no new investments in EPAct Projects from the date of
the Cinergy merger until the Midlands transaction in mid-1996. During this
period, the Company focused on successful integration of CG&E and PSI under
the merged company and the realization of projected merger savings./41/ In
addition, all the nonutility businesses that Cinergy succeeded to as a
result of the merger were evaluated and several were divested or
discontinued.
In June 1996, Cinergy and GPU acquired Midlands in a 50-50 joint
venture transaction for approximately $2.6 billion. A major portion of the
purchase price about $1.6 billion was funded through non-recourse bank
borrowings by the joint venture company formed for the acquisition. The
remaining $1 billion was funded through equal equity contributions by GPU
and Cinergy.
As a result of the Midlands acquisition, Cinergy essentially had no
remaining capacity for additional recourse investments in EPAct Projects
under the safe harbor provisions of Rule 53. In March 1997, following
meetings with Cinergy's state regulators, Cinergy filed an application with
the Commission requesting increased authority to invest in EWGs and FUCOs,
capped at 100% of consolidated retained earnings.
The next step in the development of Cinergy's international
business was the acquisition from Midlands of its team of experienced
project developers, along with rights to certain projects in development
and future projects. In addition to its core business of supplying and
distributing electricity to 2.2 million customers in mid-central England,
Midlands had a separate wholly-owned subsidiary, Midlands Power
International Ltd. ("MPI"), which developed and invested in independent
power projects on a global basis. More specifically, at the time of the
Cinergy/GPU acquisition, MPI had invested a total of approximately 181
million pounds sterling (US$293 million) in 9 power projects in the U.K.
and other countries, including:
1. Teesside Power Station-an 1875 MW gas-fired electric generating
station located in Wilton, Teesside, in which MPI had a 26.7%
ownership interest. Commissioned in April 1993, Teesside Power
Station was the first independent power project built in the U.K.
and at the time the largest in the world.
2. Humber Power Station-a 1250 MW gas-fired electric generating
station located in Stallingborough, Humberside, U.K., being
developed in two stages, phase 1 of which (750 MW) was then under
construction. MPI had an 18.75% ownership interest in this
project.
3. Uch Power Limited-a 586 MW gas-fired electric generating station
being developed in Baluchistan, Pakistan, the first such
independent power project in Pakistan to utilize indigenous fuel.
MPI had a 40% ownership interest.
4. Trakya Elektrik A.S.-a 480 MW gas-fired electric generating
facility being developed in Marmara Ereglisi, Turkey, in which
MPI had a 31% ownership interest.
In September 1997 Cinergy and GPU reached an agreement whereby
Cinergy acquired at nominal cost substantially all of the project
development team of MPI (over 30 individuals) together with certain
projects under development by MPI and all future projects of MPI. Midlands
retained all of the MPI projects in operation and certain projects under
development, such as Uch and Trakya. The individuals hired from MPI became
employees of Cinergy Global Power Services Ltd ("Cinergy Global Power
Services" or "CGPS"), a UK company and indirect, wholly-owned subsidiary of
CGR./42/ Headquartered in Stratford-upon-Avon, CGPS acts as the primary
project development arm of CGR.
In March 1998, the Commission approved Cinergy's application to
raise the investment ceiling to 100% of consolidated retained earnings. In
May 1998, Cinergy formed Cinergy Global Resources to hold Cinergy's
international businesses. Previously, the international businesses had
been held, together with the domestic nonutility subsidiaries, by Cinergy
Investments and PSI. The creation of CGR was intended to focus, organize
and manage Cinergy's international investments as one business. A
secondary purpose was to raise the profile of Cinergy's international
activities, centralizing and marketing the investments under a separate
entity and name.
Since the Commission issued the 100% Order, Cinergy has made a
series of investments in different countries under a three-pronged strategy
focusing on (i) acquiring and modernizing existing energy assets, (ii)
owning and operating clean energy sources, and (iii) creating critical mass
within regions to develop an integrated energy company with multiple
positions in the value chain. Late in 1998, Cinergy monetized the
remaining pre-merger investment in Argentina, selling its equity in Edesur,
the electric distribution company, at a profit.
Throughout this period, Cinergy also concentrated on enhancing the
value of its substantial investment in Midlands. One major focus was
reengineering, where Cinergy has considerable expertise from its own
operations./43/ Business changes implemented by Midlands as a result of
this reengineering campaign are projected to achieve significant cost
savings, through increased efficiencies in areas such as business support,
information technology costs, network costs, contracting, procurement and
customer management. Under the British regulatory system, the benefits of
such cost savings accrue primarily to Midlands' shareholders.
In November 1998, Midlands entered into an agreement, contingent on
U.K. government and regulatory approval, to sell its electric supply
business for approximately $300 million plus other consideration to
National Power plc, one of the U.K.'s principal generation companies.
Midlands will continue to own and operate its electric distribution
business, which will remain a regulated monopoly. By contrast, the supply
of electricity (i.e., the purchase of electricity from generators for
resale to consumers) is now open to full competition in the U.K.
In April 1999, the necessary U.K. approvals were obtained for the
sale to National Power, and the transaction closed in June 1999. With the
closing of that transaction, Midlands became the first of the 14 U.K.
regional electric companies ("RECs") to "exit" the electric supply business
and focus solely on the electric distribution business. The distribution
business accounted for approximately 90% of Midlands' net income before
interest and including taxes for the fiscal year ended March 1998. In
August 1999, the Office of Gas and Electricity Markets, the U.K.'s primary
electricity regulator, proposed substantial cuts in the RECs' electric
distribution rates, covering the five-year period beginning April 1, 2000.
The regulator's average proposed cut was between 25 and 30 percent for the
first year, with a further cut of 3 percent below the inflation rate
annually thereafter.
On July 15, 1999, Cinergy and GPU completed a transaction announced
earlier that month, pursuant to which GPU acquired Cinergy's 50 percent
ownership interest in Avon Energy Holdings, the parent company of Midlands,
for approximately $700 million in cash. As a result Midlands became a
wholly-owned subsidiary of GPU. Cinergy will retain Midlands' natural gas
marketing operations headquartered in London and the Redditch Power
Station, a 29 MW electric generating facility in the U.K. The Midlands
sale contributed $0.43 per share to Cinergy's third quarter 1999 earnings.
2. IBU Investments/December 31, 1999
At December 31, 1999, approximately $206 million of Cinergy's
aggregate investment of $580 million was devoted to a variety of foreign
projects. This total understates the extent of Cinergy's foreign business,
since with the recent monetization transaction the roughly $500 million
investment in Midlands - historically by far the largest single project -
is no longer included. The foreign projects are located in six countries,
Bangladesh, Czech Republic, Estonia, Spain, U.K. and Zambia. Currently,
the IBU's investments are concentrated in the Czech Republic.
Under the IBU's direction, CGR has been assembling a portfolio of
project investments, diversified by geographic location and type of project
(greenfield projects vs. existing assets), intended to balance near-term
earnings against long-term value creation and higher returns. CGR has been
guided by the following specific strategies in implementing the authority
granted under the 100% Order:
1. Local Asset Rehabilitator: This strategy is based on the
principle of improving existing assets and infrastructure by
utilizing Cinergy's asset management skills and continuous
improvement processes. These businesses are usually in highly
regulated markets and are supported by long-term PPA's. This
approach is focused on Central Europe and developing countries of
South America and Asia. South Africa is another potential target
area. Many of these countries have higher demand growth and high
reward potential, but correspondingly higher risk profiles.
Consequently Cinergy applies especially intensive scrutiny to
these projects. At December 31, 1999, CGR's investments under
this strategy were located in the Czech Republic and Estonia.
2. Global Niche Aggregator: This strategy concentrates on "niche
plays," through the development of a renewables portfolio of
projects. Wind, hydro, and biomass form the basis of this
strategy, which is pursued in both the European countries and the
United States, where there is a growing environmental awareness
and a willingness and ability to provide the governmental
subsidies needed to support these types of projects. As this
market is impacted so strongly by state policy, the Company
closely monitors possible changes in government thinking, and
manages the portfolio accordingly. At December 31, 1999, CGR's
international renewable investments were located in Spain and the
U.K. CGR also holds interests in two U.S. wind-powered
generating facilities - a California QF and a Wyoming EWG.
3. Regional, Convergent Value Chain Integrator: Under this
strategy, the acquisition of "critical mass" within specific
geographic regions is emphasized, with CGR's goal being the
development within that region(s) of integrated energy companies
that operate in multiple parts of the value chain (from
generation to transmission and distribution). Projects under
this strategy must also offer the potential for significant
trading opportunities around the energy commodity. Concentrated
in Western and Central Europe, the strategy envisions ownership
and operation of gas and electric assets (optimized by
rehabilitation and reengineering) which in turn support the
development of a state-of-the-art trading capability. At
December 31, 1999, CGR's investments within this strategy were
located in the U.K.
The following table lists Cinergy's investments in all of its EPAct
Projects as of December 31, 1999./44/
<PAGE>
<TABLE>
<CAPTION> Cinergy's EPAct Projects
<S> <C> <C> <C>
PROJECT COUNTRY STATUS RULE 53
INVESTMENT
1. Copperbelt Zambia commercial $24.4 million
Energy Corporation operation
plc
2 & 3. EOS Pax I, Spain commerical $8.3 million
S.L. & EOS Pax Iia, operation
S.L.
4. Construcciones Spain commerical $4.1 million
y Representaciones operation
Industriales S.A.
5. Parque Eolico Spain commercial $0/45/
de Ascoy, S.A. operation
6. Midlands Bangladesh development $8.7 million
Hydrocarbons
(Bangladesh)
Limited
7. Moravske Czech commercial $40.1 million
Teplarny a.s. Republic operation
8. Plzenska Czech commercial $23.8 million
Energetika a.s. Republic operation
9. EPR Ely Ltd. U.K. construction $6.8 million
10. Aktsiaselts Estonia commercial $5.4 million
Narva Elektrivork operation
11. Dessarrollo Spain commercial $3.8 million
Eolico del Ebro, operation
S.A.
12. Cinergetika Czech commercial $26.6 million
U/L a.s. Republic operation
13. Teplarna Czech commercial $1.5 million
Otrokovice, a.s. Republic operation
14. Energetika Czech commercial $2.8 million
Chropyne, a.s. Republic operation
15. Foote Creek U.S./WY commercial $14.8 million
III, LLC operation
16. Cinergy Global U.K. commercial $3.7 million
Power (UK) Limited operation
17 & 18. Westwood U.S./PA commercial $9.5 million
Operating Company operation
L.L.C./CinCap VI,
L.L.C.
19. VMC Generating U.S./OH&IN construction $365 million
Company
</TABLE>
The following provides more detailed information for each of these
projects (other than the ECBU's Westwood and Duke projects, previously
discussed).
a. Copperbelt Energy Corporation plc
In November 1997, Cinergy and National Grid Company plc ("National
Grid") acquired electric transmission and distribution assets spun-off in
connection with the privatization of the copper mining industry in Zambia.
This was the IBU's first acquisition.
The assets were transferred by Zambia Consolidated Copper Mines
Ltd. ("ZCCM") into a newly created subsidiary, Copperbelt Energy
Corporation plc, a UK company ("CEC"), in which each of Cinergy and
National Grid acquired a 39% ownership interest, with ZCCM retaining a 20%
ownership interest and a local management team (unaffiliated with Cinergy)
holding the balance. CEC's electric assets are located in and around the
city of Kitwe in Copperbelt Province in north central Zambia and include
129 miles of 220 kV and 363 miles of 66 kV overhead transmission lines,
together with associated low voltage distribution facilities and 80 MW of
standby gas turbine generation. CEC delivers 700 MW of power to Zambia's
copper mines and other power consumers within the Copperbelt Province,
comprising over two-thirds of Zambia's total electric demand.
b & c. EOS PAX I, S.L. & EOS PAX IIa, S.L.
In March 1998, Cinergy, together with Tomen Power Company, a
Japanese construction company, acquired EOS Pax I, S.L. & EOS Pax IIa, S.L.
(collectively, "EOS"), two wind farms located in Galicia in northwest
Spain. The wind farms (each of which consists of over 30 wind turbines)
have an aggregate installed generating capacity of approximately 40 MW.
Cinergy and Tomen are 50-50 owners of each wind farm. EOS is in commercial
operation and supplies electricity to Union Fenosa, the regional electric
utility. This transaction was the first under the IBU's global niche
aggregator strategy.
d. Construcciones y Representaciones Industriales S.A.
In April 1998, Cinergy acquired 95% ownership of Construcciones y
Representaciones Industriales S.A. ("Crisa"), another renewable energy
investment. Crisa is located near Murcia in southern Spain and consists of
five mini hydro plants with a total installed electric generating capacity
of approximately 6 MW. The plants are in commercial operation and supply
electricity to Iberdrola, the regional electric utility. Cinergy acquired
its interest in Crisa from Midlands, pursuant to the 1997 agreement with
GPU noted above.
e. Parque Eolico de Ascoy
In April 1998, Crisa purchased a 19.5% interest in Parque Eolico de
Ascoy ("Ascoy"), a wind farm located in Murcia Province in southeastern
Spain. Nine 660 kW wind turbines provide an installed electric generating
capacity of approximately 6 MW. Commercial operations commenced in January
1999. Ascoy supplies electricity to Iberdrola, the regional utility.
f. Midlands Hydrocarbons (Bangladesh) Ltd.
Midlands Hydrocarbons is an EWG that is developing a "gas to power"
project in Bangladesh. The project addresses the urgent need in Bangladesh
for commercially available supplies of indigenous fuels for power
generation.
The project is proceeding in two stages, involving first, the
exploration of fuel for, and second the construction of a power plant.
In the first stage, now underway, Midlands Hydrocarbons, Shell and
Cairn Energy, a UK-based gas and oil exploration company, are conducting
seismic surveys, drilling and otherwise exploring and developing natural
gas concession rights which they own to the Semutang gas field located 37
miles north of Chittagong in Bangladesh. Midlands Hydrocarbons has a 30%
ownership interest in this gas concession. Cinergy acquired Midlands
Hydrocarbons' rights to the gas concession in the spring of 1998 from
Midlands.
In the second stage, Midlands Hydrocarbons and the other investors
would develop, construct, own and operate a power plant sited at or near
the Semutang gas field, fired by the available gas reserves. Initially the
power plant would have at least 40 MW of installed capacity. The plant
would include nine miles of 132 kV transmission line to connect with the
national grid.
g. Moravske Teplarny a.s.
Moravske Teplarny a.s. ("Teplarny") is a combined heat and power
plant in the city of Zlin, located in the south Moravian region of the
Czech Republic. The plant consists of five coal-fired turbine generators
with 48 MW of installed capacity, along with associated distribution
assets, which supply electricity to the regional electric distribution
company, Jihomoravska Energetika ("JME"), together with 10 boilers ranging
from 22 to 150 tons/hour of steam output with 410 MW of installed capacity
which supply district heating and process steam to the Svit industrial
complex and heating to the eastern 40 percent of the city. CGR acquired
100% ownership of Teplarny in June 1998.
Teplarny was the first acquisition under CGR's strategy (the "local
asset rehabilitator" model) to acquire and modernize existing energy assets
located in Central Europe and other regions, capitalizing on Cinergy's
operational and reengineering expertise. CGR has already implemented
various measures to optimize this investment. A computer model has been
created to perform economic analysis of the plant more efficiently and
allow for the evaluation of new equipment. CGR has also conducted a
reengineering study for comparison against the corporate management model.
Third, CGR is adding a new boiler/turbine to the site. The fluidized bed
boiler will provide 125 tons/hour of steam output, while the condensing
turbine generator will have 30 MW of electric capacity. The project is
scheduled for completion by the 2001-2002 heating season.
h. Plzenska Energetika a.s.
In September 1998, CGR acquired 100% ownership of Plzenska
Energetika a.s. ("Energetika"), a combined heat and power plant located in
the city of Plzen, approximately 70 miles southwest of Prague in the Czech
Republic.
The plant consists of three coal-fired turbine generators with 84
MW of installed capacity, along with associated transmission and
distribution assets, which supply electricity to the nearby Skoda
industrial complex, the largest industrial engineering conglomerate in the
Czech Republic, and Ceske Energeticke Zavody, the Czech electric
transmission grid, together with five boilers ranging from 75 to 160
tons/hour of steam output which have over 400 MW of heating capacity and
supply district heating and process steam to the Skoda complex.
Since closing on this acquisition, CGR has developed a long-term
reengineering plan for Energetika, which is well underway. Organizational
restructuring has already reduced material and labor expenses and created a
system of objective performance measurements. Second, capital improvements
have been made to increase performance and produce higher returns. Another
process of adding value is the divestiture of non-core business lines in
order to focus on the core energy business. CGR has restructured these
businesses and has sold the non-core lines.
i. EPR Ely Ltd.
EPR Ely Ltd. ("Ely") is a 36 MW straw-fired electric generation
facility under construction in Ely, Cambridgeshire in the U.K. CGR
acquired a 30% interest in Ely in September 1998. The remaining equity is
held by Energy Power Resources Ltd., a major independent developer of
renewable energy projects in the U.K.
The facility is expected to begin commercial operation in autumn
2000 and will supply electricity to Eastern Electricity plc, a REC. When
completed, Ely is expected to be the world's largest straw-fired power
plant, consuming about 200,000 tons of straw per year and generating enough
electricity to supply about 80,000 homes. The project has a number of
environmental benefits; for example, it will produce virtually no waste
products.
j. Aktsiaselts Narva Elektrivork
Aktsiaselts Narva Elektrivork ("Narva") owns and uses facilities
for the distribution and sale of electricity at retail in northeastern
Estonia, including the cities of Narva, Narva-Joesuu and Sillamae. The
facilities include approximately 300 substations of different voltage and
capacity characteristics, and a distribution network totaling 484 miles
with voltages up to 110 kV. The current maximum system demand is 60 MW.
CGR acquired its interest in Narva pursuant to the Estonian
Government's privatization of Narva's electric distribution network. In
November 1998, CGR and an Estonian investment company, Sthenos Grupp,
jointly acquired a 49% ownership interest in Narva (CGR's allocable share
being 33%). In April 1999, the Estonian Privatization Agency selected CGR
and the Sthenos Grupp to acquire the remaining 51 percent from the Estonian
Government. This transaction closed in May 1999, as a result of which CGR
indirectly owns 67 percent of Narva.
k. Dessarrollo Eolico del Ebro, S.A.
Cinergy acquired 50% ownership of Dessarrollo Eolico del Ebro, S.A.
("Desebro") in December 1998. Desebro is a 15 MW wind-powered facility in
northeast Spain near the City of Zaragoza, which supplies electricity to
Electricas Reunidas de Zaragoza, S.A., a local utility company. The wind
farm began commercial operations in August 1999.
l. Cinergetika U/L a.s.
Cinergetika U/L a.s. (formerly Setuza Energetika a.s.)
("Cinergetika") is a combined heat and power plant located in the city of
Usti nad Labem in northwestern Czech Republic. CGR acquired 100% ownership
of Cinergetika in February 1999. The plant consists of two coal-fired
turbine generators with 14 MW of capacity, along with associated
transmission and distribution assets, which supply electricity to the
nearby Setuza complex (one of the largest Czech producers of food,
household and oleochemical products) and Severoceska Energetika, the
regional electric distribution company, together with four boilers ranging
from 60 to 75 tons/hour of steam output with 230 MW of capacity, which
supply district heating and process steam to the Setuza complex and a
wholesale housing administrator.
m. Teplarna Otrokovice a.s.
Teplarna Otrokovice a.s. ("Otrokovice") is a combined heat and
power plant located in Otrokovice, near Moravske Teplarny, in the Czech
Republic. CGR acquired a 11.4% ownership interest in Otrokovice in March
1999. The plant consists of two coal-fired turbine generators with 50 MW
of electric capacity, which supply electricity to JME, together with five
boilers ranging from 110 to 375 tons/hour of steam output with 349 MW of
capacity, which supply the district heating needs and process steam for
local industrial plants.
n. Energetika Chropyne, a.s.
Energetika Chropyne a.s. ("Chropyne") is a combined heat and power
plant located in Chropyne, near Moravske Teplarny, in the Czech Republic.
CGR acquired 100% ownership of Chropyne in May 1999. The plant consists of
one natural gas-fired turbine generator with up to 2.5 MW of electric
capacity, which supplies electricity to Technoplast industrial complex via
Chropyne's own power and power purchased from JME, together with three
boilers ranging from 20 to 44 tons/hour of steam output with 48 MW of
capacity, which supply the district heating needs and process steam for the
Technoplast industrial complex and local residential housing. This is
CGR's fifth project acquisition in the Czech Republic.
n. Foote Creek III, LLC
In August 1999, Cinergy acquired 100 percent ownership of Foote
Creek III, LLC ("Foote Creek"), a wind farm located near Laramie, Wyoming.
The installed electric generating capacity of 25 MW is provided by 33 wind
turbines. Commercial operations commenced in June 1999. Foote Creek
supplies electricity to Public Service Company of Colorado. Foote Creek is
CGR's first domestic EWG.
o. Cinergy Global Power (UK) Limited
In connection with the sale of Cinergy's stake in Midlands
Electricity, Cinergy acquired 100 percent ownership of the Redditch Power
Station, now held by Cinergy Global Power (UK) Limited ("CGP-UK").
Commissioned in 1991, this open cycle peaking plant has a kerosene-fueled
gas turbine generator with an installed electric capacity of 29 MW. The
unit is dispatched by National Grid during winter peaks and as needed for
system reinforcement. Located in the U.K., Redditch has a power purchase
agreement with National Power. A subsidiary of CGP-UK is Cinergy Global
Trading Limited, a gas and electricity trading business in the U.K., which
was also retained as a result of the Midlands sale. This trading business
will maximize the value of the Redditch electric generating facility. This
transaction was CGR's first under its value chain integrator strategy.
3. Future IBU Investments
The actual use of the proposed investment authority will of course
depend upon available opportunities for investment, but in general these
opportunities are widespread and increasing. They arise both from the
growing need for new generating capacity in developing countries/46/ and
the worldwide movement toward privatized and competitive energy markets, as
governments open up state-owned monopolies to private investors in response
to economic and political imperatives.
The IBU continues to develop and acquire projects under the
three-pronged strategy described above. The Growth Cap would enable CGR
not only to expand its international business along existing lines, but
also to bid for additional large privatizations and secondary sales, while
at the same time enabling the ECBU to build its generation business in the
United States.
a. Local Asset Rehabilitator/ Global Niche Aggregator/ Regional,
Convergent Value Chain Integrator Strategies
The following outlines the IBU's ongoing efforts to develop
Cinergy's international business under the existing strategies. All of
these strategies are subject to change. As CGR pursues its strategies in
these three areas, it continues to look for opportunities in new markets.
For example, much of the expertise gained in connection with the asset
rehabilitation strategy can be transferred to new regions, such as South
America.
1. Local Asset Rehabilitator Strategy: The combined heat and power
plants in the Czech Republic have provided an opportunity for CGR
to apply its rehabilitation and reengineering expertise. The
growing portfolio of Czech projects has created a strong base to
expand into other Central European countries. Recently announced
privatization programs have created new opportunities in these
countries. CGR's Narva (Estonia) acquisition in 1998/1999 is a
variation on the theme of a single asset "play" with value
creation through reengineering. There is significant opportunity
to use this approach throughout the region. CGR is also actively
considering opportunities in South America and Asia. From time
to time, CGR will participate in individual transactions outside
of target areas to further relationships with key partners
(customers, suppliers, other developers, or investors).
CGR's initial investment in Zambia through CEC has opened up
opportunities in southern Africa. Governments in this region are
eager to privatize assets and sponsor IPP development. CGR
believes that the experience it is acquiring through its
investment in CEC will benefit it in other non-target areas.
2. Global Niche Aggregator Strategy: CGR continues to develop its
renewables strategy in Spain where its investments are
concentrated, while at the same time investigating other
opportunities in the rest of Eur ope and in the United States.
By becoming a key player in the renewables market, and building
upon relationships, CGR is able to consider a variety of wind,
hydro and biomass projects.
3. Regional, Convergent Value Chain Integrator Strategy: This
strategy is centered on mid-size generation assets (greenfield or
acquisition) combined with enabling assets (transmission,
distribution, gas, storage). All of these assets must be able to
support power/gas trading and large account retailing. Under
this strategy, CGR's primary areas of focus are the
deregulated/deregulating European markets. The opening of the
European Union ("EU") to competition in the energy value chain
has created new opportunities for cross-border acquisitions and
energy marketing (see discussion below). Specific targets are
the EU countries primarily on the continent as well as Central
European countries.
Brazil may also offer opportunities under this strategy. CGR's
U.K. investment in an electric generating plant coupled with a
gas and electric trading business is the first step in developing
an integrated energy company.
b. Privatizations/Secondary Sales/Public Company Acquisitions
According to Cambridge Energy Research Associates, the pace of
electric privatizations will accelerate in 1999 and 2000 as sales in Brazil
and other Latin American countries continue, the scope of transactions
expand in Europe, and a number of countries in Asia conduct asset sales for
the first time./47/ More specifically, CERA reports that privatizations
are expected to remain strong in Latin America, led by the sell-off of
generation assets in Brazil, the completion of privatization programs in
Colombia, Peru and Central America, and the potential for a commencement of
asset sales in Mexico./48/ Additional important privatization sales are
anticipated in Europe, especially Italy, where up to 15,000 MW of power
plants could be auctioned by 2003./49/ In Asia, South Korea recently
announced that it intends to open up its state-run power generation
industry to foreign investors./50/
The evolving situation in Western Europe points up the range of
opportunities stemming from the continued liberalization and integration of
global energy markets. One of the main catalysts has been the European
Commission, the executive arm of the European Union, through its efforts to
introduce competition in the energy sectors of member countries./51/ The
EC's Electricity Directive called for the formal opening of electricity
markets by February 19, 1999, permitting large-scale consumers (at least 40
GW-hours per year) to shop for their electricity supplier, with choice
extending in phases up to 2003, when electric customers using 9 GW-hours
per year will be able to switch suppliers. (Under the EU's Gas Directive,
phased competition in gas supply is to begin in 2000.) Meanwhile, many
member countries have been opening their market more rapidly. Even before
the Electricity Directive went into effect, nearly two-thirds of the EU
market already enjoyed some level of retail competition for electric
supply, including consumers in Germany, the U.K., Spain and the
Scandinavian countries./52/
This growing electric competition has been accompanied by the
creation of regional power pools to promote and coordinate wholesale
trading. The U.K. Electricity Pool (launched in 1990, involving English
and Welsh participants), Nordpool (launched in 1996, involving Swedish,
Finnish and Norwegian participants, with Denmark a provisional member) and
the Amsterdam Power Exchange (launched in June 1999, involving, among
others, Dutch, German, Belgian, Scandinavian and U.S. participants), among
other similar arrangements, are offering or developing U.S.-style power
trading instruments, such as spot and futures contracts, to meet the
demands of counterparties. As in the U.S., the liquidity and products
afforded by these electricity pools should improve management of system
capacity and lead to lower electricity prices./53/
The Electricity Directive has also sparked a surge in cross-border
acquisitions, joint ventures and strategic stake-building throughout
Western Europe. Examples include Electricite de France's acquisition of
London Electricity for $3.18 billion and the $1.95 billion acquisition of
Stockholm Energi by Imatran Voima, the Finnish power group./54/ U.S.
companies establishing beachheads on the continent include Southern
Company, which in 1997 acquired a 26 percent stake in Bewag, the Berlin
utility, for $830 million, and Reliant Energy, which in March 1999
announced a deal to acquire the Dutch generation group,
Energieproduktiebedrijf UNA, for $2.4 billion. Falling electricity prices
in Germany have ignited a dramatic consolidation of the industry there, as
witnessed by the recently announced $14.1 billion merger between Veba A.G.,
Germany's second-largest utility, and Viag A.G, the nation's third largest
utility; and RWE A.G., Germany's biggest power company, recently announced
that it will acquire VEW A.G., a big regional provider./55/
Acquisitions of foreign utilities can offer many financial and
strategic benefits to the acquiror. One is control of extensive utility
systems already in commercial operation serving large numbers of customers
in a stable political and legal environment. Another is the potential for
significant, immediately accretive impacts on earnings. These transactions
thus help to balance and make practicable investments in greenfield
projects, with their longer lead times and greater risk. And acquisitions
made in the early stages of governmental privatization and deregulation can
serve as strategic "points of entry," opening up opportunities for building
scale economies through additional transactions (in that country or
neighboring regions), as the industry further consolidates, including
through sell-downs by initial purchasers.
All of these points apply to Cinergy's investment in Midlands. The
Company must not be artificially constrained from completing transactions
of similar magnitude and commensurate benefits. The ability to compete for
major privatizations, large secondary offerings and public company
acquisitions is crucial to Cinergy's international business. In turn that
business is a linchpin of the Company's overall corporate strategy for
success.
Item 2. Fees, Commissions and Expenses
Other than the fees relating to proposed financing transactions,
which are described previously, the fees, commissions, and expenses paid or
to be paid or incurred by Applicants or any associate companies thereof in
connection with the proposed transactions, including the applicable fees of
Thelen Reid & Priest, Skadden Arps, Merrill Lynch and DLJ, will be supplied
by amendment.
Item 3. Applicable Statutory Provisions
Sections 6(a), 7, 9(a), 10, 12, 32 and 33 of the Act and Rules 45,
53 and 54 are or may be applicable to the proposed transactions.
Rule 53 provides that if each of the conditions of paragraph (a) is
met, and none of the conditions of paragraph (b) is applicable, then the
Commission may not make certain adverse findings under Sections 7 and 12 of
the Act in determining whether to approve a proposal by a registered
holding company to issue securities in order to finance an investment in
any EWG or to guarantee the securities of any EWG.
Giving effect to the proposed transactions, Cinergy will satisfy
all of the conditions of Rule 53(a) except for clause (1), since Cinergy is
proposing that its aggregate investment exceed 50% of consolidated retained
earnings. None of the conditions specified in Rule 53(b) is applicable.
Rule 53(c) states that in connection with a proposal to issue and
sell securities to finance an investment in any EWG, or to guarantee the
securities of any EWG, a registered holding company that is unable to
satisfy the requirements of paragraph (a) or (b) must affirmatively
demonstrate that such proposal:
will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and
will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of
State commissions to protect such subsidiary or customers.
The Commission has held that these same tests apply to registered holding
company financings of FUCO acquisitions.
The proposed transactions will not result in any such adverse
impacts. As discussed below:
1. Cinergy subjects potential investments in EPAct Projects to a series
of project review screens before any funds are committed. Once funds
have been invested, Cinergy closely monitors project performance and
uses a variety of techniques to mitigate specific risks. More
generally, Cinergy's portfolio diversification approach serves to
mitigate the risks presented by any single project. Open access
transmission service, increasing competition in bulk power markets and
the growing demand for new generating capacity also mitigate risks of
U.S. EWG projects.
2. Wherever practicable Cinergy finances EPAct Projects with non-recourse
debt. Cinergy's 50 percent stake in Midlands was financed with $800
million in non-recourse bank borrowings, in addition to Cinergy's $500
million equity investment. In any event, the Operating Companies will
never finance, lend their credit to, or mortgage their assets in
respect of any EPAct Project, other than potentially in connection
with a transfer of existing regulated generation to EWG status.
3. Cinergy's has a successful track record, as borne out by the recent
sale of the Company's sizable investment in Midlands.
4. Credit ratings and other indicators attest that Cinergy and its
utility subsidiaries are in sound financial condition. The Operating
Companies are not expected to need any funds from Cinergy to finance
capital requirements through at least year-end 2004.
5. Just as with the existing and prior investments, Cinergy will
prudently finance the new investments, to preserve the financial
integrity of Cinergy and the Operating Companies. Cinergy has
developed a comprehensive financial model addressing the expected
financing and likely impacts of the proposed new investments, the
results of which indicate that the financial performance of Cinergy
will be enhanced without undermining the financial integrity of the
Operating Companies.
Cinergy retained Merrill Lynch to perform a credit analysis with
respect to the proposed EPAct Projects covered by the Growth Cap. On
the basis of and subject to the matters set forth or referred to in
its letter dated February 16, 2000, Merrill Lynch was of the view
that, as of such date, the credit ratings of Cinergy, CG&E and PSI
would not be expected to fall below investment grade due to
investments in EPAct Projects as outlined in this application.
Finally, Cinergy will not issue any additional debt to finance
investments in EPAct Projects covered by the Growth Cap if Cinergy's
senior debt is not rated investment grade by at least two of the major
ratings agencies.
6. The Operating Companies and their customers will remain insulated from
the direct effects of Cinergy's project investments. In the first
place, the Operating Companies will continue to have no involvement in
financing the acquisition of any EPAct Projects, except potentially in
connection with the transfer of existing generating facilities owned
by them to EWG affiliates. Any transfer of such assets to EWG status
will conform to the requirements of section 32 of the Act, including
the requirement for speci fic findings from Cinergy's state
commissions. Third, Cinergy will not seek recovery through higher
rates to the Operating Companies' customers for any losses or
inadequate returns from project investments.
7. Cinergy's 1994 merger commitments, and the recently enacted
legislation in Ohio providing for customer choice in the supply of
electricity, provide further assurances that the proposed transactions
will not adversely affect the Opera ting Companies or their customers
or the affected state commissions.
8. Prior to filing this application, Cinergy held numerous meetings with
the commissioners and staff of the Ohio, Indiana and Kentucky
commissions. All three of these commissions have submitted letters to
this Commission stating that, based on the commitments of Cinergy and
subject to the qualifications referred to or stated therein, Cinergy's
proposal will not have an adverse impact on their ability to protect
Cinergy's utility subsidiaries or their retail customers.
With respect to restructuring Cinergy's existing retail-based
regulated generation to EWG status pursuant to the Restructuring Cap,
Cinergy submits that these transactions are fundamentally different from
acquisitions of new projects, and should be considered in that light.
Cinergy already owns these assets and has for many years. The Company
proposes to transfer title to these assets within its affiliated group of
companies, from the utility to the nonutility side of its business, in
response to or anticipation of state legislation deregulating electric
generation and supply. Given that Cinergy owns these properties today, and
upon consummation of the restructuring transactions will still own such
properties, there is in substance no new investment. The Division of
Investment Management has recommended such restructuring transactions like
these be exempted from Commission review. As the Commission itself
recently emphasized, in a different context under the Act, "Our analysis
... is guided by the substance of the proposed transactions and not their
form."/56/
In any case, as discussed earlier, Cinergy should not incur any
material increase in its consolidated debt to finance these restructuring
transactions, and any incremental debt at Cinergy or the EWGs will be
largely offset by reduced debt at CG&E/PSI. Cinergy is working with DLJ to
finance the restructuring transactions in a prudent manner and will
transfer the assets at the lowest transaction cost practicable. The
internal transfers and associated financings should not themselves
adversely impact the credit ratings of Cinergy, CG&E or PSI; any such
impact arises rather from state deregulation and loss of monopoly supplier
status.
A. Project Review Procedures/Risk Mitigation Techniques
Cinergy subjects all proposed investments in EPAct Projects to a
series of screens, analyses and reviews before any funds are committed.
Thereafter Cinergy regularly monitors project performance. These processes
- - enhanced since the Commission issued the 100% Order - mitigate the risks
presented by EPAct Projects and serve to protect the financial integrity of
Cinergy and the Operating Companies. As described below, these processes
consist of:
Cinergy's annual strategic planning process, including key performance
indicators, or KPIs, and quarterly reviews;
Cinergy's global risk management function, which has responsibility
for evaluating and mitigating risks arising from Cinergy's
investments;
Cinergy's capital investment process for allocating funds to specific
projects; and
The additional prior review and monitoring processes specifically
applicable to foreign utility investments.
In addition to these processes, Cinergy uses various techniques to
minimize the specific types of risks posed by EPAct Projects. These
techniques are also described below, after an overview of the investment
screens and reviews, which immediately follows.
1. Strategic Planning Process
Cinergy has a number of processes in place in order to ensure that
EWG and FUCO projects will not impair Cinergy or the Operating Companies.
One of the first processes, or screens, is Cinergy's strategic planning
process.
The strategic planning process is both an annual process and an
ongoing process throughout the year. Each proposed EWG or FUCO project is
scrutinized with a view to whether it fits strategically with the direction
of Cinergy. In order to assess strategic fit, there are five criteria
which each project must meet: does it give the organization a sustainable
competitive advantage? add to shareholder value? does it link with the
internal corporate strategies effectively? is the risk profile of the
project acceptable to Cinergy? and is the size of the opportunity
satisfactory? Besides strategic fit, other items which are reviewed during
the strategic planning process are the pro forma financials for the
proposed project, the key assumptions associated with the pro formas, and
key decisions which need to be made in order to move forward with the
project.
In addition to the above information, proposed EWG and FUCO
projects are requested during the strategic planning process to supply key
performance indicators ("KPIs"), or quantification of expected business
results, which indicate if the project is adding value to the firm. The
KPIs established through the strategic planning process are monitored not
only by the strategic planning organization, but also through Cinergy's
quarterly review process of its business units.
Each quarter, Cinergy's business units are required to meet with
the chief executive officer and chief financial officer of Cinergy to
discuss not only their quarterly financial results, including EWG/FUCO
projects, but also how they are performing against their KPIs for their
business unit, including EWG/FUCO projects.
Therefore, through the strategic planning process, including
establishment of KPIs and quarterly reviews, EPAct Projects are subjected
to rigorous advance screening and continuous review to ensure that they are
consistent with Cinergy's strategic objectives and adding value to the
organization.
2. Global Risk Management Function
Cinergy has taken an enterprise-wide approach to risk. Within
Cinergy's finance department is a group charged with global risk management
for Cinergy and its subsidiaries. With the support of Cinergy's Board of
Directors, this group, or function, is responsible for identifying,
measuring, mitigating and monitoring the full spectrum of risks affecting
the business of Cinergy and its subsidiaries.
For instance, this group led the effort to put in place the process
described in the next section, a project which resulted in mandatory,
formal investment committee review for all investments above a certain
dollar amount. This group is also responsible for identifying energy
commodity marketing risks, and making sure that risks above a certain level
are brought before Cinergy's Risk Policy Committee. Cinergy's global risk
management function has helped the corporation understand that risk
management spans all aspects of Cinergy's business - from making good
initial decisions, managing transactions after closing, and exiting when
appropriate.
3. Capital Investment Review Process
Since filing the 100% application, Cinergy has implemented a
comprehensive capital investment review process applicable to all proposed
investments. Each proposed investment is subjected to a three-phased
review process including decisional checkpoints, the primary responsibility
for which resides in the business unit that originated the proposal.
Cinergy's global risk management group helps to coordinate the entire
process. Depending on the size of the proposed investment, before funds
are committed, approval must be obtained for the investment from the
business unit president, Cinergy's Investment Committee and the chief
executive officer, and/or Cinergy's Board of Directors.
The first phase, the "identification phase," includes an initial
strategy screen and an initial analysis screen by the business unit project
sponsors. The initial strategy screen determines whether a proposed
investment fits within the Company's and business unit's explicitly stated
strategy. The initial analysis screen is designed to evaluate the high
level economics and risks of a project.
The second, or "assessment phase," includes a detailed analysis
screen and a due diligence screen by the business unit. The detailed
analysis screen consists of activities to develop a more detailed economic
analysis. A discounted cash flow analysis is completed that accounts for
project economic elements, drivers, opportunities, and risks. The due
diligence screen is a risk mitigation process that focuses on understanding
all relevant issues and risks related to the project valuation identified
during the economic valuation as well as those identified subsequent to the
valuation.
The "management review and approval phase" consists of the
execution and monitoring steps of the process. The execution of a project
occurs after final approval is received from the appropriate internal
authority (see below). Once a project is executed and is operational, the
business unit has responsibility for tracking the performance of the
project. Actual project results are compared to anticipated results and
differences are adequately researched and explained.
In addition to the identification, assessment and management
processes just described, which are carried out at the business unit level,
Cinergy's capital investment review process can involve many individuals
across the corporation with varying levels of responsibility. The level of
involvement, and the need for prior internal approvals outside the
particular business unit, depends on the size of the proposed investment.
For these purposes, there are three levels of investment (up to $5 million
and between $5 and $25 million being the first two thresholds), with all
proposed investments in equity, corporate guarantees or recourse financial
debt in an amount greater than $25 million (the third threshold) requiring
prior approval from Cinergy's Board of Directors. (The specific dollar
thresholds currently in effect are subject to change.)
The business unit project sponsors have the primary responsibility
for managing projects throughout the investment process. This
responsibility includes, but is not limited to:
1. Originating project ideas
2. Developing project economics
3. Leading the project through the approval process
4. Presenting the project for approval
5. Executing the project
6. Monitoring project performance
The role of the Corporate Center in the review process is to assist
and advise the business units in developing complete project proposals. As
such, various groups within Corporate Center are required to review and
sign-off on projects prior to their presentation to management when called
upon by the business unit initiating the project or by Cinergy's Global
Risk Management group.
Business unit presidents have final approval authority for all
projects up to a certain threshold level (currently $5 million) originating
from their respective business units. Additionally, business unit
presidents have responsibility for reviewing and sponsoring projects in
excess of $5 million submitted for review to Cinergy's Investment
Committee.
The Investment Committee is a corporate oversight group that
assists in ensuring significant investments made by Cinergy's business
units are consistent with corporate strategy and have been adequately
analyzed to identify value, risks, and benefits to the corporation. The
committee consists of senior executives of Cinergy, namely:
1. Presidents of each of the business units
2. Corporate Chief Financial Officer
3. Vice President of Corporate Services
4. General Counsel
The committee is responsible for reviewing and making recommendations to
Cinergy's chief executive officer ("CEO") on all capital projects in excess
of $5 million. Additionally, the committee is responsible for reviewing
unique/new-to-the-Company investments on an informational/screening level
at the initial analysis gate of the investment process.
The CEO has final approval authority for all projects between $5
million and $25 million. Additionally, the CEO is responsible for
reviewing and making recommendations to the Board of Directors on all
capital projects in excess of $25 million.
The Board of Directors approves all investment projects in excess
of $25 million. The Executive Committee of the Board reviews projects
requiring Board of Directors approval if presented between formal board
meetings.
Through this formal process, then, all business units must analyze
projects using the same rigorous criteria. And depending on the size of
the project, progressively greater scrutiny throughout Cinergy is applied,
with the requirement for Investment Committee and CEO approval (in addition
to approval from the president of the business unit sponsoring the project)
for all projects in excess of $5 million and Board of Directors approval
for all projects greater than $25 million. Thus, Cinergy's capital
investment review procedures help ensure that Cinergy's EPAct Projects will
not adversely impact the Company or its utility subsidiaries.
4. International Project Review and Performance Management
International projects undergo additional rigorous screening,
analysis, and review processes. Senior management of Cinergy Global Power
Services, or CGPS (Cinergy's international project development subsidiary,
earlier described), CGR and, under certain circumstances, Cinergy itself
are extensively involved in the up-front decision making before projects
are bid on and in the continual monitoring of existing project results.
New projects must pass multiple criteria and five key review points
in order to move to financial closure. Throughout the process, risks are
monitored to ensure they can be effectively mitigated. Potential projects
are first identified by the CGPS or CGR development groups. Second,
analyses are made regarding country characteristics and financial
considerations. Key project evaluation factors include the host country,
host government, partner profile, energy demand, and project structure.
The capital investment review team within Cinergy's global risk management
group is typically notified of the project under consideration at this
point, so that they can work in conjunction with the International Business
Unit in moving the project further through the screening process. The
third phase involves due diligence and formal analysis including
preliminary financial analysis. Due diligence typically involves both
resources from CGR and the Cincinnati Corporate office. Fourth, an initial
decision is made whether to proceed further or not. If the project has
progressed this far, third party consultants are typically brought in to
provide additional legal and financial advice. The fifth key analysis is a
financial model which assesses the net present value and internal rate of
return of the project. The model is run based on different risk scenarios.
Having successfully completed this process, final approval is then sought
in compliance with the capital investment review parameters before an
actual bid is submitted. Depending on the size of the bid, prior approval
will be required from the IBU president (up to $5 million), the Investment
Committee and CEO (>$5 million to $25 million) and/or Cinergy's Board of
Directors (>$25 million).
Cinergy Global Resources and CGPS management have determined key
value drivers for all projects in order to extract the most value from each
asset held in the International Business Unit. Key performance indicators
are defined for each business by metric and time scale such that management
can effectively monitor existing assets. Examples of such key performance
indicators include financial reengineering, business restructuring, and
asset upgrades. On a quarterly basis the international management team
along with Cinergy's CEO meet to review individual project's progress
against those goals (see discussion above, "strategic planning process").
In addition, when existing businesses are acquired, monthly board
meetings with the project companies are held to review performance.
Cinergy Global Power Services also conducts monthly internal management
meetings, which include personnel from CGR and Cinergy Services in
Cincinnati, to discuss the status of all existing projects, including those
under development.
For projects under construction, the primary development manager
for the project is responsible for monitoring progress. Additionally,
monthly construction reports are distributed to provide updated information
regarding progress versus the budgeted completion time and costs.
To monitor Cinergy's investment in Midlands, monthly management
meetings were held along with periodic visits to the U.K. These were
normally attended by the president and chief financial officer of the
International Business Unit. Financing tools, hedge agreements, and
progress toward reengineering goals were all continually monitored.
5. Risk Mitigation/Specific Project Risks
In conjunction with the project review processes described in the
preceding sections, Cinergy carefully evaluates, and takes steps to
mitigate, the various types of risks presented by EPAct Projects. The
significant risks are as follows:
a. Operating Risks
Operating risks are those risks that present themselves in the day
to day course of operating power plants and other EPAct Projects assets.
Examples include fuel supply, safety issues, mechanical malfunctions and
labor disruptions. These risks are addressed by Cinergy in a number of
ways.
First, Cinergy's expertise and competence in electric and gas
utility technologies serves to minimize operating risks of projects in
which it invests. Through its domestic utility businesses, Cinergy owns
and/or operates 11,200 MW of electric generation facilities, as well as
extensive electric transmission and electric and natural gas distribution
facilities. Cinergy's safety record is outstanding and operating
achievements numerous. Cinergy thus has gained a wealth of technical
expertise and practical knowledge in managing a broad range of operating
risks intrinsic to electric and gas utility systems.
Second, extensive due diligence is performed before each
development project is commenced or acquisition of existing assets is
closed to ensure that all significant risks are identified and addressed up
front. This due diligence is conducted by Cinergy engineering staff having
extensive technical expertise in the particular technology involved. In
addition, outside technical consultants may be retained, both in the due
diligence process and after the project has been acquired or development
has begun, in order to maximize the project's value and further minimize
risks. In certain cases the due diligence review may result in the
transaction being aborted.
Fuel price risk for generation facilities can be managed in many
ways: through supplier contract terms; through some level of cost pass
through to customers; or by designing a facility to burn dual or multiple
fuels. Other operating risks can be addressed through equipment
warranties, casualty insurance, equipment supplier guarantees and other
insurance.
b. Construction Risks
Any development project or acquisition that requires substantial
reconstruction or overhaul will present construction risks to be managed.
As with operating risks, Cinergy has a long, successful history of
construction project management, in the areas of electric generation and
transmission and electric and gas distribution facilities. Longstanding
relationships exist with original equipment manufacturers, architectural
and engineering firms and construction companies. Cinergy has extensive
experience in working with outside contractors to manage the multitude of
construction-type risks that could arise.
Some construction risks are managed through contract terms. This
can be done through fixed price contracts, performance guarantees such as
heat rate or availability, or construction milestone incentives or penalty
provisions. To manage the credit risks some contractors may present,
Cinergy attempts to deal mainly with large, national contracting firms. In
all cases, the contractors must be approved as to their creditworthiness,
and when necessary Cinergy requires appropriate bonding, letters of credit
and/or damage provisions.
c. Commercial Risks
Historically, independent power projects tended to rely on the
"off-take" and payment commitments of a single power purchaser, usually the
local utility company, to eliminate all or most of the risk of variation in
revenues. In cases where this model still applies, Cinergy would make an
assessment of the credit-worthiness of the power purchaser over the life of
the project, with the risk of non-payment being factored into the overall
project risk.
As previously discussed, however, in today's increasingly
competitive markets traditional IPPs are becoming more the exception than
the rule. IPPs are being displaced by merchant plants, which sell their
output under short-term contracts or into the open market, where
electricity prices are determined by the economic laws of supply and
demand. Cinergy assesses potential investments in merchant facilities
based on an underlying analysis of the wholesale power market in the
relevant geographic area. This analysis includes models which simulate the
market and the dispatch order of existing and planned power plants. These
models form the basis for Cinergy's economic evaluation of potential
merchant projects and their expected performance. In general, Cinergy
seeks to ensure that the merchant plant will be capable of producing
electricity at or below the long-run marginal cost in the region, so that
the project can be a competitive supplier in a non-regulated environment.
In addition, as discussed earlier, Cinergy's wholesale energy
marketing business benefits Cinergy's domestic EWG projects, significantly
reducing commercial risks. In competitive energy markets, where supply and
demand balances and imbalances dictate the price for energy, the single
most effective risk management tool is to have a sophisticated marketing
and trading organization that is actively involved in energy markets on a
continuous basis, as Cinergy does. The energy traders can identify
emerging trends and manage risks on a daily, monthly and year forward
basis. It is also imperative to maintain, as Cinergy does, an active
supply and demand analysis of each market as well as a forward price curve
(expectation) for energy markets. The ECBU continually analyzes not only
market dynamics, but the cost to operate generating facilities. In short,
an active, skilled energy trading organization is an essential complement
to, and risk-reducer of, owned electric generation assets, including EPAct
Projects. Conversely, those physical assets are an important hedge for the
wholesale supply business. The two are correlated and mutually beneficial.
d. Financial Risks
Cinergy addresses financial risks associated with investments in
EPAct Projects in a variety of ways.
First and foremost, Cinergy seeks to leverage each EPAct Project in
which it invests with the maximum principal amount of permanent
non-recourse debt that the EPAct Project can obtain in the marketplace and
prudently incur.
For these purposes "non-recourse debt" means debt that is fully or
partially non-recourse to Cinergy, secured solely or primarily by the EWG
or FUCO (including any special-purpose subsidiary created to acquire or
hold the EWG or FUCO investment) and its assets and revenues. Under such a
financing structure, by definition, the debt is that of the EPAct Project
and not Cinergy or its other system companies, so that upon default, the
non-recourse lenders have no (or only limited) recourse to Cinergy for
repayment of the funds borrowed by or on behalf of the Exempt Project, but
must exercise remedies exclusively against the EPAct Project and its assets
and revenues.
Such non-recourse lending serves also as an independent check and
validation of the due diligence procedures performed by Cinergy prior to
investing in the EWG or FUCO, since the non-recourse lenders will not
commit to lend to the project unless they are satisfied that it will
support repayment of their principal and carrying charges.
The amount of non-recourse debt that Cinergy will be able to
arrange in connection with its investments in EPAct Projects will
necessarily depend in part on the existing capitalization of the EPAct
Project in question; for example, the project company may already have a
significant amount of debt on its balance sheet, limiting its capacity for
further leverage.
Where Cinergy is successful in obtaining non-recourse debt
financing, the project debt will be carefully structured to match the
characteristics of the project. For example, if the value of the project
depends on a long-term, fixed price, off-take PPA, the project debt would
typically be designed to have a similar term, with scheduled debt payments
usually covered by fixed payments of at least an equal amount under the PPA
(usually the capacity payment component in the contract).
On the other hand, where there is no long-term, fixed source of
revenue (as with merchant plants), the percentage of non-recourse debt
financing would typically be smaller.
Approximately 60 percent of the purchase price paid by Cinergy and
GPU for Midlands in 1996 (about $1.6 billion, Cinergy's share of which was
$800 million) was financed with non-recourse bank borrowings.
e. Interest Rate Risk
Another financial risk - interest rate variability/57/ - is
addressed, in part, by borrowing on a fixed-rate basis or by purchasing
financial instruments that fix or cap variable interest rates. The effects
of interest rate volatility can be mitigated principally through two
strategies: hedging and diversifying. Hedging is designed to limit or
remove exposure to risk. For example, interest rate hedging could be in
the form of purchasing U.S. Treasury securities before the issuance of debt
to lock-in most of the coupon spread on an ensuing sale of long-term debt
(the position is unwound at pricing and the gain/loss on the hedge offsets
any change in the general level of interest rates on the debt). After an
issuance, hedging could be effected through the purchase of interest rate
caps, which limit the rate payable on floating rate debt to a certain
prescribed maximum, or swaps, which would fix the rate at a known level for
a period of time. Diversification involves spreading liabilities among
short- and long-term debt instruments and fixed and floating interest
obligations.
f. Foreign Currency Exchange Risk
Cinergy implements foreign currency risk minimization strategies
when it enters into projects that subject it to material foreign exchange
rate risk. For instance, this risk can be significantly mitigated where
project-related debt is borrowed in the same currency as the project
revenues and expenses, ensuring a match between debt service obligations
and operating income. In addition, Cinergy evaluates the various
approaches available to mitigate foreign currency exchange risk based on
the anticipated project return and timing of cash flows. Various types of
both option-based (e.g., call, put and average rate options) and fixed rate
instruments (e.g., futures contracts and currency swaps) are readily
available from numerous domestic and foreign counterparties.
g. Legal Risks
Legal risks are addressed by careful review of any potential
investment by qualified legal counsel (including local and international
counsel, if applicable). The legal review typically focuses on such
concerns as (i) regulatory, permitting and environmental risks; (ii) status
of title to utility property; (iii) human resource and employment issues;
and (iv) the nature and extent of the obligations, and enforceability
thereof, of the project parties under the project agreements and
instruments, including both the commercial and operating agreements and the
shareholder or equity agreements, debt financing agreements, third-party
guarantees and the like.
h. Country Risks
In addition to the specific risks mentioned above, investing
outside the U.S. can entail country-specific risks related to political or
economic performance. Cinergy evaluates country risk as part of the
project review process (described above) and mitigates this risk through a
number of measures. Most important, this review process ensures that the
political and economic stability of any country in which Cinergy invests
has been scrutinized at several managerial levels before any investment
occurs. In addition to a general review, the country analysis focuses
specifically on the country's energy sector and the government's support
for private ownership. If appropriate, introductory discussions are
arranged to facilitate dialogue between the local political community and
Cinergy management.
Also at the outset of development work in a foreign country,
Cinergy may seek local and international partners who are experienced in
doing business in the host country and internationally. For many of the
existing investments that Cinergy has described above, Cinergy is
partnering with other equity investors in the project, quite often
investors who themselves have had extensive experience in building,
operating or investing in international energy projects. Such partners can
be a very important element in mitigating the risk of expropriation or
unfair regulatory treatment.
Cinergy has also, in effect, partnered with numerous official or
multilateral agencies for many of its projects. When funds for a project
are supplied by government-sponsored export credit agencies or other
governments or institutions, such as the World Bank through its
International Finance Corporation affiliate, the host country has strong
incentives not to take actions which would harm the project's viability.
Political and currency convertibility risk can often be addressed through
insurance obtained from the Overseas Private Investment Corporation, a
United States agency, or the Multilateral Investment Guaranty Agency, a
World Bank affiliate, or in the commercial insurance market. Political
risk insurance is available to insure the project debt or the return of an
investor's equity and can also protect against outright, expropriation,
acts of civil violence or even "creeping" nationalization brought about by
punitive regulation. Cinergy typically analyzes the perceived political
risk of a project and the associated costs, and obtains insurance when the
costs associated with the risk exceed the costs of the related insurance
coverage.
i. Liquidity Risk
An "exit" strategy is an important element of liquidity risk
mitigation. Investment liquidity is analyzed during the project review
process by identifying exit options, such as potential investors. In
addition to partners already committed to the investment, potential
investors typically include local and international businesses which may
seek vertical or horizontal integration./58/ Increased investment
liquidity enhances the ability to maximize economic performance and the
ability to optimize returns./59/
In 1995, Cinergy employed this return-maximization strategy in
liquidating its investment in Central Costanera. In 1998, Cinergy repeated
this return-maximization strategy in liquidating its investment in Edesur.
Cinergy realized a substantial after-profit gain in each case.
The most important instance, however, is Cinergy's recent
disposition of its investment in Midlands. On July 15, 1999, Cinergy sold
its 50 percent ownership interest in Avon Energy Holdings, the parent
company of Midlands, to GPU for approximately $700 million in cash,
contributing $0.43 per share to Cinergy's 1999 earnings.
Since acquiring half-ownership of Midlands in 1996, Cinergy had
realized significant financial and other benefits from the investment.
However, with Midlands' agreement in late 1998 to sell its electric supply
business to National Power and focus on regulated distribution, the growth
opportunities of this investment had become limited. Moreover, the general
expectation was that the distribution rates for Midlands and the other RECs
would decrease by up to 20 percent starting April 1, 2000. In fact,
shortly after Cinergy closed the sale to GPU, the U.K. Office of Gas and
Electricity Markets proposed even more substantial cuts, between 25 and 30
percent for the first year, with a further cut of 3 percent below the
inflation rate annually for the next four years.
With respect to the domestic market, in recent years there has been
a strong seller's market for (non-nuclear) generating assets. Partly this
reflects the growing demand for electricity as well as the high quality of
many of the assets being divested in utility auctions. There are many
buyers seeking to gain market share, reduce risks through ownership of
assets in different regions of the country, and/or enter new markets.
6. General Factors Mitigating Project Risks
a. Portfolio Diversification
The risks inherent in any particular investment cannot be
eliminated entirely, even by the most careful approach to project
development. Given these practical realities, the best long-term approach
to managing risks is portfolio diversification, both in terms of the
location and the type of project.
With regard to location, Cinergy is committed to diversifying its
investments throughout key markets in the U.S. and across countries and
regions of the world. Regional diversification outside the U.S. is
important because economic and political instability may affect multiple
countries within a single region. Cinergy has substantial investments in
the U.S., Europe, Africa and Asia and previously invested successfully in
South America.
With regard to risk mitigation through diversification in project
type, Cinergy seeks a balance between facilities in commercial operation
and greenfield projects (new construction). Many of Cinergy's investments
have been in the former category - existing projects or companies with
established markets and customer bases. Midlands is the prime example.
Others include the Czech acquisitions described above, the Zambian
transaction and the investment in Narva. These acquisitions reduce the
risk of Cinergy's overall business by producing near-term earnings without
significant development or construction risk.
Together with investments in existing facilities, Cinergy also
invests in greenfield projects. Greenfield projects involve a higher
degree of risk because of development and construction. Funds are expended
during the early years, and a return on investment is not earned until the
project is in operation. Although these projects have higher levels of
risk and deferred returns, they are an important component of a diversified
portfolio, since they are expected to produce higher rates of return than
investments in existing assets. Here the leading example is the joint
venture with Duke, pursuant to which 1400 MW of wholesale peaking
facilities are under construction in the Midwest. Two other examples are
the Semutang gas-to-power project in Bangladesh and the Ely biomass project
in the U.K.
The objective of such a portfolio strategy is to ensure that
Cinergy is not dependent on any single country, regulatory environment, or
type of asset for its earnings from EWGs and FUCOs.
b. Domestic EWGs/Open Access Transmission & Subsequent
Developments
As discussed above, in 1996 the FERC put in place the foundation
necessary for competitive wholesale power markets in the United States -
open access transmission.
Since that time, the industry has undergone sweeping restructuring
activity, including a movement by many states to create retail competition,
the growing divestiture of generation plants by traditional electric
utilities, and a significant increase in the number of mergers between
traditional electric utilities and between electric and gas utilities./60/
Many new competitors are entering the industry, such as power
marketers and IPP developers. For example, in the first quarter of 1995,
there were eight power marketers (either independent or affiliated with
traditional utilities) actively trading in wholesale power markets, but by
the second quarter of 1998, there were 108 actively trading power
marketers./61/ The FERC has granted market-based rate authority to well
over 500 wholesale power marketers, some of which are independent of
traditional investor-owned utilities, while others are affiliated with
traditional utilities or are traditional utilities themselves./62/ At the
same time, there has been a significant growth in the volume of trading in
the wholesale electricity market. In the first quarter of 1995, power
marketer sales totaled 1.8 million MWh, but by the second quarter of 1998,
power marketer sales had escalated to 513 MWh./63/ Nonutility generation
is increasingly being operated competitively, as merchant plants rather
than IPPs.
In short, as evidenced by the expansion of nonutility generation, the
twin drivers of open access transmission service and increasing electric
demand have fundamentally mitigated risks of EWG ownership.
B. Financial Results & Other Benefits/Prior Investments
Cinergy's investments in EPAct Projects have benefited shareholders
and the public, and have not had any adverse impact on Cinergy's utility
subsidiaries.
Cinergy's earnings from international operations increased from $15
million in 1996, adding 10 cents to Cinergy's earnings per share ("EPS");
to $29 million in 1997, adding 18 cents to EPS (before Cinergy's share of
the windfall profits tax, equal to 69 cents per share); to $31 million in
1998, adding 20 cents to EPS. For 1999, the IBU contributed 59 cents to
EPS, 43 cents per share from the sale of Midlands in July and 16 cents per
share from normal operations (including earnings from Cinergy's investment
in Midlands for the first six months of the year)./64/
Back in 1996, earnings from the Midlands investment contributed to
the decision later that year to increase the quarterly dividend paid to
Cinergy's shareholders, from $1.72 to $1.80 per share on an annualized
basis.
Cinergy has proven too that it is skilled in extracting financial
benefits from opportune "cash outs," or "monetizations," of project
investments, where that action is appropriate under the circumstances. For
example, the Company sold both of the Argentine investments originally
acquired in 1992, realizing a $6.4 million gain (net of taxes) on the 1995
sale of its interest in Central Costanera, and a $13 million gain (net of
taxes) on the 1998 sale of its interest in Edesur.
This expertise was demonstrated most convincingly in regard to
Cinergy's largest investment, Midlands. Cinergy held its $500 million
investment for three years, before agreeing in light of various factors to
sell its stake to the other co-owner, GPU, for approximately $700 million
in June 1999. The timing was particularly propitious for Cinergy. The
transaction preceded an announcement by the U.K.'s primary utility
regulator proposing sharp reductions (significantly higher than expected)
to Midlands' electric distribution rates, Midlands sole remaining electric
business following the recent sale of its supply operations.
The Midlands investment also provided important non-financial
benefits. For one thing, Cinergy gained valuable, "hands-on" experience in
competitive electricity markets. Unlike the U.S., the U.K. has completely
opened up its retail electricity supply markets to competition. The
lessons learned from this experience have helped Cinergy prepare for
impending competition in its own retail markets. And through its Midlands
investment, Cinergy laid the foundation for further growth in its
international business, by acquiring (at nominal cost to Cinergy) the MPI
project development team and rights to various projects in preliminary
stages of developments (see discussion earlier). These individuals now
work out of the U.K. for Cinergy Global Power Services, forming the core of
Cinergy's international project development team.
Benefits to the public also accrue from the specific strategies
that CGR has been implementing. Clean energy projects are one strategic
priority, with CGR now holding numerous wind farms and other renewable
energy projects in operation or under construction the U.S., the U.K. and
the Continent. Renewable resources provide an unlimited fuel supply for
electricity generation and in turn produce little or no waste. Savings are
passed on to the public and the environment in various forms, including
lower prices and less consumption of irreplaceable fuels.
Similarly, CGR's asset "rehabilitator" strategy, which to date has
focused on Central Europe, is predicated on refurbishing and modernizing
energy assets that often are antiquated, "dirty" and in substandard
operating condition.
C. Current Financial Condition of Cinergy & Operating
Companies
Cinergy and the Operating Companies are in sound financial
condition.
1. Cinergy
At December 31, 1999, Cinergy's consolidated capitalization ratios
were 43.5% equity and 56.5% debt (including short-term debt of $550
million).
Cinergy's senior unsecured debt is rated investment grade by all
the major rating agencies. The following ratings were in effect as of
December 31, 1999:
<PAGE>
<TABLE>
<CAPTION> Cinergy Senior Debt Ratings
<S> <C> <C> <C>
D&P Fitch Moody's S&P
BBB+ BBB+ Baa2 BBB+
</TABLE>
At December 31, 1999, Cinergy had a market-to-book ratio of 1.43,
which exceeds the median market-to-book ratio of 1.36 for a benchmark group
of the largest electric utilities./65/ Market-to-book ratio reflects the
market's expectations of future performance.
Cinergy's dividend payout ratio exceeded the benchmark average for
1998 and 1997, partly due to certain one-time charges against income
resulting from, with respect to the ratio for 1998, implementation of a
1989 settlement of a dispute with Wabash Valley Power Association, Inc.
based on cancellation of PSI's Marble Hill nuclear power station in 1984
and, with respect to the ratio for 1997, Cinergy's share of the windfall
profits tax assessed against Midlands by the British Government. (For
further information see Cinergy's Annual Reports on Form 10-K for the years
ended December 31, 1998 and 1997.)
<PAGE>
<TABLE>
<CAPTION> Dividend Pay-out Ratio
<S> <C> <C> <C> <C>
1999 1998 1997 1996
Cinergy 71% 109% 111% 82%
Benchmark
Average/66/ 67% 72% 86%
</TABLE>
With respect to relevant financial benchmarks specifically
contemplated by the terms of Rule 53, none of the conditions enumerated in
paragraph (b) thereof is applicable:
1. there has been no bankruptcy of a Cinergy associate company
(cf. Rule 53(b)(1));
2. Cinergy's consolidated retained earnings for the four most
recent quarterly periods have not decreased by 10% from the
average for the preceding four quarterly periods (cf. Rule
53(b)(2)); and
3. Cinergy has never reported a full-year "operating loss"
attributable to its EPAct Projects (cf. Rule 53(b)(3)).
Cinergy will notify the Commission in writing if any of the
circumstances described in Rule 53(b) arise during the Five-Year
Period. Cinergy will remain in compliance with the requirements
of Rule 53(a), other than Rule 53(a)(1), at all times during the
Five-Year Period.
2. Operating Companies
a. Indicators of current financial strength
The Operating Companies are in strong financial condition, as
indicated by such factors as debt/equity ratios, interest coverages and
securities ratings.
The following table sets forth debt to total capital ratios for the
Operating Companies over the last four years:
<PAGE>
<TABLE>
<CAPTION> Total Debt as % of Capitalization
<S> <C> <C> <C> <C>
1999 1998 1997 1996
CG&E/67/ 47% 48% 50% 52%
ULH&P 46% 45% 36% 39%
PSI 57% 56% 48% 49%
</TABLE>
CG&E's and ULH&P's interest coverages have generally exceeded
industry averages for "A-" rated electric utilities, reflecting a strong
ability to meet interest requirements. Industry ratios at December 31,
1999 and December 31, 1998 stood at 3.02 and 3.35, respectively./68/ PSI's
ratios for 1998 and 1999 have not met the industry standard, due to certain
charges against income. (For further information see PSI's Annual Report
on Form 10-K for the year ended December 31, 1998 and Current Report on
Form 8-K dated August 10, 1999.) All of the Operating Companies anticipate
having more than adequate earnings to meet their interest coverages in the
foreseeable future.
<PAGE>
<TABLE>
<CAPTION> Ratio of Earnings to Fixed Charges
<S> <C> <C> <C> <C>
1999 1998 1997 1996
CG&E/69/ 4.46 4.16 3.99 3.77
ULH&P 4.04 4.17 5.09 4.98
PSI 2.99 1.78 3.31 3.35
</TABLE>
Securities of CG&E, PSI and ULH&P are highly rated by the major
rating agencies. Among other things, secured debt of each of these
companies is rated "A-" (or its equivalent) or better./70/ The Operating
Company ratings in effect as of December 31, 1999 are included in the
following table:
<PAGE>
<TABLE>
<CAPTION> Operating Company Ratings
<S> <C> <C> <C> <C>
D&P Fitch Moody's S&P
CG&E
Secured Debt A- A- A3/71/ A-
Senior Unsecured Debt BBB+ BBB+ Baa1 BBB+
Junior Unsecured Debt BBB BBB+ Baa2 BBB
Preferred Stock BBB BBB+ Baa1 BBB
PSI
Secured Debt A- A- A3 A-
Senior Unsecured Debt BBB+ BBB+ Baa1 BBB+
Junior Unsecured Debt BBB BBB Baa1 BBB
Preferred Stock BBB BBB Baa1 BBB
ULH&P
Secured Debt A- N/R N/R A-
Unsecured Debt N/R N/R Baa1 BBB+
</TABLE>
b. Ability to fund operations without Cinergy contributions
Additional project investments will not have a negative impact on
the Operating Companies' ability to fund their operations, since the
Operating Companies do not depend on Cinergy for capital. Since the
merger, with the exception of a December 1994 $160 million capital
contribution from Cinergy to PSI,/72/ the Operating Companies have financed
their capital needs entirely with their own internal funds and proceeds of
external financings by them. Cinergy's most recent five-year projections
for Operating Company capital requirements extend through December 31,
2004, and indicate that Cinergy should not have to make any equity
investments in the Operating Companies through the entire five-year period
of those projections.
D. Financing Plan for New Investments; Merrill Lynch
Letter
The additional investments in new projects are necessary for
Cinergy to successfully grow the Company and will create significant value
for Cinergy and its shareholders.
Cinergy has developed an extensive financial model addressing the
manner in which Cinergy expects to finance the additional investments and
their likely impacts on the Company. Cinergy expects to finance the
additional investments through a combination of internal cash returns
generated from the investments and external capital sources such as
unsecured debt and long-term debt and common stock. The model's results
indicate that the investments will enhance Cinergy's financial performance
without adversely affecting the Operating Companies' financial integrity.
Cinergy's model necessarily incorporates various operating
assumptions. Among the most important are that: (i) appropriate
investment opportunities exist for Cinergy to invest up to $2 billion in
EWGs and FUCOs over the next five years (in addition to investments under
the existing investment authority); (ii) the incremental investments are
consistent with Cinergy's corporate strategy and current risk tolerance
levels; (iii) the expected investment returns are reasonable; (iv) Cinergy
is able to obtain debt and equity financing at acceptable rates and terms;
and (v) Cinergy will finance the additional investments on an aggregate
basis (including through growth in retained earnings) such that the
consolidated capital structure would be comprised of 40 percent debt and 60
percent equity. A copy of the assumptions and financial forecasts
comprising Cinergy's financing plan for the incremental investments, on
which Merrill Lynch based its credit review discussed below, is submitted
as an exhibit to this application.
In 1999, Cinergy engaged Merrill Lynch to review its financing plan
and assumptions and undertake an analysis of the expected credit impacts
resulting from the proposed investments in EPAct Projects covered by the
Growth Cap. On February 16, 2000, Merrill Lynch delivered a letter to
Cinergy expressing its view to the effect that, as of such date, and based
upon the assumptions made, matters considered and limits of review set
forth in such letter, the credit ratings of Cinergy and its Rated
Subsidiaries (as defined below), would not be expected to fall below
investment grade due to investments in EPAct Projects covered by the
Growth Cap over the next five years, as outlined in this application.
A copy of the Merrill Lynch letter, which sets forth the
assumptions made, matters considered and certain limitations on the scope
of review undertaken by Merrill Lynch, is included as an exhibit to this
application. The Merrill Lynch letter was intended for the use and benefit
of Cinergy's board of directors and senior management team, was directed
only to the expected credit ratings impact of the financing of the
investments in EPAct Projects covered by the Growth Cap from a financial
point of view to Cinergy, did not address the merits of the underlying
decision by Cinergy to engage in any of the investments and does not
constitute a recommendation to invest an incremental $2 billion in EWG and
FUCO investments or any matter related thereto. The summary of the Merrill
Lynch letter set forth herein is qualified in its entirety by reference to
the full text of the Merrill Lynch letter, which is submitted herewith.
Cinergy requested that Merrill Lynch advise it as to the expected
impact of the financing of an incremental $2 billion in EWG and FUCO
investments, considered from a financial point of view, on the credit
ratings of the Company and of its two rated regulated subsidiaries, CG&E
and PSI (the "Rated Subsidiaries"). The Merrill Lynch analysis was
prepared in response to, and under the terms of, the engagement letter
entered into by Cinergy and Merrill Lynch & Co., dated May 7, 1999.
In arriving at the conclusions set forth below, and in the
performance of the requested credit analysis, Merrill Lynch has, among
other things:
1. Reviewed certain publicly available business and financial
information relating to the Company and the Rated Subsidiaries
that Merrill Lynch deemed to be relevant;
2. Reviewed certain information, including financial forecasts,
provided by the Company to Merrill Lynch as representative of
the proposed incremental $2 billion of EWG and FUCO
investments;
3. Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Company and the Rated
Subsidiaries;
4. Reviewed certain information, including the Company's
financial forecasts, relating to the business, earnings, cash
flow, capital expenditures, financing plan, timing and sources
and uses of funds in each case associated with the proposed
incremental $2 billion of EWG and FUCO investments;
5. Conducted discussions with members of senior management of the
Company concerning the matters described in clauses 1 through
4 above, as well as the business and prospects of the Company
before and after giving effect to the implementation, if any,
of the proposed incremental $2 billion of EWG and FUCO
investments;
6. Reviewed credit ratios of the Company in the Standalone Case
and Investment Case (as defined below) and compared them with
financial targets for utility companies as published by
Standard & Poor's;
7. Reviewed the draft of the Form U-1 filing in this docket dated
November 16, 1999; and
8. Reviewed such other financial studies and analyses and took
into account such other matters as Merrill Lynch deemed
necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In arriving at the conclusions set forth below, Merrill Lynch
assumed and relied on the accuracy and completeness of all information
supplied or otherwise made available to Merrill Lynch, discussed with or
reviewed by or for Merrill Lynch. Merrill Lynch was supplied with all of
the information regarding the incremental $2 billion of EWG and FUCO
investments by the Company; it is Merrill Lynch's understanding that the
incremental $2 billion of EWG and FUCO investments have not been identified
and that the Company expects the financial information, including financial
forecasts, to be representative of the actual incremental $2 billion of EWG
and FUCO investments. Merrill Lynch does not assume any responsibility for
independently verifying any information provided by the Company or for
undertaking an independent evaluation or appraisal of any of the assets or
liabilities of Cinergy and was not furnished with any such evaluation or
appraisal. In addition, Merrill Lynch did not assume any obligation to
conduct any physical inspection of the properties or facilities of the
Company. With respect to the financial forecast information furnished to
or discussed with Merrill Lynch by the Company and regarding the
incremental $2 billion of EWG and FUCO investments, Merrill Lynch assumed
that they were reasonably prepared and reflected the best currently
available estimates and judgements of the Company.
Merrill Lynch's view was necessarily based upon market, economic and
other conditions as they exist and can be evaluated on, and the information
made available to Merrill Lynch as of the date hereof, including the
assumptions contained in the Company's financial forecasts provided to
Merrill Lynch and outlined in this application.
On the basis of this information and the assumptions outlined
above, Merrill Lynch prepared integrated financial models and performed
sensitivity analyses on the financial information derived from such models
in a manner that Merrill Lynch believes is consistent with the sensitivity
analyses performed by statistical rating agencies. In this connection,
Merrill Lynch determined to review the following credit ratios for the
Company and its consolidated subsidiaries for the years 2000 to 2004, which
Merrill Lynch understands to be those reviewed by credit rating agencies:
(i) Net Debt as a percent of Total Capitalization; (ii) Funds from
Operations to net interest coverage; (iii) Funds from Operations to Net
Debt coverage; and (iv) Earnings before interest, taxes and depreciation
and amortization ("EBITDA") associated with the Non-Regulated Investments
to total EBITDA of the Company. The foregoing credit ratios were
calculated under two scenarios: (i) the Standalone Case, where the
incremental $2 billion in EWG and FUCO investments were not made at any
time, and (ii) the Investment Case, where the incremental $2 billion in EWG
and FUCO investments are made over a five year period, by any entity of the
Company other than the Rated Subsidiaries.
The matters set forth above do not purport to be a complete
description of the analyses performed by Merrill Lynch in preparing its
letter. The preparation of a credit analysis is a complex process and is
not necessarily susceptible to partial or summary description. Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it,
without considering all such factors and analyses, could create a
misleading view of the process underlying the analyses set forth in Merrill
Lynch's letter. The matters considered by Merrill Lynch in its analyses
were based on numerous macroeconomic, operating and financial assumptions
with respect to industry performance, general business and economic
conditions and other matters, many of which are beyond Cinergy's and
Merrill Lynch's control and involve the application of complex
methodologies and educated judgment. Any estimates contained in Merrill
Lynch's analyses are not necessarily indicative of actual past or future
results or values, which may be significantly more or less favorable than
such estimates. There can be no assurance that the Company's incremental
$2 billion of EWG and FUCO investments will actually realize the returns
contemplated by such assumptions or that market conditions will accommodate
the Company's strategy. This is not a prediction as to what an independent
rating agency may do under any particular circumstances.
On the basis of and subject to the foregoing, and considering the
results of the credit ratio analysis outlined above, Merrill Lynch was of
the view, as of February 16, 2000, that the credit ratings of Cinergy and
its Rated Subsidiaries would not be expected to fall below investment grade
due to the incremental $2 billion of EWG and FUCO investments being made as
outlined in this application.
E. Protection of Operating Companies; State Commission
Letters
The Operating Companies will remain insulated from the direct
effects of EWG and FUCO investments.
In the first place, any losses in connection with EWGs and FUCOs
would have no direct effect on the wholesale or retail electric or gas
rates of the Operating Companies.
Second, Cinergy commits that it will not seek recovery through
higher rates to the Operating Companies' utility customers in order to
compensate Cinergy for any losses it may sustain on investments in any
EPAct Projects or for any inadequate returns on those investments.
Third, in accordance with sections 33(f) and (g) of the Act:
1. no Operating Company has issued any security for the purpose of
financing the acquisition, ownership or operation of any FUCO in
which Cinergy has invested;
2. no Operating Company has assumed any obligation or liability as
guarantor, endorser, surety or otherwise in respect of any
security issued by any FUCO in which Cinergy has invested; and
3. no Operating Company has pledged or encumbered any part of its
utility assets for the benefit of an associate FUCO.
Fourth, no Operating Company has engaged in any such transaction
with respect to any EWG in which Cinergy has invested to date. Nor in the
future will Cinergy cause or permit any Operating Company to engage in any
such transactions with respect to any FUCO or EWG in which Cinergy invests,
except potentially in connection with the transfer of generation facilities
currently owned by CG&E and PSI to one or more EWG affiliates (as to which
see the next paragraph).
Fifth, with regard to any transfer of CG&E and PSI generating
facilities to EWG affiliates, any such transaction will conform in all
respects to the requirements of section 32 of the Act, including in
particular the requirement for certain enumerated findings from Cinergy's
three state commissions as a condition to such transfer.
Sixth, Cinergy has complied and will continue to comply with the
other conditions of Rule 53(a) conferring specific protections on customers
of the Operating Companies and their state commissions, namely:
1. the requirements of Rule 53(a)(2) regarding the preparation
and making available of books and records and financial
reports regarding EPAct Projects;
2. the requirements of Rule 53(a)(3) regarding the limitation on
the use of Operating Company employees in connection with
providing services to EPAct Projects; and
3. the requirement of Rule 53(a)(4) regarding filing of copies of
applications and reports.
Further, in addition to providing the PUCO, IURC and KPSC with
copies of FUCO notices filed with this Commission and EWG applications
filed with the FERC - apprising the state commissions of each specific
project in which the Company invests - Cinergy will furnish to its state
commissions, concurrently with submission to the Commission, copies of the
quarterly reports Cinergy will file in this docket pursuant to rule 24 (see
below, Item 5, "Procedure"). These reports will furnish comprehensive
information on a periodic basis concerning the transactions proposed in
this application.
Finally, prior to filing this application, Cinergy conducted
numerous meetings, and was in frequent communications, with the
commissioners and staff of the Ohio, Indiana and Kentucky commissions
concerning the Company's proposal. As a consequence of this dialogue, and
commitments and understandings reached between Cinergy and these
commissions, all three have recently submitted letters to this Commission
regarding the proposed transactions (copies of which, including the letter
from Cinergy referred to below, are filed herewith as exhibits):
1. In a letter dated February 2, 2000, the Chairman of the PUCO
states that, in reliance upon certain understandings, and subject
to certain other qualifications and conditions contained or
referred to in his letter, "it does not appear that the SEC's
proceeding to review/approve Cinergy's Form U-1 will impair the
PUCO's ability to regulate CG&E and protect its retail customers
in Ohio."
2. In a letter dated March 17, 2000, the Chairman of the IURC
states that, based upon and subject to certain commitments,
conditions, representations and other matters enumerated therein,
"this Commission is of the view that Cinergy's proposal will not
impair the ability of this Commission to protect PSI or its
retail electric customers in Indiana."
3. And in a letter dated March 9, 2000, the Chairman of the KPSC
states that, based upon and subject to certain commitments,
conditions, representations and other matters enumerated therein,
including those set forth in a letter from Cinergy dated March 8,
2000, "this Commission is of the view that Cinergy's proposal
will not impair the ability of this Commission to protect ULH&P
or its retail customers in Kentucky."
In reaching their determinations, all three of the state
commissions cited the 1994 merger settle agreements and conditions
discussed below, among other factors.
F. Merger Commitments/Ohio Electric Deregulation
The scope and magnitude of the commitments made by Cinergy to its
state regulators and other parties in connection with the settlement of
merger proceedings in 1994 provide additional, unique assurances that the
proposal will not have an adverse impact on the ability of the state
commissions to protect Cinergy's utility subsidiaries or their customers.
Copies of all of these settlement agreements and merger approvals were
submitted by Cinergy into the record in the Commission proceeding approving
the Cinergy merger (see amended Application-Declaration in File No.
70-8427) and were discussed by the Commission in its order granting
Cinergy's application (see HCAR No. 26146, Oct. 21, 1994).
The recently enacted Ohio retail electric deregulation legislation
provides important additional protections to the PUCO.
The following is a detailed summary of the relevant provisions of
the 1994 merger settlement agreements and commitments, as well as the
additional statutory protections recently conferred on the PUCO.
1. Indiana
On March 3, 1994, PSI, Cinergy, Resources and representatives of
various Indiana retail electric customers of PSI ("Indiana Settling
Parties") entered into a comprehensive Settlement Agreement ("Indiana
Settlement Agreement") in the context of proceedings before the FERC
concerning the Cinergy merger. The IURC approved the Indiana Settlement
Agreement in its March 29, 1994 order in Cause No. 39897.
The Indiana Settlement Agreement ensures the continuing
effectiveness of state regulation in a number of important respects,
including the following:
Waiver of SEC Preemption. PSI agreed that it would not seek
to reverse or otherwise challenge any order or decision of the
IURC relating to the recovery or ratemaking treatment of costs
incurred by PSI as a result of any contract or transaction
with an affiliate on the basis that the contract or
transaction was approved by the SEC. Specifically, PSI agreed
that:
[I]t shall not seek to overturn, reverse,
set aside, change or enjoin, whether through
appeal or the initiation of or maintenance of
any action in any forum, a decision or order of
the IURC which pertains to recovery,
disallowance, allowance, deferral, or
ratemaking treatment of any expense, charge,
cost, or allocation incurred or accrued by PSI
in or as a result of a contract, agreement,
arrangement, or transaction with any
"Affiliate" of PSI...on the basis that such
expense, charge, cost, or allocation has itself
been filed with or approved by the SEC, or was
incurred pursuant to a contract, arrangement,
agreement, or allocation method which was filed
with or approved by the SEC. (Indiana
Settlement Agreement, sec. 13.2.)
Affiliate Contracts. PSI and Cinergy further agreed that (a)
any proposed amendment to the Cinergy system operating
agreement filed under Section 205 of the Federal Power Act
with the FERC (the "Operating Agreement") or to the Cinergy
system utility service agreement approved by the SEC in its
1994 merger order (the "Service Agreement") and (b) certain
other proposed affiliates contracts to which PSI would be a
party that are required to be filed with and/or approved by
the FERC or the SEC would not become effective unless and
until the proposed amendment or affiliate contract had been
filed with and approved, or not finally rejected, disapproved,
or found unreasonable by the IURC.
Books and Records, etc. PSI and Cinergy agreed that in any
pending proceeding before the IURC, PSI and Cinergy would make
available to the IURC and the Indiana Office of Utility
Consumer Counselor ("UCC") all books and records, and
employees and officers of Cinergy, PSI and any affiliate or
subsidiary of Cinergy or PSI.
As part of the Indiana Settlement Agreement, the Indiana Settling
Parties agreed to certain "Principles of Diversification." These
principles apply to Cinergy's or PSI's participation in non-utility
businesses or in public utility businesses outside of the United States.
In particular, Section 11.2 of the Indiana Settlement Agreement provides
that:
[T]he Cinergy Companies recognize and acknowledge that
the IURC under I.C. 8-1-2 [i.e., Indiana Code 8-1-2] has
continuing authority over [PSI's] capital structure,
financings and cost of capital for ratemaking purposes
sufficient to enable the IURC to protect [PSI's] retail
electric customers from any material adverse affects that
may result from [PSI's] or Cinergy's participation in
non-utility businesses or in public utility businesses
outside of the United States of America.
The foregoing statement is consistent with the following statements
contained in a July 2, 1992 letter from the then-Chairman of the IURC to
the SEC/73/ concerning a proposed investment by Resources in a public
utility business in Argentina:
In general, the IURC's continuing authority over PSI
Energy's capital structure, financings and cost of
capital for ratemaking purposes will enable the IURC to
protect PSI Energy's retail electric customers from any
financial effects resulting from the activities in PSI
Argentina. The IURC has authority to investigate
transactions between utilities and their subsidiaries,
pursuant to Indiana Code ("I.C.") 8-1-1-11, to prescribe
the form of all books, accounts, papers and records of
utilities, I.C. 8-1-2-12 and 14, and is required to
inquire into the management of the business of all public
utilities, I.C. 8-1-2-48, and to keep itself informed as
to the manner and method in which such business is
conducted, I.C. 8-1-2-49. The IURC can use these powers,
in addition to its general ratemaking authority as noted
above, to ensure that PSI Argentina's activities do not
adversely affect PSI Energy's ratepayers.
In sum, the IURC has both general and specific
authority and will exercise its authority, as
appropriate, to protect Indiana ratepayers.
With respect to the furnishing of pertinent information by PSI to
the IURC concerning the diversification activities of PSI or Cinergy,
Section 11.3 of the Indiana Settlement Agreement further provides:
In addition to the annual information filings to be
made by PSI under the Affiliate Guidelines attached
hereto as Appendix "E", PSI agrees that it shall on an
annual basis file with the IURC and provide to the UCC
the following information for each applicable PSI
Affiliate (as defined in the Affiliate Guidelines
attached hereto as Appendix "E" [which definition
includes, among others, all subsidiaries of Cinergy]):
1. The capital structure of each Affiliate as
of the end of the applicable period;
2. A statement of the changes in the capital
structure of each Affiliate during the
applicable period;
3. An assessment of the effects on PSI's
capital structure and PSI's ability to
attract capital of the activities of each
Affiliate during the applicable period; and
4. If requested by the IURC or the UCC, the
names and job descriptions of any employees
of PSI transferred to, or for whom 75
percent of their time has been allotted to,
an Affiliate during the applicable period.
In short, the Indiana Settlement Agreement confers additional
significant rights on the IURC, beyond those otherwise accruing to it under
state law, the net effect of which is to preserve unimpaired the ability of
the IURC to protect Cinergy's utility subsidiaries and their customers in
the context of the instant proposal.
2. Ohio
Ohio's recently enacted electric industry deregulation bill confers
important new authority on the PUCO. These protections further bolster the
additional protections conferred on the PUCO with respect to CG&E and
Cinergy stemming from the 1994 merger settlement agreement involving those
parties.
a. 1999 Ohio Electric Deregulation Statute
The recently passed Ohio retail electric deregulation legislation
requires CG&E to transfer its competitive retail sale of electric
generation functions into a separate corporate entity, pursuant to a
corporate separation plan and affiliate code of conduct approved by the
PUCO as part of Cinergy's transition plan./74/ Cinergy cannot operate as a
competitive retail electric supplier in Ohio after January 1, 2001, without
an approved separation plan and code of conduct. Indeed the only
separation action that Cinergy can take under the new statute without PUCO
approval is divestiture of CG&E's generation assets to a non-affiliated
third party. The new legislation grants the PUCO certification
jurisdiction over generation suppliers through Revised Code Section
4928.08. It also allows the PUCO to regulate customer protections provided
by certified suppliers, including Cinergy or its affiliates, pursuant to
Revised Code Section 4928.10.
Any transfer by CG&E of its generating assets to an affiliated EWG
will not impair the PUCO's ability to regulate CG&E. For example, under
Revised Code Section 4928.02, the new law extends and enhances state
regulatory authority over CG&E and its non-regulated affiliates to prevent
anti-competitive practices and cross-subsidization. The legislation
expands the PUCO's jurisdiction over utility mergers and allows the PUCO to
subject CG&E to severe penalties for infractions related to its separation
plan and code of conduct.
In addition to these new statutory powers, the PUCO continues to
have full regulatory jurisdiction over CG&E. The PUCO determines and
regulates the minimum service standards of CG&E, may initiate
investigations, gather information, including financial information, from
CG&E and its affiliates, and may hear complaints from CG&E's customers
regarding quality of service and alleged violations of either the corporate
separation plan or affiliate code of conduct. The PUCO also continues to
have full ratemaking jurisdiction over CG&E, and full discretion to adjust
CG&E's rates to counteract any change to its cost of capital.
Similarly, the PUCO continues to have authority to regulate the
financial integrity of CG&E. Revised Code Section 4905.40 specifically
governs utility financing transactions, including the issuance of certain
types of notes, bonds and scrip, capitalization, and mergers. Likewise,
Section 4935.04 allows the Commission to gather information concerning the
availability and reliable delivery of power to CG&E customers.
b. 1994 Ohio Settlement Agreement
The new protections inuring to the PUCO from the electric
deregulation legislation supplement those negotiated in 1994 in connection
with the Cinergy merger.
Specifically, as part of a comprehensive merger settlement, Cinergy
entered into an Ohio Joint Stipulation and Agreement ("Ohio Settlement
Agreement") that was filed with FERC on March 4, 1994. The Ohio Settlement
Agreement, which was signed by Cinergy, CG&E, the PUCO, and the Office of
the Ohio Consumers' Counsel ("OCC"), ensures the continuing effectiveness
of state regulation in a number of ways, including the following:
Waiver of SEC Preemption. CG&E and Cinergy agreed to
restrictions similar to those described above binding PSI with
respect to potential challenges to PUCO actions addressing
recovery or disallowance in retail rates of costs incurred by
CG&E under contracts or transactions with affiliates based on
SEC approval of those same contracts or transactions with
affiliates. Specifically, Paragraph 5A of the Ohio Settlement
Agreement provides that all contracts, agreements, or
arrangements of any kind required to be filed with or approved
by the SEC pursuant to the 1935 Act between CG&E and any
associate company thereof must contain and be conditioned upon
the following (without modification or alteration):
[CG&E] and [Cinergy] will not seek to overturn,
reverse, set aside, change or enjoin, whether
through appeal or the initiation or maintenance
of any action in any forum, a decision or order
of the [PUCO] which pertains to recovery,
disallowance, allowance, deferral, or
ratemaking treatment of any expense, charge,
cost, or allocation incurred or accrued by
[CG&E] in or as a result of a contract,
agreement, arrangement, or transaction with any
affiliate, associate, holding, mutual service
or subsidiary company on the basis that such
expense, charge, cost, or allocation has itself
been filed with or approved by the [SEC], or
was incurred pursuant to a contract,
arrangement, agreement, or allocation method
which was filed with or approved by the [SEC].
Paragraph 5A further provides that failure to include the above
language in any such contract, agreement, or arrangement will
render the same voidable at the sole discretion of the PUCO.
Likewise, if the above language is altered or invalidated by any
court or governmental agency, such contract, agreement, or
arrangements will be voidable at the sole discretion of the PUCO.
Affiliate Contracts. CG&E and Cinergy also agreed that (a)
any proposed amendment to the Operating Agreement or the
Service Agreement and (b) certain other proposed affiliates
contracts to which CG&E would be a party that are required to
be filed with and/or approved by the FERC or the SEC would not
become effective unless and until the proposed amendment or
affiliate contract had been filed with and approved, or not
finally rejected, disapproved, or found unreasonable by the
PUCO.
Books and Records, etc. CG&E and Cinergy agreed that in any
pending proceeding before the PUCO, CG&E and Cinergy would
make available to the PUCO and the OCC all books and records,
and employees and officers of Cinergy, CG&E and any affiliate
or subsidiary of Cinergy or CG&E.
In addition, as part of the merger settlement process, CG&E agreed
in February 1994 to certain Principles of Diversification similar to the
PSI principles discussed above. In these principles, CG&E and Cinergy:
recognize and acknowledge that the [PUCO] under Title 49
of The Ohio Revised Code has continuing authority over
CG&E's capital structure, financings and cost of capital
for ratemaking purposes sufficient to enable the [PUCO]
to protect CG&E's retail electric customers from any
material adverse [e]ffects that may result from CG&E's or
Cinergy's Participation in Diversified Business./75/
Principles of Diversification Section V.
As part of the Principles, CG&E also agreed to make certain
informational filings with the PUCO (with copies to the OCC), including:
1. The capital structure of each Affiliate as of the end of the
applicable period;
2. A statement of the changes in the capital structure of each
Affiliate during the applicable period;
3. An assessment of the effects on CG&E's capital structure and
CG&E's ability to attract capital of the activities of each
Affiliate during the applicable period; and
4. If requested by the [PUCO] or the OCC, the names and job
descriptions of any employees of CG&E transferred to, or for
whom 100 percent of their time has been allocated to, an
Affiliate during the applicable period.
Principles of Diversification Section VI.
Finally, the Principles of Diversification specify (in Exhibit B
thereof) that the financial policies and guidelines for transactions
between CG&E and its affiliates shall reflect certain cross-subsidization
principles, including:
1. CG&E's utility customers shall not subsidize the activities of
CG&E's non-utility affiliates or CG&E's utility affiliates.
2. Neither CG&E's non-utility affiliates nor CG&E's utility
affiliates shall subsidize the public utility activities of
CG&E.
3. CG&E's costs for jurisdictional rate purposes shall reflect
only those costs attributable to its jurisdictional customers.
4. CG&E shall maintain and utilize accounting systems and records
which are sufficient to identify and appropriately allocate
costs between CG&E and its affiliates, consistent with these
cross-subsidization principles and such financial policies and
guidelines.
In sum, the numerous protections built into the Ohio Settlement
Agreement and ancillary agreements give substantial assurance that the
proposal before this Commission will not have an adverse impact on the
ability of the PUCO to protect Cinergy's utility subsidiaries or their
customers.
3. Kentucky
As with Indiana and Ohio, the KPSC secured various commitments
through the merger settlement process that ensure its ability to protect
Cinergy utility subsidiaries and their customers. In its order issued May
13, 1994 in Case No. 94-104 conditionally approving the Cinergy merger
("KPSC Order"), the KPSC accepted certain commitments made by Cinergy and
CG&E during the course of that proceeding "to ensure that the creation of
Cinergy does not impair the [KPSC's] regulatory authority over ULH&P ."
These initial commitments included:
Waiver of SEC Preemption. Cinergy and CG&E committed to the
KPSC that "No claim of SEC preemption claim will be raised
before the Commission or in any action in any forum in the
event that any affiliated costs, other than those included in
ULH&P's purchased power cost, are excluded for ratemaking
purposes." KPSC Order at 5.
Affiliate Contracts. The ability of the KPSC to review and
approve or reject certain affiliate contracts involving
Cinergy system companies.
Books and Records. Access to the accounts and records of
Cinergy, Cinergy's service company subsidiary, Cinergy
Services, Inc., and any affiliates and subsidiaries controlled
by Cinergy to verify transactions with ULH&P.
Beyond these commitments, the KPSC in its merger order imposed
certain additional conditions, all of which were accepted in writing by
Cinergy and CG&E. As summarized in detail below, these conditions focused
on three areas: (1) protection of utility resources; (2) the KPSC's ability
to monitor the corporate activities of ULH&P, CG&E, Cinergy and Cinergy's
other affiliates; and (3) reporting requirements. Specifically, to
implement these protections, the KPSC imposed certain "conditions and
requirements," including but not limited to:
1. Protection of utility resources: The KPSC stated that in
future proceedings it will be the responsibility of ULH&P to show that its
allocation methodologies have not resulted in any cross-subsidization. As
part of that showing, ULH&P should be prepared to disclose fully all
allocated costs, the portion allocated to each subsidiary of Cinergy,
complete details of the methods of allocation, and the justification for
the amount and the method. The KPSC also noted that the accounting and
other procedures and controls established by Cinergy, CG&E, and ULH&P will
be reviewed periodically, and in ULH&P proceedings as appropriate. KPSC
Order at 13.
In furtherance of its ability to protect the utility's resources,
the KPSC stated the following:
For rate-making purposes, the [KPSC] has
jurisdiction over ULH&P's capital structure, financing,
and cost of capital. Through this authority, the [KPSC]
can protect ratepayers from the financial effect of non-utility
activities. No new debt, preferred stock, or
common equity can be issued without its prior approval.
This prevents significant deviations from the approved
capital structure, which is the key to ensuring that
ULH&P maintains its financial integrity. Supplementing
this financial control, the [KPSC] must approve any
guarantee of debt obligations by ULH&P for Cinergy and
its affiliates.
KPSC Order at 16. Thus, the KPSC's substantial ability to protect the
financial resources of the utility, as discussed in its order, will not be
impaired in any way by the proposal under consideration before this
Commission.
2. Ability to monitor corporate activities of ULH&P, CG&E,
Cinergy and Cinergy's other affiliates: Noting that "the most
indispensable requirement is open access to all books, records, and
personnel of Cinergy and each subsidiary," the KPSC stated that it "will
have access, as necessary in the exercise of its statutory duties, to the
books and records of Cinergy and its other affiliates and subsidiaries as
the books and records may be related to transactions with ULH&P. If the
subsidiaries or affiliates of Cinergy do not transact business with ULH&P,
ULH&P will verify, if necessary, the absence of such transactions through
independent sources." KPSC Order at 17-18.
3. Reporting requirements: The KPSC's order also imposed
substantial reporting requirements "[i]n order to monitor effectively the
activities of ULH&P, Cinergy and its related subsidiaries, and protect
ratepayers . . . ." KPSC Order at 19. Among the reporting required by the
KPSC, ULH&P is to "furnish financial statements of Cinergy including
consolidating adjustments of Cinergy and its subsidiaries with a brief
explanation of each adjustment and all periodic reports filed with the
SEC." KPSC Order at 19.
4. Conclusion/Merger Commitments & Ohio Deregulation
In sum, the 1994 merger settlement agreements and commitments,
together with the legislation enacted in 1999 in Ohio deregulating that
state's electric industry, confer substantial additional protections on
Cinergy's three state commissions - e.g., through waiver of potential
claims of SEC preemption with respect to the recoverability in retail rates
of certain costs or expenses approved by the SEC; through prior approval
rights over affiliate contracts; through access to the books, records and
employees not only of the utility but also its subsidiaries and affiliates;
through continued control of each utility's operating expenses and capital
structure; through the imposition of accounting procedures and controls;
and through the various reporting requirements - to help ensure that the
utility subsidiaries and their customers will not be adversely affected by
the proposed transactions.
Item 4. Regulatory Approval
The proposed transactions are not subject to the jurisdiction of
any state or federal commission other than this Commission.
Item 5. Procedure
Applicants request that the Commission issue an order as soon as
practicable after the expiration of the applicable public notice period
granting and permitting this Application-Declaration to become effective.
Applicants waive a recommended decision by a hearing officer or
other responsible officer of the Commission; consent that the Staff of the
Division of Investment Management may assist in the preparation of the
Commission's order; and request that there be no waiting period between the
issuance of the Commission's order and its effectiveness.
Pursuant to rule 24 under the Act, within 60 days after the end of
each calendar quarter commencing with the first full calendar quarter
following the Commission's order herein, Cinergy proposes to file a
quarterly certificate with the Commission (concurrently submitting a copy
thereof to each of the PUCO, IURC and KPSC), containing the following
information (in each case as of the end of the calendar quarter just
completed, except as otherwise noted)./76/
1. With respect to the Growth Cap:
a. A computation in accordance with rule 53(a) setting forth
Cinergy's "consolidated retained earnings" and "aggregate investment" in
all EPAct Projects covered by the Growth Cap, together with a calculation
of remaining capacity under the Growth Cap;
b. A breakdown showing Cinergy's aggregate investment in
each individual EPAct Project covered by the Growth Cap;
c. Cinergy's consolidated capitalization ratios, in terms of
debt, common equity and preferred stock;
d. The market-to-book ratio of Cinergy's common stock;
e. Identification of any new EPAct Projects covered by the
Growth Cap in which Cinergy invested or committed to invest during the
preceding quarter;
f. Growth in consolidated retained earnings, segregating
total earnings growth attributable to EPAct Projects covered by the Growth
Cap from that attributable to all other subsidiaries of Cinergy; and
g. Year-to-date revenues and net income of each EPAct
Projectcovered by the Growth Cap.
2. With respect to the Restructuring Cap:
a. A computation in accordance with rule 53(a) of Cinergy's
"aggregate investment" in all EWGs subject to the Restructuring Cap,
together with a breakdown showing Cinergy's aggregate investment in each
individual EWG subject to the Restructuring Cap; and
b. Identification of each "eligible facility" (as defined in
section 32 of the Act) acquired by any such EWG during the preceding
calendar quarter, together with the net book value of each such eligible
facility at the time of transfer to such EWG.
3. With respect to the financing authority proposed in Item 1.C:
a. Summary information concerning any securities issued
during the preceding calendar quarter pursuant to the authority requested
herein, including Cinergy's relative position as of the end of the quarter
under the Aggregate Financing Limit and the Guarantees Limit, together with
a representation confirming that Cinergy has met the applicable terms and
conditions as set forth in Item 1.C.
Item 6. Exhibits and Financial Statements
(a) Exhibits
A-1 Certificate of incorporation of Cinergy (incorporated by
reference from Cinergy's 1993 Form 10-K in File No. 1-11377)
A-2 By-laws of Cinergy, as amended on April 21, 1999
(incorporated by reference from Cinergy's March 31, 1999 Form 10-Q in File
No. 1-11377)
A-3 Specimen Cinergy common stock certificate
(incorporated by reference from File No. 70-8477)
A-4 Form of note for bank borrowings (incorporated by
reference from File No. 70-8587)
A-5 Form of commercial paper note (incorporated by
reference from File No. 70-8587)
A-6 Form of debenture (incorporated by reference from File
No. 70-8993)
A-7 Form of indenture (incorporated by reference from File
No. 70-8993)
A-8 Form of supplemental indenture (incorporated by
reference from File No. 70-8993)
B-1 Form of underwriting agreement for common stock
(incorporated by reference from Registration No. 33-55713)
B-2 Form of purchase agreement for debentures
(incorporated by reference from File No. 70-8993)
C Form of registration statement for additional shares
(incorporated by reference from Registration No. 33-55713)
D Not applicable
E Not applicable
F-1 Preliminary Opinion of Counsel (to be filed by
amendment)
G-1 Revised form of Federal Register Notice
I-1 Cinergy and Subsidiary Companies/December 31, 1999
J-1 CG&E/PSI Generating Facilities/December 31, 1999
K-1 Generation Divestitures/Significant Transactions
(through February 2000)
L-1 Foreign Utility Privatizations/Acquisitions by U.S.
Utilities (through February 2000)
M Cinergy Financing Plan (filed under request for
confidential treatment pursuant to Rule 104(b))
N Merrill Lynch Letter
O Cinergy's Wholesale Power Supply Business/1998-1999
Losses/Actions to Avoid Future Losses
P-1 Letter from PUCO to SEC dated February 2, 2000
P-2(a) Letter from KPSC to SEC dated March 9, 2000
P-2(b) Letter from Cinergy to KPSC dated March 8, 2000
P-3 Letter from IURC to SEC dated March [10,] 2000
(b) Financial Statements
FS-1 Cinergy Consolidated Financial Statements, dated
September 30, 1999 (previously filed)
FS-2 Cinergy Financial Statements, dated September 30, 1999
(previously filed)
FS-3 Cinergy Global Resources Consolidated Financial
Statements, dated September 30, 1999 (previously filed under request for
confidential treatment)
FS-4 Cinergy Capital & Trading Consolidated Financial
Statements, dated September 30, 1999 (previously filed under request for
confidential treatment)
FS-5 Cinergy Consolidated Financial Data Schedule
(previously filed as part of electronic submission only)
FS-6 Cinergy Financial Data Schedule (previously filed as
part of electronic submission only)
Item 7. Information as to Environmental Effects
(a) In light of the nature of the proposed transactions, the
Commission's action in this matter will not constitute any major federal
action significantly affecting the quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company
Act of 1935, the undersigned companies have duly caused this
Application-Declaration on Form U-1 to be signed on their behalf by the
officers indicated below.
Dated: March 20, 2000
CINERGY CORP.
By: /s/William J. Grealis
Vice President & Chief Strategic Officer
CINERGY GLOBAL RESOURCES, INC.
By: /s/Cheryl M. Foley
President
CINERGY CAPITAL & TRADING, INC.
By: /s/Michael J. Cyrus
President
Endnotes
/1/ In its 1995 Report entitled "The Regulation of Public-Utility Holding
Companies," the Division of Investment Management recommended, "[w]ith a
view to the proposed disaggregation of the electric utility industry," that
the Commission "should consider rules to exempt a corporate restructuring
that does not result in the addition of new utility operations." Id. at
xiii.
/2/ Securities and Exchange Commission, "Registered Public-Utility Holding
Companies and Internationalization," HCAR No. 27110, Dec. 21, 1999, 64 Fed.
Reg. 71341.
/3/ Edison Electric Institute, "Divestiture Action & Analysis/ January
2000 Issue."
/4/ Cambridge Energy Research Associates ("CERA"), Global Power Horizons
1999: Portfolio Strategies & Regional Outlooks ("Global Power Horizons
1999"), at Figure 3.
/5/ CERA, Global Power Horizons 1999, supra, at Table 1.
/6/ The Securities and Exchange Commission, Division of Investment
Management, "The Regulation of Public-Utility Holding Companies," June
1995, at xiii.
/7/ As of March 1, 2000, customer choice legislation or comprehensive
regulatory plans had been adopted in Arizona, Arkansas, California,
Connecticut, Delaware, Illinois, Maine, Maryland, Massachusetts, Michigan,
Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, Ohio,
Oklahoma, Oregon, Pennsylvania, Rhode Island, Texas, Vermont and Virginia.
Source: Energy Information Administration.
/8/ Oregon's electricity deregulation legislation is an exception,
affording only large industrial and commercial customers access to
competing electricity suppliers by October 1, 2001. Residential customers
and small businesses will continue to receive power from the state's two
investor-owned utilities, which under the legislation will be required to
offer these customers a portfolio of options that include rate-regulated
power, market-priced power and electricity produced from renewable
resources.
/9/ Edison Electric Institute, "Divestiture Action & Analysis/ January
2000 Issue."
/10/ Id.
/11/ Securities and Exchange Commission, "Registered Public-Utility
Holding Companies and Internationalization," HCAR No. 27110, Dec. 21, 1999,
64 Fed. Reg. 71341.
/12/ CERA, Global Power Horizons 1999, supra, at Figure 3.
/13/ Id. at Table 1.
/14/ See Summary Annual Reports of Cinergy for 1997 and 1998, Letter to
Stakeholders. Productivity for these purposes is measured by electric
customer service expense per customer, electric transmission and
distribution expense per customer, gas distribution expense per customer,
and generation expenses per megawatt-hour.
/15/ As measured by cost per megawatt ("MW") -hour (a sum of fuel expense,
nonfuel operation and maintenance ("O&M") expenses, incremental capital
expenditures, and a carrying cost for fuel and O&M inventories) derived
from 1998 FERC Form 1's for a benchmark group of the 25 largest electric
and gas utilities (based on revenues).
/16/ The common stock authority requested herein is not intended to
supersede Cinergy's existing authority to issue shares of its common stock
under a variety of stock-based plans. Such authority was granted under
various orders separate from those described in the text accompanying this
footnote, and Cinergy is not here requesting any amendment to the terms of
these orders. See HCAR No. 27028, May 19, 1999 (authorizing Cinergy to
issue, from time to time through December 31, 2004, up to 250,000 shares of
common stock under an amended retirement plan for non-employee directors
and a new retirement plan for non-employee directors); HCAR No. 27001,
April 8, 1999 (authorizing Cinergy to issue and sell, from time to time
through December 31, 2004, up to 75,000 shares of common stock under an
employee savings plan for employees of a U.K. subsidiary of Cinergy); HCAR
No. 26505, April 17, 1996 (authorizing Cinergy to issue and sell, from time
to time through December 31, 2000, up to 7 million shares of common stock
under a long-term incentive compensation plan); and HCAR No. 26505, Dec. 1,
1995 (authorizing Cinergy to issue and sell, from time to time through
December 31, 2000, up to 22,386,696 shares of common stock under a dividend
reinvestment and stock purchase plan and certain other stock-based plans).
/17/ See, e.g., SCANA Corporation, et al., HCAR No. 27137, Feb. 14, 2000;
Southern Company, HCAR No. 27134, Feb. 9, 2000; Southern Company, HCAR No.
27061, Aug. 18, 1999; Conectiv, Inc., HCAR No. 26833, Feb. 26, 1998; Ameren
Corporation, HCAR No. 26809, Dec. 30, 1997; New Century Energies, Inc.,
HCAR No. 26750, Aug. 1, 1997; The Columbia Gas System, Inc., HCAR No.
26634, Dec. 23, 1996; Gulf States Utilities Company, HCAR No. 26451, Jan.
16, 1996.
/18/ In accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, "accumulated other comprehensive
income" includes all components of common stock equity that are not
included as net income or the result of shareholder transactions (e.g.,
stock issuances or dividends). At December 31, 1999, components of
Cinergy's accumulated other comprehensive income consisted of foreign
currency translations, minimum pension liability adjustments and unrealized
gains and losses on grantor and rabbi trusts.
/19/ See HCAR No. 26146, dated October 21, 1994 (approving Cinergy merger
and related transactions).
/20/ Lawrenceburg sells and transports natural gas to approximately 20,000
people in a 60 square-mile area in southeastern Indiana. West Harrison
sells electricity over a 3-square mile area with a population of
approximately 1,000 in West Harrison, Indiana and bordering rural areas.
Miami owns a 138 kV transmission line running from the Miami Fort Power
Station in Ohio to a point near Madison, Indiana.
/21/ During 1998, the FERC approved the formation of a Midwest Independent
System Operator ("Midwest ISO"). The Midwest ISO will oversee the combined
transmission systems of its members; it will help to facilitate a reliable
and efficient market for electric power and create open transmission access
consistent with FERC policies. The Midwest ISO currently includes 14
members with over 69,000 miles of transmission lines in 16 states and an
aggregate investment of over $8.5 billion. The organization is expected to
begin operations in late 2001. In December 1999, the Midwest ISO
announced plans to combine operations with the Mid-Continent Power Pool and
the Southwest Area Power Pool.
/22/ The report found that all North American Electric Reliability Council
planning regions will need capacity by 2004, as a result of growing markets
and the need to replace current capacity, particularly nuclear plants
scheduled for retirement. See Resource Data International, "Outlook for
Power in the U.S. 1998", at "Executive Summary."
/23/ As reported in The Financial Times, July 2, 1999.
/24/ Resource Data International, "Outlook for Power in the U.S. 1998," at
"Issues and Assumptions/Industry Trends."
/25/ See Megawatt Daily, July 14, 1999, at 6, "Credit Ratings Group Sets
Merchant Plant Criteria."
/26/ Megawatt Daily, December 28, 1999, at 1, "Merchant Plant Sector Sees
Strong Growth in 1999."
/27/ Resource Data International, "Outlook for Power in the U.S. 1998."
/28/ Megawatt Daily, December 28, 1999, at 1, "Merchant Plant Sector Sees
Strong Growth in 1999."
/29/ Pursuant to its renewable energies strategy, the IBU has invested and
is considering further investments in U.S. wind-powered electric generation
facilities (and potentially other types of non-fossil-fueled U.S.
generating facilities) which may be held as QFs or EWGs.
/30/ Includes only CG&E's and PSI's portion of the total capacity of
plants jointly-owned with other utilities.
/31/ To date this work has involved the restructuring of "out of market,"
long-term wholesale PPAs originally entered into between nonaffiliated
utilities and owners of IPPs. CC&T has closed two of these transactions,
valued at more than $250 million, with Central Maine Power Company
("Central Maine"). In both transactions, special-purpose subsidiaries of
CC&T agreed to supply power to Central Maine under the terms of
restructured PPAs originally entered into between Central Maine and the IPP
owner.
/32/ CinCap VI, L.L.C. owns the facility and Westwood Operating Company,
L.L.C., another CC&T subsidiary, operates the facility.
/33/ Cinergy Press Release, February 2, 1999.
/34/ Ind. Code sec. 8-1-2.5-1 et seq. (1999).
/35/ Id. at sec. 8-1-2.5-1(2).
/36/ Id. at sec. 8-1-2.5-9(a).
/37/ Id. at sec. 8-1-2.5-5. With regard to Kentucky, where ULH&P provides
retail electric and gas service, throughout 1999 a special Kentucky
Electricity Restructuring Task Force, convened by the Kentucky legislature,
studied issues associated with electricity deregulation. In January 2000,
the Task Force issued a final report to the Kentucky Governor recommending
that lawmakers wait until the 2002 General Assembly before considering any
deregulation legislation that would open the state's electric industry to
competition.
/38/ Ohio Rev. Code Ann. sec. 4928.01 et seq. (1999).
/39/ In addition, CG&E has requested that certain costs associated with
the transition to a competitive electric industry (such as incremental
costs incurred to prepare utility systems for customer choice) be
considered regulatory assets and deferred for future recovery in rates,
including carrying costs, after the market development period. These
items, exclusive of carrying charges, total an estimated $116 million.
/40/ See HCAR No. 25570, July 2, 1992 (Edesur); HCAR No. 25674, November
13, 1992 (Central Costanera).
/41/ In 1995, the first full year following the merger, Cinergy achieved
non-fuel operation and maintenance savings of approximately $42 million,
significantly exceeding the Company's initial public statements of
projected first-year merger benefits. The merger enabled the Operating
Companies to reduce fuel costs and capital spending in 1995 by $13 million
and $170 million, respectively.
As discussed below, Cinergy also began a reengineering initiative in 1995.
These efforts have resulted in significant additional cost savings
throughout Cinergy's organization. Cinergy's demonstrated expertise in
realizing cost efficiencies in its own organization should benefit EPAct
Projects in which the Company invests, where Cinergy owns the project
outright or has operating responsibility or participation.
/42/ CGPS provides the following services to CGR and its subsidiaries:
1. Project Development Activities: This core activity involves
identifying, bidding on and developing investment prospects, hiring
advisers, and preparing or assisting in the preparation, review and
negotiation of project bidding, development, investment/financing,
operational and commercial contracts, documents and filings.
2. Asset Management Services: CGPS also provides asset management
services by which, after financial closing and acquisition of the project
investment, the project investment is managed, i.e., advice is given to the
specific Cinergy investing entity and further support services may be
provided, e.g., negotiation of additional investment or disposal of the
investment.
3. On-Site Technical Services: Third, after financial closing, CGPS
may also provide operational and maintenance and other technical and
support services directly to or on behalf of the in-country asset-owning
entity (i.e., the FUCO itself or the EWG that directly holds the eligible
facility). This is more likely to occur in cases where Cinergy owns a
controlling interest in the project company.
CGPS had 35 employees at year-end 1999, working in the following areas:
(i) project development/asset management, (ii) finance and (iii) company
administration. The bulk of the employees fall into the project
development/asset management function. Both those employees and the
finance staff may provide any combination of project development, asset
management and in-country services. The company administration staff
generally provide only internal support services.
/43/ Cinergy's reengineering efforts began in 1995, shortly after merger
consummation. These initial efforts resulted in process adjustments that
Cinergy projects will result in over $519 million in 5-year net cash flow
savings, primarily in labor, material and service procurement, and material
and fuel inventory. In 1998, a new reengineering initiative identified
additional estimated 5-year cash flow savings of over $300 million. These
savings derive primarily from increased efficiencies in Cinergy's overall
business processes as well as from material and service procurement. And
in 1999, Cinergy commenced another reengineering campaign, targeted at
reducing A&G costs by clarifying the roles of the Corporate Center and the
business units and by improving the alignment of internal service offerings
with business unit needs.
/44/ Cinergy's December 31, 1999 aggregate investment of $580 million also
included approximately $26.7 million in funds advanced to CGPS, Cinergy's
project development subsidiary, as well as $4.3 million in preliminary
development expenses for a potential investment.
/45/ This FUCO is a subsidiary of Construcciones y Representaciones
Industriales S.A., which acquired its interest therein with funds entirely
non-recourse to Cinergy.
/46/ Worldwide energy consumption is projected to increase by 65 percent
from 1996 to 2020, with much of the growth occurring in developing
countries. Electricity continues to be the most rapidly growing form of
energy consumption, with world net electricity consumption expected to
increase by over 80 percent, from 12 trillion kilowatthours in 1996 to 22
trillion kilowatthours in 2020. Electricity consumption in developing
countries is forecast to grow at more than twice the rate of growth in the
industrialized countries (4.4% vs. 1.6%), with aggregate consumption nearly
tripling between 1996 and 2020, to approximately 9.5 trillion
kilowatthours. Developing countries are expected to account for 43 percent
of the world's total electricity consumption in 2020, compared with only 28
percent in 1996. See Energy Information Administration, U.S. Department of
Energy, "International Energy Outlook 1999," at 1,6, 101-102.
/47/ CERA, Global Power Horizons 1999, supra, at 3.
/48/ Id. at 59; with respect to potential privatization in Mexico, see The
New York Times, Feb. 4, 1999, "Mexican Chief Backs Privatization of Power
Industry" (reporting proposed constitutional reforms supported by President
Ernesto Zedillo that would reverse Mexico's nationalization of the power
industry and allow private companies to invest in the leasing and
construction of power plants and regional transmission lines).
/49/ CERA, Global Power Horizons 1999, supra, at 60.
/50/ See The New York Times, Sept. 3, 1999, "Korean Power Company Moves
Toward Privatization" (reporting announcement by the state-owned Korea
Electric Power Corp., the only power generation company in South Korea,
that it will spin-off six independent companies in November 1999, and that
in September 1999 the government will offer the six companies for sale to
both domestic and foreign investors).
/51/ The member countries of the EU are Austria, Belgium, Denmark,
Finland, France, Germany, Greece, the Netherlands, Ireland, Italy,
Luxembourg, Portugal, Spain, Sweden and the U.K.
/52/ The London Financial Times, February 15, 1999, "Power Shake-Up
Energises EU Price Competition."
/53/ See http://www.commodities-now.com/online/dec98/elecdereg.html.
/54/ The London Financial Times, February 15, 1999, "Power Shake-Up
Energises EU Price Competition."
/55/ See generally The New York Times, October 28, 1999, "Cheaper Power to
the People/In Germany, a Radical Deregulation Benefits Households"; see
also Megawatt Daily, November 4, 1999, "German Utility RWE to Shop in
Britain."
/56/ The Southern Company, HCAR No. 27134, Feb. 9, 2000, 2000 SEC Lexis
200, at 32 (footnote omitted) (deeming fund transfers booked as loans from
financing subsidiaries to parent registered holding company not to
constitute loans or extensions of credit within meaning of section 12(a) of
the Act).
/57/ Interest rate variability and volatility are closely related in that
both describe uncertainty arising from exposure to floating rates of
interest. Variability usually relates to longer-term exposure, measured in
months or years, especially as regards existing obligations. For example,
to minimize exposure to interest rate variability on debt borrowed to fund
a long-lived asset, Cinergy might "match-fund" with a significant amount of
fixed-rate debt. Exposure to risk on amounts kept floating (for
flexibility of redemption) could be minimized through various derivative
instruments. Volatility, on the other hand, usually describes exposure
that is much shorter in duration, such as daily swings in interest rates or
indices. In addition, it relates to risk exposure on existing obligations
and planned issuances. Therefore, to minimize interest rate volatility on
the day of pricing a new bond, various hedging techniques are available as
described in the text. Cinergy's Treasury Department has responsibility to
analyze the cost and desirability of using various hedging instruments to
mitigate interest rate risk exposure, and to purchase and monitor such
instruments as necessary.
/58/ For example, companies that have complementary businesses (e.g., an
electric distribution company which owns another electric distribution
business or a water or gas distribution business) are said to be
horizontally integrated. Vertical integration encompasses a spectrum of
functionally distinct business operations or processes within a particular
industry, such as the generation, transmission and distribution of
electricity.
/59/ The ability to "cash-out" of, or "monetize," an investment
expeditiously and on advantageous terms represents an important value of
that investment. A company may no longer desire to own an investment
perhaps because the investment is perceived to be at its maximum market
value or it is not achieving its pre-defined goals. Likewise, an
alternative investment may be preferred, or there may simply be a need to
raise cash. In any of these hypotheticals, the ability to achieve such a
disposition is critical.
/60/ See generally 87 FERC Par. 61,173, Docket No. RM99-2-000, May 13,
1999 (Notice of Proposed Rulemaking/ Regional Transmission Organizations)
("RTO NOPR"); Edison Electric Institute, "Electric Industry Key
Trends/November 1998," supra, at 7.
/61/ RTO NOPR, supra, at 22.
/62/ Ibid.
/63/ Id. at 21 (based on power marketer quarterly filings and caveating
that a significant portion of such sales involve multiple resales of the
same generation).
/64/ Cinergy has submitted information to the Commission on the individual
earnings from each EPAct Project in quarterly certificates filed pursuant
to the 100% Order in File No. 70-9011, as well as in Cinergy's Annual
Reports on Form U5S.
/65/ Bloomberg Financial Services.
/66/ As reported by George Pugh & Co. The benchmark group consists of 25
electric and gas utilities including Cinergy.
/67/ CG&E percentages are consolidated.
/68/ Source: Merrill Lynch, Electric Utilities, Third Quarter 1999 and
Fourth Quarter 1998 Reports.
/69/ CG&E percentages are consolidated.
/70/ The average rating for utility company senior debt is A- from S&P and
A3 from Moody's.
/71/ An "A3" rating from Moody's is equivalent to an "A-" rating from any
of the other three agencies.
/72/ In December 1994 Cinergy issued and sold over 7 million shares of its
common stock to the public and contributed $160 million of the net proceeds
to the equity capital of PSI (see Rule 24 certificate in File No. 70-8477).
PSI used the funds for general corporate purposes, including repayment of
short-term indebtedness incurred for construction financing.
/73/ See PSI Resources, Inc., et al., HCAR No. 25674, Nov. 13,
1992 (text accompanying notes 21 and 22).
/74/ Ohio Rev. Code sec. 4928.17.
/75/ "Diversified Business" was defined in the Principles to mean (i) a
non-utility business, or (ii) a public utility business outside the United
States of America. "Participation" was defined to mean "an acquisition of
securities, or any interest in a business, which results in either CG&E
becoming a direct owner of a Diversified Business or a Diversified Business
becoming an Affiliate of CG&E." Principles of Diversification Section II D
and G.
/76/ The rule 24 reporting obligations proposed herein would supersede the
(1) corresponding reporting obligations imposed by the 100% Order and (2)
with respect to the proposed financing authority detailed above in Item
1.C, the corresponding reporting obligations imposed by the January 1998
Order and, to the extent duplicative (i.e., regarding guarantees), the
March 1999 Order.
Exhibit G-1
SEC File No. 70-9577
Revised Form of Public Notice
Securities and Exchange Commission
(Release No. 35-_________)
Cinergy Corp., a registered holding company ("Cinergy" or
"Company"), and its direct wholly-owned nonutility subsidiaries Cinergy
Global Resources, Inc. and Cinergy Investments, Inc., all at 139 East
Fourth Street, Cincinnati, Ohio 45202, have filed an
application-declaration ("Application") with the Commission under sections
6(a), 7, 9(a), 10, 12, 32 and 33 of the Act and rules 45, 53and 54
thereunder.
By order dated March 23, 1998 (HCAR No. 26848) ("100% Order"), the
Commission amended certain prior orders issued to Cinergy, authorizing
Cinergy to apply the proceeds of certain financing transactions to an
aggregate investment in exempt wholesale generators ("EWGs") and foreign
utility companies ("FUCOs" and collectively with EWGs, "EPAct Projects")
not to exceed 100% of Cinergy's consolidated retained earnings ("100%
Cap"), subject to various conditions. (The terms "aggregate investment"
and "consolidated retained earnings" have the meanings assigned in Rule
53(a)(1).)
At December 31, 1999, Cinergy's aggregate investment and
consolidated retained earnings were approximately $580 million and $1,023
million, respectively, leaving available investment capacity under the 100%
Order of approximately $443 million.
Cinergy asserts that the remaining investment capacity is not
sufficient to enable the Company to grow its business and adapt to
industry-wide restructuring. Cinergy now requests greater authority to
invest in EPAct Projects and general revisions to outstanding Commission
orders granting Cinergy authority to issue securities.
Specifically, over a five-year period beginning with issuance of
the requested order from the Commission ("Five-Year Period"), Cinergy seeks
to apply proceeds from the proposed financing transactions described below
to make additional investments in EPAct Projects, provided that:
1. Growth Cap. Cinergy's aggregate investment shall not exceed the
sum of (a) an aggregate investment equal to 100% of consolidated
retained earnings plus (b) $2,000,000,000 (collectively, "Growth
Cap"), exclusive of any investments by Cinergy in one or more EWG
affiliates formed to acquire generating assets now owned by
Cinergy's utility subsidiaries, The Cincinnati Gas & Electric
Company, an Ohio electric and gas utility ("CG&E"), and PSI
Energy, Inc., an Indiana electric utility ("PSI").
2. Restructuring Cap. With respect solely to the transfer of CG&E's
and PSI's generating assets to one or more EWG affiliates,
Cinergy's aggregate investment in such EWGs shall not exceed the
net book value of such generating assets at the time of transfer
(the "Restructuring Cap"). The current net book value of CG&E's
and PSI's generating assets is approximately $2.9 billion.
As noted, Cinergy proposes to apply proceeds from financing
transactions authorized in the Application to make additional investments
in EPAct Projects, subject to the Growth Cap and the Restructuring Cap.
Under the following outstanding orders, Cinergy is currently authorized to
issue common stock, debt securities and guarantees for general corporate
purposes including, among other things, investing in EPAct Projects up to
the 100% Cap:
Short-term debt/$2 billion overall debt cap/common stock. Order dated
January 20, 1998, HCAR No. 26819 ("January 1998 Order"), in which the
Commission authorized Cinergy to issue and sell, from time to time
through December 31, 2002, (a) short-term notes and commercial paper
in an aggregate principal amount not to exceed - together with the
principal amount of the debentures referred to below and (prior to the
March 1999 Order, as defined below) certain guarantees - $2 billion at
any time outstanding, and (b) up to 30,867,385 shares of Cinergy
common stock, $.01 par value per share (i.e., 30 million new shares
plus the remaining shares authorized for issuance under a prior
order).
Long-term debentures. Order dated August 21, 1998, HCAR No. 26909
("August 1998 Order"), in which the Commission authorized Cinergy to
issue and sell, from time to time through December 31, 2002, unsecured
debentures with maturities of two to 15 years in an aggregate
principal amount at any time outstanding not to exceed $400 million,
subject to the overall debt cap of $2 billion just noted.
Guarantees; $1 billion cap. Order dated March 1, 1999, HCAR No. 26984
("March 1999 Order"), in which the Commission (a) consolidated
authority granted to Cinergy under prior orders to issue guarantees of
obligations of system companies, while (b) imposing an overall cap of
$1 billion (separate from the $2 billion debt cap) on the amount of
Cinergy guarantees issued and outstanding from time to time through
December 31, 2003. This order modified the January 1998 Order by
removing guarantees from the coverage of the $2 billion debt cap.
Among other things, the March 1999 Order also expanded Cinergy's
existing authority to create intermediate subsidiaries to hold
interests in nonutility businesses, including EPAct Projects.
Cinergy now proposes to replace the January and August 1998 Orders
in their entirety, and to supersede the March 1999 Order solely to the
extent of the guarantee authority granted therein, by new financing
authority the terms of which are set forth below. As with the existing
authority, the new authority would be used for general corporate purposes,
not merely to fund investments in EPAct Projects./1/
Cinergy states that the requested authority is intended to enable
the Company to respond quickly and efficiently to its financing needs and
available conditions in capital markets. Cinergy asserts that its request
is generally consistent with similarly broad financing authority granted to
other registered holding companies in recent Commission orders./2/
Subject to the terms and conditions described below, from time to
time through the Five-Year Period, Cinergy proposes (A) to increase its
total capitalization (excluding retained earnings and accumulated other
comprehensive income/3/) by $7,000,000,000 through issuance and/or sale of
any combination of debt or equity securities, whether directly or through
one or more special-purpose subsidiaries ("Aggregate Financing Limit"), and
(B) to increase the level of its guarantees outstanding at any time to an
aggregate of $2,000,000,000 ("Guarantees Limit"), all without further
authorization from the Commission, including with respect to the terms of
sale or issuance. At December 31, 1999, Cinergy's total capitalization
(excluding retained earnings and accumulated other comprehensive loss)
totaled approximately $2 billion, and Cinergy's subsidiaries and affiliates
had debt or other obligations outstanding totaling $515 million backed by
Cinergy guarantees.
In addition to the other terms and conditions stated below, the
following restrictions govern the proposed financing transactions:
(i) Except in the case of the transactions covered by the
Restructuring Cap, common equity will comprise at least 30
percent of Cinergy's consolidated capitalization (based upon
the financial statements included in Cinergy's most recent
quarterly report on Form 10-Q or annual report on Form 10-K);
(ii) the interest rate on any series of debt security with a
maturity of one year or less will not exceed the greater of
(a) 300 basis points over the comparable term London interbank
offered rate, or (b) a rate that is consistent with similar
securities of comparable credit quality and maturities issued
by other companies;
(iii)the interest rate on any series of debt security with a maturity
greater than one year will not exceed the greater of (a) 300
basis points over the comparable term U.S. Treasury securities or
other market-accepted benchmark securities, or (b) a rate that is
consistent with similar securities of comparable credit quality
and maturities issued by other companies;
(iv) the distribution rate on any series of preferred security will
not exceed the greater of (a) 400 basis points over the
comparable term U.S. Treasury securities or other market-accepted
benchmark securities, or (b) a rate that is consistent with
similar securities of comparable credit quality and structure
issued by other companies;
(v) the underwriting fees, commissions or similar remuneration paid
in connection with the issue, sale or distribution of any
securities authorized hereunder (excluding interest rate risk
management instruments, as to which separate provisions governing
fees and expenses are proposed below) will not exceed 700 basis
points of the principal or face amount of the securities issued
or gross proceeds of the financing; and
(vi) solely with respect to investments in EPAct Projects pursuant
to the Growth Cap, Cinergy will not issue any additional debt
securities to finance such investments if upon original
issuance thereof Cinergy's senior debt obligations are not
rated investment grade by at least two of the major ratings
agencies, i.e., Standard & Poor's Corporation ("S&P"), Fitch
Investor Service ("Fitch"), Duff & Phelps Credit Rating Co.
("D&P") and Moody's Investor Service ("Moody's").
The following additional terms and conditions apply to the proposed
financing transactions.
1. Debt Securities
A. Short-term notes
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
proposes to make short-term borrowings from banks or other financial
institutions. Such borrowings will be evidenced by (1) "transactional"
promissory notes to be dated the date of such borrowings and to mature not
more than one year after the date thereof or (2) "grid" promissory notes
evidencing all outstanding borrowings from the respective lender, to be
dated as of the date of the first borrowing evidenced thereby, with each
such borrowing maturing not more than one year thereafter. Any such note
may or may not be prepayable, in whole or in part, with or without a
premium in the event of prepayment.
B. Commercial paper
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
also proposes to issue and sell commercial paper through one or more
dealers or agents or directly to a limited number of purchasers if the
resulting cost of money is equal to or less than that available from
commercial paper placed through dealers or agents.
Cinergy proposes to issue and sell the commercial paper at market
rates with varying maturities not to exceed 270 days. The commercial paper
will be in the form of book-entry unsecured promissory notes with varying
denominations of not less than $25,000 each. In commercial paper sales
effected on a discount basis, no commission or fee will be payable in
connection therewith; however, the purchasing dealer will re-offer the
commercial paper at a rate less than the rate to Cinergy. The discount
rate to dealers will not exceed the maximum discount rate per annum
prevailing at the date of issuance for commercial paper of comparable
quality and the same maturity. The purchasing dealer will re-offer the
commercial paper in such a manner as not to constitute a public offering
within the meaning of the Securities Act of 1933, as amended ("Securities
Act").
C. Long-term notes
From time to time over the Five-Year Period, subject to the
Aggregate Financing Limit and the other conditions specified above, Cinergy
also proposes to issue and sell long-term debt securities ("Notes") in one
or more series.
Notes of any series may be either senior or subordinated obligations
of Cinergy. If issued on a secured basis, Notes would be secured solely by
common stock, or other assets or properties, of one or more of Cinergy's
nonutility subsidiaries (exclusive of any nonutility subsidiary held by
CG&E or PSI). Notes of any series (a) will have maturities greater than
one year, (b) may be subject to optional and/or mandatory redemption, in
whole or in part, at par or at various premiums above the principal amount
thereof, (c) may be entitled to mandatory or optional sinking fund
provisions, and (d) may be convertible or exchangeable into common stock of
Cinergy. Interest accruing on Notes of any series may be fixed or floating
or "multi-modal" (where the interest is periodically reset, alternating
between fixed and floating interest rates for each reset period, with all
accrued and unpaid interest together with interest thereon becoming due and
payable at the end of each such reset period). Notes will be issued under
one or more indentures to be entered into between Cinergy and financial
institution(s) acting as trustee(s); supplemental indentures may be
executed in respect of separate offerings of one or more series of Notes.
Notes may be issued in private or public transactions. With respect
to the former, Notes of any series may be issued and sold directly to one
or more purchasers in privately negotiated transactions or to one or more
investment banking or underwriting firms or other entities who would resell
the Notes without registration under the Securities Act in reliance upon
one or more applicable exemptions from registration thereunder. From time
to time Cinergy may also issue and sell Notes of one or more series to the
public either (i) through underwriters selected by negotiation or
competitive bidding or (ii) through selling agents acting either as agent
or as principal for resale to the public either directly or through
dealers.
The maturity dates, interest rates, redemption and sinking fund
provisions, if any, with respect to the Notes of a particular series, as
well as any associated placement, underwriting, structuring or selling
agent fees, commissions and discounts, if any, will be established by
negotiation or competitive bidding and reflected in the applicable
indenture or supplement thereto and purchase agreement or underwriting
agreement setting forth such terms.
D. Interest rate risk management
In connection with the issuance and sale of the short- and long-term
debt securities described above, Cinergy proposes to manage interest
rate risk through the use of various interest rate management instruments
commonly used in today's capital markets, such as interest rate swaps,
caps, collars, floors, options, forwards, futures and similar products
designed to manage interest rate risks.
Cinergy will enter into such derivative transactions pursuant to
agreements with counterparties that are highly rated financial institutions
i.e., whose senior secured debt, at the date of execution of the agreement
with Cinergy, is rated at least "A-" by S&P, Fitch or D&P or "A3" by
Moody's. The derivative transactions will be for fixed periods and in no
case will the notional principal amount exceed the principal amount of the
underlying debt security. Cinergy will not engage in "leveraged" or
"speculative" derivative transactions.
Fees, commissions and annual margins in connection with any interest
rate management agreements will not exceed 100 basis points in respect of
the principal or notional amount of the related debt securities or interest
rate management agreement. In addition, with respect to options such as
caps and collars, Cinergy may pay an option fee which, on a net basis
(i.e., when netted against any other option fee payable with respect to the
same security), would not exceed 10% of the principal amount of the debt
covered by the option.
2. Equity Securities
A. Common stock (including Stock Purchase Contracts/ Units)
At December 31, 1999, Cinergy had 600 million shares of common
stock authorized for issuance, 158,923,399 shares of which were issued and
outstanding. Cinergy states that it has issued 771,258 shares of common
stock pursuant to the January 1998 Order.
From time to time over the Five-Year Period, subject to the Aggregate
Financing Limit and the other conditions specified above, Cinergy proposes
to issue and sell additional shares of its common stock (i) through
solicitations of proposals from underwriters or dealers, (ii) through
negotiated transactions with underwriters or dealers, (iii) directly to a
limited number of purchasers or to a single purchaser, and/or (iv) through
agents. The price applicable to additional shares sold in any such
transaction will be based on several factors, including the current market
price of the common stock and prevailing capital market conditions.
Cinergy also proposes to issue and sell from time to time stock
purchase contracts ("Stock Purchase Contracts"), including contracts
obligating holders to purchase from Cinergy, and/or Cinergy to sell to the
holders, a specified number of shares or aggregate offering price of
Cinergy common stock at a future date. The consideration per share of
common stock may be fixed at the time the Stock Purchase Contracts are
issued or may be determined by reference to a specific formula set forth in
the Stock Purchase Contracts. The Stock Purchase Contracts may be issued
separately or as part of units ("Stock Purchase Units") consisting of a
stock purchase contract and debt and/or preferred securities of Cinergy
and/or debt obligations of nonaffiliates, including U.S. Treasury
securities, securing holders' obligations to purchase the common stock of
Cinergy under the Stock Purchase Contracts. The Stock Purchase Contracts
may require holders to secure their obligations thereunder in a specified
manner.
Further, Cinergy requests authorization to issue common stock as
consideration, in whole or part, for acquisitions by Cinergy or any
nonutility subsidiary thereof of securities of businesses, the acquisition
of which (a) is exempt under the Act or the rules thereunder or (b) has
been authorized by prior Commission order issued to Cinergy or any
nonutility subsidiary thereof, subject in either case to applicable
limitations on total investments in any such businesses. The shares of
Cinergy common stock issued in any such transaction would be valued at
market value based on the closing price on the day before closing of the
sale, on average high and low prices for a period prior to the closing of
the sale, or on some other method negotiated by the parties.
B. Preferred securities
From time to time over the Five-Year Period, subject to the Aggregate
Financing Limit and the other conditions specified above, Cinergy also
proposes to issue and sell preferred securities in one or more series.
Preferred securities of any series (a) will have a specified par or
stated value or liquidation value per security, (b) will carry a right to
periodic cash dividends and/or other distributions, subject among other
things, to funds being legally available therefor, (c) may be subject to
optional and/or mandatory redemption, in whole or in part, at par or at
various premiums above the par or stated or liquidation value thereof, (d)
may be convertible or exchangeable into common stock of Cinergy, (e) and
may bear such further rights, including voting, preemptive or other
rights, and other terms and conditions, as set forth in the applicable
certificate of designation, purchase agreement and/or similar instruments
governing the issuance and sale of such series of preferred securities.
Preferred securities may be issued in private or public transactions.
With respect to private transactions, preferred securities of any series
may be issued and sold directly to one or more purchasers in privately
negotiated transactions or to one or more investment banking or
underwriting firms or other entities who would resell the preferred
securities without registration under the Securities Act in reliance upon
one or more applicable exemptions from registration thereunder. From time
to time Cinergy may also issue and sell preferred securities of one or more
series to the public either (i) through underwriters selected by
negotiation or competitive bidding or (ii) through selling agents acting
either as agent or as principal for resale to the public either directly or
through dealers.
The liquidation preference, dividend or distribution rates, redemption
provisions, voting rights, conversion or exchange rights, and other terms
and conditions of a particular series of preferred securities, as well as
any associated placement, underwriting, structuring or selling agent fees,
commissions and discounts, if any, will be established by negotiation or
competitive bidding and reflected in the applicable certificate of
designation, purchase agreement or underwriting agreement, and other
relevant instruments setting forth such terms.
3. Financing Conduits
In addition to issuing any of the foregoing debt or equity securities
directly, Cinergy requests approval to form one or more subsidiaries for
the sole purpose of issuing and selling any of the foregoing securities,
lending, dividending or otherwise transferring the proceeds thereof to
Cinergy or an entity designated by Cinergy, and engaging in transactions
incidental thereto, subject to the Aggregate Financing Limit and the other
conditions previously specified.
The proposed subsidiaries will comprise one or more financing
subsidiaries (each, a "Financing Subsidiary") and one or more
special-purpose entities (each, a "Special-Purpose Entity," and together
with Financing Subsidiaries, "Financing Conduits"). In either case the
subsidiaries' businesses will be limited to issuing and selling securities
on behalf of Cinergy; the subsidiaries will have no substantial physical
assets or properties. Any securities issued by the Financing Conduits will
be fully guaranteed by Cinergy, either directly or ultimately.
Cinergy would acquire all of the outstanding shares of common stock or
other equity interests of the Financing Subsidiary for an amount not less
than the minimum required by applicable law. The business of the Financing
Subsidiary will be limited to effecting financing transactions with third
parties for the benefit of Cinergy and its subsidiaries. As an alternative
in a particular instance to Cinergy directly issuing debt or equity
securities, or through a Special-Purpose Entity, Cinergy may determine to
use a Financing Subsidiary as the nominal issuer of the particular debt or
equity security. In that circumstance, Cinergy would provide a full
guarantee or other credit support with respect to the securities issued by
the Financing Subsidiary, the proceeds of which would be lent, dividended
or otherwise transferred to Cinergy or an entity designated by Cinergy.
The primary strategic reason behind the use of a Financing Subsidiary would
be to segregate financings for the different businesses conducted by
Cinergy, distinguishing between securities issued by Cinergy to finance its
investments in nonutility businesses from those issued to finance its
investments in the core utility business. A separate Financing Subsidiary
may be used by Cinergy with respect to different types of nonutility
businesses.
Cinergy would use Special-Purpose Subsidiaries in connection with
certain financing structures for issuing debt or equity securities, in
order to achieve a lower cost of capital, or incrementally greater
financial flexibility or other benefits, than would otherwise be the case.
4. Guarantees
Cinergy also proposes to supersede its existing guarantee authority,
capped at $1 billion as provided in the March 1999 Order, with greater
authority intended to accommodate growth in its business.
Specifically, from time to time through the Five-Year Period, Cinergy
requests authority to guarantee, obtain letters of credit and otherwise
provide credit support (each, a "Guarantee") in respect of the debt or
other securities or obligations of any or all of Cinergy's subsidiary or
associate companies (including any thereof formed or acquired at any time
over the Five-Year Period), and otherwise to further the business of
Cinergy, provided that the total amount of Guarantees at any time
outstanding does not exceed the Guarantees Limit, and provided further,
that (i) any Guarantees of EPAct Projects shall also be subject to the
Growth Cap or Restructuring Cap, as applicable; and (ii) any Guarantees of
energy-related companies within the meaning of rule 58 ("Rule 58
Companies") shall also be subject to the aggregate investment cap of rule
58. The terms and conditions of any Guarantees would be established at
arm's length based upon market conditions.
In the event that Cinergy issues any authorized debt or equity
securities by means of any Financing Conduits, Cinergy would provide a full
Guarantee in respect of the payment and other obligations of the Financing
Conduit under the securities issued by it. Given that any securities
nominally issued by any such Financing Conduit are in substance securities
issued by Cinergy itself, any securities issued by a Financing Conduit
would count dollar-for-dollar against the Aggregate Financing Limit.
However, Cinergy submits that any Guarantees of securities of Financing
Conduits should be excluded entirely from the Guarantees Limit, since
inclusion thereof would amount to "double counting," in effect penalizing
Cinergy for using Financing Conduits.
5. Use of proceeds
Cinergy proposes to issue the authorized debt and equity securities
for general corporate purposes, including without limitation (i) payments,
redemptions, acquisitions, and refinancings of outstanding securities
issued by Cinergy, (ii) acquisitions of and investments in EPAct Projects,
provided that Cinergy's aggregate investment therein does not exceed the
Growth Cap or Restructuring Cap, as applicable, (iii) acquisitions of and
investments in Rule 58 Companies, provided that Cinergy's aggregate
investment therein does not exceed the aggregate investment limitation of
Rule 58, (iv) loans to and investments in other system companies, including
through the Cinergy system money pool, and (v) other lawful corporate
purposes.
As previously described, in the event Cinergy utilizes Financing
Conduits to issue securities authorized herein, such entities would apply
the proceeds of securities nominally issued by them to make loans,
dividends or other transfers thereof to Cinergy or an entity designated by
Cinergy, which would then be applied for any of the purposes enumerated in
the preceding paragraph.
With respect to the Restructuring Cap, Cinergy states that as a
result of state restructuring of the electric utility industry, it intends
to transfer all or a substantial portion of the generating assets owned by
CG&E and eventually PSI to one or more newly created EWG affiliates.
Cinergy has requested authority over the Five-Year Period to make
investments in such EWG affiliates in an amount not to exceed the net book
value of the generation assets transferred by CG&E and PSI to such
affiliates. Cinergy states that the net book value thereof at December 31,
1999 was approximately $2.9 billion.
CG&E and its four wholly-owned utility subsidiaries - The Union
Light, Heat and Power Company, a Kentucky electric and gas utility
("ULH&P"), Lawrenceburg Gas Company, an Indiana gas utility
("Lawrenceburg"), The West Harrison Gas and Electric Company, an Indiana
electric utility ("West Harrison"), and Miami Power Corporation ("Miami"),
an electric utility (solely by virtue of its ownership of certain
transmission assets) - provide electric and gas service in the southwestern
portion of Ohio and adjacent areas in Kentucky and Indiana. The area
served with electricity, gas or both covers approximately 3,200 square
miles and has an estimated population of two million. CG&E produces,
transmits, distributes and sells electricity and sells and transports
natural gas in the southwestern portion of Ohio, serving an estimated
population of 1.6 million people in 10 of the state's 88 counties including
the cities of Cincinnati and Middletown. ULH&P transmits, distributes and
sells electricity and sells and transports natural gas in northern
Kentucky, serving an estimated population of 328,000 people in a 500
square-mile area encompassing six counties and including the cities of
Newport and Covington./4/ At and for the twelve months ended December 31,
1999, CG&E had total consolidated assets of approximately $4.9 billion and
operating revenues of approximately $2.6 billion.
PSI produces, transmits, distributes and sells electricity in north
central, central and southern Indiana, serving an estimated population of
2.2 million people located in 69 of the state's 92 counties including the
cities of Bloomington, Columbus, Kokomo, Lafeyette, New Albany and Terre
Haute. At and for the twelve months ended December 31, 1999, PSI had total
consolidated assets of approximately $3.8 billion and operating revenues of
approximately $2.1 billion.
CG&E and PSI own significant electric generating facilities. The
generating assets are either wholly-owned by CG&E or PSI or jointly-owned
with other utilities, and are located in Ohio and Indiana, with the
exception of one plant in Kentucky owned by CG&E. The installed capacity
and net book value of the generation assets allocable to CG&E's and PSI's
ownership interests are 11,221 MW and $2.892 billion, respectively, at
December 31, 1999, with 5,245 MW of installed capacity having a net book
value of $1.755 billion allocable to CG&E, and 5,976 MW of installed
capacity having a net book value of $1.137 billion allocable to PSI. None
of Cinergy's other utility subsidiaries own any electric generating
facilities.
Comprehensive electric restructuring legislation was passed in Ohio
in July 1999./5/ Under the new law, all retail customers in Ohio can
choose their electric supplier commencing January 1, 2001.
The legislation deregulates electric generation and supply, with
electric transmission and distribution continuing as regulated utility
functions. According to Cinergy, although it does require restructuring or
divestiture of generating assets, the new Ohio legislation encourages that
result, to foster generation supplier diversity and curb potential market
power of incumbent utilities. As an incumbent Ohio electric utility, CG&E
is required to separate its existing functions pertaining to competitive
retail sale of generation service from those pertaining to transmission and
distribution service, transferring the generation services into a separate
legal entity. The legislation requires that utilities devise incentives to
induce 20 percent of their electric loads by customer class to switch
providers by halfway through the market development period, but in no event
later than December 31, 2003.
Other provisions of the law include:
1. A 5 percent cut in the generation component of rates for every
residential customer beginning January 1, 2001.
2. The establishment of a "market development period" (i.e., the
transition period to full competition) beginning January 1,
2001 and ending no later than December 31, 2005.
3. Utility rates otherwise are frozen for non-switching customers
through the market development period.
4. An opportunity to recover transition costs approved by the
Public Utilities Commission of Ohio ("PUCO") over the market
development period.
5. An opportunity to recover PUCO-approved regulatory assets
through December 31, 2010.
6. The transfer of either ownership or control of transmission
assets to an independent transmission entity before December
31, 2003.
7. A requirement that incumbent utilities provide retail electric
service to native load customers who decline to switch to
different suppliers or who desire to return to service from
the incumbent utility.
8. The filing of a proposed transition plan by year-end 1999.
The transition plan must include a rate unbundling plan, a
corporate separation plan, an operational support plan, an
employee assistance plan and a consumer education plan. The
transition plan may also include a quantification of utility
transition costs and an application to receive transition
revenues. The PUCO is required to issue its order on the
transition plan no later than October 31, 2000.
As required by the legislation, CG&E filed its proposed transition
plan with the PUCO on December 28, 1999. The transition plan is comprised
of eight component plans: a rate unbundling plan, corporate separation
plan, operational support plan, employee assistance plan, consumer
education plan, application for receipt of transition revenues, independent
transmission plan and shopping incentive plan.
In its transition plan, CG&E has proposed to meet its corporate
separation obligations in part by legally separating the generation from
the transmission and distribution businesses, transferring all of its
generating assets to one or more affiliated EWGs. The generation assets
would be moved as soon as practicable after receipt of PUCO approval. The
asset transfer is contingent on various other factors, including receipt
from the Ohio, Indiana and Kentucky commissions of the findings required
under section 32(c) of the Act. Coincident with the transfer of the
generation assets, CG&E would enter into a power purchase agreement ("PPA")
with the EWG approved by the Federal Energy Regulatory Commission. The PPA
would grant CG&E a first call on all power produced by the EWG at embedded
cost through the end of the market development period, ensuring CG&E
sufficient power to meet its electric supply obligations to customers who
do not switch or who return. Cinergy states that it has no current
intention of establishing an affiliate of CG&E to market competitive
generation services to retail customers in Ohio, as permitted by the new
legislation.
As part of its proposed transition plan, CG&E filed a request to
recover transition costs comprised of (1) generation-related regulatory
assets in the total amount of $364 million (excluding carrying charges) and
(2) above-market generation costs in the total amount of $563 million
(excluding carrying charges), in each case beginning January 1, 2001. The
total carrying costs, for which CG&E has also requested recovery, are
estimated at $311 million.
Although comprehensive electric industry restructuring legislation
has not yet been enacted in Indiana, Cinergy expects that such legislation
will be enacted before expiration of the five-year investment period
proposed in the Application. Moreover, Cinergy asserts that existing
statutory provisions in the Indiana Code for "alternative" regulation of
utilities provide a basis for Cinergy to seek approval from the Indiana
Utility Regulatory Commission to transfer PSI's generating facilities to
EWG affiliates, prior to the adoption of state-wide restructuring.
Cinergy maintains in the Application that it needs to be able to
reposition the generation assets now held by CG&E and PSI to maximize the
value of those assets in a competitive environment. Cinergy states that,
like a number of other utilities in states undergoing restructuring, it is
seeking to achieve asset flexibility and optimization by transferring the
assets to EWG affiliates, where they can be used for electric sales back to
the remnant affiliated "T&D" utility or marketed for sale to off-system
buyers, either with respect to all or some of the particular assets.
According to the Application, Cinergy's current intention is to convert all
or a substantial number of CG&E's and PSI's power plants to EWG status,
since the Company believes that corporate disaggregation will eventually be
required for the entire portfolio of generating properties, not merely
CG&E's plants. Therefore, Cinergy has requested a separate investment
ceiling - the Restructuring Cap - with a view to restructuring both CG&E's
and PSI's generating assets. Cinergy further states that, although it
likely would not make permanent recourse investments equal to the full
amount of the book value of the transferred assets, Cinergy could be
required to make investments of that magnitude, on a short-term basis, if
"bridge" financing becomes necessary. Cinergy asserts that the overriding
purpose of the Restructuring Cap is to afford it sufficient financial
flexibility under the Act to pursue a variety of alternatives in an
uncertain and changing regulatory environment.
Cinergy states that the assets would be transferred in one or more
transactions, as soon as practicable after receipt of necessary regulatory
approvals and satisfaction of other conditions. Cinergy has engaged
Donaldson, Lufkin & Jenrette ("DLJ") to provide financial advice in
connection with these transactions.
Cinergy explains that there are two basic transaction structures by
which CG&E and PSI (collectively, "Utility") would transfer their
generating assets to the EWG affiliates (collectively, "Genco"):
Under the "Sale Scenario," Utility sells its generating assets, for
cash and/or promissory notes or other consideration, directly to one
or more newly created subsidiaries of Cinergy (collectively, "Genco"),
held either directly by Cinergy or indirectly by one or more newly
created, special-purpose intermediate holding companies directly held
by Cinergy (collectively, "Genco Holdco").
Under the "Spin-Off Scenario," Utility contributes its generating
assets to Genco for shares of stock or other equity securities of
Genco. Utility then distributes its inves tment in Genco to Cinergy
by dividend or otherwise, which thereupon contributes such stock or
other equity to Genco Holdco. Genco might further drop down its
generating assets into one or more special-purpose subsidiaries; for
example, a separate subsidiary might be established for each power
plant.
Under both scenarios, the assets would likely be transferred at net
book value. The decision to use a particular transaction structure will
depend, among other factors, on whether the transaction can be structured
on a tax-deferred basis and other transaction costs. Under either
scenario, Genco will have an initial capitalization equal to the value of
the transferred generating assets, approximately $2.9 billion (assuming
transfer of all the generating assets at year-end 1999 book value). The
Company is considering both potential structures discussed above, as well
as variations of each.
Cinergy asserts that, regardless of which particular structure is
used, there should be no material increase in the Company's consolidated
debt. Any incremental debt at the Cinergy or EWG level will be largely
offset by reduced debt at the CG&E/PSI level. This reflects the underlying
fact that Cinergy already owns the assets, and would merely transfer direct
title therein from the utility to the nonutility side of its business.
Cinergy states that the Company and DLJ believe that the asset transfers
and associated financings should not themselves have any material adverse
impact on the credit ratings of Cinergy, CG&E or PSI; rather, according to
Cinergy, any such potential impact is a consequence of state deregulation
and loss of monopoly supplier status.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
ENDNOTES
/1/ Cinergy states that the common stock authority requested in the
Application is not intended to supersede Cinergy's existing authority to
issue shares of its common stock under a variety of stock-based plans. See
HCAR No. 27028, May 19, 1999 (authorizing Cinergy to issue, from time to
time through December 31, 2004, up to 250,000 shares of common stock under
an amended retirement plan for non-employee directors and a new retirement
plan for non-employee directors); HCAR No. 27001, April 8, 1999
(authorizing Cinergy to issue and sell, from time to time through December
31, 2004, up to 75,000 shares of common stock under an employee savings
plan for employees of a U.K. subsidiary of Cinergy); HCAR No. 26505, April
17, 1996 (authorizing Cinergy to issue and sell, from time to time through
December 31, 2000, up to 7 million shares of common stock under a long-term
incentive compensation plan); and HCAR No. 26505, Dec. 1, 1995 (authorizing
Cinergy to issue and sell, from time to time through December 31, 2000, up
to 22,386,696 shares of common stock under a dividend reinvestment and
stock purchase plan and certain other stock-based plans).
/2/ See, e.g., SCANA Corporation, et al., HCAR No. 27137, Feb. 14, 2000;
Southern Company, HCAR No. 27134, Feb. 9, 2000; Southern Company, HCAR No.
27061, Aug. 18, 1999; Conectiv, Inc., HCAR No. 26833, Feb. 26, 1998; Ameren
Corporation, HCAR No. 26809, Dec. 30, 1997; New Century Energies, Inc.,
HCAR No. 26750, Aug. 1, 1997; The Columbia Gas System, Inc., HCAR No.
26634, Dec. 23, 1996; Gulf States Utilities Company, HCAR No. 26451, Jan.
16, 1996.
/3/ In accordance with Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income, "accumulated other comprehensive
income" includes all components of common stock equity that are not
included as net income or the result of shareholder transactions (e.g.,
stock issuances or dividends). At December 31, 1999, components of
Cinergy's accumulated other comprehensive income consisted of foreign
currency translations, minimum pension liability adjustments and unrealized
gains and losses on grantor and rabbi trusts.
/4/ Lawrenceburg sells and transports natural gas to approximately 20,000
people in a 60 square-mile area in southeastern Indiana. West Harrison
sells electricity over a 3-square mile area with a population of
approximately 1,000 in West Harrison, Indiana and bordering rural areas.
Miami owns a 138 kV transmission line running from the Miami Fort Power
Station in Ohio to a point near Madison, Indiana.
/5/ Ohio Rev. Code Ann. sec. 4928.01 et seq. (1999).
Exhibit I-1
File No. 70-9577
CINERGY CORP. SYSTEM CORPORATE STRUCTURE
AS OF 12/31/99
Cinergy Corp. (Delaware, 6/30/1993)
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)
Ohio Valley Electric Corporation (Ohio, 10/1/52)/1/
PSI Energy, Inc. (Indiana, 9/6/1941)
South Construction Company, Inc. (Indiana, 5/31/1934)
Cinergy Investments, Inc. (Delaware, 10/24/1994)
(please see attachment for listing of subsidiaries)
Cinergy Global Resources, Inc. (Delaware, 5/15/1998)
(please see attachment for listing of subsidiaries)
Cinergy Foundation, Inc. (Indiana, 12/7/1988)
DOMESTIC
NON-REGULATED CORPORATIONS
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 MVC OpCo, LLC (Delaware, 9/28/99)
CinCap IV, LLC (Delaware, 12/3/1997)/4/
CinCap V, LLC (Delaware, 7/21/98)/5/
CinCap VI, LLC (Delaware, 9/18/98)
CinCap VIII, LLC (Delaware, 12/2/98)
VMC Generating Company/6/
CinCap VII, LLC (Delaware, 12/2/98)
Duke Energy Madison, LLC
Duke Energy Vermillion, LLC
Westwood Operating Company, LLC (Delaware, 10/2/98)
CinPower I, LLC (Delaware, 6/12/1998)
Cinergy Marketing & Trading, LLC (Delaware, 10/27/95;
formerly Producers Energy Marketing, LLC)
Cinergy Communications, Inc. (Delaware, 9/20/1996)
Cinergy Telecommunication Networks Holdings, Inc. (Delaware,
12-7-99)
Lattice Communications, LLC (Delaware, 1/7/99)/7/
Cinergy Engineering, Inc. (Ohio, 3/28/1997)
Cinergy-Centrus, Inc. (Delaware, 4/23/98; formerly Cinergy-Ideon,
Inc.)
Centrus, LLP (Indiana, 7/7/1998)/8/
Cinergy-Centrus Communications, Inc. (Delaware, 7/17/98)
Cinergy Resources, Inc. (Delaware, 1/10/1994; formerly CG&E
Resource Marketing, Inc.)
Cinergy Solutions, Inc. (Delaware, 2/1//1997)
(please see attached list of subsidiaries)
Cinergy Supply Network, Inc. (Delaware, 1/14/98)
Reliant Services, LLC (Indiana, 6/25/98)/9/
Cinergy Technology, Inc. (Indiana, 12/12/1991; formerly PSI
Environmental Corp.)
Enertech Associates, Inc. (Ohio, 10/26/1992)/10/
DOMESTIC
NON-REGULATED CORPORATIONS
Cinergy Investments, Inc. (Delaware, 10/24/1994)/11/
Cinergy Solutions, Inc. (Delaware, 2/11/1997)
1388368 Ontario Inc. (Ontario, 12/2/99)
Cinergy Solutions Limited Partnership (Ontario,
12/14/99)/12/
3036243 Nova Scotia Company (Nova Scotia, 12/10/99)
Cinergy Solutions Limited Partnership (Ontario,
12/14/99)/12/
Cinergy Business Solutions, Inc. (Delaware, 4/6/98)
Rose Technology Group Limited (Ontario, 3/9/84)/13/
Cinergy Customer Care, Inc. (Delaware, 8/21/98)
Cinergy EPCOM, LLC (Delaware, 8/20/99)
Cinergy EPCOM College Park, LLC (Delaware, 8/20/99)
Cinergy Solutions of Golden, Inc.(Delaware, 3/22/99)
Cinergy Solutions of Tuscola, Inc. (Delaware, 10/13/98)
Energy Equipment Leasing LLC (Delaware, 11/12/98)/14/
Trigen-Cinergy Solutions LLC (Delaware, 2/18/1997) /15/
Trigen-Cinergy Solutions of Ashtabula LLC (Delaware,
4-21-99)/14/
Trigen-Cinergy Solutions of Baltimore LLC (Delaware,
11/10/98)/14/
Trigen-Cinergy Solutions of Boca Raton, LLC (Delaware,
9/4/98)/16/
Trigen-Cinergy Solutions of Cincinnati LLC (Ohio,
8/29/1997)/17/
Trigen-Cinergy Solutions of College Park, LLC (Delaware,
2/18/99)/14/
Trigen-Cinergy Solutions of Danville LLC (Delaware,
11/29/99)
Trigen-Cinergy Solutions of Illinois L.L.C. (Delaware,
4/17/1997)/14/
Trigen-Cinergy Solutions of Lansing LLC (Delaware,
11/3/99)/16/
Trigen-Cinergy Solutions of Orlando LLC (Delaware,
6/12/1998)/16/
Trigen-Cinergy Solutions of Owings Mills LLC (Delaware,
9/20/99)/14/
Trigen-Cinergy Solutions of Owings Mills Energy Equipment
Leasing, LLC (Delaware, 10/20/99)/14/
Trigen-Cinergy Solutions of Rochester LLC (Delaware,
10/20/99)/14/
Trigen-Cinergy Solutions of Silver Grove LLC (Delaware,
3/18/99)/14/
Trigen-Cinergy Solutions of St. Paul LLC (Delaware
8/13/98)/14/
St. Paul Cogeneration LLC (Minnesota, 12/18/98)/18/
Trigen-Cinergy Solutions of Tuscola, LLC (Delaware,
8/21/98)/14/
INTERNATIONAL
NON-REGULATED CORPORATIONS
Cinergy Global Resources, Inc. (Delaware, 5/15/1998)/19/
Cinergy Global Power, Inc. (Delaware, 9/4/1997; formerly Cinergy
Investments MPI, Inc.)
Cinergy Global Ely, Inc. (Delaware, 8/28/98)
EPR Ely Power Limited (England, 5/7/98)/20/
EPR Ely Limited (England, 7/10/97)
Ely Power Limited (England, 7/3/97)
Anglian Straw Limited (England, 5/14/90)
Cinergy Global Foote Creek, Inc. (Delaware, 5/4/99)
Foote Creek III, LLC (Delaware, 1/8/99)
Cinergy Global Foote Creek II, Inc. (Delaware, 11/23/99)
Foote Creek II, LLC
Cinergy Global Power Services Limited (England, 8/14/1997;
formerly MPI International Limited)
Cinergy Global Power Limited (England, 2/5/98)
MPI International Limited (England, 2/5/98; formerly Cinergy
Global Power Services Limited)
Cinergy Global Power (UK) Limited (England, 2/5/98)
Cinergy Global Trading Limited (England, 5-25-99)
Cinergy Global San Gorgonio, Inc. (Delaware, 10/13/98)
San Gorgonio Westwinds II, LLC (California, 10/13/98)/21/
Cinergy Global Holdings, Inc. (Delaware, 12/18/98)
Cinergy Holdings B.V. (The Netherlands, 4/7/48; formerly
Watercorner Investments B.V.)
(please see attached list of subsidiaries)
Cinergy Global (Cayman) Holdings, Inc. (Cayman Islands, 9/4/1997;
formerly Cinergy MPI III, Inc.)
Cinergy Global Hydrocarbons Pakistan (Cayman Islands,
9/4/1997; formerly Cinergy MPI I, Inc.)
Cinergy Global Tsavo Power (Cayman Islands, 9/4/1997;
formerly Cinergy MPI II, Inc.)
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)
Midlands Hydrocarbons (Bangladesh) Limited (England, 6/29/93)
Powermid No. 1 (England, 11/6/97)/22/
Cinergy Global Power Africa (Pty) Limited (South Africa)
Cinergy UK, Inc. (Delaware, 5/1/1996)
PSI Argentina, Inc. (Indiana, 4/10/1992)
Costanera Power Corp. (Indiana, 4/10/1992)
PSI Energy Argentina, Inc. (Indiana, 6/5/1992)
INTERNATIONAL
NON-REGULATED CORPORATIONS
Cinergy Global Resources, Inc. (Delaware, 5/15/1998)
Cinergy Global Power, Inc. (Delaware, 9/4/1997; formerly Cinergy
Investments MPI, Inc.)
Cinergy Global Holdings, Inc. (Delaware, 12/18/98)
Cinergy Holdings B.V. (The Netherlands, 4/7/48; formerly
Watercorner Investments B.V.)
Cinergy Zambia B.V. (The Netherlands, 11/18/85;
formerly MPII (Zambia) B.V.)
Copperbelt Energy Corporation PLC (Republic of
Zambia, 9/19/97)/23/
Cinergy Turbines B.V. (The Netherlands, 7/7/83;
formerly Cedarwood B.V.)
EOS PAX I S.L. (Spain)/24/
EOS PAX IIa S.L. (Spain)/24/
Cinergy Hydro B.V. (The Netherlands, 2/13/95; formerly
Midlands Power International B.V.)
Cinergy Global Baghabari I B.V. (The Netherlands,
3/5/99)
Baghabari Power Company Limited/25/
Cinergy Global Baghabari II B.V. (The Netherlands,
3/5/99)
Baghabari Power Company Limited (Bangladesh,
3/18/99)/25/
Cinergy Global 3 B.V. (The Netherlands, 7/15/99)
Cinergy Global 4 B.V. (The Netherlands, 7/15/99)
INTERNATIONAL
NON-REGULATED CORPORATIONS
Cinergy Global Resources, Inc. (Delaware, 5/15/1998)
Cinergy Global Power, Inc. (Delaware, 9/4/1997; formerly Cinergy
Investments MPI, Inc.)
Cinergy Global Holdings, Inc. (Delaware, 12/18/98)
Cinergy Holdings B.V. (The Netherlands, 4/7/48; formerly
Watercorner Investments B.V.)
Cinergy Hydro B.V. (The Netherlands, 2/13/95; formerly
Midlands Power International B.V.)
Construcciones y Representaciones Industriales S.A.
(Spain, 1944)/26/
Cinergy Global Power Iberia, S.A. (Spain, 6/17/98)
Escambeo, S.L. (Spain, 12/21/99)/27/
Parque Eolico de Ascoy, S.A. (Spain, 4/1/98)/28/
Ventoabrego, S.L. (Spain, 11/17/99)/29/
Vendresse Limited (Isle of Man, 3/2/95)
Cinergy 1 B.V. (The Netherlands, 9/11/64; formerly
Midlands Power I B.V.)
Startekor Investeeringute OU (Estonia, 7/6/98)/30/
Aktsiaselts Narva Elektrivork (Estonia, 9/4/97)
Cinergy Global Resources 1 B.V. (The Netherlands, 5/31/68; formerly
Midlands Power Europe B.V.)
Moravske Teplarny a.s. (formerly Teplarna Svit
a.s.)
Plzenska Energetika s.r.o. (formerly Skoda
Energetika s.r.o.)
Cinergy Global Resources a.s.
Cinergetika U/L a.s. (formerly SETUZA energetika
a.s.)/31/
Energetika Chropyne a.s.
Teplarna Otrokovice a.s./32/
Cinergy 2 B.V. (The Netherlands, 6/14/38; formerly
Midlands Power Asia B.V.)
Desarrollo Eolico del Ebro S.A./33/
Northeolic Pico Gallo, S.L. (Spain, 8/18/99)/34/
Desarrollos Eolico El Aguila, S.A. (Spain,
10/21/98)/35/
Sinergia Aragonesa, S.L. (Spain, 10/28/99)/36/
ENDNOTES
/1/ Jointly owned 9% by The Cincinnati Gas & Electric Company, 39.9% by
American Electric Power Company, Inc., 4.3% by Columbus Southern Power
Company, 4.9% by The Dayton Power and Light Company, 2.5% by Kentucky
Utilities Company, 4.9% by Louisville Gas and Electric Company, 16.5% by
Ohio Edison Company, 1.5% by Southern Indiana Gas and Electric Company, 4%
by The Toledo Edison Company, 12.5% by West Penn Power Company.
/2/ Some of the subsidiaries listed are not currently engaged in active
business operations.
/3/ Jointly owned 33-1/3% each with Progress Holdings, Inc. and New
Century-Cadence, Inc.
/4/ Jointly owned 10% by Cinergy Capital & Trading, Inc. and 90% by other
investors managed via the 1998 CinPower Trust.
/5/ Jointly owned 10% by Cinergy Capital & Trading, Inc. and 90% by other
investors managed via the 1999 CinPower Trust.
/6/ Jointly owned 50% by CinCap VIII, LLC and 50% by Duke Energy Trenton,
LLC.
/7/ Jointly owned 43.5% by Cinergy Communications, Inc., 43.5% Lattice
Investors, L.P., and 13% by Lattice Partners LTD.
/8/ Jointly owned 33-1/3% each with New Century-Centrus, Inc. and Progress
Centrus, Inc.
/9/ Jointly owned 50% each with IGC Energy, Inc.
/10/ Formerly Power International, Inc. and formerly Enertech Associates
International, Inc.
/11/ Some of the subsidiaries listed are not currently engaged in active
business operations.
/12/ Jointly owned 99.9% by 3036243 Nova Scotia Company and .1% by 1388368
Ontario, Inc.
/13/ 1381055 Ontario, Inc. (Ontario, 10-22-99) and Rose Technology Group
Limited (Ontario, 3-9-84) are predecessors to the amalgamation effective
12-17-99.
/14/ Jointly owned 49% by Cinergy Solutions, Inc. and 51% by Trigen
Solutions, Inc.
/15/ Jointly owned 50% each with Trigen Solutions, Inc., a subsidiary of
Trigen Energy Corporation.
/16/ Jointly owned 51% by Cinergy Solutions, Inc. and 49% by Trigen
Solutions, Inc.
/17/ Effective August 29, 1997, the former Cinergy Cooling Corp. was
merged with and into Trigen-Cinergy Solutions of Cincinnati LLC, with said
LLC being the surviving company jointly owned 51% by Cinergy Solutions,
Inc. and 49% by Trigen Solutions, Inc.
/18/ Jointly owned 50% by Trigen-Cinergy Solutions of St. Paul LLC and 50%
by Market Street Energy Company, LLC.
/19/ Some of the subsidiaries listed are not currently engaged in active
business operations.
/20/ Jointly owned 30% by Cinergy Global Ely, Inc., and 70% by Energy
Power Resources Limited.
/21/ Jointly owned 50% by Cinergy Global San Gorgonio, Inc., 20% by Heller
Financial, and 30% by Caithness LLC.
/22/ Jointly owned 50% by Cinergy Global Power, Inc. and 50% by Cinergy
Zambia B.V.
/23/ Jointly owned 40% by Cinergy Zambia B.V., 40% by National Grid
Holland B.V. (changed its name to National Grid Zambia B.V. on January 12,
1998), 20% was retained by Zambia Consolidated Copper Mines Limited. The
local management of Copperbelt Energy Corporation PLC are entitled to a 1%
interest in the issued share capital of Copperbelt Energy Corporation PLC
vesting in installments over a 4 year period, without payment, and to
purchase up to a further 2%, dependent on the company's performance.
Cinergy Zambia B.V. is only responsible for providing half of any such
share entitlements. Cinergy Zambia B.V., formerly MPII (Zambia) B.V.,
formerly Seascope Holding B.V., was originally organized in The Netherlands
on November 18, 1985. The name was changed to Cinergy Zambia B.V.
effective September 18, 1998 and MPII (Zambia) B.V. effective November 19,
1997.
/24/ Jointly owned 48.5% by Cinergy Turbines B.V., 48.5% by Tomen (Europe)
B.V., and 3% by Gestion Energetica de Galicia S.A.
/25/ Same company; Under the Bangladesh Companies Act the Baghabari Power
Company Limited will require two founding shareholders.
/26/ 95.45% owned by Cinergy Hydro B.V. and 4.55% by the Alvarez de
Estrada brothers.
/27/ Jointly owned 50% by Cinergy Global Power Iberia, S.A., 49.98% by
Ventovirazon, S.L., and .02% by Fernando Molina Martinez.
/28/ Jointly owned 19.5% by Construcciones y Representaciones Industriales
S.A., 41% by Elecdey, 10% by Nuevos Riesgos del Progreso, 18.5% by
I.D.A.E., and 10.5% by Caja de Cataluna.
/29/ Jointly owned 50% by Contrucciones y Representaciones Industriales,
SA, 49.98% by Pe da Mula, S.L., and .02% by Fernando Molina Martinez.
/30/ Jointly owned 67% by Cinergy 1 B.V. and 33% by AS Sthenos Grupp, an
Estonian investment company.
/31/ 700 out of 701 shares of stock acquired by Cinergy Global Resources,
B.V. One Share retained by the seller, SETUZA a.s.
/32/ Jointly owned 12% by Cinergy Global Resources 1 B.V., 86% by Newton
Stock Investments a.s., and 2% by small investors.
/33/ Jointly owned 50% by Cinergy 2 B.V., 38% by Jorge S.A. and 12% by
Valle del Ebro Ingenieria y Consultoria, S.L.
/34/ Jointly owned 20% by Cinergy 2 B.V. and 79.9% by Northeolic, S.A.
/35/ Jointly owned 11.50% by Cinergy 2 B.V., 45.13% by Financiera
Agroganadera, S.A., and 43.37% by Valle del Ebro Ingenieria y Consultoria,
S.L.
/36/ Jointly owned 20% by Cinergy 2 B.V., 40% by Jorge, S.A., and 40% by
Valledel Ebro Ingenieria y Consultoria, S.L.
Exhibit J-1
File No. 70-9577
CG&E/PSI GENERATING FACILITIES
At December 31, 1999, Cinergy's utility subsidiaries owned electric
generating plants, or portions thereof in the case of jointly-owned plants,
with net capabilities (winter ratings) as shown in the following table:
<PAGE>
<TABLE>
<CAPTION> CG&E/PSI Generating Facilities
<S> <C> <C> <C> <C>
Principal Net
Percent Fuel Capability
Plant Name Location Ownership Source MW
CG&E
Steam Electric Generating
Plants:
Miami Fort Station
(Units 5&6) North Bend, OH 100.0% Coal 243
Miami Fort Station
(Unites 7&8) North Bend, OH 64.00 Coal 640
W. C. Beckjord Station
(Units 1-5) New Richmond, OH 100.0 Coal 704
W. C. Beckjord Station
(Unit 6) New Richmond, OH 37.50 Coal 158
J. M. Stuart Station Aberdeen, OH 39.00* Coal 913
Killen Station Adams Cty., OH 33.00* Coal 198
Conesville Station Conesville, OH 40.00* Coal 312
Wm. H. Zimmer Generating
Station Moscow, OH 46.50 Coal 605
East Bend Station Boone Cty, KY 69.00 Coal 414
Combustion Turbines:
Dicks Creek Station Middletown, OH 100.00 Gas 172
Miami Fort Gas Turbine
Station North Bend, OH 100.00 Oil 78
W.C. Beckjord Gas
Turbine Station New Richmond, OH 100.00 Oil 245
Woodsdale Generating Station Butler Cty, OH 100.00 Gas 564
Total: 5,246
*Station is not operated by CG&E.
PSI
Steam Electric Generating
Plants:
Gibson Generating Station
(Units 1-4) Princeton, IN 100.00 Coal 2,532
(Unit 5) Princeton, IN 50.05 Coal 313
Wabash River Station Terre Haute, IN 100.00 Coal 668
Cayuga Station Cayuga, IN 100.00 Coal 1,005
R.A. Gallagher Station New Albany, IN 100.00 Coal 560
Edwardsport Station Edwardsport, IN 100.00 Coal 160
Noblesville Station Noblesville, IN 100.00 Coal 90
Combustion Turbines:
Cayuga Combustion Turbine Cayuga, IN 100.00 Gas 120
Wabash River Coal
Gasification Project Terre Haute, IN 100.00 Coal 262
Internal Combustion Units:
Connersville Peaking Station Connersville, IN 100.00 Oil 98
Miami-Wabash Peaking Station Wabash, IN 100.00 Oil 104
Cayuga Peaking Units Cayuga, IN 100.00 Oil 11
Wabash River Peaking Units Terre Haute, IN 100.00 Oil 8
Hydroelectric Generating Station:
Markland Generating Station Markland Dam, 100.00 Water 45
Ohio River
Total: 5,976
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Largest Power Plant Divestitures by U.S.
Utilities
LARGEST POWER PLANT DIVESTITURES BY U.S. UTILITIES/1/
1997 - February 2000
<S> <C> <C> <C> <C>
Date Sale Total Cost
Seller Acquirer Announced MW ($millions)
Unicom Edison Mission 3/23/99 9,772 $4,813
Energy
Sithe Energies Reliant Energy 2/20/00 4,200 $2,100
NYSEG and GPU Edison Mission 8/3/98 1,896 $1,800
Energy
GPU Sithe Energies 11/9/98 4,117 $1,720
DQE Inc. Orion Power 9/27/99 2,614 $1,705
Holdings
NEES PG&E Generating Co. 8/6/97 5,107 $1,675
Montana Power PP&L 11/2/98 2,614 $1,586
Cogen Technologies Enron 10/98 1,037 $1,100
NYSEG AES 8/3/98 1,424 $ 950
Central Maine Power FPL Group 1/6/98 1,185 $ 846
PG&E Corp. Southern 11/24/98 3,065 $ 801
Conectiv NRG Energy 1/18/00 1,875 $ 800
Southern California AES 11/24/97 3,956 $ 781
Edison
Consolidated Edison KeySpan 1/28/99 2,168 $ 597
Consolidated Edison Orion Power Holdings 3/3/99 1,855 $ 550
Boston Edison Sithe Energies 12/10/97 1,983 $ 536
Consolidated Edison NRG Energy 1/28/99 1,456 $ 505
PG&E Corp. Duke 11/18/97 2,645 $ 501
Orange & Rockland Southern 11/24/98 1,776 $ 480
Northeast Utilities NRG Energy 7/6/99 2,235 $ 460
Niagara Mohawk Orion Power Holdings 12/28/98 661 $ 425
San Diego Gas & Dynergy (DYN & 12/15/98 951 $ 356
Electric NRG JV)
Niagara Mohawk NRG Energy 12/28/98 1,360 $ 355
United Illuminating Wisvest 10/6/98 1,056 $ 272
ENDNOTES
/1/ The covered transactions also include the sale of power plants
announced in February 2000 by Sithe Energies to Reliant Energy.
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Foreign Utility Acquistions by U.S. Companies
FOREIGN UTILITY ACQUISITIONS BY U.S. COMPANIES
1995 - FEBRUARY 2000/1/
<S> <C> <C> <C>
Acquirer Cost
Acquirer/Project/Country Year ($million) Ownership
Southern-SWEB-UK 1995 $1,800 100%
PacifiCorp-PowerCor-Australia 1995 1,600 100%
Texas Utilities-Eastern 1995 1,600 100%
Energy-Australia
UtiliCorp-United Energy- 1995 600 50%
Australia
CSW-SEEBOARD-UK 1996 2,500 100%
Dominion Resources-East 1996 2,200 100%
Midlands-UK
MidAmerican Energy-Northern 1996 910 70%
Electric-UK
Cinergy-Midlands-UK 1996 1,300 50%
GPU-Midlands-UK 1996 1,300 50%
Entergy-CitiPower-Australia 1996 1,200 100%
GPU-PowerNet-Australia 1997 1,900 100%
Southern-CEPA-Asia 1997 3,400 100%
Entergy-London Electricity-UK 1997 2,100 100%
AES-Companhia Centro Oeste de 1997 1,370 90%
Distribuicao de Energia
Electrica-Brazil
AEP-Yorkshire Electricity-UK 1997 1,200 50%
PSC Colorado-Yorkshire 1997 1,200 50%
Electricity-UK
Southern-BEWAG-Germany 1997 820 26%
PSEG-Rio Grande Energia-Brazil 1997 500 33%
AES-Light Servicos de 1996-1997 470 13.75%
Electriciadade-Brazil/2/
Texas Utilities-Energy Group-UK 1998 7,400 100%
Enron-Elektro Electriciolade e 1998 1,300 100%
Servicos S.A.-Brazil
Reliant-Corelca-Columbia 1998 420 32.5%
Reliant-UNA-Netherlands 1999 2,400 100%
Texas Utilities-Westar/Kinetik 1999 1,020 100%
- -Australia
British Gas-Comgas-Brazil 1999 940 64%
Edison Mission-Contact Energy 1999 6,250 40%
- -New Zealand
Sempra Energy-Chilquinta S.A.- 1999 415 45%
Chile
PSEG-Chilquinta S.A.-Chile 1999 415 45%
GPU-Transmission Pipelines 1999 675 100%
Australia-Australia
AES-National Power Drax 1999 3,000 100%
Limited-UK
Duke Energy-Companhia de 1999 80 100%
Energia Electrica
Paranapanema-Brazil
Edison Mission-Ferrybridge and 1999 2,030 100%
Fiddlers Ferry Power Stations-UK
Potomac Electric Power Co 1999 724 100%
("PEPCO")-gas transmission
networks-The Netherlands
AES-Tiete-Brazil 1999 486 61%
UtiliCorp-Trans Alta Corp. 2000 450 100%
electric assets-Alberta
PEPCO-gas distribution assets 2000 525 100%
- -The Netherlands
</TABLE>
<PAGE>
<TABLE>
<CAPTION> Secondary Sales By Or To U.S. Utilities
SECONDARY SALES BY OR TO U.S. UTILITIES
1995 - FEBRUARY 2000/3/
<S> <C> <C> <C>
Acquirer Cost
Acquirer/Project/Seller Year ($ millions) Ownership
PowerGen-East Midlands 1998 $3,200 100%
- -Dominion Resources
Electricite de France- 1998 3,180 100%
London Electricity-Entergy
AEP-Citipower-Entergy 1998 1,100 100%
GPU-Midlands-Cinergy 1999 700 50%
Duke Energy-certain Latin 1999 405 100%
American electric generation
facilities-Dominion Resources
PP&L Resources-SWEB 1996-1998 400 51%
Southern/4/
</TABLE>
ENDNOTES
/1/ Includes completed and announced privatizations and acquisitions of
foreign utility companies or assets where purchase price at least $400
million. All data based on publicly available information.
/2/ AES acquired its 13.75% interest in two transactions (May 1996 and
January 1997).
/3/ Includes completed and announced transactions where purchase price at
least $400 million. All data is based on publicly available information.
/4/ Southern sold an aggregate 51% interest in SWEB to PP&L Resources in
two transactions (July 1996 and June 1998).
Exhibit N
File No. 70-9577
February 16, 2000
Cinergy Corp.
139 East Fourth Street
Cincinnati, OH 45202
Attention: Mr. William Grealis
Vice President and Chief Strategic Officer
Cinergy Corp. ("Cinergy" or the "Company") has requested that Merrill
Lynch & Co. advise it as to the expected impact of the financing of an
incremental $2 billion of Non-Regulated Investments (as defined below),
considered from a financial point of view, on the credit ratings of the
Company and of its two rated regulated subsidiaries, Cincinnati Gas &
Electric Co. and PSI Energy Inc. (the "Rated Subsidiaries"). We understand
this advice will be included as part of Cinergy's Form U-1 filing (the
"Form U-1 Filing") with the Securities and Exchange Commission (the "SEC")
under the Public Utility Holding Company Act of 1935. The Form U-1 Filing,
among other things, requests authority for Cinergy to invest $2 billion on
a recourse basis in exempt wholesale generators and foreign utility
companies over the next five years (collectively, the "Non-Regulated
Investments") on the terms and under the assumptions set forth therein.
Our analysis was prepared in response to, and under the terms of, the
engagement letter entered into by Cinergy and Merrill Lynch & Co., dated
May 7, 1999.
In arriving at our conclusions set forth below, and in the performance
of the requested credit analysis, we have, among other things:
1. Reviewed certain publicly available business and financial
information relating to the Company and the Rated Subsidiaries
that we deemed to be relevant;
2. Reviewed certain information, including financial forecasts,
provided by the Company to us as representative of the proposed
Non-Regulated Investments;
3. Reviewed certain information, including financial forecasts,
relating to the business, earnings, cash flow, assets,
liabilities and prospects of the Company and the Rated
Subsidiaries;
4. Reviewed certain information, including the Company's financial
forecasts, relating to the business, earnings, cash flow, capital
expenditures, financing plan, timing and sources and uses of
funds, in each Case associated with the Non-Regulated
Investments;
5. Conducted discussions with members of senior management of the
Company concerning the matters described in clauses 1 through 4
above, as well as the business and prospects of the Company
before and after giving effect to the implementation, if any, of
the proposed Non-Regulated Investments;
6. Reviewed credit ratios of the Company in the Standalone Case and
Investment Case (as defined below) and compared them with
financial targets for utility companies as published by Standard
& Poor's;
7. Reviewed the draft of the Form U-1 filing dated November 16,
1999; and
8. Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In arriving at our conclusions set forth below, Merrill Lynch assumed
and relied on the accuracy and completeness of all information supplied or
otherwise made available to Merrill Lynch, discussed with or reviewed by or
for Merrill Lynch. Merrill Lynch was supplied with all of the information
regarding the Non-Regulated Investments by the Company; it is Merrill
Lynch's understanding that the Non-Regulated Investments have not been
identified and that the Company expects the financial information,
including financial forecasts, to be representative of the actual
Non-Regulated Investments. Merrill Lynch does not assume any
responsibility for independently verifying any information provided by the
Company or for undertaking an independent evaluation or appraisal of any of
the assets or liabilities of Cinergy and was not furnished with any such
evaluation or appraisal. In addition, Merrill Lynch did not assume any
obligation to conduct any physical inspection of the properties or
facilities of the Company. With respect to the financial forecast
information furnished to or discussed with Merrill Lynch by the Company and
regarding the Non-Regulated Investments, Merrill Lynch assumed that they
were reasonably prepared and reflected the best currently available
estimates and judgements of the Company.
Our view is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and the information made
available to us as of the date hereof, including the assumptions contained
in the Company's financial forecasts provided to us and outlined in the
Form U-1 Filing.
On the basis of this information and the assumptions outlined above,
we prepared integrated financial models and performed sensitivity analyses
on the financial information derived from such models in a manner that we
believe is consistent with the sensitivity analyses performed by
statistical rating agencies. In this connection, Merrill Lynch determined
to review the following key credit ratios for the Company and its
consolidated subsidiaries for the years 2000 to 2004, which we understand
to be those reviewed by credit rating agencies: (i) Net Debt as a percent
of Total Capitalization; (ii) Funds from Operations to net interest
coverage; (iii) Funds from Operations to Net Debt coverage; and (iv)
Earnings before interest, taxes and depreciation and amortization
("EBITDA") associated with the Non-Regulated Investments to total EBITDA of
the Company. The foregoing credit ratios were calculated under two
scenarios: (i) the Standalone Case, where the Non-Regulated Investments
were not made at any time, and (ii) the Investment Case, where the
Non-Regulated Investments are made over a five year period, by any entity
of the Company other than the Rated Subsidiaries.
The matters set forth above do not purport to be a complete
description of the analyses performed by Merrill Lynch in preparing this
letter. The preparation of a credit analysis is a complex process and is
not necessarily susceptible to partial or summary description. Merrill
Lynch believes that its analyses must be considered as a whole and that
selecting portions of its analyses and the factors considered by it,
without considering all such factors and analyses, could create a
misleading view of the process underlying the analyses set forth in this
letter. The matters considered by Merrill Lynch in its analyses were based
on numerous macroeconomic, operating and financial assumptions with respect
to industry performance, general business and economic conditions and other
matters, many of which are beyond Cinergy's and Merrill Lynch's control and
involve the application of complex methodologies and educated judgment.
Any estimates contained in Merrill Lynch's analyses are not necessarily
indicative of actual past or future results or values, which may be
significantly more or less favorable than such estimates. There can be no
assurance that the Company's Non-Regulated Investments will actually
realize the returns contemplated by such assumptions or that market
conditions will accommodate the Company's strategy. This is not a
prediction as to what an independent rating agency may do under any
particular circumstances.
On the basis of and subject to the foregoing, and considering the
results of the credit ratio analysis outlined above, we are of the view, as
of the date hereof, that the credit ratings of Cinergy and its Rated
Subsidiaries would not be expected to fall below investment grade due to
the Non-Regulated Investments being made as outlined in the Form U-1.
Very truly yours,
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
Exhibit O
File No. 70-9577
Cinergy's Wholesale Power Supply Business
1998-1999 Losses/Actions to Avoid Future Losses
I. Introduction
In 1998 and 1999, Cinergy recorded charges to income of $0.54 per share and
$0.36 per share, respectively, related to its wholesale power marketing and
trading business. The losses were primarily the result of (i) the halting
pace of national and state-by-state deregulation of the electricity
industry and (ii) extreme summer weather conditions. None of these losses
resulted in a downgrade to the outstanding credit ratings of Cinergy or any
of its utility subsidiaries./1/
Cinergy is taking steps to forestall the potential for future adverse
impacts. These include a change in strategy, development of additional
physical assets, aggressive load management efforts, and assembly of an
industry-recognized team of power marketing professionals. These proactive
steps, in concert with other factors discussed below, should significantly
reduce Cinergy's exposure to the consequences of extreme weather and
operating conditions and, therefore, the risk of future financial losses.
Additional investments in regional EWGs - which are severely constrained
under Cinergy's current SEC investment cap, given the limited available
capacity - is a linchpin of this mitigation strategy.
II. Initial National Strategy/1998 Losses and Strategic Reorientation
Following the passage of the Energy Policy Act of 1992, Cinergy was
convinced that the pace of deregulation in the electric utility industry
was accelerating, and would result in lower power prices nationwide and
migration of captive customers from their historic utility providers.
Believing the opportunities for "first mover" companies would be immense,
Cinergy embarked on a strategy in 1996 to become one of the top five
electric commodity marketing and trading companies in the nation. Pursuant
to that strategy, Cinergy moved quickly to establish a wholesale power
marketing presence in 27 states, and power marketing and trading offices in
every region of the country. This included 11 cities around the nation,
nine of which were outside Cinergy's utility service territory in the
Midwest.
Also key to Cinergy's strategy was the belief that as power markets
deregulated and prices fell, an active, liquid and orderly market for power
sales would develop, not only providing accurate forward price discovery,
but also obviating the need for ownership of physical assets to settle
power contracts.
Acting on this strategy, Cinergy began aggressively seeking new wholesale
electric customers, and marketing power sales and financial options. In
1996, wholesale customers increased from 37 to 107. Also, Cinergy's power
trading book consisted of a number of fixed-price forward purchase and
sales contracts and options, which would require settlement by physical
delivery. Cinergy intended to settle a majority of these contracts through
purchases in the power markets, reflecting its belief that prices, showing
the effects of deregulation, would eventually decline.
Implementation of the national strategy continued in 1997 as Cinergy
secured 13 new wholesale power agreements with electric co-operatives and
municipal systems in Illinois, Indiana, South Carolina and Virginia.
In early 1998, however, it became apparent to Cinergy that the timing of
deregulation was decidedly slower than had been anticipated. Expected and
needed legislation at the national level was not moving forward, roadblocks
to full competition were being erected in several states, and movement
toward deregulation in Cinergy's own utility service territory was slow and
laborious. As a result of this slowdown, neither the expected loss of
retail customers in Ohio, Indiana and Kentucky, nor the rapid decline in
power prices nationally had occurred.
Therefore, in April 1998, Cinergy realigned its strategy to focus on the
Midwest and surrounding areas where it had a higher degree of market
expertise and had or could reasonably obtain physical delivery
capabilities. By reorienting the business to the Midwest, Cinergy could
capitalize on the residual availability (i.e., capacity available after
meeting native load supply obligations) of the Company's 11,200 MW of
generating assets in Ohio, Indiana and Kentucky. The experience in
attempting to build a national business had convinced the Company of the
need to own supporting physical assets./2/ Cinergy closed eight power
marketing offices, and critically reviewed all trading positions taken
prior to April 1998.
In late June 1998, wholesale power markets in the Midwest exhibited
unprecedented price volatility due to several factors, including an
extended period of unseasonably hot weather, scheduled and unplanned
generating unit outages, transmission constraints, and defaults by certain
power marketers on their supply obligations. As a result of the increase
in price volatility, Cinergy's daily value-at-risk for its power marketing
and trading activities increased by 80% from the previous year end
(although it was less than 3% of Cinergy's Income Before Interest and Other
Charges for the 12 months ended June 30, 1998). Based on new projections
of future electricity prices reflecting the increased price volatility,
and its adoption of mark-to-market accounting, Cinergy took a 54 cents per
share charge to record net trading liabilities.
III. 1999 Losses
During July 1999, conditions in Cinergy's service territory reflected a
number of concurrent anomalies that were to affect the supply and demand
for electric power.
1. The entire area was experiencing the hottest July on record
2. Based on data over the last 50 years, there was a 99.2%
probability that the prevailing temperature pattern would not
occur
3. Weather conditions resulted in successive record peak energy
demands for Cinergy and for regions surrounding the Cinergy
service area
4. The Cinergy area was experiencing a record lack of precipitation,
resulting in record high water temperatures and record low water
levels in rivers and lakes used by all of Cinergy's generating
stations
5. Water conditions prevalent during July decreased the operating
efficiency and capability of generating units
6. The confluence of these conditions also resulted in the highest
power prices in history, the highest hourly purchased volumes,
and the highest transmission restrictions ever experienced
These conditions had an extensive impact on Cinergy's regulated utility
business. First, Cinergy's native load, which ultimately was to be 400 MW
above the predicted peak, would have been 1000 MW above the predicted peak
had it not been reduced through voluntary customer curtailments. Even with
these reductions, Cinergy experienced an all-time record peak demand of
about 10,900 megawatts. Second, electric load from the previously-existing
full requirements wholesale customers obtained during 1996 and 1997 was
also significantly above budget. Third, Cinergy could not serve 700 MW of
calendar call options (options sold to others for 12 months of power at the
forward price of electricity) struck in December 1998 with physical
capability.
Cinergy attempted to meet its obligations by purchasing power in the
short-term markets to meet peak demands. However, regional transmission
constraints prevented the receipt of significant amounts of prescheduled
power, which further limited hourly purchases from the north, east and
west. As a result, Cinergy was forced to cut eight financially firm
marketer contracts for four to six hours on one day under force majeure
provisions. Throughout this period, Cinergy maintained electric service to
native load customers in Ohio, Indiana and Kentucky as well as to
municipalities and other wholesale customers, with the exception of the
marketer contracts just noted. No rotating blackouts were instituted and,
at times during this period of extreme demand, all of Cinergy's power
plants were on line producing power, an operational milestone for the
Company.
As a result of the events of late July, Cinergy recorded a net loss of 36
cents per share comprised of (i) cash losses incurred to serve the
wholesale power contracts ($0.36 per share) and (ii) the anticipated
liquidated damage claims ($0.10 per share), partially offset by increased
sales from retail operations ($0.10 per share). Cinergy has settled all of
the liquidated damage claims.
IV. Additional Mitigation Actions for the Future
Although Cinergy possesses one of the largest and most efficient fleets of
generating units in the nation, and indeed has significant "excess"
generation during shoulder months, the events of the past several summers
in the Midwest have driven home the potential risks posed by being short
power during super-peak periods.
Therefore, Cinergy is aggressively pursuing a combination of mitigation
strategies as described below. These strategies, along with the expiration
of the legacy wholesale contracts, recently enacted customer choice
legislation in Ohio, and general market maturation, should result in far
less exposure to the consequences of extreme weather and operating
conditions and, therefore, the risk of future financial losses.
A. Additional Expertise
Cinergy has been assembling an industry-recognized team of experienced
power trading, marketing and risk professionals. These include a new
Business Unit President, a new head of trading and a new head of marketing.
B. Supply-side Actions
Cinergy expects to increase its physical supply capability by the summer of
2000 through its 50% ownership in three gas-fired, wholesale peaking
facilities currently under development in Indiana and Ohio. These
facilities, jointly owned with Duke Energy Corporation, will provide about
700 MW of new capacity to Cinergy - which, alone, is more than half the
amount Cinergy was short going into the summer of 1999.
These three peaking facilities are EWGs and entail a large capital
investment ($365 million) by Cinergy. The limited capacity remaining under
Cinergy's SEC investment cap effectively precludes the Company from
similarly sized, regional generation projects. Acquisition of additional
regional generating assets is a critical element of Cinergy's strategy to
mitigate its supply risks stemming from summer periods of "super" peak
demand and related price volatility. Moreover, in order to eventually grow
Cinergy's Energy Commodities Business Unit beyond the Midwest to national
scope, Cinergy requires an increased capacity to invest in physical assets
in these new regions, to back up and hedge energy sales and trades.
Cinergy also has made significant additional block power purchases to meet
on-peak demand during the summer of 2000, most of which is within Cinergy's
NERC region of ECAR, with the balance in an adjacent region./3/
C. Demand-side Actions
Demand on Cinergy's system is expected to decrease in future years as a
result of the expiration of existing wholesale contractual obligations and
peak load management initiatives recently developed by Cinergy.
Over the next five years, Cinergy's wholesale obligations will decline from
almost 3,000 MW of obligations in 1999 to about 1,000 MW in 2005. In the
near term, this includes one 10 MW contract that expired at the end of 1999
and was not renewed, another 10 MW contract that expires prior to the
summer of 2000, a 40 MW contract that expires prior to July 2000, and a 30
MW contract that expires at the end of 2000. Further, the 700 MW calendar
call option obligation expired in late 1999.
Cinergy also has developed an innovative Peak Load Management Program (PLM)
to manage peaks and minimize high-price exposure. The tariffs for these
programs received regulatory approval in early 2000 in the three states in
which Cinergy's utility subsidiaries operate.
PLM has two market-based products to reduce demand at a cost less than the
cost of purchasing power in the wholesale market. The first is a call
option in which the customer is obligated to reduce demand or make
generation available to Cinergy in exchange for an up-front premium and an
energy credit if the option is struck. The product is only available
during the months of June through September, Monday through Friday, and for
loads of at least 500 kW. A second product gives the customer the right,
but not the obligation, to reduce demand or provide generation to Cinergy
when the wholesale price of power exceeds a predetermined level, in
exchange for an energy credit. These two programs, in addition Cinergy's
Real Time Pricing Program (a program in which the customer is sold power at
the marginal price plus an adder for Cinergy), are expected to reduce the
summer 2000 peak demand by about 400 MW.
D. Contract Restructuring
In addition to the normal expiration over time of the legacy wholesale
power contract obligations, Cinergy is actively engaged in discussions with
its full-requirements wholesale customers to restructure certain terms of
the existing contracts. These customers are being incentivized to curtail
load through power swaps, call options, and offers to increase the price of
delivered power in the near term in exchange for contract extensions at
lower long-term prices.
E. Additional Transmission Capacity
Cinergy has purchased additional firm transmission capacity for the summer
of 2000. The amount purchased represents a 70% increase over the amount
available during the summer of 1999. The additional capacity will more
effectively enable Cinergy to import and export power within ECAR and with
other surrounding regions.
F. Purchased Power Tracker
In May 1999 PSI filed a petition with the IURC seeking approval of a
purchased power tracking mechanism ("tracker"). The purpose of the request
is to provide for the recovery of costs related to purchases of power
necessary to meet native load requirements, to the extent recovery of such
costs is not sought through PSI's existing fuel adjustment clause. The
tracker is intended to apply to a limited number of purchases made for the
purpose of ensuring adequate power reserves to meet peak native load
requirements, which in recent years (as noted herein) have coincided with
periods of extreme price volatility. As proposed, the tracker would apply
only to capacity purchases which are presented to the IURC for review and
approval as to reasonableness under the circumstances. A hearing on this
request was completed on December 9, 1999. An order is expected in the
second calendar quarter of 2000.
G. Other Mitigants
Even beyond the extensive measures already undertaken by Cinergy to
mitigate the impacts of existing wholesale contracts and of extreme
conditions on its system as described above, other factors, both inside and
outside of Cinergy, will serve to decrease volatility and risk of losses in
the future.
For example, almost 12,000 MW of additional capacity has been announced as
planned generation additions in the ECAR region through 2004. This
represents an 11% increase over current installed capacity.
Further, once it commences operations (expected for late 2001), the Midwest
ISO will render substantial assistance in scheduling and pricing
transmission service, especially in times of extreme demand.
Potentially most significant, Ohio's recently enacted customer choice
legislation requires that Cinergy develop "shopping incentives" to induce
at least 20% of CG&E's retail electric load in each customer class to
switch to other suppliers by not later than December 31, 2003. In its
proposed transition plan filed with the PUCO in December 1999, Cinergy/CG&E
indicated that it currently has no plans to replace these customers by
acquiring new electric retail customers in Ohio. The effect therefore will
be to free up a significant portion of the 5,200 MW of generating capacity
owned by CG&E to support Cinergy's wholesale power marketing and trading
operations.
V. The Summer of 2000 and Beyond
Cinergy went into the summer of 1999 about 1200 MW short of peak
requirements. But with the expected plant additions, power purchases,
option and contract roll-offs, interruptible and other load management
programs, and contracts for additional transmission from outside the
region, Cinergy should have a significantly more balanced book for the
summer of 2000. Beyond 2000, Cinergy's position should improve even more
due to additional contractual reductions and continuing legislative
initiatives geared toward national deregulation of the industry. Finally,
Cinergy is assembling a premier team of industry professionals to guide its
wholesale power supply business.
ENDNOTES
/1/ Capitalized terms used in this exhibit without separate definition
have the meanings set forth in the accompanying U-1 application in File No.
70-9577.
/2/ As discussed in the accompanying U-1 application, owning electric
generating facilities to support, or anchor, the wholesale power marketing
business is important for several reasons. In the first place, having
electric generation assets in the region can serve to minimize or avoid
transmission charges and mitigate delivery risks for trades in that region.
Second, physical assets hedge risks inherent in the marketing business,
notably price risk.
/3/ The East Central Area Reliability Council (ECAR) covers a broad
portion of the eastern Midwest, including Ohio and Indiana in their
entirety; large parts of Michigan, West Virginia and Kentucky; and smaller
portions of Pennsylvania, Maryland, Virginia and Tennessee.
Exhibit P-1
File No. 70-9577
February 2, 2000
The Honorable Arthur Levitt
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cinergy Corp./SEC File No. 70-9577
Dear Chairman Levitt:
The Cincinnati Gas & Electric Company ("CG&E"), a subsidiary of the
registered holding company Cinergy Corp. ("Cinergy"), is a public utility
in Ohio that is regulated by the Public Utilities Commission of Ohio
("PUCO"). CG&E advised me that Cinergy has recently filed an
application-declaration on "Form U-1" to initiate the above docket before
the Securities and Exchange Commission ("SEC"), pursuant to the Public
Utility Holding Company Act of 1935 ("PUHCA"). Cinergy's Form U-1 filing
requests greater authority to invest in foreign utility companies ("FUCOs")
and exempt wholesale generators ("EWGs"). Cinergy's Form U-1 filing also
contemplates the creation of one or more EWG affiliates by Cinergy for the
sole purpose of acquiring all or a substantial portion of the generating
assets of CG&E and Cinergy's Indiana utility, PSI Energy, Inc.
In particular, it is my understanding that Cinergy's Form U-1 filing
requests over a five-year period that Cinergy be permitted to make (1)
additional investments of up to $2 billion in EWGs and FUCOs, supplementing
its existing SEC authority for such investments to be capped at an amount
equal to 100% of Cinergy's consolidated retained earnings, and (2)
additional investments in its EWG affiliate(s), not to exceed the net book
value of the generating assets transferred to the EWG affiliate(s). In
this context, CG&E has informally requested that I indicate to the SEC that
Cinergy's Form U-1 proposal will not impair the ability of the PUCO to
regulate CG&E or protect its retail customers in Ohio.
First, I will address the proposed transfer of CG&E's generating
assets to the Cinergy EWG affiliate(s). It is my understanding that
Cinergy will need to obtain additional specific findings and approvals from
the PUCO (including the approvals required by Section 32 of PUHCA) in order
to actually transfer CG&E's generating assets to any EWG affiliate. In
fact, CG&E has already filed an application before the PUCO, in Case No.
99-1663-EL-UNC, and related matters in Case No. 99-1658-EL-ETP, to seek
PUCO approval for the proposed EWG generation asset transfer. In this
context, Cinergy has explicitly recognized the legal requirements that the
PUCO must approve any transfer by CG&E of generation assets, independent of
any related SEC approvals.
Specifically, Cinergy Corp. and each of its affiliate companies have
agreed, and will not argue to the contrary in any forum, that the PUCO has
jurisdiction and discretionary authority (that may not be preempted by
federal law or waived by means of the PUCO's support of any application at
the SEC) to approve or deny the findings required by 15 U.S.C. 79z-5a(c).
Moreover, Cinergy and its affiliates have agreed that the generation assets
of CG&E will not be transferred to an EWG unless and until the PUCO
approves such findings. Thus, nothing in this letter should be construed
as constituting or consenting to the required PUCO findings or approvals
relating to generation asset transfer. Rather, the PUCO will address those
issues in due course as part of its pending cases.
Relative to the other issues presented in Cinergy's U-1 application
pending before the SEC, I can relay the following:
1. The PUCO is the administrative agency responsible for supervising and
regulating electric and gas utilities under Ohio law in all matters
relating to retail utility service.
2. It is my understanding that Cinergy's U-1 filing sets forth
representations that the proposed investments will be structured in
such a way that CG&E's Ohio ratepayers will be insulated from any
negative effects of the proposed investments, including but not
limited to a commitment by Cinergy not to pledge or encumber CG&E
assets and a commitment not to seek a rate increase for potential
losses or inadequate returns arising from the EWG/FUCO investments.
3. Cinergy has represented that it will timely inform the PUCO when
Cinergy actually acquires ownership in EWGs or FUCOs pursuant to its
proposal, and will provide the PUCO with additional information as
requested regarding the same.
4. The settlement agreement approved by the PUCO in 1994 in connection
with the Cinergy merger acknowledged or conferred additional oversight
on the PUCO relative to Cinergy and CG&E and nothing in this letter
affects or diminishes the terms of that agreement.
5. It is my understanding that this letter will not be interpreted or
used to restrict, limit or otherwise diminish the ability of the PUCO
or its staff to freely make comments or take positions regarding
Cinergy's proposed investments or EWG strategy in any forum, including
without limitation any subsequent public comments solicited by the SEC
in this proceeding, any proceeding before the Federal Energy
Regulatory Commission or any PUCO proceeding.
In reliance upon those understandings, and subject to the other
qualifications and conditions contained in this letter, it does not appear
that the SEC's proceeding to review/approve Cinergy's Form U-1 will impair
the PUCO's ability to regulate CG&E and protect its retail customers in
Ohio. Instead, the PUCO's duty to review the transactions affecting CG&E
will be discharged in the course of the pending PUCO cases. I do expect
that the PUCO decisions will be made in the latter part of the year 2000,
and we can notify the SEC when those decisions are made. In the meantime,
I see no reason why the SEC and its staff should not proceed with its
evaluation of Cinergy's U-1 proposal.
The foregoing is expressly conditioned on and is subject to being
revised or withdrawn by me or the PUCO, if deemed appropriate.
Sincerely,
/s/Alan R. Schriber
Chairman
Public Utilities Commission of Ohio
cc: James B. Gainer
Cinergy legal counsel
Exhibit P-2(a)
File No. 70-9577
March 9, 2000
Honorable Arthur Levitt, Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Cinergy Corp./SEC File No. 70-9577
Dear Chairman Levitt:
The Union Light, Heat and Power Company ("ULH&P"), a Kentucky electric
and gas utility and subsidiary of Cinergy Corp. ("Cinergy"), a registered
public utility holding company, has advised this Commission that Cinergy
has recently filed an application-declaration on Form U-1 in the above
docket (the "U-1") pursuant to the Public Utility Holding Company Act of
1935 ("PUHCA") requesting greater authority to invest in exempt wholesale
generators ("EWGs") and foreign utility companies ("FUCOs"). Specifically,
we understand that Cinergy is requesting over a five-year period to make
(1) additional recourse investments of up to $2 billion in EWGs and FUCOs,
supplementing its existing SEC authority for EWG/FUCO investments capped at
an amount equal to 100% of Cinergy's consolidated retained earnings, and
(2) additional recourse investments, not to exceed the net book value of
the assets transferred (the "Restructuring Investment"), in one or more EWG
affiliates of Cinergy, created for the sole purpose of acquiring all or a
substantial portion of the generating assets of Cinergy's Ohio utility
subsidiary, The Cincinnati Gas & Electric Company, and Cinergy's Indiana
utility subsidiary, PSI Energy, Inc.
Cinergy has requested that we certify to you that such increased
investment authority in EWGs and FUCOs will not impair the ability of the
Kentucky Public Service Commission to regulate ULH&P or protect its retail
customers in Kentucky.
As the State commission having jurisdiction over the retail electric
and gas rates of Cinergy's Kentucky public utility subsidiary, ULH&P,
please be advised that based on:
(1) this Commission's statutory authority to supervise and regulate
electric and gas utilities and all matters relating to the
performance of their public duties and their charges therefor,
and to correct any abuses of such utilities,
(2) the commitments of and conditions accepted by Cinergy and ULH&P
in connection with this Commission's 1994 order authorizing
Cinergy's acquisition of ULH&P,
(3) the representations set forth in the U-1, including but not
limited to the representations that the assets of ULH&P will not
be pledged or encumbered and that ULH&P will not seek higher
rates for potential losses or inadequate returns arising from any
EWG and FUCO investments, and
(4) the commitments set forth in Cinergy's letter of March 8, 2000
(copy attached hereto), one of which is Cinergy's agreement that
this Commission's approval is a condition precedent to the
transfer to an EWG of any facility by an affiliate of ULH&P.
this Commission is of the view that Cinergy's proposal will not impair the
ability of this Commission to regulate ULH&P or protect its retail
customers in Kentucky.
The foregoing opinion of this Commission is expressly conditioned on
and is subject to being revised or withdrawn by this Commission, if it
deems that action to be appropriate. Cinergy has represented that it will
timely inform this Commission when Cinergy actually acquires ownership in
EWGs or FUCOs pursuant to its proposal.
Sincerely,
/s/B. J. Helton, Ph.D.
Chairman
Attachment
Exhibit P-2(b)
File No. 70-9577
March 8, 2000
B.J. Helton, Chair
Public Service Commission
211 Sower Boulevard
P. O. Box 615
Frankfort, Kentucky 40602
Dear Chair Helton:
In light of Cinergy's pending request at the Securities and Exchange
Commission seeking greater authority to invest in exempt wholesale
generators and foreign utility companies (SEC File No. 70-9577), and in
consideration of our request that the Kentucky Public Service Commission
(Commission) review the proposal to determine that it will not impair the
ability of the Commission to regulate The Union Light, Heat and Power
Company (ULH&P) or protect its retail customers in Kentucky, please accept
the following commitments on behalf of Cinergy Corp. and ULH&P:
1. Cinergy and ULH&P will continue to provide the necessary capital to
ensure that ULH&P is able to continue to provide safe, reliable retail
public utility service to new and existing customers.
2. Cinergy and ULH&P will continue to act as a reasonable and prudent
public utility to invest in activities that will maintain the current
level or improve customer service.
3. The assets of ULH&P will not be pledged or encumbered to support any
EWG or FUCO investment.
4. The increased level of investments in foreign utility companies
("FUCOs") and exempt wholesale generators ("EWGs") by Cinergy will not
have a material detrimental effect on the cost of capital of ULH&P.
5. Cinergy will not seek to recover through higher wholesale rates to
ULH&P, or by other means, any possible losses or increased costs that
may be sustained on investments in EWGs or FUCOs. Furthermore, ULH&P
will not seek to pass on to Kentucky ratepayers any such losses or
increases in costs.
6. Cinergy will inform the Commission within 10 days of any notification
of a downgrade of the credit rating of Cinergy by a maj or credit
rating agency, due wholly or in part to Cinergy's investment in EWGs
or FUCOs. Said notice to the Commission will contain information on
the reason for the downgrade an d what plans exist to restore the
previous credit rating. Cinergy will also provide an explanation of
how ULH&P ratepayers will be prevented from paying higher rates due to
increased interest costs resulting from the credit downgrading related
to Cinergy's investment in EWGs or FUCOs.
7. To the extent necessary to determine that the above assurances are
met, and as may further be necessary to monitor the impact of
Cinergy's diversified activities upon the costs of ULH&P, Cinergy,
ULH&P and its affiliated interests will provide reasonable access to
financial statements, and supporting books and records.
8. Cinergy and ULH&P will provide copies of all SEC filings related to
EWG and FUCO investments within 10 days of the date the filings are
provided to the SEC.
9. Cinergy and ULH&P will provide annually its general corporate
objectives regarding diversification and foreign utility investments.
10. Cinergy Corp. and each of its affiliate companies agree, and will not
argue to the contrary in any forum, that the Commission has
jurisdiction and discretionary authority, that may not be preempted by
federal law, or waived by means of the Commission's support of any
application at the Securities and E xchange Commission, to approve or
deny the findings required by 15 U.S.C. 79z-5a(c), and, the generation
assets of The Cincinnati Gas & Electric Company will not be
transferred to an exempt wholesale generator unless and until the
Commission approves such findings.
Further Cinergy Corp. and each of its affiliate companies agree that
ULH&P will initiate the aforementioned proceeding at the Commission in
a timely manner and in addition to seeking the statutorily required
findings will propose and negotiate in good faith with all interested
parties a reformation of the Electric Service Agreement for wholesale
power currently in effect betw een The Cincinnati Gas & Electric
Company and ULH&P.
Thank you for your consideration of this important matter.
Sincerely,
/s/James E. Rogers
President and CEO, Cinergy Corp.
/s/James L. Turner
President, The Cincinnati Gas & Electric Company
President, The Union Light, Heat and Power Company
Exhibit P-3
File No. 70-9577
March 17, 2000
Honorable Arthur Levitt
Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
RE: Cinergy Corp./SEC File No. 70-9577
Dear Chairman Levitt:
PSI Energy, Inc. ("PSI"), a subsidiary of Cinergy Corp. ("Cinergy"), a
registered holding company under The Public Utility Holding Company Act of
1935 ("PUHCA"), has advised this Commission that Cinergy has recently filed
an application to initiate the above docket before the Securities and
Exchange Commission ("SEC"). Cinergy seeks to increase its authority to
acquire or otherwise invest in exempt wholesale generators ("EWGs") and
foreign utility companies ("FUCOs") beyond its current SEC authorization
capped at 100% of consolidated retained earnings. Cinergy has requested
that the Indiana Utility Regulatory Commission ("IURC") certify to you that
such increased investment authority in FUCOs and EWGs will not impair the
ability of this Commission to protect PSI or its retail electric customers
in Indiana.
It is our understanding that Cinergy is seeking SEC authority to
provide financing over the five-year period and that this authority would
be "bifurcated" between new projects ($2 billion) and restructuring of
existing regulated assets ($3 billion). Specifically, (1) a maximum of $2
billion in new EWG and FUCO projects, supplementing its existing SEC
authority for such investments which is capped at an amount equal to 100%
of Cinergy's consolidated retained earnings and (2) up to $3 billion for
restructuring existing Cincinnati Gas & Electric ("CG&E") and PSI
generating assets to EWG status. The existing CG&E and PSI generating
assets have a net book value of approximately $3 billion.
As the State commission having jurisdiction over the retail electric
rates of Cinergy's public utility subsidiary, PSI, please be advised that
based on:
1. this Commission's statutory authority to supervise and regulate
electric utilities and all matters relating to the performance of
their public duties and their charges therefor and to correct any
abuses of such utilities,
2. the settlement agreement approved by this Commission in 1994 in
connection with the Cinergy merger conferring additional
oversight on this Commission over PSI and Cinergy,
3. a commitment by Cinergy that before transferring any PSI
generating facilities to an EWG affiliate, Cinergy would seek
IURC approval for the transfer, unless existing Indiana law were
changed to eliminate the need for IURC approval,
4. the representations set forth in Cinergy's application that the
proposed investments will be structured in such a way that PSI
ratepayers will be insulated from any negative effects of the
proposed investments,
5. the representations set forth in Cinergy's application not to
pledge or encumber PSI assets,
6. the representations set forth in Cinergy's application not to
seek a rate increase for potential losses or inadequate returns
arising from the EWG/FUCO investments, and
7. the consent of Cinergy to amend the U-1 Application as follows:
a. the request for additional investment authority will be
clearly bifurcated between new projects ($2 billion) and
restructuring of existing regulated assets ($3 billion),
b. Cinergy will not issue any additional debt to finance
investments in new EWG and/or FUCO projects if Cinergy's
senior debt is not rated investment grade (AAA to BBB) by at
least two of the major rating agencies. Major rating
agencies should only include the following: Standard & Poors,
Moodys, Duff & Phelps, and Fitch,
this Commission is of the view that Cinergy's proposal will not impair the
ability of this Commission to protect PSI or its retail electric customers
in Indiana.
Nothing in this letter should be interpreted or used to restrict,
limit or otherwise diminish the ability of this Commission or its staff to
freely make comments or take positions regarding Cinergy's proposed
investments or EWG strategy in any forum, including without limitation any
subsequent public comments solicited by the SEC in this proceeding, any
proceeding before the Federal Energy Regulatory Commission or any IURC
proceeding. This includes, but is not limited to the IURC's position
relative to the pending case, docketed as Cause No.41569, regarding the
request of CINCAP VII, LLC, a subsidiary of Cinergy, to construct an EWG.
The foregoing is expressly conditioned on and is subject to being
revised or withdrawn by this Commission, if it deems that action to be
appropriate. PSI has represented that it will timely inform this Commission
when Cinergy actually acquires ownership in FUCOs or EWGs pursuant to its
proposal.
Sincerely,
/s/William D. McCarty
Chairman
cc: James L. Turner, President
CG&E
