File No. 70-9577
SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3 (POST-EFFECTIVE AMENDMENT NO. 1)
TO
FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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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)
Wendy L. Aumiller
Assistant Treasurer
Cinergy Corp.
(address above)
(Name and address of agent for service)
<PAGE>
Please direct communications to:
George Dwight II/ Senior Counsel
Cinergy Corp.
(mailing address above)
513-287-2643 (ph)
513-287-3810 (f)
[email protected]
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
202-371-7877 (ph) 212-603-2106 (ph)
202-371-7012 (f) 212-603-2001 (f)
[email protected] [email protected]
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A. Background: June 2000 Order
By order dated June 23, 2000 in this file (HCAR No. 27190) (the "June 2000
Order"), the Commission amended various prior financing orders issued to Cinergy
Corp. ("Cinergy" or the "Company"), a Delaware corporation and registered
holding company under the Public Utility Holding Company Act of 1935, as amended
(the "Act"), authorizing Cinergy, among other things, from time to time through
June 23, 2005 (the "Authorization Period"), to use proceeds of securities issued
thereunder for investments in exempt wholesale generators ("EWGs") and foreign
utility companies ("FUCOs"), as defined in sections 32 and 33 of the Act,
respectively (collectively, "EPAct Projects"), up to an aggregate investment (as
defined in rule 53(a)) equal to Cinergy's aggregate investment at June 23, 2000
plus $1,000,000,000 (the "Investment Limitation").
In the June 2000 Order, the Commission reserved jurisdiction over Cinergy's
proposal, among other things, to increase its permitted aggregate investment in
EPAct Projects to an amount greater than the Investment Limitation --
specifically, by the difference between (i) the Investment Limitation and (ii)
the sum of (a) Cinergy's consolidated retained earnings from time to time (as
defined in rule 53(a)) plus (b) approximately $5 billion, subject to certain
terms and conditions specified in Cinergy's application-declaration in this
proceeding as heretofore amended (the "Original Investment Proposal"). (The
application-declaration in this file, including the exhibits thereto, as amended
prior to the date of the June 2000 Order, is hereinafter referred to as the
"Existing Record").
Cinergy's aggregate investment in EPAct Projects at June 23, 2000 was $731
million and accordingly the Investment Limitation is $1.731 billion. Cinergy's
aggregate investment at September 30, 2000 was approximately $752 million.
On December 12, 2000, Cinergy announced that its wholly-owned nonutility
subsidiary, Cinergy Capital & Trading, Inc. ("CC&T"), and Enron North America
had signed a definitive agreement under which CC&T will purchase two natural
gas-fired merchant generating facilities located in the southeastern United
States (the "Enron Transaction"). The generating facilities are EWGs with 1000
megawatts of rated capacity. This is Cinergy's largest transaction since its
1996 acquisition with GPU, Inc. of Midlands Electricity plc, a FUCO operating in
the United Kingdom ("Midlands").
The Enron Transaction underscores Cinergy's need for greater investment
capacity.
B. Request for Supplemental Order; Continued Reservation of Jurisdiction
Cinergy now requests that the Commission issue a supplemental order in this
proceeding at the earliest practicable date, authorizing Cinergy to apply
financing proceeds authorized in the June 2000 Order, from time to time over the
Authorization Period, for additional investments in EPAct Projects; provided
that Cinergy's aggregate investment (as defined in rule 53(a)) does not at any
time exceed $4,000,000,000 ("New Investment Limitation").
The New Investment Limitation would supersede the Investment Limitation,
effective on the date of the Commission's order. Cinergy's aggregate investment
in EPAct Projects, as of the date of the effectiveness of the New Investment
Limitation, would count against this new investment ceiling. In connection with
the New Investment Limitation, Cinergy reaffirms that it will continue to abide
by the terms and conditions contained in the letters previously submitted into
this file by the Ohio, Indiana and Kentucky commissions, as discussed further
below.
Pending completion of the record, Cinergy requests the Commission to
reserve jurisdiction over investments in EPAct Projects at a level greater than
the New Investment Limitation, as contemplated under the Original Investment
Proposal. In addition, Cinergy requests the Commission to continue to reserve
jurisdiction over any increase in Cinergy's total capitalization (excluding
retained earnings and accumulated other comprehensive income) by an amount
greater than the $5 billion authorized in the June 2000 Order.
C. Satisfaction of rule 53(c)
Cinergy's proposal to make recourse investments in EWGs and FUCOs in an
amount not to exceed $4 billion is consistent with rule 53(c). Investing at that
level--
o "will not have a substantial adverse impact upon the financial integrity of
[Cinergy's] holding company system;" and
o "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."
The Existing Record provides a compelling basis for Cinergy to invest not
merely at the $1.731 billion level, but also at the higher level now requested.
Since submission of that evidentiary record, there have been no material adverse
developments affecting the financial integrity of Cinergy and its utility
subsidiaries. Rather, the material developments have been positive.
For example, Cinergy's retained earnings and market capitalization have
increased. Cinergy's consolidated retained earnings (as defined in rule 53(a))
increased from $1.023 billion at year-end 1999 to $1.123 billion at September
30, 2000. Cinergy's market capitalization increased from $3.8 billion at
year-end 1999 to $5.3 billion at September 30, 2000.1
In August 2000, the Ohio commission approved a comprehensive settlement
agreement among Cinergy's Ohio utility, The Cincinnati Gas & Electric Company
("CG&E"), and interested parties with respect to CG&E's proposed transition plan
implementing Ohio's electric industry restructuring legislation.2 The settlement
fully implements customer choice in accordance with the provisions of the new
law -- under which, beginning January 1, 2001, all of CG&E's retail electric
customers can choose electricity suppliers and non-switching customers will
enjoy an extended rate freeze on the generation portion of electric rates --
while at the same time accommodating the interests of Cinergy's investors.
In connection with these events, CG&E has discontinued application of
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects
of Certain Types of Regulation," for the generation portion of its business. The
effect of this change on CG&E's results of operations and financial condition is
immaterial. Additionally, with reference to Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed Of," Cinergy's analysis indicates that future
revenues will be sufficient to recover the costs of CG&E's generating assets
over their estimated remaining useful lives. Therefore, CG&E is incurring no
write-off as a result of the resolution of its transition case.
Aside from these developments directly affecting the Company, Cinergy notes
that since the June 2000 Order, the Commission has authorized another registered
holding company to invest up to $4 billion in EPAct Projects. See Exelon
Corporation, et al., HCAR No. 27296, Dec. 8, 2000 ("Exelon").
For the following reasons, in addition to those just mentioned, Cinergy
believes that its present proposal satisfies the criteria of rule 53(c),
including as applied in Exelon.
1. Project review procedures/risk mitigation
First and foremost, Cinergy subjects potential investments in EPAct
Projects to a series of rigorous project review screens before committing any
funds, and once funds have been invested, Cinergy closely monitors project
performance, using effective techniques to mitigate project risks.
Wherever practicable, Cinergy finances EPAct Projects with non-recourse
debt. Cinergy's acquisition of its interest in Midlands was financed with $800
million in non-recourse bank borrowings, in addition to Cinergy's $500 million
equity investment.
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 domestic EWG projects.
For more information with respect to Cinergy's project review procedures
and risk mitigation measures, see the Existing Record at Item 3.A.
2. Financial results and other benefits/prior investments
Cinergy has considerable experience with EPAct Projects, holding
significant investments in both domestic EWGs and FUCOs. Domestic EWGs and FUCOs
present distinct risks. Cinergy has a proven track record of selecting and
developing projects, successfully managing these risks, and extracting maximum
value.3
Nearly five years ago, for example, Cinergy acquired its 50% stake in
Midlands, which it held for three years, and ultimately sold at a substantial
profit in 1999.
The Commission has had occasion to review Cinergy's performance and
procedures several times already -- in connection with the 1998 order
authorizing Cinergy to invest at a level equal to 100% of consolidated retained
earnings4 and most recently in connection with the June 2000 Order.
For more information with respect to financial results and other benefits
associated with Cinergy's prior investments, see the Existing Record at Item
3.B.
3. Current financial condition
Capitalization ratios, credit ratings and other financial factors attest
that Cinergy and its utility subsidiaries are in sound financial condition.
At September 30, 2000, consolidated common equity of Cinergy and its two
primary utility subsidiaries, CG&E and PSI Energy, Inc., an Indiana electric
utility ("PSI"), comprised 41.3%, 53.5% and 41.7%, respectively, of their total
consolidated capitalizations. The common equity component of Cinergy's other
significant utility subsidiary, The Union Light, Heat and Power Company, a
Kentucky electric and gas utility ("ULH&P"), was 57.2% of total capitalization
at the same date. These percentages are well above the Commission's traditional
30% benchmark.5 (CG&E, PSI and ULH&P are collectively referred to below as the
"Operating Companies.")
In any event, pursuant to the terms and conditions applicable to the
general financing authorization granted in the June 2000 Order, significant
additional restrictions come into play if Cinergy's consolidated common equity
would fall below 30%, other than as a result of state electric industry
restructuring. In that event, without a further order from the Commission,
Cinergy would be precluded from issuing any additional debt.
At September 30, 2000, Cinergy's senior unsecured debt was rated
"investment grade" by all the major rating agencies.6 The following ratings were
in effect:
Fitch Moody's S&P7
BBB+ Baa2 BBB+
In any event, pursuant to the terms and conditions applicable to the
general financing authorization granted in the June 2000 Order, further
restrictions are triggered if Cinergy's senior unsecured debt would fall below
investment grade. Specifically, Cinergy has committed that without further
authorization from the Commission, it will not issue any additional debt to
finance investments in EPAct Projects (other than in connection with state
electric industry restructuring) if, upon original issuance, Cinergy's senior
debt obligations are not rated "investment grade" by at least two of the major
ratings agencies.
At September 30, 2000, Cinergy's consolidated retained earnings were $1.158
billion. As noted earlier, Cinergy's trailing four-quarters' average
consolidated retained earnings at September 30, 2000 (i.e., "consolidated
retained earnings" as defined in rule 53(a)) were $1.123 billion, an increase
over the corresponding average at December 31, 1999.
Securities of the Operating Companies are highly rated by the major rating
agencies. Among other things, their secured debt is rated "A-" (or its
equivalent) or better.8 The ratings in effect at September 30, 2000 are:
Fitch Moody's S&P
CG&E
Secured Debt A- A39 A-
Senior Unsecured Debt BBB+ Baa1 BBB+
Junior Unsecured Debt BBB Baa2 BBB
Preferred Stock BBB baa1 BBB
PSI
Secured Debt A- A3 A-
Senior Unsecured Debt BBB+ Baa1 BBB+
Junior Unsecured Debt BBB Baa2 BBB
Preferred Stock BBB baa1 BBB
ULH&P
Secured Debt A- A3 A-
Unsecured Debt N/R10 Baa1 BBB+
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.11 Since the merger, with the
exception of a December 1994 $160 million capital contribution from Cinergy to
PSI, 12 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 the Operating Companies' capital
requirements indicate that Cinergy should not have to make any equity
investments in the Operating Companies through the entire five-year period of
those projections (that is, through December 31, 2004).
4. Protection of Operating Companies; state letters
The Operating Companies will remain insulated from the direct effects of
EWG and FUCO investments.
In the first place, all of Cinergy's EPAct Projects are legally and
structurally separate from the Operating Companies, held in separate ownership
chains below Cinergy by various intermediate special-purpose nonutility holding
companies. Consequently, 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 reaffirms 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:
o 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;
o 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
o 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,
Cinergy reaffirms, will the Company 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, Cinergy reaffirms that 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 reaffirms that it 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:
o the requirements of rule 53(a)(2) regarding the preparation and making
available of books and records and financial reports regarding EPAct
Projects;
o 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
o the requirement of rule 53(a)(4) regarding filing of copies of applications
and reports.
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 reaffirms that it will notify the Commission in writing if any of the
circumstances described in rule 53(b) arise during the Authorization Period.
Cinergy will remain in compliance with the requirements of Rule 53(a), other
than Rule 53(a)(1), at all times during the Authorization Period.
Further, in addition to providing the affected state commissions (namely,
the Ohio, Indiana and Kentucky commissions) 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 continue to furnish to these state commissions, concurrently with
submission to the Commission, copies of the quarterly reports Cinergy files in
this docket pursuant to rule 24 and the June 2000 Order.
Finally, prior to filing the original application, Cinergy held numerous
meetings with the commissioners and staff of the Ohio, Indiana and Kentucky
commissions. In February and March, 2000, these commissions submitted letters to
the Commission stating that, based on the commitments of Cinergy and subject to
the qualifications referred to or stated in the letters, Cinergy's Original
Investment Proposal would not have an adverse impact on their ability to protect
Cinergy's utility subsidiaries or their retail customers.
Cinergy hereby reaffirms that it will continue to abide by the commitments
and other qualifications referred to or stated in these letters. Accordingly,
Cinergy commits that, without further authorization from its state commissions,
not more than $3.123 billion of the New Investment Limitation (such amount being
equal to (a) Cinergy's consolidated retained earnings as of September 30, 2000,
as defined in rule 53(a), plus (b) $2 billion) will be used for an aggregate
investment in EWGs and FUCOs exclusive of any aggregate investment resulting
from any potential transfer of ownership of electric generating facilities owned
by CG&E or PSI to EWG affiliates, with the balance thereof (i.e., $877 million
of the New Investment Limitation) being reserved exclusively for any such
restructuring transactions.
5. 1994 merger commitments/Ohio electric deregulation
Cinergy's 1994 merger commitments, and Ohio's 1999 legislation providing
for customer choice in the supply of electricity, provide further assurances
that the proposed transactions will not adversely affect the Operating Companies
or their customers or the affected state commissions.
For more information with respect to the merger commitments and the Ohio
legislation as it relates to these concerns, see Item 3.F of the Existing
Record. See also HCAR No. 26146, Oct. 21, 1994 (approving the Cinergy merger and
related transactions).
*****
For all the foregoing reasons, the undersigned companies respectfully
request that the Commission issue the supplemental order requested herein at the
earliest practicable date.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this amendment to their
application-declaration on Form U-1 to be signed on their behalf by the officers
indicated below.
Dated: January 5, 2001
CINERGY CORP.
By: /s/Wendy L. Aumiller
Assistant Treasurer
CINERGY GLOBAL RESOURCES, INC.
By: /s/Wendy L. Aumiller
Assistant Treasurer
CINERGY CAPITAL & TRADING, INC.
By: /s/Wendy L. Aumiller
Assistant Treasurer
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1 On December 21, 2000, Cinergy announced that it had reached an agreement in
principle with the U.S. Environmental Protection Agency ("EPA"), the
Department of Justice, several Northeastern states and two environmental
groups that could serve as the basis for a negotiated resolution of claims
and other related matters brought under the Clean Air Act against
coal-fired power plants owned and operated by Cinergy's utility
subsidiaries. Under the terms of the tentative agreement, EPA and the other
plaintiffs have agreed to drop all challenges of past maintenance and
repair activities at Cinergy's coal-fired generation fleet. In addition,
Cinergy would be allowed to continue on-going activities to maintain
reliability and availability without subjecting the plants to new federal
permitting requirements. In return for resolution of past claims and future
operational certainty, Cinergy has committed to shut down or repower with
natural gas nine small coal-fired boilers at three power plants beginning
in 2004, build four additional sulfur dioxide scrubbers starting in 2008,
upgrade existing pollution control systems, and phase in the operation of
NOx reduction technology year-round starting in 2004. In reaching the
tentative agreement, Cinergy did not admit any wrongdoing and remains free
to continue its current maintenance projects, as well as implement future
projects for improved reliability. Cinergy believes that a negotiated
resolution based on the terms of the agreement in principle would not have
a negative impact on the financial integrity of Cinergy or its utility
subsidiaries.
2 The legislation is codified at Ohio Rev. Code Ann.ss.4928.01 et seq.
(Baldwin 2000). The Ohio commission's order is available electronically,
see In the Matter of the Application of The Cincinnati Gas & Electric
Company for Approval of its Electric Transition Plan, Etc., Case Nos.
99-1658-EL-ETP et seq., Public Utilities Commission of Ohio, 2000 Ohio PUC
LEXIS 814, August 31, 2000.
3 Cf. Exelon, supra (no prior FUCO investments).
4 HCAR No. 26848, March 23, 2000.
5 Cf. Exelon, supra (consolidated common equity below 30%; commitment to
raise to 30% by June 30, 2002).
6 The major rating agencies are Standard & Poor's Corporation ("S&P"), Fitch
Investor Service ("Fitch") and Moody's Investor Service ("Moody's").
Another rating agency, Duff & Phelps, was recently merged into Fitch.
7 Standard & Poor's recently placed its ratings for Cinergy, CG&E, PSI and
ULH&P on "credit watch with negative implications." The negative credit
watch was announced on December 12, 2000 after Cinergy announced the Enron
Transaction (described above). S&P stated that it expects to resolve the
credit watch listing after review of the ultimate financing plan for this
acquisition, as well as the Company's strategy in Ohio with regard to the
separation of CG&E's generating assets from its regulated transmission and
distribution assets. It should be noted that Cinergy and the Operating
Companies could each slip two "notches," as a result of a downgrade by S&P,
and still remain investment grade under the S&P rating classification
scheme.
8 See the footnote above concerning the December 2000 announcement by S&P
placing rated securities of Cinergy and the Operating Companies on credit
watch with negative implications.
9 An "A3" rating from Moody's is equivalent to an "A-" rating from any of the
other three agencies.
10 Not rated.
11 From time to time Cinergy makes short-term loans to the Operating Companies
under, and in accordance with the Commission authorization granted with
respect to, the Cinergy system "money pool." See HCAR Nos. 26723, May 30,
1997 & 26362, August 25, 1995.
12 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.
