File No. 70-______
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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E.ON AG, on its behalf and for the E.ON US Investments Corp.
benefit of the direct and indirect LG&E Energy LLC
nonutility subsidiaries of E.ON AG listed Louisville Gas and Electric Company
on Exhibit A hereto. Kentucky Utilities Company
E.ON US Holding GmbH 220 West Main Street
E.ON-Platz 1 Louisville, Kentucky 40202
40479 Dusseldorf
Germany
(Name of company filing this statement
and address of principal executive office)
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E.ON AG
(Name of top registered holding company)
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Karl-Heinz Feldmann
General Counsel, Senior Vice President
E.ON AG
E.ON-Platz 1
40479 Dusseldorf
Germany
Telephone: 011-49-211-4579-388
Facsimile: 011-49-211-4579-610
(Name and address of agent for service)
The Commission is also requested to send copies of any
communication in connection with this matter to:
Markian M. W. Melnyk
LeBoeuf, Lamb, Greene & MacRae L.L.P.
1875 Connecticut Ave.
Washington, D.C. 20009-5728
Telephone: (202) 986-8212
Facsimile: (202) 986-8102
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TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction...............................1
A. Introduction......................................................1
B. The Company.......................................................1
C. E.ON Subsidiaries.................................................3
1. Generally.....................................................3
2. LG&E Energy and the U.S. Midwest Market Unit..................4
3. Foreign Utility Companies.....................................5
(a) E.ON Energie and the Central Europe Market Unit..........5
(b) E.ON Ruhrgas and the Pan-European Gas Market Unit........6
(c) E.ON UK and the U.K. Market Unit.........................6
(d) E.ON Nordic and the Nordic Market Unit...................7
4. TBD Subsidiaries..............................................7
D. Request for Financing Authorization...............................8
1. Current Financing.............................................8
2. General Terms Applicable to the Proposed New
Financing Authorization.......................................8
(a) Effective Cost of Money..................................8
(b) Maturity.................................................8
(c) Issuance Expenses........................................9
(d) Common Equity Ratio......................................9
(e) Investment Grade Ratings.................................9
(f) Authorization Period....................................10
3. Use of Proceeds..............................................10
E. Proposed Financing Program.......................................10
1. Summary of Authorization Requested...........................10
2. E.ON External Financing......................................11
(a) Common Stock............................................13
(b) Preferred Stock, Preferred Securities and
Equity-linked Securities................................14
i
(c) Long-term Debt..........................................15
(d) Short-term Debt.........................................15
(e) Interest Rate and Currency Risk Management Devices......16
(f) Guarantees..............................................18
(g) Profit and Loss Transfer Agreements.....................19
3. Subsidiary Financing.........................................21
(a) TBD Subsidiaries and Retained Nonutility
Subsidiaries............................................21
(b) Intermediate Companies..................................25
4. LG&E Energy Group Companies..................................27
(a) LG&E Energy.............................................27
(b) Utility Subsidiaries of LG&E Energy.....................28
(c) Subsidiaries of LG&E Energy.............................30
5. Continuation of Money Pool...................................32
6. Acquisition, Redemption or Retirement of
Securities...................................................34
7. Financing Entities...........................................34
8. Changes in Capital Stock of Subsidiaries.....................35
9. Payment of Dividends Out of Capital or Unearned
Surplus......................................................36
10. Nonutility Reorganizations...................................37
F. EWG and FUCO Subsidiaries........................................40
1. Reinvestment of Proceeds from the Divestiture of
Nonutility Businesses........................................42
2. Compliance with Rule 53......................................43
(a) The Proposed Investments Will Not Have a
Substantial Adverse Impact Upon the Financial
Integrity of the E.ON System............................45
(b) The Proposed Transactions Will Not have an
Adverse Impact on Any U.S. Utility Subsidiary,
Any Customers of a U.S. Utility Subsidiary, or on
the Ability of the State Public Utility
Commissions to Protect Such Customers...................47
G. Energy Related Subsidiaries......................................49
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H. Reporting Requirements...........................................50
Item 2. Fees, Commissions and Expenses.......................................53
Item 3. Applicable Statutory Provisions......................................53
Item 4. Regulatory Approvals.................................................53
Item 5. Procedure............................................................54
Item 6. Exhibits and Financial Statements....................................54
Item 7. Information as to Environmental Effects..............................54
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Item 1. Description of the Proposed Transaction
A. Introduction
This Application-Declaration ("Application") seeks authorization under
the Public Utility Holding Company Act of 1935 ("Act" or "1935 Act") relating to
the financing of E.ON AG ("E.ON") and its associated companies (the "E.ON
Group"). On June 14, 2002, the Securities and Exchange Commission ("Commission")
issued an order authorizing E.ON and certain other applicants to undertake
specific financing transactions through May 31, 2005. See E.ON AG et al.,
Holding Co. Act Release No. 27539 (June 14, 2002) ("2002 Order"). The proposed
new financing authorizations for the E.ON Group, to take effect immediately upon
the issuance of an order granting this Application, are described below.
B. The Company
E.ON is a registered holding company under the 1935 Act, headquartered
in Dusseldorf, Germany, and with the preponderance of its operations in Europe.
For the six months ended June 30, 2004, E.ON reported consolidated revenues of
EUR 25.594 billion (USD 31.171 billion)/1 calculated in accordance with US GAAP.
As of June 30, 2004, E.ON had total consolidated assets of EUR 113.958 billion
(USD 138.789 billion). At June 30, 2004 E.ON and its subsidiaries employed
69,786 employees.
As of June 30, 2004, E.ON had approximately 478,000 shareholders
worldwide. E.ON's shares, all of which are ordinary shares, are listed on all
seven German stock exchanges. They are also actively traded over the counter in
London. E.ON's American Depositary Shares ("ADSs"), each of which represents one
ordinary share, are listed on the New York Stock Exchange.
E.ON's consolidated capitalization (including short-term debt) at June
30, 2004 was as follows:
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1 Unless otherwise noted, amounts expressed in United States dollars ("USD") are
unaudited and have been translated for the convenience of the reader at an
exchange rate of USD 1.2179 = EUR 1.00, the Noon Buying Rate of the Federal
Reserve Bank of New York on June 30, 2004.
Book Value Percentage of Total
(millions) (%)
Common Equity* USD 39,479/EUR 32,416 54.8
Minority Interest USD 5,343/EUR 4,387 7.4
Short-Term Debt** USD 11,115/EUR 9,126 15.4
Long-Term Debt USD 16,057/EUR 13,184 22.4
Total USD 71,994/EUR 59,113 100.0
* Common equity includes common stock (i.e., amounts received equal to the par
or stated value of common stock), additional paid-in capital, retained earnings,
and accumulated Other Comprehensive Income.
** Including current portion of long-term debt.
E.ON follows a centralized financing policy. Most of the financing
transactions of E.ON's market units have been centralized and netted at the
Group level to reduce the Group's overall debt and interest expense. As a
general rule, external financings will be undertaken at the E.ON level (or via
finance subsidiaries under its guarantee) and on-lent as needed within the
Group. In certain limited circumstances, future external financings may also
take place at the subsidiary level. E.ON's aim is to maximize its financing
efficiency and minimize structural subordination issues that would arise if
significant external debt was held at the operating subsidiary level. Generally,
over time E.ON intends to refinance outstanding external subsidiary debt that is
not consistent with the group financing policy as it comes due with intercompany
loans. However, the financing of joint ventures or partly-owned companies is
generally concluded externally.
E.ON has committed itself to maintaining at least a strong single-A
rating. At June 30, 2004, E.ON's securities were rated as follows:
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Security Standard & Poor's Moody's Investors Service
Ratings Group ("S&P") ("Moody's")
E.ON AG commercial paper A-1+ Prime-1
E.ON AG bonds AA- (stable outlook) Aa3 (stable outlook)
C. E.ON Subsidiaries/2
1. Generally
E.ON launched in 2003, the "on*top" project; a comprehensive strategic
review. The principle elements of the project were an analysis of E.ON's
competitive position, the redefinition of its corporate strategy and the design
of a revised organizational structure to reflect E.ON's strategic goals. The
primary result of the on*top process was E.ON's commitment to an integrated
business model with a clear focus on power and gas. In order to help implement
that model, the core energy business has been reorganized into five new market
units, each of which is focused on a market in which management believes E.ON
has a strong competitive position. These market units are:
o Central Europe, led by E.ON Energie AG ("E.ON Energie");
o Pan-European Gas, led by E.ON Ruhrgas AG ("E.ON Ruhrgas");
o U.K., led by E.ON UK plc ("E.ON UK");
o Nordic, led by E.ON Nordic AB ("E.ON Nordic"); and
o U.S. Midwest, led by LG&E Energy LLC ("LG&E Energy").
The on*top project has resulted in the transfer of management of LG&E
Energy and its utility subsidiaries from Powergen Ltd. ("Powergen") to E.ON.
Accordingly, by order dated November 22, 2004, the Commission granted Powergen's
application for an order authorizing the deregistration under the Act of
Powergen, and its direct and indirect parent holding companies, E.ON UK Holding
GmbH ("E.ON UK Holding") and E.ON UK Holding Company Ltd. Each of the business
segments are described more fully below.
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2 This section describes E.ON's principal subsidiaries. Additional E.ON
subsidiaries to which this Application applies are listed in Exhibit A hereto.
3
2. LG&E Energy and the U.S. Midwest Market Unit
E.ON US Holding GmbH ("E.ON US Holding") is a direct subsidiary of
E.ON and the parent company of E.ON US Investments Corp. ("E.ON US
Investments"). E.ON US Holding and E.ON US Investments are referred to herein as
the "Intermediate Companies." E.ON US Investments is the direct parent of LG&E
Energy, the holding company for E.ON's United States utility subsidiaries. E.ON
US Holding, E.ON US Investments and LG&E Energy are registered holding
companies.
LG&E Energy owns Louisville Gas and Electric Company ("LG&E") and
Kentucky Utilities Company ("KU") (collectively, the "Utility Subsidiaries"). In
addition to holding the Utility Subsidiaries, LG&E Energy is also engaged in
nonutility businesses, through wholly owned subsidiaries LG&E Capital Corp.
("LCC") and LG&E Energy Marketing Inc. ("LEM")./3 LCC operates one oil-fired and
nine coal-fired electricity generation units in western Kentucky through its
wholly owned subsidiary Western Kentucky Energy Corp. and affiliates. In
addition, through its subsidiaries, LCC operates several other independent power
projects in the United States. LCC also owns interests in three Argentine gas
distribution companies and stakes in two power plants in the United States
through another wholly owned subsidiary, LG&E Power Inc. LG&E Energy is in the
process of disposing of its stakes in the power plants held by LG&E Power Inc.
LG&E is an electricity and natural gas utility based in Louisville,
Kentucky, which distributes electricity to approximately 384,000 customers and
supplies natural gas to approximately 312,000 customers in Louisville and 17
surrounding counties. KU is an electric utility based in Lexington, Kentucky,
which serves approximately 482,000 customers in 77 Kentucky counties,
approximately 30,000 customers in five counties in Virginia, as well as 12
municipalities and fewer than 10 customers in Tennessee. The U.S. Midwest market
unit sold 23.6 billion kWh of electricity and 8.9 billion kWh of gas in the six
month period ended June 30, 2004. Revenues from the U.S. Midwest market unit
were USD 1,173 million (EUR 963 million) for the same period; 3.8% of E.ON's
consolidated revenues.
The capital structure and credit ratings of LG&E and KU are provided
in the tables below.
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3 The subsidiary companies of LG&E Energy now owned or hereafter acquired or
formed except the Utility Subsidiaries are referred to as the "Nonutility
Subsidiaries."
4
As of June 30, 2004 LG&E KU
Percentage Percentage
Book Value of Total Book Value of Total
(USD Millions) (%) (USD Millions) (%)
Common Stock Equity 946.7 49.41 945.8 53.53
Preferred Stock 70.4 3.67 39.7 2.25
Long-Term Debt 873.1 45.56 728.0 41.21
Short-Term Debt 26.0 1.36 53.2 3.01
Total 1,916.2 100.0% 1,766.7 100.0%
Security S&P Ratings Moody's Ratings
LG&E commercial paper A-2 P-1
LG&E first mortgage bonds A- A1
LG&E preferred stock BBB- Baa1
KU commercial paper A-2 P-1
KU first mortgage bonds A A1
KU preferred stock BBB- Baa1
3. Foreign Utility Companies
(a) E.ON Energie and the Central Europe Market Unit
E.ON Energie, headquartered in Munich, Germany, is a direct wholly
owned subsidiary of E.ON and a foreign utility company ("FUCO"). E.ON Energie's
core business consists of the ownership and operation of power generation
facilities, the transmission, distribution and sale of electric power, and the
distribution and sale of gas and heat through its subsidiary companies.
Electricity is transmitted to purchasers by means of high-voltage transmission
lines and underground cables owned by E.ON Energie. As of December 31, 2003, its
power generation facilities within Germany have a total installed capacity of
approximately 33,000 MW, E.ON Energie's attributable share of which is
approximately 25,100 MW (not including mothballed, shutdown and reduced power
plants). Its international power generation facilities have a total installed
capacity
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of approximately 1,800 MW, which is fully attributable to E.ON Energie. The
Central Europe market unit sold 125.1 billion kWh of electricity and 66.2
billion kWh of gas in the six month period ended June 30, 2004. Revenues from
the Central Europe market unit were EUR 10.866 billion for the same period;
42.5% of E.ON's consolidated revenues.
(b) E.ON Ruhrgas and the Pan-European Gas Market Unit
E.ON Ruhrgas (formerly Ruhrgas AG), headquartered in Essen, Germany,
is 5.5% directly held by E.ON and 94.5% held by E.ON's wholly owned direct
subsidiary E.ON Ruhrgas Holding GmbH ("E.ON Ruhrgas Holding"; formerly Ruhrgas
Holding GmbH). E.ON Ruhrgas Holding is a FUCO under the Act. E.ON Ruhrgas'
principal business is the supply, transmission, storage and sale of natural gas
through its subsidiary companies. E.ON Ruhrgas also engages indirectly in gas
distribution, through a number of mostly minority holdings in gas utilities.
E.ON Ruhrgas imports gas from Russia, Norway, the Netherlands, the UK and
Denmark and also purchases gas from sources in Germany. E.ON Ruhrgas sells gas
to regional and supraregional distributors, municipal utilities and industrial
customers in Germany and increasingly also exports gas to customers in other
European countries. As of June 30, 2004, E.ON Ruhrgas owned gas pipelines
totaling 6,449 km and co-owned gas pipelines totaling 1,550 km with other
companies, in some of which E.ON Ruhrgas holds a stake through its subsidiary
E.ON Ruhrgas International-Aktiengesellschaft. In addition, German project
companies in which E.ON Ruhrgas holds an interest owned gas pipelines totaling
3,274 km. E.ON Ruhrgas sold 336.6 billion kWh of gas in the six month period
ended June 30, 2004. Revenues from the pan-European gas market unit were EUR
7.436 billion for the same period; 29.1% of E.ON's consolidated revenues.
(c) E.ON UK and the U.K. Market Unit
E.ON's wholly owned direct subsidiary E.ON UK Holding GmbH, a FUCO
under the Act, indirectly owns E.ON UK (formerly Powergen UK plc), an electric
and gas utility headquartered in Coventry, United Kingdom. Through various
subsidiaries, E.ON UK produces electricity at jointly and wholly owned power
plants. As of June 30, 2004, E.ON UK and its subsidiaries owned or through joint
ventures had an attributable interest in 7,895 MW of generating capacity.
Electricity is transmitted to purchasers by means of the National Grid
transmission network in the U.K. E.ON UK's operations also include electricity
distribution, the transportation and distribution of gas, energy trading, CHP
(combined heat and power plants) and renewable generation businesses.
E.ON UK and its subsidiaries serve approximately 8.7 million customer
accounts, including approximately 5.8 million electricity customer accounts, 2.7
million gas customer accounts, 0.1 million telephone customer accounts and 0.1
million industrial and commercial electricity and gas customer accounts. The
companies in the U.K. market unit sold 32.9 billion kWh of electricity and 58.0
billion kWh of gas in the six month period ended June 30, 2004. Revenues from
the U.K. market unit were EUR 4.468 billion for the same period; 17.5% of E.ON's
consolidated revenues.
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(d) E.ON Nordic and the Nordic Market Unit
E.ON's wholly owned direct subsidiary E.ON Nordic Holding GmbH ("E.ON
Nordic Holding"), headquartered in Dusseldorf, and a FUCO under the Act,
directly owns E.ON Nordic, headquartered in Malmo, Sweden. E.ON Nordic holds
55.2% of the shares in Sydkraft, the second largest Swedish utility. Statkraft
SF, a Norwegian utility unrelated to E.ON, holds the remaining interest in
Sydkraft. Sydkraft directly and indirectly owns interests in facilities for the
production of hydroelectric power, nuclear power, wind power, and conventional
power plants that use biofuels and fossil fuels. Sydkraft has a total installed
generation capacity of 7,667 MW. Sydkraft sells electricity, natural gas,
liquefied petroleum gas, heating, cooling, water and sewage, recycled energy and
broadband communication services. Sydkraft has approximately 1.2 million
customers, consisting of approximately 1.0 million electricity distribution and
retail customers, 0.2 million district heating customers and 25,000 gas
customers. Sydkraft also owns one-third of the shares in Baltic Cable AB, the
owner of one of the longest direct current submarine cables in the world (250
km), which links the power transmission grid of E.ON Energie to Scandinavia. The
remaining two-thirds interest in Baltic Cable is held by Statkraft SF. E.ON
Nordic also has a 65.6% interest in E.ON Finland Oyj, Espoo, a utility in
Finland engaged in the generation, distribution, marketing, trading and sale of
electricity and heat.
The companies in the Nordic market unit sold 24.8 billion kWh of
electricity, 3.7 billion kWh of gas, and 5.8 billion kWh of district heating in
the six month period ended June 30, 2004. Revenues from the Nordic market unit
were EUR 1.753 billion for the same period; 6.8% of E.ON's consolidated
revenues.
4. TBD Subsidiaries
The TBD Subsidiaries are subsidiaries that E.ON is required to divest
under the 2002 Order. Viterra AG ("Viterra"), E.ON's wholly owned real estate
group is engaged in two businesses: residential real estate and real estate
development. E.ON currently holds a 42.9% interest in Degussa AG ("Degussa"), a
specialty chemical company. In the 2002 Order, E.ON was required to divest
Degussa, Viterra and five passive real estate investment vehicles managed by
Viterra within five years./4
The 2002 Order also required the divestiture of several other E.ON
subsidiaries within three years. Since the issuance of the 2002 Order, E.ON has
divested VEBA Oel AG, Viterra Energy Services, Inc., Stinnes AG, Schmalbach
Lubeca AG and the other companies listed as to-be-divested within three years on
Exhibit G-1 to the application in SEC File No. 70-9961, with the exception of AV
Packaging and Hibernia
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4 The five real estate investment vehicles are: ERKA
Vermogensverwaltungsgesellschaft mbH vorm. Reichs-Kredit-Gesellschaft,
Projektgemeinschaft Humboldtpark Munchen II GbR, Hibernia Industriewerte GmbH &
Co. KG, Humboldt-Verwaltungsgebaude Mulheim, Induboden GmbH & Co.
Grundstucksgesellschaft, and Induboden GmbH & Co. Industriewerte.
7
Gamma Beteiligungsgesellschaft mbH./5 From January 1, 2002 to June 30, 2004, the
aggregate proceeds received by E.ON from the divestiture of various businesses
in connection with its transformation from a diversified company into an energy
and utility company were approximately EUR 21.8 billion. E.ON intends to
complete the divestiture of AV Packaging and Hibernia Gamma
Beteiligungsgesellschaft mbH by July 1, 2005, the three year anniversary of
E.ON's registration under the Act.
D. Request for Financing Authorization
1. Current Financing
The current financing authorization under the 2002 Order applicable to
the E.ON Group expires on May 31, 2005. This Application seeks new financing
authorization for the E.ON Group from the date of the order granting this
Application through May 31, 2008 ("Authorization Period"). For the sake of
simplicity, the terms of the proposed financing authorization are stated below
in their entirety.
2. General Terms Applicable to the Proposed New Financing
Authorization
Authorization is requested herein to engage in financing transactions
during the Authorization Period for which the specific terms and conditions are
not at this time known, and that are not exempt under the Act or the rules
thereunder, without further Commission authorization. The "Financing Parameters"
set forth below will be applicable where appropriate to the external financing
transactions proposed herein:
(a) Effective Cost of Money
The effective cost of money on external debt securities and preferred
stock or other types of preferred securities issued by E.ON, LG&E Energy and the
Utility Subsidiaries will not exceed the competitive market rates available at
the time of issuance for securities having the same or reasonably similar terms
and conditions issued by similar companies of reasonably comparable credit
quality./6
(b) Maturity
The maturity of long-term debt will be between one and 50 years after
the issuance thereof. Preferred securities and equity-linked securities will be
redeemed no later than 50 years after the issuance thereof, unless converted
into common stock. Preferred stock issued directly by E.ON may be perpetual in
duration. Short-term debt will have an original maturity of less than one year.
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5 LG&E Energy also has sold CRC-Evans Pipeline International in compliance with
the Commission's order in Powergen plc, Holding Co. Act Release No. 27291 (Dec.
6, 2000).
6 See E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002). Similar
interest rate provisions have been authorized by the Commission in Energy East
Corporation, et al., Holding Co. Act Release No. 27643 (January 28, 2003) and
Ameren Corp. et al., Holding Co. Act Release No. 27655 (February 27, 2003).
8
(c) Issuance Expenses
The underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of securities
pursuant to this Application will not exceed the greater of (i) 5% of the
principal or total amount of the securities being issued or (ii) issuance
expenses that are generally paid at the time of the pricing for sales of the
particular issuance, having the same or reasonably similar terms and conditions
issued by similar companies of reasonably comparable credit quality.
(d) Common Equity Ratio
E.ON and LG&E Energy, each on a consolidated basis, and LG&E and KU,
individually, will maintain common stock equity/7 as a percentage of total
capitalization/8 of at least 30%, as reflected in their most recent annual or
semiannual report, in the case of E.ON, and, with respect to LG&E Energy, LG&E
and KU, quarterly financial statements prepared in accordance with US GAAP;
provided that E.ON in any event will be authorized to issue common stock to the
extent authorized herein.
(e) Investment Grade Ratings
Except for securities issued for the purpose of funding money pool
operations, no guarantees or other securities, other than common stock, may be
issued in reliance upon the authorization granted by the Commission pursuant to
this Application, unless (i) the security to be issued, if rated, is rated
investment grade; (ii) all outstanding securities of the issuer that are rated
are rated investment grade; and (iii) all outstanding securities of E.ON that
are rated, are rated investment grade. For purposes of this provision, a
security will be deemed to be rated "investment grade" if it is rated investment
grade by at least one nationally recognized statistical rating organization
("NRSRO"), as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule
15c3-1 under the Securities Exchange Act of 1934, as amended ("1934 Act")./9 In
addition,
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7 Common stock equity includes common stock (i.e., amounts received equal to the
par or stated value of the common stock), additional paid in capital, retained
earnings and minority interests.
8 Applicants would calculate the common stock equity to total capitalization
ratio as follows: common stock equity (as defined in the immediately preceding
footnote)/(common stock equity + preferred stock + gross debt). Gross debt is
the sum of long-term debt, short-term debt and current maturities. The minimum
common stock equity standard will be applied on a US GAAP basis.
9 Investment grade long-term debt is denoted by the Standard & Poor's ratings of
AAA, AA, A and BBB. The ratings may be modified by a plus (+) or minus (-) to
show relative standing within the rating categories. Moody's ratings of Aaa, Aa,
A and Baa denote investment grade long-term debt. Moody's applies numerical
clarifiers (1, 2 and 3) to denote relative ranking within a generic rating
category. Standard & Poor's short-term debt ratings range from A-1 for the
highest quality obligations to D for the lowest. Categories A-1 to A-3 are
investment grade. The A-1 rating may also be modified by a plus sign to
distinguish the strongest credits in that category. Moody's short-term issuer
ratings are Prime-1, Prime-2 and Prime-3, all of which are investment grade.
Fitch IBCA's ratings of AAA - BBB are denoted investment grade categories. A
plus (+) or minus (-) may be appended to a rating to denote relative status
within major rating categories. If there is a split rating by the rating
agencies, one investment grade credit rating will be sufficient to satisfy the
investment grade credit commitment.
9
Applicants request authorization as follows: (i) notwithstanding that at any
time the preferred stock of a Utility Subsidiary, if rated, may not be rated
investment grade by an NRSRO, such Utility Subsidiary may nonetheless
participate in the Utility Money Pool pursuant to Item 1.E.5. of this
Application, borrow funds as secured intercompany loans from Fidelia pursuant to
Item 1.E.4.(b)(ii) of this Application and borrow funds as intercompany loans
pursuant to Item 1.E.4.(c) of this Application and (ii) notwithstanding that at
any time the securities of a Nonutility Subsidiary that are rated are not rated
investment grade, such Nonutility Subsidiary may nonetheless participate in the
U.S. Nonutility Money Pool pursuant to Item 1.E.5. of this Application and may
borrow funds as intercompany loans pursuant to Item 1.E.4.(c) of this
Application. Applicants request that the Commission reserve jurisdiction over
the issuance of any guarantee or other securities in reliance upon the
authorization granted by the Commission pursuant to this Application at any time
that the conditions set forth in clauses (i) through (iii) above are not
satisfied.
(f) Authorization Period
No security will be issued pursuant to the authorization sought herein
after the last day of the Authorization Period (May 31, 2008); provided that
securities issuable or deliverable upon exercise or conversion of, or in
exchange for, securities which were issued during the Authorization Period, may
be issued or delivered after May 31, 2008.
3. Use of Proceeds
The proceeds from the financings authorized by the Commission pursuant
to this Application will be used for general corporate purposes, including (i)
financing investments by and capital expenditures of the E.ON Group, (ii) the
funding of future investments in companies that are exempt under the Act or the
rules thereunder or permitted by Commission order, including exempt wholesale
generators ("EWGs"), FUCOs, TBD Subsidiaries, exempt telecommunications
companies ("ETCs"), companies engaged or formed to engage in energy-related
businesses as proposed herein, and companies exempt under Rule 58 under the Act
("Rule 58 Subsidiaries"), consistent with any limits discussed in this
Application, (iii) the repayment, redemption, refunding or purchase by any E.ON
Group company of any of its own securities, (iv) financing or refinancing
capital requirements of the E.ON Group and (v) other lawful purposes. The
Applicants represent that no financing proceeds will be used to acquire the
equity securities of any company unless such acquisition has been approved by
the Commission or is in accordance with an available exemption under the Act or
rules thereunder, including Sections 32, 33, 34 and Rule 58.
E. Proposed Financing Program
1. Summary of Authorization Requested
o Financings by E.ON, including but not limited to the issuance of
common stock and ADSs, preferred stock, preferred securities,
equity-linked securities, options, warrants, purchase contracts,
units, short and long-term
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debt, subordinated debt, bank borrowings, securities with call or put
options, convertible securities, currency and interest rate swaps and
guarantees;
o Financings, (a) by the Intermediate Companies, (b) by LG&E Energy and
its subsidiaries, including LG&E and KU (the "LG&E Energy Group"), and
(c) by certain nonutility subsidiaries;
o The continuation of the existing money pools and intercompany
financing arrangements;
o Continued authorization to invest in EWGs and FUCOs;
o Continued authorization to pay dividends out of capital or unearned
surplus;
o Continued authorization to change the terms of any E.ON Group
company's authorized capital stock, the issuance of additional shares,
or alteration of the terms of any then existing authorized security;
o Continued authorization to form financing entities and related
transactions; and
o Continued authorization to invest in energy-related companies doing
business outside the U.S.
2. E.ON External Financing
E.ON requests authorization to increase its capitalization through the
issuance and sale of securities including, but not necessarily limited to,
common stock, preferred stock, preferred securities, equity-linked securities,
options, warrants, purchase contracts, units (consisting of one or more purchase
contracts, warrants, debt securities, shares of preferred stock, shares of
common stock or any combination of such securities), long-term debt,
subordinated debt, lease financing, bank borrowings, securities with call or put
options, and securities convertible into any of these securities./10 The
aggregate amount of new financing obtained by E.ON during the Authorization
Period (exclusive of short-term debt and guarantees), through the issuance of
securities, in each case valued at the time of issuance, shall not exceed USD 50
billion outstanding at any one time ("E.ON External Limit"),/11 provided that
securities issued for purposes of refunding or replacing
------------------
10 Any convertible of equity-linked securities would be convertible into or
linked only to common stock, preferred securities or unsecured debt securities
that E.ON is otherwise authorized to issue directly or indirectly through a
financing entity on behalf of E.ON. The Commission has previously authorized
registered holding companies to issue and sell equity-linked securities. See
Exelon Corp., Holding Co. Act Release No. 27830 (Apr. 1, 2004); Ameren
Corporation, Holding Co. Act Release No. 27449 (Oct. 5, 2001) and American
Electric Power Company, Inc., Holding Co. Act Release No. 27517 (Apr. 11, 2002).
11 Because the limit applies only to securities issued and outstanding during
the Authorization Period, when a security is issued during the Authorization
Period and later redeemed or retired during the Authorization Period, the
aggregate amount issued and outstanding under the limit is reduced and
additional financing capacity under the limit is made available.
11
other outstanding securities where E.ON's capitalization is not increased as a
result thereof shall not be counted against this limitation./12 In addition,
E.ON requests authority to issue and sell from time to time, directly or
indirectly through one or more financing subsidiaries, short-term debt,
including commercial paper and bank borrowings, in an aggregate principal amount
at any time outstanding not to exceed USD 30 billion ("E.ON Short-term Limit"),
provided that securities issued for purposes of refunding or replacing other
outstanding short-term debt securities where E.ON's capitalization is not
increased as a result thereof shall not be counted against this limitation.
Although the financing and investment limits in the application are
stated in U.S. dollars, a large portion of the securities issued under this
authorization and investments are expected to be denominated in Euros or other
currencies the value of which will fluctuate against the dollar. To provide
consistent financing and investment limits over the Authorization Period and
with respect to the authorizations previously granted to E.ON under the 2002
Order, for purposes of measuring compliance with the limits, E.ON would value
securities issued and investments in currencies other than the dollar based on
the applicable exchange rate between the dollar and the currency in which the
security is denominated in effect on the date the 2002 Order was granted./13
The 2002 Order placed an overall limit on E.ON's external financing of
USD 75 billion. That limit applied to the aggregate of E.ON's issuances of
equity, long and short-term debt securities and guarantees. To maintain
consistent overall financing limits, E.ON proposes in this Application that
issuances during the Authorization Period subject to the E.ON External Limit,
the E.ON Short-term Limit and the E.ON Guarantee Limit (defined infra at Item
1.E.2.(f)) would not, in the aggregate, exceed USD 75 billion.
------------------
12 Any refunding or replacement of securities where capitalization is not
increased as a result thereof will be through the issuance of securities of the
type authorized in this Application. An increase in capitalization would be
judged by a comparison of the book value shown in E.ON's U.S. GAAP financial
statements of the replaced security and the new security. For example, if
long-term debt with a book value of USD 600 million, and a market value of USD
675 million is replaced by a new issue of long-term debt with a book value of
USD 675 million, only the incremental USD 75 million of additional book
capitalization would be counted against the E.ON External Limit.
13 Fixing the exchange rates between currencies at the date of the 2002 Order,
for purposes of applying the financing limits set forth in this Application,
provides more certainty to E.ON and the Commission and makes financing decisions
neutral as to choice of currency, all other things remaining equal. If issuances
under the Commission's order granting this Application denominated in Euros are
converted into dollars at the time of issuance, however, an increasing Euro
would use more of the authorized financing capacity and could, conceivably,
cause an issuance to exceed the financing limits due to exchange rate movements
alone - something largely out of E.ON's ability to control. Alternatively, a
decreasing Euro would result in more effective borrowing capacity under the
order because a given issuance in Euros would use up less of the dollar
authorization granted in the order. The fixed exchange rate proposed in the
application means that, for the duration of the Authorization Period, E.ON will
have a fixed and determinable financing authorization. On June 14, 2002, the
date of the 2002 Order, the USD/EUR exchange rate was: USD 1.00 = EUR 1.06.
12
All securities issued by E.ON in accordance with the authorization
requested herein, including, without limitation, securities issued for the
purpose of refunding or retiring outstanding securities, will comply with the
applicable Financing Parameters set forth in Item 1. D.2 above.
E.ON contemplates that such securities would be issued and sold
directly to one or more purchasers: (i) through public offerings; (ii) in
private placements; (iii) in exchange for securities or assets being acquired
from other companies; (iv) under its dividend reinvestment, stock-based
management incentive and employee benefit and employee share purchase plans; or
(v) through subscription rights. If underwriters are used, such securities will
be acquired by the underwriters for their own account and may be resold from
time to time in one or more transactions, including negotiated transactions, at
a fixed public offering price or at varying prices determined at the time of
sale. Securities may be offered to the public either through underwriting
syndicates (which may be represented by a managing underwriter or underwriters
designated by E.ON) or directly by one or more underwriters acting alone, or may
be sold directly by E.ON or through agents designated by E.ON from time to time.
If dealers are utilized, E.ON will sell such securities to the dealers, as
principals. Any dealer may then resell such securities to the public at varying
prices to be determined by such dealer at the time of resale. If common stock is
being sold in an underwritten offering, E.ON may grant the underwriters thereof
a "green shoe" option permitting the purchase from E.ON at the same price
additional shares then being offered solely for the purpose of covering
over-allotments. In addition, sales may be made through private placements or
other non-public offerings to one or more persons.
(a) Common Stock
E.ON may issue and sell common stock, options, warrants or other stock
purchase rights exercisable for common stock. Public distributions may be
pursuant to private negotiation with underwriters, dealers or agents, or
effected through competitive bidding among underwriters. In addition, sales may
be made through private placements or other non-public offerings to one or more
persons. All such common stock sales will be at rates or prices and under
conditions negotiated or based upon, or otherwise determined by, competitive
capital markets. E.ON also may issue common stock, options, warrants or other
stock purchase rights exercisable for common stock in public or
privately-negotiated transactions as consideration for the equity securities or
assets of other companies, provided that the acquisition of any such equity
securities or assets has been authorized by the Commission or is exempt under
the Act or the rules thereunder (e.g., Rule 58)./14
------------------
14 E.ON will value the equity issued in such circumstances in accordance with
the agreement negotiated between the purchaser and the seller. The Commission
has previously approved the issuance of common stock as consideration for the
acquisition of a new business in an exempt transaction or transaction that has
been approved in a separate proceeding. See e.g., SCANA Corporation, Holding Co.
Act Release No. 27137 (Feb. 14, 2000).
13
E.ON also proposes to issue common stock and/or purchase shares of its
common stock (either currently or under forward contracts) in the open market or
through negotiated purchases for purposes of (i) reissuing such shares at a
later date pursuant to stock-based plans which are maintained for stockholders,
employees and directors or (ii) managing its capital structure. Negotiated
purchases would be at prices and under conditions based upon, or otherwise
determined by, competitive capital markets. E.ON also requests authorization to
use its common stock and other equity instruments to fund employee benefit plans
and in connection with dividend reinvestment plans currently in existence or
that may be formed during the Authorization Period. E.ON currently maintains a
stock-based compensation plan that issues stock appreciation rights ("SARs")
which was authorized by the Commission in the 2002 Financing Order. The E.ON
Group's stock-based compensation programs are described in E.ON's Annual Report
on Form 20-F, included as Exhibit D hereto. E.ON would count against the E.ON
External Limit the market value of stock issued pursuant to stock-based
compensation programs at the time of issuance. The current SAR program, however,
does not award E.ON common stock and, accordingly, the issuance of SARs would
not count against the E.ON External Limit. E.ON common stock issued pursuant to
an option would count against the E.ON External Limit at such time, if any, that
the option is exercised.
E.ON proposes to issue shares of its common stock under the
authorization and within the limitations set forth herein in order to satisfy
its obligations under its stock-based plans, as they may be amended or extended,
and similar plans or plan funding arrangements hereafter adopted without any
additional Commission order. Shares of common stock issued under these plans may
either be newly issued shares, treasury shares or shares purchased in the open
market, including ADSs, provided that only the net proceeds from sales of newly
issued shares will be counted against the E.ON External Limit. E.ON may make
open-market or negotiated purchases of common stock in accordance with the terms
of, or in connection with, the operation of the plans, or as part of a program
to repurchase its securities generally. Stock repurchases could include the
acquisition of E.ON common stock from investors that may have an affiliate
interest in E.ON, provided that such transactions reflect prices and other
conditions based upon, or otherwise determined by, competitive capital markets.
(b) Preferred Stock, Preferred Securities and Equity-linked
Securities
E.ON may issue preferred stock directly and/or issue, indirectly
through one or more financing subsidiaries, other forms of preferred securities
(including, without limitation, trust preferred securities or monthly income
preferred securities). Preferred stock and other forms of preferred securities
may be issued in one or more series with such rights, preferences, and
priorities as may be designated in the instrument creating each such series, as
determined by E.ON's board of directors, and may be convertible or exchangeable
into shares of E.ON common stock or unsecured indebtedness. Dividends or
distributions on such securities will be made periodically and to the extent
funds are legally available for such purpose, but may be made subject to terms
which allow the issuer to defer dividend payments for specified periods. E.ON
may also issue and sell equity-linked securities in the form of stock purchase
units, which combine a security
14
with a fixed obligation (e.g., preferred stock or debt) with a stock purchase
contract that is exercisable (either mandatorily or at the option of the holder
or a combination of both) within a relatively short period (e.g., three to six
years after issuance)./15 The dividend or distribution rates, interest rates,
redemption and sinking fund provisions, conversion features, if any, and
maturity dates with respect to the preferred stock or other types of preferred
securities and equity-linked securities of a particular series, as well as any
associated placement, underwriting or selling agent fees, commissions and
discounts, if any, will be established by E.ON's board, negotiation or
competitive bidding.
(c) Long-term Debt
Long-term debt would be unsecured and may be issued directly through a
public or private placement or indirectly through one or more financing
subsidiaries, in the form of notes, convertible notes, medium-term notes or
debentures under one or more indentures or long-term indebtedness under
agreements with banks or other institutional lenders. The maturity dates,
interest rates, redemption and sinking fund provisions and conversion features,
if any, with respect to the long-term debt of a particular series, as well as
any associated placement, underwriting or selling agent fees, commissions and
discounts, if any, will be established by negotiation or competitive bidding at
the time of issuance./16
(d) Short-term Debt
E.ON proposes to issue and sell from time to time, directly or
indirectly through one or more financing subsidiaries, short-term debt, in the
form of unsecured commercial paper, notes issued to banks and other
institutional lenders, and other forms of unsecured short-term indebtedness, in
an aggregate principal amount at any time outstanding not to exceed the E.ON
Short-term Limit. Unused borrowing capacity under a credit facility would not
count towards the E.ON Short-term Limit. Short-term borrowings under credit
lines will have original maturities of less than a year from the date of each
borrowing.
Commercial paper issued under any commercial paper facility would be
sold, directly or indirectly through one or more financing subsidiaries, in
established U.S. or European commercial paper markets. Such commercial paper
would typically be sold to dealers at the discount rate per annum prevailing at
the date of issuance for commercial paper of comparable quality and maturities
sold to commercial paper dealers generally. It is expected that the dealers
acquiring such commercial paper would reoffer it at a
------------------
15 Any convertible or equity-linked securities would be convertible into or
linked only to common stock, preferred securities or unsecured debt securities
that E.ON is otherwise authorized to issue directly or indirectly through a
financing entity on behalf of E.ON. The Commission has previously authorized
registered holding companies to issue and sell equity-linked securities. See
Exelon Corp., Holding Co. Act Release No. 27830 (Apr. 1, 2004); Ameren
Corporation, Holding Co. Act Release No. 27449 (Oct. 5, 2001) and American
Electric Power Company, Inc., Holding Co. Act Release No. 27517 (Apr. 11, 2002).
16 Any convertible debt issued by E.ON would be convertible only into common
stock, preferred securities or unsecured debt securities that E.ON is otherwise
authorized to issue directly or indirectly through a financing entity on behalf
of E.ON.
15
discount to corporate, institutional and, with respect to European commercial
paper, individual investors. It is anticipated that such commercial paper would
be reoffered to investors such as commercial banks, insurance companies, pension
funds, investment trusts, foundations, colleges and universities, finance
companies and nonfinancial corporations.
(e) Interest Rate and Currency Risk Management Devices
During the normal course of operating its business and related
financing activities, E.ON is exposed to currency and interest rate risks. E.ON
uses derivative financial instruments to eliminate or limit these risks. Hedging
Instruments (as defined below) held by E.ON are used for hedging and not for
trading purposes. For hedging purposes, use is made of established and commonly
used instruments with sufficient market liquidity.
E.ON's treasury department, which is responsible for entering into
derivative foreign exchange and interest rate contracts, acts as a service
center for the E.ON Group and not as a profit center. E.ON monitors the scope of
the underlying and hedging transactions through a computerized reporting and
controlling system implemented throughout the E.ON Group. E.ON also maintains
internal guidelines for the scope of permitted derivatives transactions,
responsibilities and financial reporting procedures./17
E.ON requests authorization to enter into, perform, purchase and sell
financial instruments intended to manage the volatility of interest rates and
currency exchange rates, including but not limited to swaps, caps, floors,
collars and forward agreements or any other similar agreements ("Hedging
Instruments"). E.ON would employ Hedging Instruments as a means of prudently
managing the risk associated with any of the outstanding debt issued by it or
any of its associate companies under the authority requested in this Application
or an applicable exemption by, for example, (i) converting variable rate debt to
fixed rate debt, (ii) converting fixed rate debt to variable rate debt, (iii)
limiting the impact of changes in interest rates resulting from variable rate
debt, and (iv) providing an option to enter into interest rate swap transactions
in future periods for planned issuances of debt securities.
In addition, E.ON requests authorization to enter into Hedging
Instruments with respect to anticipated debt or equity offerings ("Anticipatory
Hedges"), subject to certain limitations and restrictions. Anticipatory Hedges
would only be entered into on-exchange or off-exchange with Approved
Counterparties, and would be used to fix and/or limit the interest rate or
currency exchange rate risk associated with any proposed new issuance.
Anticipatory hedges may include: (i) a forward sale of U.S. or European
------------------
17 The E.ON Group Finance Guidelines (May 2004) specify E.ON's policy with
respect to financial planning, and the management of liquidity, credit, currency
risks and interest rate risks, as well as the financial controlling, reporting
and internal audit functions. The Guidelines define the requirements and the
responsibilities of the major E.ON Group companies and of E.ON, as well as the
ways in which they are to work together.
16
Economic Area ("EEA") Treasury futures contracts, U.S. or EEA Treasury
obligations and/or a forward swap (each a "Forward Sale"), (ii) the purchase of
put options on U.S. or EEA Treasury obligations (a "Put Options Purchase"),
(iii) a Put Options Purchase in combination with the sale of call options on
U.S. or EEA Treasury obligations (a "Zero Cost Collar"), (iv) transactions
involving the purchase or sale of U.S. or EEA Treasury obligations, or (v) some
combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or
other derivative or cash transactions, including, but not limited to structured
notes, caps and collars, appropriate for the Anticipatory Hedges.
Hedging Instruments and Anticipatory Hedges may be executed
on-exchange ("On-Exchange Trades") with brokers through the opening of futures
and/or options positions, the opening of over-the-counter positions with one or
more Approved Counterparties ("Off-Exchange Trades"), or a combination of
On-Exchange Trades and Off-Exchange Trades. E.ON will determine the optimal
structure of each Hedging Instrument or Anticipatory Hedge transaction at the
time of execution. Off-Exchange Trades would be entered into only with associate
companies or with counterparties whose senior debt ratings are mainly investment
grade as determined by Standard & Poor's, Moody's Investors Service, Inc. or
Fitch IBCA, Inc. ("Approved Counterparties").
E.ON will comply with applicable standards relating to accounting for
derivative transactions as are adopted and implemented by the Financial
Accounting Standards Board ("FASB"). All transactions in Hedging Instruments and
Anticipatory Hedges would be matched to an underlying business purpose.
Consequently, pursuant to this authorization, E.ON and its subsidiaries would
not enter into transactions in Hedging Instruments or Anticipatory Hedges for
speculative purposes or to finance businesses that are not permitted, authorized
or exempt under the Act or Commission order. E.ON and its subsidiaries will
comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting
for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for
Certain Derivative Instruments and Certain Hedging Activities) or other
standards relating to accounting for derivative transactions as are adopted and
implemented by the Financial Accounting Standards Board ("FASB"). The Applicants
will also comply with any existing or future FASB financial disclosure
requirements associated with hedging transactions.
To the extent such securities are not exempt under Rule 52, E.ON's
subsidiaries propose to enter into Hedging Instruments or Anticipatory Hedges
with E.ON or another subsidiary to hedge interest rate or currency exposures on
the same terms applicable to E.ON. Such transactions would be on market terms,
provided that any such hedging transaction entered into by an LG&E Energy Group
company will be on terms no less favorable to such company than such company
could obtain in a similar transaction with an unaffiliated third party. No gain
or loss on a Hedging Instrument or Anticipatory Hedge entered into by E.ON or
its subsidiaries will be allocated to the Utility Subsidiaries, except that a
gain or loss may be allocated to a Utility Subsidiary
17
where such transaction is entered into by a Utility Subsidiary in connection
with a Utility Subsidiary financing./18
(f) Guarantees
E.ON requests authorization to provide guarantees with respect to debt
securities or other contractual obligations of any subsidiary as may be
appropriate in the ordinary course of such subsidiary's business, in an
aggregate principal or nominal amount not to exceed USD 40 billion at any one
time outstanding ("E.ON Guarantee Limit"), exclusive of any guarantees and other
forms of credit support that are exempt pursuant to Rule 45(b) and Rule 52(b),
provided however, that the amount of guarantees in respect of obligations of any
EWGs and FUCOs or Rule 58 Subsidiaries shall remain subject to the limitations
of Rule 53(a)(1) or Rule 58(a)(1), as applicable.
Guarantees may take the form of, among others, direct guarantees,
reimbursement undertakings under letters of credit, "keep well" undertakings,
agreements to indemnify, expense reimbursement agreements, and credit support
with respect to the obligations of the Subsidiaries as may be appropriate to
enable such system companies to carry on their respective authorized or
permitted businesses. Any guarantee that is outstanding at the end of the
Authorization Period may remain in force until it expires or terminates in
accordance with its terms.
The debt of any financing subsidiary guaranteed by E.ON will comply
with the Financing Parameters and will count against E.ON's financing limit. To
avoid double counting, the amount of any guarantee with respect to securities
issued by a financing subsidiary will not also be counted against the proposed
limit on guarantees.
Guarantees may, in some cases, be provided to support obligations of
subsidiaries that are not readily susceptible of exact quantification or that
may be subject to varying quantification. In such cases, E.ON will determine the
exposure under such guarantee for purposes of measuring compliance with the
proposed limitation on guarantees by appropriate means, including estimation of
exposure based on loss experience or projected potential payment amounts. If
appropriate, such estimates will be made in accordance with Generally Accepted
Accounting Principles ("GAAP"). Such estimation will be reevaluated
periodically.
E.ON requests authorization for the E.ON Group (other than the LG&E
Energy Group) to charge each subsidiary (other than an LG&E Energy Group
company) a fee for the period of time that a guaranty is outstanding, such fee
to be based upon market rates, which take into account credit risk, where such
may be necessary to operate its business efficiently under applicable
regulations./19 Where such regulations are not
------------------
18 The proposed terms and conditions of the hedging transactions are
substantially the same as the Commission has approved in other cases. See New
Century Energies, Inc., et al., Holding Co. Act Release No. 27000 (Apr. 7,
1999); and Ameren Corp., et al., Holding Co. Act Release No. 27053 (July 23,
1999).
19 See discussion of applicable German law in Item 1.E.3. below. Market rates
for guarantee fees would be determined in a manner consistent with the
determination of market interest rates discussed below.
18
applicable or with respect to any guarantee of the obligations of an LG&E Energy
Group company, E.ON may charge the subsidiary a fee for each guarantee that is
not greater than the cost, if any, of obtaining the liquidity necessary to
perform such guarantee (for example, bank line commitment fees or letter of
credit fees, plus other transactional expenses) for the period of time that it
remains outstanding. The amount of guarantees in respect of obligations of any
Rule 58 Subsidiaries shall remain subject to the limitations of Rule 58(a)(1).
(g) Profit and Loss Transfer Agreements
Although E.ON and its German subsidiary companies will file a
consolidated German income tax return, they have not entered into a written
agreement relating to either federal or state taxes as provided by Rule 45(c)
under the Act. E.ON and its German subsidiaries do, however, allocate the taxes
paid by the consolidated German group among the German group companies with
income and compensate the German group companies with losses on a current basis.
Applicants request that the Commission continue to authorize the profit and loss
transfer agreements and the consolidated tax filing of E.ON and its German
subsidiaries approved in the 2002 Order under Section 12(b) of the Act.
E.ON has entered into profit and loss transfer agreements with certain
subsidiaries organized in Germany under provisions of the German Stock
Corporation Act. A profit and loss transfer agreement automates the transfer of
profits as well as the balancing of losses from the subsidiaries to E.ON./20
Such agreements are commonly done by German companies for tax optimization.
A profit and loss transfer agreement is required to establish a
consolidated tax group for German corporate income tax purposes and for trade
tax purposes. The profit and loss transfer agreements permit income from one
company to be offset by losses from another, thereby reducing the taxes of the
group. Under a profit and loss transfer agreement, all the profits of the
controlled subsidiary are generally transferred to the parent by booking a debt
in favor of the parent in the subsidiary's balance sheet as of the end of the
business year and showing an expense in the profit and loss account (i.e.,
income statement). During the term of the agreement the controlled subsidiary
may transfer amounts forming part of its net profits to general reserves (i.e.,
retained earnings) with the consent of the controlling shareholder only to the
extent that this is economically reasonable from a business perspective. If
profits are transferred to general reserves they are effectively retained by the
controlled subsidiary and reinvested at that level.
Losses shown in the controlled subsidiary's financial statements must
be absorbed by the controlling corporation by crediting the losses as a
receivable to the subsidiary at the end of the fiscal year to the extent the
losses are not offset against retained earnings of the controlled subsidiary.
------------------
20 Profit and loss transfer agreements can only run between a parent company and
its direct and indirect subsidiaries. Sister companies in a corporate group
cannot enter into such agreements.
19
The allocation of taxes among members of a German group that have
profit and loss transfer agreements generally is analogous to the practice of
allocating taxes among U.S. consolidated groups. In German groups, the tax paid
by the parent is charged back to the income generating subsidiaries under a
formula that treats the subsidiaries as if they were "stand alone" taxable
entities. Loss subsidiaries would similarly receive payment for the value of the
losses used to offset the income of the consolidated group. Thus, in practice,
the use of profit and loss transfer agreements among E.ON and its German
subsidiaries complies with Section 12(b) of the Act and the principles of Rule
45(c). A written tax allocation agreement is not needed in Germany and,
therefore, is not in place between the German companies in the E.ON Group.
In E.ON's U.S. GAAP consolidated balance sheet the transactions
resulting from the profit and loss transfer agreements are eliminated, so the
transactions have no effect on the U.S. GAAP books of E.ON on a consolidated
basis. Profits transferred from the subsidiary are eliminated in the same way
dividends would be. In effect, the profit and loss transfer agreements merely
permit consolidation of group accounts for tax purposes, as opposed to
accounting purposes.
Although E.ON's potential exposure under the profit and loss transfer
agreements is uncertain, the likelihood of a significant loss is small. E.ON, on
a consolidated basis, has a history of profitability and its core non-U.S.
regulated utility business is stable. The profit and loss transfers are
conducted only at the end of each fiscal year. E.ON has a profit and loss
transfer agreement with E.ON Energie, for example, and the latter company has
retained earnings of EUR 8,975 million (USD 10,931 million) and total
consolidated stockholders equity of EUR 13,999 million (USD 17,016 million) as
of June 30, 2004. E.ON Energie's profits are offset, in part, by losses for
example from E.ON Nordic Holding.
In this manner, the combined E.ON Group pays lower taxes on a
consolidated basis, improving its profitability and general financial soundness.
The fact that E.ON's shareholders approved the profit and loss transfer
agreements indicates that the benefits are clearly perceived to outweigh the
potential risks. E.ON proposes to maintain and continue to enter into profit and
loss transfer agreements with its subsidiaries as necessary in accordance with
prudent tax and financial planning. E.ON would enter into profit and loss
transfer agreements with subsidiaries organized in Germany only and not with the
LG&E Energy Group companies.
Because a profit and loss transfer agreement is in some respects like
a financial guarantee from a parent to its subsidiary, E.ON will treat its net
exposure under the profit and loss transfer agreements as a Guarantee subject to
the E.ON Guarantee Limit. Since this exposure is not capable of exact
quantification until year end when the accounting for the financial performance
of each company subject to a profit and loss transfer agreement is complete,
during the year E.ON will review its aggregate exposure under all such profit
and loss transfer agreements for purposes of measuring compliance with the E.ON
Guarantee Limit and, based on prior experience and interim information, will
estimate projected potential payment amounts. Such amounts will count against
the E.ON Guarantee Limit. When the year end results are available, E.ON will
true-up the
20
estimated exposure under the profit and loss transfer agreements with its actual
experience and adjust the amount charged against the E.ON Guarantee Limit
accordingly.
The E.ON subsidiaries organized in Germany, other than E.ON's FUCO
subsidiaries, also request authorization to enter into profit and loss transfer
agreements on the same terms applicable to E.ON. The net exposure of an E.ON
subsidiary under the profit and loss transfer agreements shall be treated as a
guarantee, for which authorization is requested above.
3. Subsidiary Financing
(a) TBD Subsidiaries and Retained Nonutility Subsidiaries
The TBD Subsidiaries and E.ON's nonutility subsidiaries that are not
now or hereafter held within a FUCO group or the LG&E Energy Group (the
"Retained Nonutility Subsidiaries") will continue to finance their own
businesses in accordance with the exemption provided in Rule 52(b) under the Act
or as provided below.
The E.ON Group companies (other than the LG&E Energy Group companies)
propose to finance the TBD Subsidiaries and the Retained Nonutility Subsidiaries
through capital contributions, loans, guarantees, the purchase of equity or debt
securities or other methods throughout the Authorization Period. The Retained
Nonutility Subsidiaries also propose to finance their respective businesses and
the acquisition of new businesses, as permitted under the Act or Commission
order, through the issuance of equity, preferred stock and debt securities to
third parties. In connection with the financing of the TBD Subsidiaries,
investments would not exceed, in the aggregate, through July 1, 2007 (the end of
the divestiture period described in Item 1. C.4 above), USD 1 billion (the "TBD
Investment Limit"). The 2002 Order authorized E.ON to make investments of up to
USD 4 billion through May 31, 2005, pending the divestiture of the TBD
Subsidiaries. To date, E.ON has made investments of approximately USD -0.5
billion pursuant to the 2002 Order. E.ON requests a continuation of its
authorization to make investments in the TBD Subsidiaries during the
Authorization Period, subject to the TBD Investment Limit.
In connection with the financing of the Retained Nonutility
Subsidiaries, investments would not exceed USD 15 billion. The authorization
requested to invest in Retained Nonutility Subsidiaries would not apply to the
companies in the LG&E Energy Group.
Applicants request such authorization to allow the E.ON Group (other
than the LG&E Energy Group companies) to finance the TBD Subsidiaries and the
Retained Nonutility Subsidiaries consistent with German law as authorized in the
2002 Financing Order. In transactions between German companies and their foreign
subsidiaries, German tax law assumes market rate financing between companies in
the same corporate group because market rate pricing assures that intercompany
loans will
21
not be used to transfer profits from one related entity to another (including,
to transfer profits to entities based outside Germany in jurisdictions with
lower tax rates).21 Market rates also allow the lending entity to recover its
true costs of liquidity, and the risks associated with credit quality and
interest rate and currency variability. Sound corporate management is also
encouraged by requiring each autonomous business unit within the E.ON Group to
seek the best terms for its financing. The management of each subsidiary must
maximize its profitability and controlling financing costs is one component of
that task. If E.ON or another entity within the E.ON Group is required to lend
at cost to an associate, the responsibility for controlling the cost of funds
will be shifted from the borrower to the lender./22
A cost-based funding rule rather than a market rate funding rule can
lead to additional adverse effects. German corporate law requires all joint
stock companies not connected by a control agreement to provide a dependency
statement in their annual financial reports. The dependency statement almost
always concludes that all transactions with affiliated companies have been
conducted on an arm's length basis and not to the reporting company's
disadvantage because a failure to follow arm's length terms could subject the
company to a shareholder suit. If the interest rate charged by the lender is
higher than the market rate, the margin above market could be considered a
deemed distribution of capital or a deemed dividend from the borrowing
subsidiary to the lender. A deemed distribution may have adverse tax
consequences and a deemed distribution of capital may violate certain corporate
law restrictions with regard to payments from capital. If the lender finances a
subsidiary at cost which is below market rates, the subsidiary would accrue an
advantage that the lender may not recover, particularly if the borrower is a TBD
Subsidiary that will be divested in the near future.
The role of German corporate law in mandating market rate financing
among affiliated companies merits discussion in additional detail. Section 57 of
the Joint Stock Company Act addresses the prohibition on the repayment of
capital. A German joint stock company may not repay to its shareholders any
capital contributed by them. Consequently, any payments to shareholders must be
made only from company profits as shown in the balance sheet.
A prohibited repayment of capital can not only occur in explicit form
but also in a concealed form, if a transaction between a company and its
shareholder shows a disproportion or incongruity between consideration and
performance. This is always the case if there are market prices or rates for the
respective consideration and these are not
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21 Section 1 of the German Foreign Tax Law provides: "If the income of a
taxpayer resulting from his transaction with the related party is reduced
because the taxpayer has, in the transaction with the foreign related party,
agreed on terms and conditions which deviate from those which unrelated third
parties would have agreed to upon under the same or similar circumstances, then
the taxpayer's income shall, notwithstanding other provisions, be so determined
as if such income would have been earned under terms and conditions agreed upon
between unrelated parties."
22 See, e.g., Energy East Corp., Holding Co. Act Release No. 27228 (September
12, 2000); Entergy Corp., Holding Co. Act Release No. 27039 (June 22, 1999) (a
requirement that the lender charge only its effective cost of capital for
nonutility loans when market rates are greater would result in a subsidy to the
nonutility borrower).
22
taken into account in the relevant transaction. It is notable that German law in
this regard addresses one of the very same holding company abuses underlying the
adoption of the 1935 Act where, as stated in Section 1(b)(2) of the Act,
"subsidiary public utility companies are subjected to excessive charges for
services, construction work, equipment and materials, or enter into transactions
in which evils result from an absence of arm's length bargaining . . ."
The legal consequence under the Joint Stock Company Act of any such
repayment of capital is that the respective transaction or contract is legally
void, overpayments have to be reimbursed and the management board may be subject
to damage claims./23
Furthermore, German joint stock company law sets specific requirements
for the conduct of business between group companies. Any disadvantageous
influence of the parent company on its subsidiary is restricted to the extent
that any consequential disadvantages caused by the parent have to be
compensated./24 If not compensated, the parent and its legal representatives,
i.e. the management board and the supervisory board, would be subject to damage
claims./25
In addition, the dependent subsidiary must prepare an annual
dependency report in which it describes all transactions with the parent or any
other group company of the parent, together with all measures and acts the
dependent subsidiary has taken upon request of the parent./26 The dependency
report must be examined by the supervisory board and additionally is part of the
annual auditors report. Furthermore, each shareholder has the right to apply for
a special auditors report if either the supervisory board or the auditor
declares the necessity for further investigations or if there are other facts
indicating unduly caused disadvantages by the parent./27 It is black letter law
under the above-mentioned statutory requirements that disadvantageous behavior
has to be compensated and reported in all cases where market rates or prices
exist but are not followed in transactions between the parent and the dependent
subsidiary.
Applicants note that although the statutory requirements discussed
herein apply to joint stock companies - be they publicly listed or not - they do
not directly apply to limited liability companies. Nevertheless, there is
extensive case law precedent and direction from the German High Court of Appeal
that the same general rules applicable to joint stock companies also apply to
limited liability company dependent subsidiaries where the subsidiary is under
the constant leadership of the parent to such an extent that there is a lack of
adequate regard to the affairs of the subsidiary by the parent. In such cases,
German corporate law has developed the concept of the "qualified factual group"
------------------
23 Section 93 III no. 2, Joint Stock Company Act.
24 Section 311, Joint Stock Company Act.
25 Section 317, Joint Stock Company Act.
26 Section 312, Joint Stock Company Act.
27 Sections 313-315 Joint Stock Company Act.
23
to which in principle the same rules apply as mentioned above, including
compensation of disadvantages and the necessity for a dependency report.
For these reasons, E.ON requests authorization for the E.ON Group
(other than the LG&E Energy Group) to continue to finance the TBD Subsidiaries
and the Retained Nonutility Subsidiaries at market rates where this is necessary
to allow E.ON to operate its businesses efficiently under German law or
regulations. Where such law or regulations are not applicable, the E.ON Group
(other than the LG&E Energy Group) would continue to finance the TBD
Subsidiaries and the Retained Nonutility Subsidiaries at the lending company's
cost of borrowing. Where market rate financing is required, E.ON would continue
to determine the appropriate market rate for loans to each TBD Subsidiary or
Retained Nonutility Subsidiary or among such entities in much the same manner
practiced by an independent bank. E.ON would review the nature of each
subsidiary's business, evaluate its capital structure, the particular risks to
which it is subject, and generally prevailing market conditions. E.ON would also
evaluate and take into account information from third parties such as banks that
would indicate the prevailing market rates for similar businesses. In
particular, E.ON will obtain information on the range of rates used by one or
more banks for loans to similar businesses. Such independent third-party
information would serve as an index against which an appropriate market rate
could be determined. This analysis is referred to as the "Market Rate Method."
E.ON would provide its analysis supporting its market-based rate determination
to the Commission upon request.
In addition, as noted below, to the extent funds are borrowed by a
company in the LG&E Energy Group from an associate company, the loan would
continue to be made at E.ON's effective cost of capital or a lower rate,
regardless of the cost of capital incurred by the lending company. Consequently,
the E.ON Group companies that are financed according to the Market Rate Method
would not pass increased costs on to the companies in the LG&E Energy Group.
The requested authorization to lend funds to certain subsidiaries at
market rates has been previously authorized by the Commission in the 2002
Financial Order. In addition, in Emera Inc., the Commission permitted Emera to
lend funds to its Canadian subsidiaries at market rates where this was necessary
to allow Emera to operate its businesses efficiently under Canadian tax
regulations./28 The market rate loans made by Emera were required to be
calculated in the same manner as the Market Rate Method proposed in this
Application. In addition, Emera's public utility subsidiaries were insulated
from any increased costs associated with the market rate financing of Emera's
nonutility subsidiaries because all borrowings by the utilities would be at the
lowest of (1) Emera's cost of capital, (2) the cost of capital of an associate
FUCO if that company
------------------
28 Emera Inc., Holding Co. Act Release No. 27445 (October 1, 2001).
24
was the lender, or (3) the utility's cost of capital incurred in a direct
borrowing at that time from a nonassociated lender for a comparable term
loan./29
The Commission also has permitted the issuance of securities by
partially-owned subsidiaries of registered holding companies at interest rates
that would at least cover the effective cost of capital of the lender. Here
again, reasonableness, efficiency and a lack of adverse effect on the protected
interests under the Act made such relief appropriate./30 E.ON's proposal fully
protects the LG&E Energy Group from being the recipients of any potential
increased costs because the LG&E Energy Group companies will not receive a
significant amount of services or goods from the TBD Subsidiaries or the
Retained Nonutility Subsidiaries and will not borrow at rates that would exceed
E.ON's cost of funds for loans with similar terms.
(b) Intermediate Companies
E.ON holds its interest in LG&E Energy through the Intermediate
Companies, E.ON US Holding and E.ON US Investments, which are registered holding
companies under the Act. E.ON US Holding holds Fidelia Corp. ("Fidelia"), a
financing subsidiary, and E.ON US Investments holds E.ON North America Inc.
("E.ON NA") and its subsidiaries, which also function as financing entities. To
finance the LG&E Energy Group and/or the Intermediate Companies and their
subsidiaries, Applicants request authorization for the Intermediate Companies
and their subsidiaries to issue and sell securities to E.ON and associate
companies, but not companies in the LG&E Energy Group. In addition,
authorization is requested for E.ON NA and Fidelia (and any subsidiary thereof)
to issue securities to third parties such as banks to finance the capital needs
of the E.ON Group, including the LG&E Energy Group./31 Applicants also request
authorization for the Intermediate Companies and their subsidiaries to acquire
securities of other Intermediate Companies and their subsidiaries and the LG&E
Energy Group companies. The Intermediate Companies and their subsidiaries also
seek authorization to issue guarantees and other forms of credit support to or
for the benefit of another Intermediate Company, its subsidiaries and the LG&E
Energy Group companies. In no case would an Intermediate Company borrow, or
receive any extension of credit or indemnity, from any LG&E Energy Group company
or its subsidiaries, except that an Intermediate Company may borrow from its
direct or indirect financing entity subsidiary that is not part of the LG&E
Energy Group./32
Each of the Intermediate Companies is intended to function as a
financial conduit to facilitate E.ON's U.S. investments. For reasons of economic
efficiency, the
------------------
29 See also, National Grid Group plc, Holding Co. Act Release No. 27445 (October
22, 2001) (including substantially similar terms to assure that the utility
subsidiaries in the National Grid system would always obtain the lowest
available cost of funds when borrowing from associate companies).
30 Entergy Corp., Holding Co. Act Release No. 27039 (June 22, 1999).
31 E.ON NA and Fidelia would function as indirect financing subsidiaries of E.ON
in this capacity and any securities issued by E.ON NA and Fidelia to third
parties would count against the appropriate E.ON financing limit.
32 See Item 1.E.7, infra.
25
terms and conditions of any securities issued by the Intermediate Companies or
their subsidiaries (but not the LG&E Energy Group) would be market-based
determined under the Market Rate Method. The Intermediate Company financings
proposed herein would be used to finance the capital requirements of the LG&E
Energy Group, directly or through E.ON NA and Fidelia as appropriate. The
Intermediate Company financings will not be used by the Intermediate Companies,
E.ON NA, Fidelia or their subsidiaries to carry on business or investment
activities within the Intermediate Companies.
The Intermediate Companies would not issue securities to third
parties./33 All borrowings by an Intermediate Company would be unsecured, but
may be guaranteed by E.ON or another Intermediate Company. Debt offerings by the
Intermediate Companies would have short and long-term maturities. Short-term
debt would have a maturity of less than one year and long-term debt would have
maturities from one to 50 years.
The proposed financing authority provides the flexibility needed to
efficiently structure financings within the E.ON Group. From time-to-time, it
may be advantageous for an Intermediate Company, E.ON NA or Fidelia to borrow
funds from an indirect parent company or from a FUCO associate company./34 Such
loans allow E.ON the flexibility to meet the short-term working capital
requirements of E.ON's United States subsidiaries when funds can be raised at a
lower cost by E.ON. When funds are needed on short notice, it is often easier
from a financial/treasury management perspective to make loans directly to an
indirect subsidiary of E.ON rather than through each Intermediate Company. The
board meetings and approvals necessary to fund capital needs through the
Intermediate Companies can be time consuming and prevent the rapid funding of
short-term capital needs. Loans from associate companies also allow more
efficient use of surplus cash, minimizing having cash on deposit within the
group when other group companies have external borrowings. The requested
flexibility allows E.ON to reduce the number and amount of unused committed bank
facilities while maintaining liquidity to meet working capital requirements.
When unused bank facilities are eliminated the fees associated with maintaining
the facilities are saved.
In addition, authority is requested for the Intermediate Companies,
E.ON NA and Fidelia, and their respective subsidiaries, to guarantee the
indebtedness or contractual obligations of, and to otherwise provide credit
support to, their respective associated subsidiary companies. Guarantees
provided by Intermediate Companies, E.ON NA and Fidelia in support of the
external obligations of direct and indirect subsidiaries would not exceed USD 2
billion outstanding at any one time, in the aggregate, exclusive of any
guarantees and other forms of credit support that are exempt pursuant to Rule
45(b) and Rule 52(b), provided however, that the amount of guarantees in respect
of obligations of any Rule 58 Subsidiaries shall remain subject to the
limitations of Rule 58(a)(1).
------------------
33 E.ON NA has bank credit line and letter of credit facilities in place that
support the credit and funding requirements of E.ON Group companies, including
the LG&E Energy Group.
34 Such flexible financing authorization was provided by the Commission in
National Grid Group plc, Holding Co. Act Release No. 27455 (October 22, 2001).
26
For reasons of economic efficiency, the terms and conditions of any
financings between an Intermediate Company (or E.ON NA and Fidelia), and its
direct or indirect parent, or between an Intermediate Company and a FUCO
subsidiary or their associate company subsidiaries will be on market terms.
Market rate financing assures that intercompany loans will not be used to
transfer profits from one related entity to another. Market rates also allow the
lending entity to recover its true costs of liquidity, and the risks associated
with credit quality and interest rate and currency variability.
4. LG&E Energy Group Companies
(a) LG&E Energy
Although LG&E Energy has not historically had external debt, it has
guaranteed, or otherwise provided credit support for, substantial obligations of
its subsidiaries. Pursuant to a support agreement between LG&E Energy and LCC,
LG&E Energy has provided support for obligations of LCC, including support of
certain debt and lease obligations of LCC in the approximate amount of USD 300
million outstanding as of June 30, 2004.35 LG&E Energy has guaranteed
obligations of LG&E and KU in connection with a cross-border lease of certain
turbines jointly owned by LG&E and KU. LG&E Energy has also guaranteed certain
of its non-utility subsidiaries in connection with the lease and operation of
power generation facilities owned by Big Rivers Electric Corporation, a power
generation cooperative in western Kentucky, and by the City of Henderson,
Kentucky. In addition, LG&E Energy has guaranteed certain obligations of LG&E
Energy Marketing Inc. under a long-term power sale agreement. The potential
liability of LG&E Energy under these contractual arrangements is not easily
quantifiable. As a matter of prudent business practice, it is desirable for LG&E
Energy to have the ability to incur short-term debt in the unlikely event that
LG&E Energy is called upon to perform any of such obligations.
Consequently, LG&E Energy requests authorization to obtain funds
through the issuance of short-term debt securities to meet its funding
requirements. In particular, LG&E Energy requests authorization to have
outstanding at any time during the Authorization Period external short-term debt
in an aggregate amount of up to USD 400 million.
LG&E Energy's external short-term debt may include, without
limitation, commercial paper sold in established commercial paper markets, lines
of credit with banks or other financial institutions and other short-term debt
securities. All transactions will be at rates or prices, and under conditions,
negotiated pursuant to, based upon or otherwise determined by competitive market
conditions, provided that any external debt issued by LG&E Energy also will
comply with the applicable Financing Parameters.
------------------
35 The obligations of LCC supported by LG&E Energy under the support agreement
include, as of June 30, 2004: (1) Obligations of LCC in respect of its
medium-term notes outstanding, in an aggregate principal amount as of June 30,
2004 of USD 300 million; and (2) Obligations of LCC under a guarantee of certain
obligations of LG&E Energy Services Inc. under a lease of fleet vehicles (no
limit is stated).
27
(b) Utility Subsidiaries of LG&E Energy
(i) Financing
The issue and sale of most securities by the Utility Subsidiaries will
be exempt from the preapproval requirements of Sections 6(a) and 7 of the Act
pursuant to Rule 52(a), as most such securities must be approved by the public
service commission in the state in which each Utility Subsidiary is incorporated
and operating. All securities of LG&E and KU, except for securities with
maturities of two years or less are subject to approval by the Kentucky Public
Service Commission. In addition, all issuances of securities of KU, except for
securities with maturities of one year or less are subject to approval by the
Tennessee Regulatory Authority. Generally, all issuances of securities of KU,
except for securities with maturities of less than one year are subject to
approval by the Virginia State Corporation Commission ("VSCC"). Securities of KU
with maturities of less than one year also must be approved by VSCC unless such
notes, together with all other outstanding notes and drafts of a maturity of
less than 12 months on which KU is primarily or secondarily liable, aggregate
not more than 12% of KU's total capitalization.
To the extent their financing is not exempt under Rule 52(a) or
otherwise, LG&E and KU request authorization to issue debt securities having a
maturity of two years or less in the aggregate principal amount at any one time
outstanding of up to USD 400 million for each of LG&E and KU.
Each of LG&E and KU may issue debt securities with a maturity of two
years or less as each may deem appropriate in light of its needs and market
conditions at the time of issuance, subject to the applicable Financing
Parameters. Such financing could include, without limitation, commercial paper
sold in established U.S. or European commercial paper markets, lines of credit
with banks or other financial institutions, and other short-term debt
securities. All transactions will be at rates or prices, and under conditions
negotiated pursuant to, based upon, or otherwise determined by competitive
market conditions.
The table below shows the capital structure of each of LG&E and KU as
of June 30, 2004.
Common Stock Preferred Long-Term Short-Term Total
Equity Stock Debt* Debt
USD % USD % USD % USD % USD %
(MM) (MM) (MM) (MM) (MM)
LG&E 946.7 49.4 70.4 3.67 873.1 45.56 26.0 1.36 1,916.2 100.0
KU 945.8 53.5 39.7 2.25 728.0 41.21 53.2 3.01 1,766.7 100.0
* Includes current portion of long-term debt.
28
(ii) Secured Intercompany Loans
Pursuant to the Commission's order in Holding Co. Act Release No.
27711 (Aug. 15, 2003), the Commission authorized through May 31, 2005 LG&E and
KU to obtain secured intercompany loans from Fidelia, upon the terms set forth
in Application-Declaration on Form U-1 filed in File No. 70-9985. Applicants
request that such authorization be continued through the Authorization Period.
The articles of incorporation of each of LG&E and KU contain a
provision for the benefit of the holders of their preferred shares that limits
the amount of unsecured indebtedness which may be outstanding at any time that
such company has any preferred shares outstanding. The unsecured debt limit at
LG&E is 20% of the sum of (a) secured debt plus (b) total of capital and
surplus. The limit at KU is 25% of the same sum. In order to satisfy the
requirements of the Articles of Incorporation of LG&E and KU, LG&E and KU must
borrow on a secured basis.
The secured intercompany loans provide a cost-efficient means for LG&E
and KU to finance their capital needs, including payment of maturing
indebtedness and financing of capital expenditures. Use of secured intercompany
loans to fund the capital needs of LG&E and KU will allow LG&E and KU to use
unsecured short-term debt, including loans through the money pool, to finance
their respective working capital needs.
Specifically, authorization is requested for Fidelia to provide
intercompany loans to LG&E and KU on a secured basis, as described below. Each
of LG&E and KU request authorization pursuant to Section 12(d) of the Act and
Rule 43 thereunder to secure such intercompany loans with a subordinated lien on
certain of the personal property of such company, including "utility assets"
within the meaning of the Act. The collateral will consist of all of the
borrower's now owned or hereafter acquired "equipment", as that term is defined
in Kentucky's Uniform Commercial Code (KRS Chapter 355), excluding, however, any
equipment that is not subject to the lien pursuant to such borrower's first
mortgage bond indenture. The subordination provisions will provide that the E.ON
Group companies cannot exercise any rights or remedies against the property of
LG&E and KU unless all bonds under such company's first mortgage bond indenture
have been paid in full. The aggregate outstanding principal amount of
intercompany loans made to LG&E and KU on a secured basis pursuant to this
authorization will not exceed USD 275 million and USD 215 million,
respectively./36 Further, each of LG&E and KU will commit that the aggregate
principal amount of secured intercompany loans, together with the aggregate
principal amount of bonds issued under their respective first mortgage bond
indenture, will not exceed the limit on bonds set forth in such first mortgage
bond indenture. The secured intercompany loans will be in compliance with the
Best Rate Method (defined below). Thus, LG&E and KU
------------------
36 Currently, each of LG&E and KU have sufficient capacity under their
respective first mortgage bond indenture to issue first mortgage bonds, or
alternatively to incur secured intercompany loans, in the amount of the
authorization requested herein.
29
will not pay more than each would pay in the capital markets for a similar loan
had the borrower sought to finance its capital requirements with independent
third parties.
LG&E and KU undertake to review the redemption provisions of the
preferred stock on a periodic basis to evaluate the economics, feasibility and
appropriateness of effecting the redemption of the preferred stock. At such time
that LG&E and KU have redeemed all series of preferred stock and are no longer
subject to the limits set forth in their respective Articles of Incorporation on
the amount of unsecured debt which may be outstanding, any intercompany loans
made to LG&E and KU will be made on an unsecured basis.
(iii) Guarantees
The Utility Subsidiaries seek authorization to guarantee or otherwise
provide credit support for the obligations of their subsidiaries and other
companies in which they have invested (but not EWGs, ETCs or FUCOs) to the
extent not exempt under Rule 45 under the Act./37 Any guarantee of an obligation
of an EWG, FUCO or ETC will be undertaken only if such investment is authorized
under Sections 32, 33 or 34 of the Act, applicable rules, and/or Commission
order. Such guarantees would not exceed USD 200 million in the case of LG&E and
USD 200 million in the case of KU. Certain guarantees may be in support of
obligations that are not capable of exact quantification. The Utility
Subsidiaries will in these cases determine the exposure under a guarantee for
purposes of measuring compliance with the above limits by appropriate means
including estimation of exposure based on loss experience or projected potential
payment amounts. The Utility Subsidiaries may charge each subsidiary a fee for
each guarantee provided on its behalf that is not greater than the cost, if any,
of the liquidity necessary to perform the guarantee. Guarantees issued by the
Utility Subsidiaries would not be secured by any utility assets.
(c) Subsidiaries of LG&E Energy
E.ON, E.ON NA and Fidelia (or a special purpose financing subsidiary
thereof) propose to finance all or a portion of the capital needs of the LG&E
Energy Group companies directly or through other E.ON Group companies, including
the Intermediate Companies, at the lowest practical cost. Companies in the LG&E
Energy Group propose to borrow funds from other E.ON Group companies that may
have available surplus funds. Except as provided in Item 1.E.4.(b)(ii) above,
such borrowings
------------------
37 As of the date hereof, LG&E owns 4.9% of Ohio Valley Electric Corp. ("OVEC"),
a public utility company, and KU owns 2.5% of OVEC and 20% of Electric Energy
Inc., an EWG. LG&E has entered into an agreement with American Electric Power
Company, Inc. to acquire an additional 0.73% of the outstanding common stock of
OVEC. See Application-Declaration on Form U-1 in File No. 70-10260. KU has power
purchase and other agreements with EEI and LG&E and KU have power purchase
agreements with OVEC, which agreements provide for payments based on the costs
of the operation and maintenance of the facilities, including a proportionate
share of debt service requirements. The obligations of KU and LG&E under their
respective agreements may be construed as effectively providing credit support
(within the meaning of the 1935 Act) to EEI and/or OVEC, as applicable, and
their respective obligations.
30
will be unsecured. In all cases, such borrowings will only occur if the interest
rate on the loan would result in an equal or lower cost of borrowing than the
LG&E Energy Group company could obtain in a loan from E.ON or in the capital
markets on its own.
Accordingly, all borrowings by an LG&E Energy Group company from an
associate company would be at the lowest of: (i) E.ON's effective cost of
capital; (ii) the lending associate's effective cost of capital (if lower than
E.ON's effective cost of capital); and (iii) the borrowing LG&E Energy Group
company's effective cost of capital determined by reference to the effective
cost of a direct borrowing by such company from a nonassociate for a comparable
term loan that could be entered into at such time (the "Best Rate Method"). The
Best Rate Method assures that an LG&E Energy Group company that elects to obtain
debt financing from an associate company would not pay more for that financing
than it would pay in the capital markets for a similar loan had the borrower
sought to finance its capital requirements with independent third parties.
Borrowings by LG&E Energy Group companies would comply, at a minimum, with the
cost of money, maturity and issuance expense provisions of the Financing
Parameters.
E.ON will report to the Commission in its Rule 24 certificates filed
hereunder the lender, principal amount, term and interest rate applicable to any
loans between an E.ON Group company and an LG&E Energy Group company.
Information regarding the benchmarking method used to establish the interest
rate charged to the LG&E Energy Group company in connection with each such loan
will be made available to the staff of the Commission upon request.
Intercompany Loans Among Companies in the LG&E Energy Group. The
activities of LG&E Energy and its Nonutility Subsidiaries are financed, in part,
through intercompany loans. The sources of funds for the operations of LG&E
Energy and the Nonutility Subsidiaries also include internally generated funds
and the proceeds of external financings.
Applicants request authorization for intercompany loans among LG&E
Energy and its Nonutility Subsidiaries in a net principal amount at any one time
outstanding during the Authorization Period not to exceed USD 1.5 billion. The
authorization for intrasystem financing requested in this paragraph excludes
financing that is exempt pursuant to Rules 45(b) and 52, as applicable. LG&E
Energy will not borrow funds from its subsidiary companies.
The terms and conditions of intercompany loans available to any
borrowing company will be materially no less favorable than the terms and
conditions of loans available to such borrowing company from third-party
lenders. All intercompany loans will be payable on demand or have a maturity of
less than 50 years from the date of issuance.
Guarantees Among the LG&E Energy Group. Applicants request
authorization for LG&E Energy and the LG&E Energy Group Nonutility Subsidiaries
to enter into guarantees, extend credit, obtain letters of credit, enter into
guaranty-type expense agreements and otherwise to provide credit support
("Guarantees") for the
31
obligations from time to time of the LG&E Energy Group companies during the
Authorization Period. Guarantees issued during the Authorization Period by LG&E
Energy would not exceed an aggregate principal amount of USD 1.5 billion and
Guarantees issued during the Authorization Period by the LG&E Energy Group
Nonutility Subsidiaries would not exceed an additional aggregate principal
amount of USD 1.5 billion, in each case based on the amount at risk outstanding
at any one time, exclusive of guarantees that may be exempt pursuant to Rule
45(b).
The request for Guarantee authorization is separate from E.ON's
External Financing Limit or E.ON's Guarantee Limit and is also separate from the
guarantee authorization sought by the Utility Subsidiaries, discussed above. Any
securities issued by the LG&E Energy Group companies which are guaranteed or
otherwise covered by credit support arrangements, will either be issued pursuant
to a Commission order or pursuant to an applicable exemption under the Act.
Any Guarantees or other credit support arrangements outstanding at the
end of the Authorization Period may continue until expiration or termination in
accordance with their terms. The amount of Guarantees outstanding at any one
time shall not be counted against the aggregate respective limits applicable to
external financings or the limits on intra-system financing requested elsewhere
herein. The guarantor will not charge a fee for any such Guarantee which would
exceed the guarantor's cost of obtaining the liquidity necessary to perform the
Guarantee for the period of time the Guarantee remains outstanding. To the
extent that the exposure under any Guarantee is not capable of exact
quantification, the guarantor will estimate its exposure thereunder based on
loss experience or projected potential payment amounts.
5. Continuation of Money Pool
Applicants request authorization to continue to operate three money
pools, as authorized in the 2002 Order and modified with respect to the E.ON
Nonutility Money Pool in Holding Co. Act Release No. 27788 (Dec. 29, 2003). The
Utility Money Pool includes only the Utility Subsidiaries, as borrowers from and
lenders to the pool. E.ON, E.ON NA,/38 Fidelia and LG&E Energy may lend to, but
not borrow from, the Utility Money Pool. LG&E Energy Services Inc. ("LG&E
Services") will continue to act as the administrator of the Utility Money Pool.
The U.S. Nonutility Money Pool includes the Nonutility Subsidiaries as
borrowers from and lenders to the pool. E.ON, E.ON NA, Fidelia and LG&E Energy
may lend to, but not borrow from, the U.S. Nonutility Money Pool. LG&E Services
will continue to act as the administrator of the U.S. Nonutility Money Pool.
The E.ON Nonutility Money Pool may include all E.ON Group companies as
borrowers from and lenders to the pool, except E.ON, the Intermediate Companies,
------------------
38 E.ON NA may also form a wholly-owned special purpose subsidiary for purposes
of lending funds to the Utility Money Pool and the U.S. Nonutility Money Pool.
32
and the LG&E Energy Group companies./39 E.ON and the Intermediate Companies,
however, may lend to, but not borrow from, the E.ON Nonutility Money Pool.
The daily outstanding balance of all borrowings from the Utility Money
Pool during any month will accrue interest at the rate, as published in the Wall
Street Journal on the last business day of the prior calendar month for high
grade 30-day commercial paper issued by major corporations and sold through
dealers (the "WSJ Rate") plus an at-cost allocation of LG&E Services' cost of
managing the money pool. The interest rate paid on loans to the Utility Money
Pool would be the weighted average of the WSJ Rate earned on loans to pool
participants and the interest rate earned by the pool on surplus deposits
invested in high-quality short-term readily marketable instruments./40
LG&E Services would continue to administer the Utility Money Pool on
an "at cost" basis and maintain the records for the pool. The determination of
whether a participant in a money pool has surplus funds to lend to such pool or
should borrow from the pool would be made by each participant's chief financial
officer or treasurer, or by a designee thereof, on the basis of cash flow
projections and other relevant factors, in such participant's sole discretion.
No party would be required to effect a borrowing through a money pool if it is
determined that it could (and had the authority to) effect a borrowing at a
lower cost directly from banks or through the sale of its own commercial paper.
The Utility Subsidiaries' borrowings from the Utility Money Pool would
be counted against their overall short-term borrowing limits stated above. The
U.S. Nonutility Money Pool will be operated on substantially the same terms and
conditions as the Utility Money Pool. The E.ON Nonutility Money Pool is
administered by E.ON
------------------
39 Some E.ON nonutility business subgroups operate a cash management system to
manage cash efficiently within their respective subgroup. Such arrangements
involve loans of the temporary cash surpluses of subgroup members to the
subgroup parent and borrowings by subgroup members that have temporary cash
deficits, all on a daily basis. Subgroup arrangements were authorized by the
2002 Order at 81, n. 101. To the extent the subgroup parent has a net cash
surplus or net cash deficit for the subgroup in the aggregate, the subgroup
parent would deposit funds with or borrow funds from the E.ON Nonutility Money
Pool. Any E.ON subsidiary that is not part of a subgroup (excluding the LG&E
Energy Group) could deposit funds with or borrow funds from the E.ON Nonutility
Money Pool directly, as necessary. Viterra and its subsidiaries have a separate
cash management system which does not deposit funds with or borrow from the E.ON
Nonutility Money Pool. Applicants hereby request authorization to continue such
subgroup cash management arrangements.
40 Funds not required by the Utility Money Pool, the U.S. Nonutility Money Pool,
or the E.ON Nonutility Money Pool to make loans (with the exception of funds
required to satisfy each pool's liquidity requirements) would ordinarily be
invested in one or more short-term investments, including: (i) interest-bearing
accounts with banks; (ii) obligations issued or guaranteed by a European or the
U.S. Government and/or its agencies and instrumentalities, including obligations
under repurchase agreements; (iii) obligations issued or guaranteed by any state
or political subdivision thereof, provided that such obligations are rated not
less than "A" by a nationally recognized rating agency; (iv) commercial paper
rated not less than "A-1" by S&P or "P-1" by Moody's or their equivalent by a
nationally recognized rating agency; (v) money market funds; (vi) bank deposits
and certificates of deposit; (vii) Eurodollar funds; and (viii) such other
investments as are permitted by Section 9(c) of the Act and Rule 40 thereunder.
33
Finance GmbH (formerly, Hibernia Industriewerte GmbH) pursuant to the terms of
the Commission's order in Holding Co. Act Release No. 27788 (Dec. 29, 2003).
6. Acquisition, Redemption or Retirement of Securities
The Applicants request authorization for each company in the E.ON
Group other than EWGs, FUCOs and ETCs to acquire, redeem or retire its
securities or those of its direct and indirect subsidiaries, which securities
may be either outstanding presently or issued and sold in the future from time
to time during the Authorization Period./41 These transactions will be
undertaken at either the competitive market prices for the securities or at the
stated price for those securities, as applicable. The Utility Subsidiaries will
acquire, retire or redeem securities only in accordance with Rule 42. The
redemption or retirement of securities would be effected consistent with
corporate law and state or national law applicable in the jurisdiction where the
company whose securities are being acquired, retired or redeemed is organized
and in accordance with any applicable financing covenants./42 See also Item
1.E.2.(a) hereof with respect to authorization of stock repurchases in
connection with stock based plans and/or stock repurchase programs.
7. Financing Entities
Applicants request authorization for the E.ON Group companies, except
the EWGs, FUCOs and ETCs, to organize new or use existing corporations, trusts,
partnerships or other entities (the "Financing Entities"), to finance the
business of the respective founding company or its subsidiaries. A Financing
Entity/43 would be used to finance the authorized or permitted businesses of its
direct or indirect parent company ("Founding Parent"), including the businesses
of the LG&E Energy Group, but in no event would a Financing Entity engage in
prohibited upstream loans involving companies in the LG&E Energy Group./44
Financing Entities may issue any securities that the Founding Parent would be
authorized to issue under the terms of this Application as
------------------
41 Applicants also request authorization for Fidelia to acquire the debt
securities of companies in the LG&E Energy Group at the stated prices for such
securities, or in open market or negotiated transactions with unaffiliated third
parties. Such authorization would facilitate the efficient refinancing of LG&E
Energy Group debt.
42 See, National Grid Group plc, Holding Co. Act Release No. 27490 (January 16,
2002) (authorizing Niagara Mohawk Holdings, Inc. and its nonutility subsidiaries
to pay dividends or to acquire, retire or redeem their securities without
restriction, to the extent permitted under applicable state and corporate law or
applicable financing covenants).
43 For tax reasons, a Financing Entity may have its own special purpose
subsidiaries that are engaged in financing transactions. References to Financing
Entities herein would include such special purpose subsidiaries which would be
subject to the restrictions on Financing Entities set forth in this Application.
44 Notwithstanding the foregoing, LG&E Energy may organize a Financing Entity to
finance its business and may issue securities to such Financing Entity to
evidence the transfer of financing proceeds by such Financing Company to LG&E
Energy and LG&E Energy may enter into Expense Agreements for the benefit of such
Financing Entity.
34
authorized by the Commission, or Commission rule, regulation or order under the
Act./45 Applicants also requests authorization to issue securities to a
Financing Entity to evidence the transfer of financing proceeds by a Financing
Entity to a company receiving financing. The terms of the securities issued to a
Financing Entity would typically be designed to service the obligations of the
Financing Entity under the securities that it has issued.
As noted above, a Financing Entity would raise funds and finance the
businesses of its Founding Parent company, or the subsidiaries thereof, as
authorized and permitted under the Act. A Financing Entity would finance such
companies on terms and conditions applicable to financings conducted by its
parent as set forth in this Application or permitted by rule, regulation or
order of the Commission.
Securities issued by Financing Entities to third parties would count
against issuance limits set forth in this Application that are applicable to the
Founding Parent of the Financing Entity. To avoid double counting, securities or
guarantees issued by the Founding Parent to the Financing Entity would not count
against the Founding Parent's respective issuance limits./46
Applicants also request authorization to enter into support or expense
agreements ("Expense Agreement") with Financing Entities to pay the expenses of
any such entity. In cases where it is necessary or desirable to ensure legal
separation for purposes of isolating the Financing Entity from its parent or
another subsidiary for bankruptcy purposes, the ratings agencies may require
that any Expense Agreement whereby the parent or subsidiary provides financing
related services to the Financing Entity be at a price, not to exceed a market
price, consistent with similar services for parties with comparable credit
quality and terms entered into by other companies so that a successor service
provider could assume the duties of the parent or subsidiary in the event of the
bankruptcy of the parent or subsidiary without interruption or an increase of
fees. Therefore, Applicants seek approval under Section 13(b) of the Act and
Rules 87 and 90 to provide the services described in this paragraph at a charge
not to exceed a market price but only for so long as such Expense Agreement
established by the Financing Entity is in place./47
8. Changes in Capital Stock of Subsidiaries
The portion of an individual subsidiary's aggregate financing to be
effected through the sale of stock to E.ON or other associate company during the
Authorization Period under Rule 52 and/or under an order issued by the
Commission
------------------
45 For example, if a Financing Entity organized by E.ON issues long-term debt or
preferred stock in a public offering, such securities would, when issued, be
rated investment grade by a nationally recognized statistical rating
organization.
46 The authorization sought herein with respect to financing entities is
substantially similar to prior Commission authorizations. See, e.g., the
Powergen Order, New Century Energies, Inc., Holding Co. Act Release No. 26750
(Aug. 1, 1997); Conectiv, Inc., Holding Co. Act Release No. 26833 (Feb. 26,
1998).
47 See PECO Energy Co., Holding Co. Act Release No. 27483 (December 12, 2001).
35
cannot be ascertained at this time. The proposed sale of capital securities
(i.e., common stock or preferred stock) may in some cases exceed the then
authorized capital stock of such subsidiary. In addition, the subsidiary may
choose to use capital stock with no par value.
Applicants request authorization to change the terms of any
subsidiary's authorized capital stock capitalization or other equity interests
by an amount deemed appropriate by E.ON or other intermediate parent company;
provided that the consents of all other shareholders, if required by applicable
corporate law or the subsidiary's governing documents, have been obtained for
the proposed change. This request for authorization will not affect the
aggregate limits or other conditions contained herein. A subsidiary would be
able to change the par value, or change between par value and no-par stock, or
change the form of such equity from common stock to limited partnership or
limited liability company interests or similar instruments, or from such
instruments to common stock, without additional Commission approval. Additional
terms that may be changed include dividend rates, conversion rates and dates,
and expiration dates. Any such action by a Utility Subsidiary would be subject
to and would only be taken upon the receipt of any necessary approvals by the
state commission in the state or states where the Utility Subsidiary is
incorporated and doing business. E.ON will be subject to all applicable laws
regarding the fiduciary duty of fairness of a majority shareholder to minority
shareholders in any such subsidiary and will undertake to ensure that any change
implemented under this paragraph comports with such legal requirements./48 In
the event that proxy solicitations are necessary with respect to any corporate
reorganization, Applicants state that they will seek Commission approvals as
necessary under Section 6(a)(2) and 12(e) of the Act through the filing of a
declaration.
9. Payment of Dividends Out of Capital or Unearned Surplus
Applicants request authorization that each of the TBD Subsidiaries,
the Retained Nonutility Subsidiaries, the Intermediate Companies, and the LG&E
Energy Group companies (excluding the Utility Subsidiaries), be permitted to
continue to pay dividends with respect to its capital stock, from time to time
through the Authorization Period, out of capital and unearned surplus to the
extent permitted under the corporate law and state or national law applicable in
the jurisdiction where each company is organized and the terms of any credit
agreements and indentures that restrict the amount and timing of distributions
to shareholders./49 In addition, none of such companies will declare or pay any
dividend out of capital or unearned surplus unless it: (i) has received excess
cash as a result of the sale of some or all of its assets; (ii) has engaged in a
restructuring or reorganization; and/or (iii) is returning capital to an
associate company.
------------------
48 See e.g., FirstEnergy Corp., Holding Co. Act Release No. 27459 (Oct. 29,
2001); and Reliant Energy, Inc., et al., Holding Co. Act Release No. 27548 (July
5, 2002).
49 The Commission has granted similar approvals to other registered holding
company groups. See Entergy Corporation, et al., Holding Co. Act Release No.
27039 (June 22, 1999); and Interstate Energy Corporation, et al., Holding Co.
Act Release No. 27069 (Aug. 26, 1999).
36
E.ON anticipates that there will be situations in which one or more of
its direct or indirect subsidiaries will have unrestricted cash available for
distribution in excess of any such company's current and retained earnings. In
such situations, the declaration and payment of a dividend would have to be
charged, in whole or in part, to capital or unearned surplus. As an example, if
a subsidiary were to sell stock of a subsidiary or assets to a third party for
cash, the selling subsidiary would have substantial unrestricted cash available
for distribution, but (assuming no profit on the sale) would not have current
earnings and therefore could not, without the Commission's approval, declare and
pay a dividend to its parent out of such cash proceeds.
Even under circumstances in which a subsidiary has sufficient
earnings, and therefore may declare and pay a dividend to its immediate parent,
such immediate parent may have negative retained earnings, even after receipt of
the dividend, due to losses from other operations. In this instance, cash would
be trapped at a subsidiary level where there is no current need for it. In all
these circumstances, the payment of dividends out of capital or unearned surplus
is appropriate.
10. Nonutility Reorganizations
Applicants request continued authority to restructure, consolidate or
otherwise reorganize E.ON's nonutility holdings, including those in the LG&E
Energy Group, from time to time as may be necessary or appropriate in the
furtherance of the E.ON Group's authorized nonutility activities and to maintain
and support investment in the E.ON TBD Subsidiaries pending divestiture./50 To
effect any such consolidation or other reorganization, E.ON may wish to either
contribute the securities of one nonutility subsidiary to another nonutility
subsidiary (including a newly formed Development Subsidiary, defined below) or
sell (or cause a nonutility subsidiary to sell) the securities or all or part of
the assets of one nonutility subsidiary to another one. Such transactions also
may take the form of the acquisition, directly or indirectly, of the securities
or assets of such subsidiary, either by purchase or by receipt of a dividend.
The purchasing nonutility subsidiary in any transaction structured as an
intrasystem sale of equity securities or assets may execute and deliver its
promissory note evidencing all or a portion of the consideration given. Each
transaction would be carried out in compliance with all applicable U.S. or
foreign laws and accounting requirements./51 In addition, in the event that
proxy solicitations are necessary with respect to any corporate reorganization,
Applicants will seek Commission approvals as necessary under Section 6(a)(2) and
12(e) of the Act through the filing of a declaration./52
------------------
50 The authorization proposed in this section does not involve the Utility
Subsidiaries or any future-acquired public utility subsidiaries in the E.ON
Group.
51 The Commission has authorized other registered holding companies to carry out
future reorganizations of their non-utility businesses without further approval.
See Columbia Energy Group, Inc., Holding Co. Act Release No. 27099 (Nov. 5,
1999); Entergy Corporation, et al., Holding Co. Act Release No. 27039 (June 22,
1999).
52 Sections 12(c), 32(g), 33(c)(1) and 34(d) and Rules 43(b), 45(b), 46(a) and
58, as applicable, may exempt many of the transactions described in this
paragraph. Applicants would seek authorization under the Act for the sale or
transfer of a nonutility subsidiary held by a FUCO to another company in the
E.ON Group, unless the associate company's acquisition of the nonutility
subsidiary being sold or transferred by the FUCO would otherwise be exempt under
the Act, applicable rules such as Rule 58, or under an applicable prior
Commission order.
37
E.ON also requests authorization to acquire, directly or indirectly,
the securities of one or more intermediate subsidiaries ("Development
Subsidiaries") organized exclusively for the purpose of acquiring, financing,
divesting and/or holding the securities of one or more existing or future
nonutility subsidiaries. Development Subsidiaries may also provide management,
administrative, project development, and operating services to such entities.
Restructuring could involve the acquisition of one or more new
special-purpose subsidiaries to acquire and hold direct or indirect interests in
any or all of the E.ON TBD Subsidiaries and the E.ON Group's existing or future
authorized nonutility businesses. Restructuring could also involve the transfer
of existing subsidiaries, or portions of existing businesses, among the E.ON
Group companies and/or the reincorporation of existing subsidiaries in a
different jurisdiction. This would enable the E.ON Group to consolidate similar
businesses, to participate effectively in authorized nonutility activities, and
to position the E.ON TBD Subsidiaries appropriately for eventual sale without
the need to apply for or receive additional Commission approval.
Development Subsidiaries might be corporations, partnerships, limited
liability companies or other entities in which E.ON, directly or indirectly,
might have a 100% interest, a majority equity or debt position, or a minority
debt or equity position. Development Subsidiaries would engage only in
businesses to the extent the E.ON Group is authorized, whether by statute, rule,
regulation or order, to engage in those businesses (including the businesses of
the E.ON TBD Subsidiaries pending divestiture). E.ON commits that the
reorganization authorization requested in this Application will not result in
the entry by the E.ON Group into a new, unauthorized line of business./53
Development Subsidiaries would be organized for the purpose of
acquiring, holding and/or financing the acquisition of the securities of or
other interest in one or more EWGs, FUCOs, Rule 58 subsidiaries, Energy Related
Subsidiaries (defined below), ETCs or other non-exempt nonutility subsidiaries.
Development Subsidiaries may also engage in development activities ("Development
Activities") and administrative activities ("Administrative Activities")
relating to the permitted businesses of the nonutility subsidiaries.
Development Activities will include due diligence and design review;
market studies; preliminary engineering; site inspection; preparation of bid
proposals, including, in connection therewith, posting of bid bonds; application
for required permits and/or regulatory approvals; acquisition of site options
and options on other necessary
------------------
53 E.ON would limit its investment in the TBD Subsidiaries to an aggregate of
USD 1.0 billion. As the Commission recognized in the 2002 Financing Order, E.ON
requires authorization to continue to invest in the TBD Subsidiaries until they
are divested because they must be maintained as going concerns and, in many
cases improved, to position the businesses most appropriately for sale.
38
rights; negotiation and execution of contractual commitments with owners of
existing facilities, equipment vendors, construction firms, power purchasers,
thermal "hosts," fuel suppliers and other project contractors; negotiation of
financing commitments with lenders and other third-party investors; and such
other preliminary activities as may be required in connection with the purchase,
acquisition, financing or construction of facilities or the acquisition of
securities of or interests in new businesses. Administrative Activities will
include ongoing personnel, accounting, engineering, legal, financial, and other
support activities necessary to manage E.ON's investments in nonutility
subsidiaries.
A Development Subsidiary may be organized, among other things, (1) to
facilitate the making of bids or proposals to develop or acquire an interest in
any EWG, FUCO, Rule 58 subsidiary, Energy Related Subsidiary, ETC or other
non-exempt nonutility subsidiary; (2) after the award of such a bid proposal, to
facilitate closing on the purchase or financing of such acquired company; (3) at
any time subsequent to the consummation of an acquisition of an interest in any
such company in order, among other things, to effect an adjustment in the
respective ownership interests in such business held by E.ON and non-affiliated
investors; (4) to facilitate the sale of ownership interests in one or more
acquired nonutility companies; (5) to comply with applicable laws of foreign
jurisdictions limiting or otherwise relating to the ownership of domestic
companies by foreign nationals; (6) as a part of financial optimization or tax
planning to limit E.ON's exposure to German, U.S. and foreign taxes; (7) to
further insulate E.ON and its utility subsidiaries from operational or other
business risks that may be associated with investments in non-utility companies;
or (8) for other lawful business purposes.
Investments in Development Subsidiaries may take the form of any
combination of the following: (1) purchases of capital shares, partnership
interests, member interests in limited liability companies, trust certificates
or other forms of equity interests; (2) capital contributions; (3) open account
advances with or without interest; (4) loans; and (5) guarantees issued,
provided or arranged in respect of the securities or other obligations of any
Development Subsidiaries. Funds for any direct or indirect investment in any
Development Subsidiary will be derived from (1) financings authorized in this
proceeding; (2) any appropriate future debt or equity securities issuance
pursuant to an applicable exemption or authorization obtained by E.ON from the
Commission; and (3) other available cash resources, including proceeds of
securities sales by nonutility subsidiaries pursuant to Rule 52. To the extent
that E.ON provides funds or guarantees directly or indirectly to or for the
benefit of a Development Subsidiary that are used for the purpose of making an
investment in any EWG, FUCO or a Rule 58 Subsidiary, the amount of such funds or
guarantees will be included in E.ON's "aggregate investment" in such entities,
as calculated in accordance with Rule 53 or Rule 58, as applicable.
To the extent such transactions are not exempt from the Act or
otherwise authorized or permitted by rule, regulation or order of the Commission
issued thereunder, Applicants request authorization for the Development
Subsidiaries to provide management, administrative, project development and
operating services to direct or indirect subsidiaries at cost in accordance with
Section 13 of the Act and the rules thereunder, including Rules 90 and 91.
Applicants also propose, however, under certain
39
circumstances to sell services and goods to subsidiaries of E.ON at fair market
prices, under an exemption from the at-cost standard of section 13(b) of the Act
and rules 90 and 91, when the E.ON subsidiary receiving the goods or services
is:
o a FUCO or foreign EWG that does not derive any income, directly or
indirectly, from the generation, transmission or distribution of
electric energy for sale within the United States;
o an EWG that sells electricity to nonassociate companies at
market-based rates approved by the Federal Energy Regulatory
Commission ("FERC");
o a "qualifying facility" under PURPA that sells electricity to
industrial or commercial customers for their own use at negotiated
prices or to electric utility companies at their "avoided cost," as
defined under PURPA;
o a domestic EWG or "qualifying facility" that sells electricity to
nonassociate companies at cost-based rates approved by FERC or a state
commission; and
o a Rule 58 subsidiary or any other authorized subsidiary that: (a) is
partially owned, provided that the ultimate purchaser of the goods or
services is not an associate public-utility company or an associate
company that primarily provides goods and services to associate
public-utility companies; (b) is engaged solely in the business of
developing, owning, operating and/or providing goods and services to
nonutility companies described in items (1) through (4), above; or (c)
does not derive, directly or indirectly, any material part of its
income from sources within the United States and is not a
public-utility company operating within the United States./54
F. EWG and FUCO Subsidiaries
The issuance of securities by E.ON for the purpose of financing any
investment in an EWG or FUCO is subject to regulation under the Act./55 In the
2002 Order, the Commission authorized an aggregate EWG/FUCO investment by E.ON
of up to USD 65 billion. This amount consisted of (i) an initial combined E.ON,
Powergen and LG&E Energy aggregate investment in EWGs and FUCOs of USD 4.886
billion as of December 31, 2001, (ii) the proposed reinvestment of the sale
proceeds of the TBD Subsidiary divestitures in an amount up to USD 35 billion,
and (iii) an additional amount of EWG/FUCO proposed investment of up to USD 25
billion. In this application, E.ON seeks to continue that authorization.
------------------
54 See National Fuel Gas Company, Holding Co. Act Release No. 27487 (December
31, 2001), Entergy Corp., Holding Co. Act Release No. 27039 (June 22, 1999), and
Rule 83.
55 Under Sections 32 and 33 of the Act, E.ON may acquire the securities of an
EWG or FUCO without prior authorization under the Act and an EWG or FUCO may
issue and sell securities without restriction under the Act. Accordingly, E.ON
and its FUCO subsidiaries are not requesting authorization in this Application
with respect to such transactions.
40
E.ON's aggregate EWG/FUCO investment as of June 30, 2004 is USD 13.672
billion./56 That level of investment reflects E.ON's strategy to become a
leading global integrated energy and utility company. E.ON was formed in June
2000 as a result of the merger of German conglomerates VEBA AG and VIAG AG. That
merger left E.ON with hundreds of subsidiaries in the energy, chemicals, real
estate, oil, telecommunications and distribution/logistics businesses. At the
time of its acquisition of Powergen, E.ON had determined to simplify its
diversified businesses and to focus on the energy and utility business.
Accordingly, the company began a dramatic process of transformation through the
disposition of many non-core businesses and the reapplication of capital to core
energy and utility businesses.
For example, E.ON sold VEBA Oel AG, its oil, gas and petrochemical's
business, Stinnes AG and Klockner & Co. AG, its distribution and logistics
businesses, VAW aluminium AG, an aluminum producer, MEMC Electronic Materials
Inc., a silicon wafer manufacturer, Bouygues Telecom, a wireless communications
company, Schmalbach-Lubeca, a packaging manufacturer, and many other businesses.
E.ON has also sold certain companies operating in the energy sector in
connection with rationalizing its businesses or to satisfy regulatory
requirements imposed in connection with the acquisition of additional energy
assets, such as the Ruhrgas AG acquisition. For example, E.ON has sold Viterra
Energy Services to enhance Viterra's focus on the real estate business in
connection with positioning that company for eventual divestiture. E.ON also has
sold its stakes in Bayerngas GmbH, EWE AG and Verbundnetz Gas AG ("VNG") in
connection with the divestment program imposed on E.ON by the ministerial permit
for the acquisition of Ruhrgas AG. In the aggregate, from January 1, 2002
through June 30, 2004, E.ON estimates that it has received approximately EUR
21.8 billion (USD 26.5 billion) from divestitures made in connection with the
transformation of E.ON's business into an integrated power and gas company.
A large portion of these divestiture proceeds were re-deployed to
additional investments in the energy and utility businesses in Europe. The most
significant transaction was the acquisition of Ruhrgas AG, completed in March
2003. Other significant acquisitions include the acquisition of the retail
business of TXU Energi and the acquisition of Midlands Electricity in the U.K.,
and several utilities in Central Europe, including majority interests in two
regional Czech electric utilities, JME and JCE. In the aggregate, E.ON's direct
and indirect investments in electric and gas utilities and related energy
businesses outside the U.S. from the date of E.ON's registration under the Act
on July 1, 2002 to June 30, 2004, total approximately EUR 11.2 billion (USD 13.7
billion).
E.ON now seeks authorization (i) to invest the proceeds from
divestitures (including any completed divestitures as well as future
divestitures), which may total approximately USD 35 billion, in EWG and FUCO
investments;/57 and (ii) to finance
------------------
56 The certification of E.ON UK Holding and E.ON Nordic Holding as FUCOs in
December 2004, will change the aggregate investment figure. The new figure will
be provided by amendment.
57 Although the proceeds of divestitures may be invested in EWGs and FUCOs they
would not be limited to such uses and could be used to finance the activities of
the E.ON Group generally, as authorized or permitted under the Act.
41
additional investments in EWGs and FUCOs in an amount up to USD 25 billion,
provided that during the authorization period E.ON's aggregate investment as
determined under Rule 53 in EWGs and FUCOs would not exceed USD 65 billion (the
"Aggregate EWG/FUCO Financing Limitation"). Accordingly, given E.ON's EWG and
FUCO investment as of June 30, 2004, of USD 13.672 billion, the additional EWG
and FUCO investments that may be made during the Authorization Period would not
exceed USD 51.328 billion (the USD 65 billion proposed maximum aggregate
investment less the USD 13.672 billion current aggregate investment).
Because the timing of the receipt of divestiture proceeds will not
always coincide with the opportunity to invest in additional EWG or FUCO assets,
the authorization requested to reinvest divestiture proceeds would also include
flexibility for E.ON to issue and sell up to USD 35 billion of securities to
finance EWG and FUCO investments pending the receipt of divestiture proceeds
("Bridge Loans"), so that attractive investment opportunities could be pursued
pending the ultimate receipt of divestiture proceeds. Upon the receipt of the
divestiture proceeds, the Bridge Loans or debt securities with an equivalent
principal amount would be retired, redeemed or otherwise paid down./58 Any
issuance of Bridge Loans would count against the E.ON External Financing Limit
or the E.ON Short-term Limit, depending on the maturity of the Bridge Loans.
1. Reinvestment of Proceeds from the Divestiture of Nonutility
Businesses.
E.ON requests authorization, during the Authorization Period, to
continue to reinvest the proceeds of the divestitures of E.ON's existing
businesses in eligible EWG and FUCO assets. Eligible FUCO assets include
non-U.S. electric and gas utilities as well as energy-related and other
functionally related activities such as water utility assets.
The investment of divestiture proceeds in EWGs and FUCOs does not
involve any additional commitment by E.ON to its non-U.S. businesses. Rather,
the substance of the transactions is generally the Euro-for-Euro substitution of
utility or energy-related investments for non-utility investments, and in some
cases the disposition of certain energy-related investments and the acquisition
of other energy-related investments as necessary to rationalize E.ON's overall
business or to comply with regulatory requirements. Unlike the FUCO investments
of U.S. holding companies, no
------------------
58 Bridge Loans could be any combination of securities that E.ON is authorized
to issue under the Act. The issuance of such securities would be subject to all
the restrictions and commitments applicable to securities issuances by E.ON
including E.ON's commitment to maintain a minimum equity capitalization ratio
and E.ON's commitment to maintain an investment grade credit rating. In
addition, E.ON has committed that prior to issuing debt, preferred securities or
equity, E.ON will evaluate the relevant financial implications of the issuance,
including without limit, the cost of capital, and select the security that
provides the most efficient capital structure consistent with sound financial
practices and the capital markets. Likewise, when E.ON is considering what
securities to retire, redeem or otherwise pay down with divestiture proceeds it
will employ a similar analysis with the objective of securing the most efficient
capital structure consistent with sound financial practices and the capital
markets.
42
part of the capital currently invested in E.ON's FUCO and non-utility operations
was derived, directly or indirectly, from U.S. ratepayers.
E.ON's diversified multi-utility portfolio enhances the stability of
its energy and gas utility businesses by reducing the risk of any one operation.
E.ON has substantial experience and expertise in managing a multi-utility
portfolio, as reflected in its earnings from its foreign utility operations.
Further, E.ON subjects its potential EWG and FUCO investments to careful
scrutiny to minimize the risks associated with such investments. This risk
review and management process accords with that outlined in the Commission's
February 7, 2001 proposed rulemaking on foreign utility companies and with the
practice of registered holding companies that have received similar
authorization.
E.ON maintains a corporate structure that separates its foreign
operations, with the exception of the LG&E Energy Group's FUCO holdings, from
its U.S. utility operations, insulating the latter from any adverse effects from
FUCO investments. The organization of the U.S. utility activities under LG&E
Energy reflects E.ON's intent to operate the U.S. utility business in a
financially independent manner.
E.ON commits not to seek to recover any FUCO losses from its Utility
Subsidiaries or their customers. E.ON further commits not to issue additional
debt securities to finance EWG or FUCO acquisitions if at the time of issuance
E.ON's senior debt obligations are not rated investment grade by at least one of
the major rating agencies (i.e., Standard & Poor's Corporation, Fitch Ratings
and Moody's Investor Service), and, as provided in the Financing Parameters,
E.ON commits to maintaining a capital structure in which common equity comprises
at least 30% of its consolidated capitalization.
2. Compliance with Rule 53
E.ON proposes to finance EWG and FUCO investments during the
Authorization Period in an amount up to the Aggregate EWG/FUCO Financing
Limitation. 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 6, 7 and 12 of
the 1935 Act in determining whether to approve a proposal by a registered
holding company to issue securities in order to finance an investment in any EWG
or to guarantee the securities of any EWG. Giving effect to the proposals
contained herein, E.ON will satisfy all of the conditions of Rule 53(a) except
for clause (1).
E.ON's aggregate investment (as defined in Rule 53(a)(1)) in EWGs and
FUCOs as of June 30, 2004, was USD 13.672 billion. As of June 30, 2004, E.ON's
"consolidated retained earnings"/59 calculated in accordance with Rule 53(a)
were USD 21.837 billion. E.ON's aggregate investment represents approximately
62.6% of E.ON's
------------------
59 "Consolidated retained earnings" is the average of consolidated retained
earnings of E.ON as reported for the semiannual periods ended December 31, 2003
and June 30, 2004.
43
"consolidated retained earnings." If additional EWG/FUCO investments up to the
amount of the Aggregate EWG/FUCO Financing Limitation were made, the proposed
aggregate investment of USD 65 billion would represent approximately 298% of
E.ON's "consolidated retained earnings" calculated in accordance with Rule
53(a).
Given that all the standards of Rule 53(a) cannot be satisfied, E.ON
must establish its compliance with Rule 53(c). Rule 53(c) states that, in
connection with a proposal to issue and sell securities to finance an investment
in any EWG, or to guarantee the securities of any EWG, a registered holding
company that is unable to satisfy the requirements of paragraph (a) or (b) of
Rule 53 must "affirmatively demonstrate" that such proposal:
o will not have a substantial adverse impact upon the financial
integrity of the registered holding company system; and
o will not have an adverse impact on any utility subsidiary of the
registered holding company, or its customers, or on the ability of the
State commissions to protect such subsidiary or customers.
In the 2002 Order the Commission concluded that E.ON, like other
foreign registered holding companies, had significant existing FUCO investments,
and that given these pre-registration investments and a showing that the
registered holding company system was financially sound, that the requirements
of Rule 53(c) were satisfied. In several orders under Rule 53(c) issued to U.S.
based registered holding companies (the "100% Orders"), the applicants sought
relief from the safe-harbor requirements of Rule 53(a)(1).60 The Commission
found that the applicants in each of the 100% Orders had demonstrated
successfully, through the use of certain financial indicators, that investing in
EWGs and FUCOs in an amount in excess of 50% of their respective consolidated
retained earnings would not have a substantial adverse impact on the financial
integrity of the holding company system. E.ON presents a similar analysis below.
------------------
60 The Commission has previously analyzed the requirements of Rule 53(c) in
connection with requests by a number of U.S. registered holding companies to
exceed the so-called "50 percent limit" under Rule 53. See Southern Co.
("Southern"), Holding Co. Act Release No. 26501 (April 1, 1996); Central and
South West Corporation ("CSW"), Holding Co. Act Release No. 26653 (Jan. 24,
1997); GPU, Inc. ("GPU"), Holding Co. Act Release No. 26779 (Nov. 17, 1997);
Cinergy Corp. ("Cinergy"), Holding Co. Act Release No. 26848 (March 23, 1998);
American Electric Power Company ("AEP"), Holding Co. Act Release No. 26864
(April 27, 1998); and New Century Energies ("NCE"), Holding Co. Act Release No.
26982 (Feb. 26, 1999), Cinergy Corp., Holding Co. Act Release No. 27190
(aggregate limit in EWGs and FUCOs of USD 1.58 billion consisting of its current
investment of USD 580 million plus USD 1.0 billion additional); Entergy Corp.,
Holding Co. Act Release No. 27184 (June 13, 2000) (aggregate limit of USD 2.7
billion based on average retained earnings in 1999); KeySpan Corp., Holding Co.
Act Release No. 27272 (Nov. 8, 2000); Exelon Corp., Holding Co. Act Release No.
27296 (Dec. 8, 2000) (aggregate investment of USD 4.0 billion).
44
(a) The Proposed Investments Will Not Have a Substantial Adverse
Impact Upon the Financial Integrity of the E.ON System
The use of proceeds from the issuance of debt and equity securities of
E.ON to make additional investments in EWGs and FUCOs in amounts of up to the
Aggregate EWG/FUCO Financing Limitation, and the issuance of, or provision for,
guarantees in connection therewith by E.ON, will not have a "substantial adverse
impact" on the financial integrity of the E.ON Group. This is demonstrated
through analysis of historic trends in E.ON's consolidated capitalization ratios
and retained earnings as well as consideration of E.ON's stringent review
process for new investments.
Capitalization Ratios. Aggregate investments in EWGs and FUCOs as
described above would be a significant commitment of E.ON's capital, based on
various key financial ratios but, nevertheless, appropriate given E.ON's
strategy of refocusing its operations on the utility and energy business. The
following table compares E.ON's proposed investment in an amount up to USD 65
billion and the EWG/FUCO investment amounts authorized for U.S. registered
holding companies, and the foreign registered holding companies, National Grid
Transco plc, Emera Inc. and Scottish Power plc.
Company Authorized Consolidated Consolidated Total Market Value of
FUCO Capitalization Net Property Consolidated Outstanding
Investment Plant and Assets Common Stock
(billions) Equipment
Southern/61 $5.336 24.77% 20.49% 15.23% 21.83%
AEP/CSW/62 $2.1 9.39% 9.53% 5.72% 15.35%
FirstEnergy/GPU/63 $5.0 24.17% 37.68% 15.19% 35.13%
Cinergy/64 $3.536 38.92% 36.73% 25.04% 47.01%
Xcel Energy/65 * 3.07% 2.70% 1.82% 5.08%
Entergy Corp./66 $4.5 26.65% 24.59% 15.76% 30.11%
Exelon/67 $7.0 25.21% 33.93% 16.69% 25.45%
KeySpan/68 $3.0 32.06% 33.73% 20.51% 45.86%
Average U.S. Based 23.03% 24.92% 14.50% 28.23%
National Grid/69 $20.0 50.19% 47.34% 33.67% 74.75%
Emera/70 $2.64 96.94% 127.65% 88.83% 150.31%
------------------
61 See Southern Co., supra note 60.
62 American Elec. Power Co. Inc., Holding Co. Act Release No. 27186 (June 14,
2000).
63 FirstEnergy Corp., Holding Co. Act Release No. 27459 (Oct. 29, 2001), as
modified by FirstEnergy Corp., Holding Co. Act Release No. 27694 (June 30,
2003).
64 Cinergy Corp., Holding Co. Act Release No. 27400 (May 18, 2001).
65 Xcel Energy, Inc., Holding Co. Act Release No. 27494 (March 7, 2002).
66 Entergy Corp., Holding Co. Act Release No. 27184 (June 13, 2000).
67 Exelon Corp., Holding Co. Act Release No. 27830 (April 1, 2004).
68 KeySpan Corp., Holding Co. Act Release No. 27776 (Dec. 18, 2003).
69 National Grid Transco plc, Holding Co. Act Release No. 27898 (Sept. 30,
2004).
45
Scottish Power/71 $4.68 25.67% 27.92% 18.42% 33.67%
Average Non-U.S. 57.60% 67.64% 46.97% 86.25%
Based
Average of Above 32.46% 36.57% 23.35% 44.05%
E.ON $65.0 90.46% 191.29% 46.93% 137.69%
* Actual investments in FUCOs exceeds authorized FUCO investment limit of USD
369 million.
Although the percentages shown in the table indicate that E.ON is on
the high end of the range of precedent, the amount of EWG/FUCO investment
authorization requested in this application is wholly consistent with prior
Commission precedent under the 2002 Order. That precedent remains a valid basis
for holding that the EWG/FUCO investment authorization should continue to be
granted by the Commission in this case because E.ON remains profitable, well
managed and financially sound. E.ON currently has, and has committed to
maintain, its common stock equity (including minority interest) as a percentage
of total capitalization, measured on a book value U.S. GAAP basis, at 30% or
above. E.ON also has, and has committed to maintain, an investment grade senior
unsecured long-term debt rating. With its increased focus on the energy and gas
utility business and the completion of a substantial number of divestitures of
diversified nonutility businesses, it can be argued that E.ON is now more
financially sound and stable than it was at the time of the 2002 Order.
Rule 53(b) Factors. It is noteworthy that none of the financial
conditions described in Rule 53(b) is applicable. First, there has been no
bankruptcy of any E.ON subsidiary company "having assets with book value
exceeding an amount equal to 10 percent or more of consolidated retained
earnings" in which a plan of reorganization has not been confirmed. Second, the
average consolidated retained earnings for the two most recent semiannual
periods has not decreased by 10 percent from the average for the previous two
semiannual periods./72 Third, in the past fiscal year, E.ON has not reported, on
a consolidated basis, operating losses attributable to its direct or indirect
investments in FUCOs. E.ON undertakes to notify the Commission by filing a
post-effective amendment in this proceeding in the event that any of the
circumstances described in Rule 53(b) arise during the Authorization Period.
Other Indicators. Other financial indicators also show the financial
strength of E.ON. For example, E.ON's net income for the six months ended June
30, 2004 was EUR 2,815 million. Similarly, E.ON's basic earnings per share from
continuing operations for the same period was EUR 4.29. E.ON's dividend rate for
the year ended December 31, 2003 was EUR 2.0 per share. In comparison to E.ON's
basic earnings per share from continuing operations of EUR 6.04 for the year
ended December 31, 2003, the dividend payout ratio is 33.1%. In comparison to
E.ON's basic earnings per
------------------
70 Emera Inc., Holding Co. Act Release No. 27865 (June 30, 2004), as
supplemented by Emera Inc., Holding Co. Act Release No. 27906 (October 29,
2004).
71 Scottish Power plc, Holding Co. Act Release No. 27851 (May 28, 2004)
(reserving jurisdiction over a request to increase the EWG/FUCO investment
authorization to USD 12.5 billion.
72 Although Rule 53 specifies quarterly periods, E.ON is not required to prepare
accounts with this frequency.
46
share from net income of EUR 7.11 for the year ended December 31, 2003, the
dividend payout ratio is 28.1%. These figures demonstrate that E.ON is operated
conservatively and that much of its earnings are reinvested in operations.
E.ON's Review Process for New Investments. Another aspect of the
Commission's inquiry into the proposed EWG/FUCO financing focuses on whether
risks associated with the foreign utility businesses could adversely affect the
financial stability of the system. In this regard, E.ON's successful operation
of an international electric and gas utility business indicates that E.ON has
sound management skills and expertise in the utility industry, particularly as
it relates to foreign utility operations. In addition, E.ON utilizes a stringent
review process to assess the risks associated with new investments, including
EWGs and FUCOs, to provide a framework for managing investment decisions and to
establish minimum requirements for the investment process, so that decisions are
made in a consistent, informed and controlled environment.
(b) The Proposed Transactions Will Not have an Adverse Impact on
Any U.S. Utility Subsidiary, Any Customers of a U.S. Utility
Subsidiary, or on the Ability of the State Public Utility
Commissions to Protect Such Customers
E.ON's request for authorization to make investments in EWGs and FUCOs
in amounts up to the Aggregate EWG/FUCO Financing Limitation will not have an
"adverse impact" on the Utility Subsidiaries, their respective customers, or on
the ability of the relevant state commissions to protect the Utility
Subsidiaries or their customers. This is well supported by: (i) the insulation
of the Utility Subsidiaries and their customers from potential direct adverse
effects of investments in EWGs and FUCOs; (ii) analyses of the Utility
Subsidiaries' financial integrity (including ability of the Utility Subsidiaries
to issue senior securities); and (iii) the effectiveness of state commission
oversight.
E.ON's investments in EWGs and FUCOs are and will continue to be
segregated from the Utility Subsidiaries. None of the Utility Subsidiaries will
provide financing for, extend credit to, or sell or pledge its assets directly
or indirectly to any EWG or FUCO in which E.ON owns any interest, except in the
case of EEI, an EWG subsidiary of KU. Any losses that may be incurred by E.ON's
EWGs and FUCOs will have no effect on domestic rates of any Utility Subsidiary.
E.ON commits not to seek recovery in retail rates of the Utility Subsidiaries
for any failed investment in, or inadequate returns from, an EWG or FUCO
investment.
Moreover, to the extent that there may be indirect impacts on the
Utility Subsidiaries from E.ON's EWG or FUCO investments through effects on
E.ON's capital costs, the state commissions regulating the Utility Subsidiaries
can set the cost of capital for electric utilities by comparison with selected
groups of domestic utilities, which may exclude any utilities with adverse
impacts due to EWGs and FUCOs. Therefore, the states have the authority and the
mechanism to prevent any adverse effects on the cost of capital due to
investments in EWGs and FUCOs from being passed on to ratepayers.
47
E.ON will comply with the requirements of Rule 53(a)(3) regarding
limiting the use of the Utility Subsidiaries' employees to provide services to
EWGs and FUCOs. It is contemplated that project development, management and home
office support functions for the FUCOs currently held by E.ON will be largely
performed by the personnel of E.ON's FUCO subsidiaries, by their respective
subsidiary companies, and by outside consultants (e.g., engineers, investment
advisors, accountants and attorneys). Accordingly, E.ON's need for the support
of personnel provided by the Utility Subsidiaries is expected to be very
minimal. E.ON also will comply with the other conditions of Rule 53(a) providing
specific protections to customers of the Utility Subsidiaries and their state
commissions, in particular, the requirements of Rule 53(a)(1) regarding the
preparation and making available of books and records and financial reports
regarding EWGs and FUCOs, and the requirements of Rule 53(a)(4) regarding the
provision of EWG and FUCO-related information to every federal, state and local
regulator having jurisdiction over the retail rates, as applicable, of the
Utility Subsidiaries.
Except with respect to E.ON UK Holding, E.ON Nordic Holding and E.ON
Ruhrgas Holding, which will provide financial statements in accordance with
local GAAP with reconciliations of material variations from U.S. GAAP, E.ON also
will comply with Rule 53(a)(2)(ii), which requires each majority-owned FUCO
subsidiary of a registered holding company to maintain its books, records and
financial statements in conformity with U.S. GAAP and requires the registered
holding company to provide the Commission with access to such books and records.
For each non-majority owned FUCO subsidiary, E.ON will endeavor to comply with
Rule 53(a)(2)(iii), which requires either U.S. GAAP books, records and financial
statements or, upon request, for E.ON to provide a description and
quantification of material variations from U.S. GAAP if another comprehensive
body of accounting principles is followed.
Investments in EWGs and FUCOs will not have any negative impact on the
ability of the Utility Subsidiaries to fund operations and growth. As shown in
the capitalization and credit ratings tables above in Item 1.C.2., the Utility
Subsidiaries are in good financial health. The expectation of continued strong
credit ratings by the Utility Subsidiaries should allow them to continue to
access the capital markets to finance their operations and growth.
Additional investments in EWGs and FUCOs will not have any negative
impact on the Utility Subsidiaries' ability to fund operations and growth.
Present projections indicate that the Utility Subsidiaries will continue to fund
their operations and their construction expenditures primarily from internal
sources of cash and from sales of securities and other borrowings for the next
two years. Moreover, due to their credit ratings the Utility Subsidiaries should
be able to access the capital markets as needed.
The three state commissions having jurisdiction over the Utility
Subsidiaries, namely, Kentucky, Virginia, and Tennessee (collectively, "State
Commissions") have indicated in letters to the Commission that they are able to
protect
48
utility customers within their respective states./73 As set forth in such
letters, the State Commissions have not opposed E.ON's existing authorized level
of investment in EWGs and FUCOs, which levels are consistent with the
authorizations herein requested./74 Additionally, as noted above, the State
Commissions will have the authority to make adjustments in a Utility
Subsidiary's cost of capital to take into account any negative effect from
E.ON's investments in EWGs and FUCOs. For all these reasons, the State
Commissions will have adequate authority to protect the Utility Subsidiaries'
ratepayers from any adverse effect associated with E.ON's investments in EWGs
and FUCOs.
G. Energy Related Subsidiaries
E.ON conducts various businesses outside the U.S. that, but for their
source of revenues would qualify as "energy-related" or "gas-related" under Rule
58. The Commission has, however, found that certain energy-related activities
that would otherwise constitute energy-related companies under Rule 58 but for
their operations outside the U.S. could be conducted internationally by
registered holding company systems./75
E.ON has, for the past several years, engaged in a significant program
of divestiture of its non-utility businesses. E.ON expects to receive within the
next two years additional proceeds from business divestitures that, together
with the proceeds of sales already made, amount to approximately USD 35
billion.76 E.ON proposes to continue to invest some or all of the divestiture
proceeds to build its existing businesses, and to acquire additional interests
in EWGs and FUCOs and permitted non-utility businesses located primarily outside
of the United States. Accordingly, E.ON requests authorization to acquire and to
invest up to USD 10 billion during the Authorization Period in the following
non-utility businesses (the "Energy Related Subsidiaries") without regard to the
source of their revenues:
o energy management services and other energy conservation related
businesses,
------------------
73 See letters to Catherine A. Fisher, Assistant Director, Office of Public
Utility Regulation, from Martin J. Huelsman, Chairman, Commonwealth of Kentucky
Public Service Commission (dated February 4, 2002); from K. David Waddell,
Executive Secretary, Tennessee Regulatory Authority (dated February 4, 2002);
and from Philip R de Haas, Counsel to the Commission, Commonwealth of Virginia
State Corporation Commission (dated February 8, 2002).
74 Section 33(c)(2) provides that the State Commissions may make recommendations
to the Commission regarding a registered holding company's relationships to
FUCOs, and that the Commission shall "reasonably and fully consider" such
recommendations.
75 EUA Cogenex Corp., Holding Co. Act Release No. 26741 (July 15, 1997)
(authorizing EUA Cogenex Corporation and EUA Cogenex-Canada, Inc., both
subsidiaries of the U.S. public utility holding company Eastern Utilities
Associates, to organize a Canadian subsidiary engaged in a range of energy
conservation-related business activities); Energy East Corp., Holding Co. Act
Release No. 27224 (August 31, 2000) (authorizing retention of Xenergy Canada,
Inc., a company providing utility related software services); Cinergy Corp,
Holding Co. Act Release No. 26662 (February 7, 1997) (authorizing Cinergy
Solutions to market energy-related services on a domestic and international
basis).
76 The estimate is for the period January 1, 2002 to July 1, 2007.
49
o the maintenance and monitoring of utility equipment,
o the provision of utility related or derived software and services,
o engineering, consulting and technical services, operations and
maintenance services,
o brokering and marketing electricity and other energy commodities and
providing services such as fuel management, storage and procurement,
o oil and gas exploration, development, production, gathering,
transportation, storage, processing and marketing activities, and
related or incidental activities./77
H. Reporting Requirements
Applicants propose to continue to provide Rule 24 certificates on a
semiannual basis. The Rule 24 certificates will be provided to the Commission
within 180 days after the end of E.ON's fiscal year and within 90 days of the
end of its second fiscal quarter and will contain the following information:
1. The sales of common stock, preferred securities or equity-linked
securities by E.ON, and the purchase price per share and the market
price per share at the date of the agreement of sale which shall also
separately show the amount issued during the reporting period, for
each type of issued securities (common stock, preferred securities or
equity-linked securities).
2. If E.ON common stock has been transferred to a seller as consideration
for the assets or securities of a company being acquired, the number
of shares so issued, the value per share and whether the shares are
restricted in the hands of the acquirer.
3. The amount of guarantees issued during the reporting period by E.ON,
the name of the beneficiary of the guarantee and the terms and purpose
of the guarantee.
4. The amount and terms of any E.ON indebtedness issued during the
reporting period which shall also separately show the amount of
indebtedness issued during the Authorization Period.
5. E.ON's "aggregate investment," as defined under Rule 53, in EWGs and
FUCOs as of the end of the reporting period in dollars and as a
percentage of E.ON's consolidated retained earnings, a calculation of
the amount remaining under the EWG/FUCO investment authorization, and
a description of significant EWG/FUCO investments during the reporting
period.
------------------
77 See Emera Inc., Holding Co. Act Release No. 27865 (June 30, 2004).
50
6. A list showing the current "aggregate investment" under Rule 53, for
each major FUCO market group and other EWG/FUCO holdings.
7. The ratio of investment in EWGs/FUCOs to E.ON's total consolidated
capitalization, the market to book ratio of E.ON's common stock, and
an analysis of the growth in consolidated retained earnings,
segregating total earnings growth attributable to EWG/FUCO investments
from that attributable to other businesses of E.ON.
8. Revenues and adjusted EBIT (earnings before interest and taxes), as
reported by E.ON in its Form 20-F, for each FUCO market group for the
six or twelve months ending as of the end of the reporting period, as
appropriate.
9. A list of the securities issued by the Intermediate Companies during
the reporting period, including principal amount, interest rate, term,
number of shares and aggregate proceeds, as applicable, with the
acquiring company identified.
10. The amount and terms of any short-term debt issued by any Utility
Subsidiary, including the net money pool balances in the Utility Money
Pool as of the end of the reporting period. In addition, a list of the
deposits and withdrawals of each company participating in the Utility
Money Pool during the reporting period will be available to the staff
of the Commission upon request.
11. The amount of any dividends paid out of capital and unearned surplus
by any of the TBD Subsidiaries, the Retained Nonutility Subsidiaries,
the Intermediate Companies, and the LG&E Energy Group companies
(excluding the Utility Subsidiaries), identifying the paying and
receiving company.
12. A table showing, as of the end of the reporting period, the dollar and
percentage components of the capital structures of E.ON, LG&E Energy,
LG&E and KU.
13. A list of borrowings by LG&E Energy Group companies from associated
companies outside the LG&E Energy Group, as of the end of the
reporting period. Information regarding the benchmarking process for
each such borrowing, including quotes from at least three other
sources of funds (with rates and terms) and demonstrating how the Best
Rate Method was applied to such borrowings will be available to the
staff of the Commission upon request.
14. If any consolidated company is a Variable Interest Entity ("VIE"), as
that term is used in FASB Interpretation 46R, Consolidation of
Variable Interest Entities, E.ON will provide a description of the
nature, purpose, size and activities of the VIE in the notes of E.ON's
Annual Report on Form 20-F.
15. As applicable, all amounts shall be expressed in U.S. dollars and
shall be presented in accordance with the U.S. GAAP or the
reconciliation requirements of Form 20-F.
51
Applicants also propose that such certificates, which will include
information with respect to all securities issuances that are exempt under Rule
52, be in lieu of any separate certificates required on Form U-6B-2 pursuant to
Rule 52.
E.ON will also continue to provide the following supplemental
information in its annual Form U5S filing:
1. The amount of any tax credit or loss carryover generated during the
preceding taxable year by E.ON US Investments: (a) as a result of
interest expense on indebtedness incurred in connection with the
acquisition of LG&E Energy, or (b) as the result of any other item of
cost or expense;
2. A description of how the income tax credit and/or income tax liability
was calculated and allocated to all companies included in the
consolidated tax return, showing all of E.ON US Investments' interest
costs and any assumptions used in the calculation;
3. A description of how any funding is effected through all Intermediate
Companies;
4. A description of the amount and character of any payments made by each
Intermediate Company to any other E.ON Group company during the
reporting period; and
5. A statement that the allocation of tax credits and liabilities was
conducted in accordance with the tax allocation agreement in effect
and filed as an exhibit to the Form U5S.
Applicants shall file a report with the Commission within five
business days (in Germany) after the occurrence of any of the following:
1. A 10% or greater decline in common stock equity for U.S. GAAP purposes
since the end of the last semi-annual reporting period for E.ON, LG&E
Energy or either of the Utility Subsidiaries or the capitalization of
any of those companies falls below 30% common stock equity.
2. E.ON or either of the Utility Subsidiaries defaults on any debt
obligation in principal amount equal to or exceeding USD 10 million if
the default permits the holder of the debt obligation to demand
repayment.
3. Any event described in Rule 53(b) under the Act.
4. A nationally recognized statistical ratings organization has
downgraded the senior debt ratings of E.ON or either of the Utility
Subsidiaries by one full rating level (e.g., from A to BBB); or
5. Any event that would have a material adverse effect on the ability of
E.ON or any of its subsidiaries to comply with any condition or
requirement in the Commission order granting this Application on an
ongoing basis.
52
The report shall describe all material circumstances giving rise to the event.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in
connection with the preparation and filing of this Application are estimated not
to exceed USD 45,000. Fees, commissions and expenses paid in connection with any
specific financing transaction will be within the limit set forth in Item 1.C.2
above.
Item 3. Applicable Statutory Provisions
The proposed transactions are subject to Sections 6(a), 7, 9(a), 10,
12(b), 12(c), 12(d) and 13(b) of the Act and Rules 20, 26, 42, 43, 45, 46, 52,
53, 87 and 90 thereunder. To the extent that the proposed transactions are
considered by the Commission to require authorization, exemption or approval
under any section of the Act or the rules and regulations other than those set
forth above, request for such authorization, exemption or approval is hereby
made.
Item 4. Regulatory Approvals
LG&E is subject to regulation by the Kentucky Public Service
Commission (the "Kentucky Commission"). KU is subject to regulation by the
Kentucky Commission, the Virginia State Corporation Commission (the "Virginia
Commission") and the Tennessee Regulatory Authority (the "Tennessee Commission"
and, together with the Kentucky Commission and the Virginia Commission, the
"State Commissions"). All three State Commissions must approve the issuance of
long-term debt, but do not regulate the issuance of short-term debt, whether or
not such short-term debt is secured or unsecured. None of the states separately
regulate the granting of liens on the assets of the public utility company. The
Virginia Commission, however, must approve affiliate transactions involving
utilities.
Most recently, pursuant to an order issued on September 21, 2004, the
Virginia Commission approved the participation of KU in the Utility Money Pool.
Pursuant to an order issued on April 14, 2003, as clarified in an
order dated April 30, 2003, the Kentucky Commission authorized LG&E to obtain up
to USD 300 million in secured intercompany loans from Fidelia. Pursuant to an
order issued on April 14, 2003, as clarified in an order dated April 30, 2003,
the Kentucky Commission authorized KU to obtain up to USD 250 million in secured
intercompany loans from Fidelia. The Virginia Commission authorized the issuance
by KU of up to USD 250 million of secured long-term debt to its affiliate,
Fidelia, in an order dated April 10, 2003. Similarly, on April 7, 2003, the
Tennessee Commission authorized KU to borrow from Fidelia up to USD 250 million
on a secured basis.
No other state commission, and no federal commission, other than the
Commission, has jurisdiction over any of the transactions proposed in this
Application.
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Item 5. Procedure
E.ON respectfully requests that the Commission issue a notice of the
transaction proposed herein forthwith and issue an order granting and permitting
this Application to become effective by May 13, 2005 so that the order is issued
in advance of the expiration of financing authority on May 31, 2005.
Applicants waive a recommended decision by a hearing or other
responsible officer of the Commission for approval of the proposed transactions
and consent to the Division of Investment Management's assistance in the
preparation of the Commission's decision. There should not be a waiting period
between the issuance of the Commission's order and the date on which it is to
become effective.
Item 6. Exhibits and Financial Statements
Exhibits
A List of Additional E.ON Subsidiaries to which this Application Applies.
B-1 Opinion of Counsel*
B-2 Past Tense Opinion of Counsel.*
C Form of Notice.
D E.ON Annual Report on Form 20-F for the year ended December 31, 2004.*
Financial Statements
FS-1 Consolidated Balance Sheet and Statement of Income of E.ON for the year
ended and as of December 31, 2004.*
FS-2 Consolidated Balance Sheet and Statement of Income of Louisville Gas and
Electric Company for the year ended December 31, 2004.*
FS-3 Consolidated Balance Sheet and Statement of Income of Louisville Gas and
Electric Company for the year ended December 31, 2004.*
* To be filed by amendment.
Item 7. Information as to Environmental Effects
The proposed transaction involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicants have duly caused this Application-Declaration to be
signed on their behalf by the undersigned thereunto duly authorized. The
signature of each Applicant is limited to the information provided herein
relating to such Applicant and the relief requested by such Applicant in the
Application-Declaration.
Date: February 2, 2005 E.ON AG, on its behalf and for the benefit of the
direct and indirect nonutility subsidiaries of
E.ON AG listed on Exhibit A hereto.
By: /s/ Dr. Erhard Schipporeit
Name: Dr. Erhard Schipporeit
Title: Member of the Board of Management and
Chief Financial Officer
By: /s/ Karl-Heinz Feldmann
Name: Karl-Heinz Feldmann
Title: Senior Vice President Legal Affairs and
General Counsel
Date: February 2, 2005 E.ON US Holding GmbH
By: /s/ Michael C. Wilhelm
Name: Michael C. Wilhelm
Title: Executive Director
By: /s/ Heinrich Montag
Name: Heinrich Montag
Title: Executive Director
Date: February 2, 2005 E.ON US Investments Corp.
By: /s/ John R. McCall
Name: John R. McCall
Title: Vice President and Secretary
Date: February 2, 2005 LG&E Energy LLC
By: /s/ John R. McCall
Name: John R. McCall
Title: Executive Vice President, General Counsel,
Company Secretary
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Date: February 2, 2005 Louisville Gas and Electric Company
By: /s/ John R. McCall
Name: John R. McCall
Title: Executive Vice President, General Counsel,
Corporate Secretary
Date: February 2, 2005 Kentucky Utilities Company
By: /s/ John R. McCall
Name: John R. McCall
Title: Executive Vice President, General Counsel,
Corporate Secretary
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Exhibit Index
A List of Additional E.ON Subsidiaries to which this Application Applies.
D Form of Notice.
57