May 23, 2002
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Proposed Rule: Acceleration of Periodic Report Filing Dates and Disclosure Concerning Website Access to Reports - File No. S7-08-02 (the "Proposing Release")
Dear Mr. Katz:
Cinergy Corp. ("Cinergy") is pleased to submit this letter in response to the request of the Securities and Exchange Commission (the "Commission") for comments on its proposals to address acceleration of periodic report filing dates and disclosure concerning website access to reports.
Cinergy is a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended. Cinergy is a Fortune 500 company with revenues of approximately $13 billion for fiscal year 2001 and approximately 8,000 employees. Cinergy has a balanced, integrated portfolio consisting of two core businesses: Regulated Operations and Energy Merchant. Cinergy owns regulated delivery operations in Ohio, Indiana, and Kentucky that serve approximately 1.5 million electric customers and approximately 500,000 gas customers. In addition, its Indiana regulated operations own 6,000 megawatts of generation. Cinergy's Energy Merchant business is a Midwest leader in low-cost generation owning 7,000 megawatts of capacity with a profitable balance of stable existing customer portfolios, new customer origination, marketing and trading, and industrial-site cogeneration.
I. Executive Summary
We commend the Commission for its leadership during an uncertain economic environment. The actions taken by the Commission in response to varied market factors have maintained our capital markets as the strongest in the world. Furthermore, we recognize the ongoing changes that are occurring in the marketplace and support the Commission's goal for registrants to provide information that is clear, accurate and timely. In this regard, we do not oppose the Commission's proposal to accelerate the filing date for the Form 10-K to within 60 days after the year-end. We also understand the Commission's concerns regarding the filing date for the Form 10-Q. While we do not believe the proposed accelerated filing date of within 30 days after the quarter-end allows the registrant the necessary time to provide transparent, accurate information to the public at a non-prohibitive cost, we do believe that a filing date of within 40 days after the quarter-end may be manageable.
We believe the Commission's current proposal relating to the accelerated filing date of the Form 10-Q, if adopted, could materially impede the reporting process of providing transparent information and accurate disclosures of increasingly complex accounting requirements. The proposal would also likely cause companies to incur increased costs, without providing significant corresponding benefits to investors and the public interest. We recommend, therefore, the Commission reconsider its proposal relating to the accelerated filing date for the Form 10-Q.
A. Overview of Acceleration of Periodic Reports
Cinergy agrees with the Commission's assessment that quarterly and fiscal year-end financial information is important to the financial markets and that investors demand this information at the earliest time it is available. We are concerned, however, that the goals of fostering disclosure at the earliest possible time and of ensuring that the financial information is accompanied by interpretative guidance and meaningful analytical review may be inconsistent. We believe that the Commission will need to make a judgment as to which of these goals is more important, since the focus on one will clearly impact the other.
Reduction of Preparation and Review Time. The quality of the information disclosed in periodic reports is of vital interest to investors. We, as well as our industry, have grown in both size and complexity over the past few years, and the current filing deadlines permit timetables to be established that allow sufficient time to comply with all filing dates. For Cinergy, the time needed to adequately gather and review financial information and related disclosures has increased substantially. Adding to this timeline are necessary reviews by independent auditors, legal counsel, and the audit committee of the board of directors before these filings are made.
Reducing the time available for steps necessary to complete the periodic reports could result in more "boilerplate" disclosures and will lessen the time available for internal executive management review, as well as those of the independent auditors and audit committee members, all of which could affect the adequacy and transparency of the filings.
Costs and Benefits. Cinergy believes the Commission considerably underestimates the current cost of complying with regulatory requirements. In general, costs to comply with regulatory requirements have increased over the past several years. Reducing the time to file periodic reports would create an even higher peak workload that would result in both quantitative costs, in terms of increased labor costs, as well as qualitative costs, such as the decrease in amount of time dedicated to internal review and interpretation. Although we agree with the Commission's goals, we question whether the perceived benefits outweigh the significant incremental costs involved with the acceleration of filing dates.
Both the Quantity and Complexity of GAAP and Commission Disclosures Have Increased. While recent technological advances have assisted with the preparation of periodic reports, the rules that must be complied with for their preparation - accounting, disclosure, and review - have grown increasingly more complex over the past few years. The Generally Accepted Accounting Principles (GAAP) that must be complied with for the preparation of the financial statements and the related disclosures have increased greatly in quantity and complexity since the filing deadlines were first established for the Form 10-K and Form 10-Q. These include complex accounting standards and disclosures for items such as derivatives, pensions and other postemployment benefits.
In addition, while technological advances have assisted in summarizing and transmitting information within the reports, the majority of man hours are dedicated to the preparation of financial statement footnote disclosures and the interpretative text, including the forward-looking information and discussion of changes in significant accounting policies that are required for the Form 10-K and Form 10-Q. This qualitative review of information requires specific experience and knowledge of current Commission and GAAP requirements and detailed reviews to ensure quality disclosures are provided.
B. Form 10-K Acceleration
Cinergy has successfully filed its Form 10-K within 60 days of its year-end for the past three years. There is very little room for delay, however, with such a tight timeline. Although we believe the current 90-day period for the filing of the Form 10-K would continue to provide the public with timely information and to allow companies sufficient time to establish the necessary work schedules to produce transparent and timely reports, we do not oppose the acceleration of the due date for the Form 10-K.
C. Form 10-Q Acceleration
As described above, Cinergy does not believe it would be in a position to file its periodic report on Form 10-Q within 30 days after its quarter-end without a significant increase in costs (e.g., accelerated closing, more over-time, additional staff), a decrease in the time allotted for internal management and independent auditor review and a potential decrease in the amount of information ultimately provided to the investors and the marketplace. We do believe, however, that an accelerated filing date of within 40 days after the quarter-end would be manageable from a registrant perspective while still serving the Commission's goals. Although such an accelerated deadline would require the company to incur additional costs, we believe these costs would be more balanced against the potential benefits received by the investing public.
Again, we commend the Commission for its initiative to improve the process in which registrants provide clear, accurate and timely information to the marketplace. As described above, however, we believe the current proposals, if adopted, could materially impede the quantity, quality and reliability of the reporting process. The proposed process would also increase costs on registrants without providing significant corresponding benefits to investors and the public interest. We recommend, therefore, the Commission reconsider its proposals relating to the accelerated filing deadlines for periodic reports, and in particular, the Form 10-Q.
/s/ DAVID S. MALTZ
David S. Maltz
Senior Counsel, Cinergy Services, Inc.
cc: The Honorable Harvey L. Pitt, Chairman
The Honorable Cynthia A. Glassman, Commissioner
The Honorable Isaac C. Hunt, Jr., Commissioner
Alan L. Beller, Director, Division of Corporation Finance