Holding Company Act Release 27581

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27581; 70-10015)

Cinergy Corp.

Order Authorizing Acquisition and Financing of Nonutility Subsidiaries that provide Infrastructure Services in the United States

October 23, 2002

Cinergy Corp. ("Cinergy") Cincinnati, Ohio, a Delaware corporation and registered holding company under the Act, has filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10, and 11(b)(1) and rule 54 of the Public Utility Holding Company Act of 1935, as amended ("Act"). The Commission issued a notice of the proposed transactions on May 31, 2002 (HCAR No. 27534).

Cinergy requests authority to (1) engage, indirectly through new or existing non-utility subsidiaries to provide infrastructure services ("Infrastructure Services") both within and outside the United States, and (2) invest up to $500 million from time to time through March 31, 2005 ("Authorization Period") in one or more new or existing companies that derive or will derive substantially all of their operating revenues from the sale of Infrastructure Services ("IS Subsidiaries"). Cinergy requests that the Commission reserve jurisdiction over any such sales of Infrastructure Services in any country other than the United States, pending completion of the record. Infrastructure Services will include design, construction (as defined in rule 80(c)), retrofit and maintenance of utility transmission and distribution systems; substation construction; installation and maintenance of natural gas pipelines and laterals, water and sewer pipelines, and underground and overhead telecommunications networks; and installation and servicing of meter reading devices and related communications networks, including fiber optic cable.

I. Background

A. Cinergy System

For the twelve months ended December 31, 2001, Cinergy had consolidated assets of approximately $12.3 billion and operating revenues of approximately $12.9 billion.

Cinergy has two direct, wholly owned utility subsidiaries, The Cincinnati Gas & Electric Company, an Ohio electric and gas utility ("CG&E"), and PSI Energy, Inc., an Indiana electric utility ("PSI"). CG&E has three utility subsidiaries: The Union Light, Heat and Power Company ("ULH&P"), a Kentucky electric and gas utility, Lawrenceburg Gas Company ("Lawrenceburg"), an Indiana gas utility, and Miami Power Corporation ("Miami"), an electric utility (solely by virtue of its ownership of certain transmission assets).

CG&E and its utility subsidiaries provide retail electric and/or gas service in the southwestern portion of Ohio and adjacent areas in Kentucky and Indiana. The area served with electricity, gas or both covers approximately 3,200 square miles and has an estimated population of two million. CG&E produces, transmits, distributes and sells electricity and sells and/or transports natural gas in the southwestern portion of Ohio, serving an estimated population of 1.6 million people in ten of the state's 88 counties including the cities of Cincinnati and Middletown. ULH&P transmits, distributes and sells electricity and sells and transports natural gas in northern Kentucky, serving an estimated population of 338,000 in a 500 square mile area encompassing six counties and including the cities of Newport and Covington.¹ For the twelve months ended December 31, 2001, CG&E had consolidated assets of approximately $5.4 billion and operating revenues of approximately $4.7 billion.

PSI produces, transmits, distributes, and sells electricity in north central, central, and southern Indiana, serving an estimated population of 2.2 million located in 69 of the state's 92 counties including the cities of Bloomington, Columbus, Kokomo, Lafayette, New Albany and Terre Haute. For the nine months ended December 31, 2001, PSI had consolidated assets of approximately $4.6 billion and operating revenues of approximately $4.1 billion.

Cinergy has numerous nonutility subsidiaries, including "exempt wholesale generators" as defined in section 32 of the Act ("EWGs"), "foreign utility companies" as defined in section 33 of the Act ("FUCOs"), "exempt telecommunications companies" as defined in section 34 of the Act ("ETCs"), "energy-related companies" as defined in rule 58 under the Act ("Rule 58 Subsidiaries"), and entities formed to acquire or dispose of sulfur dioxide emissions allowances and to engage in financing transactions in connection with the Clean Air Act Amendments of 1990 (see 42 U.S.C. Section 7651(b) (collectively, "Non-Ordered Nonutility Companies"). Also, under prior Commission orders, dated May 4, 2001 (HCAR No. 27393) ("2001 Order") and March 21, 2002 (HCAR No. 27506 ) ("2002 Order"), Cinergy has acquired the securities of companies formed to provide energy management services and utility-related consulting services anywhere in the world and to engage in the energy commodity marketing and brokering business in Canada and Mexico (collectively, "Ordered Nonutility Companies").

B. Nonutility Subsidiaries' Prior Authorizations

By order dated February 7, 1997 (HCAR No. 26662) ("1997 Order"), as supplemented by the 2001 Order and the 2002 Order, Cinergy is currently authorized to engage, indirectly through one or more existing or new nonutility subsidiaries, in certain categories of nonutility businesses, both within and anywhere outside of the United States, subject to various reservations of jurisdiction.² More specifically, the Commission authorized Cinergy Solutions to market "Energy Management Services" and energy-related "Consulting Services":

• Energy Management Services were defined as: identification (through energy audits or otherwise) of energy and other resource (water, labor, maintenance, materials, etc.) cost reduction or efficiency opportunities; design of facility and process modifications or enhancements to realize such opportunities; management, or direct construction and installation, of energy conservation or efficiency equipment; training of client personnel in the operation of equipment; maintenance of energy systems; design, management or direct construction and installation of new and retrofit heating, ventilating, and air conditioning ("HVAC"), electrical and power systems, motors, pumps, lighting, water and plumbing systems, and related structures, to realize energy and other resource efficiency goals or to otherwise meet a customer's energy-related needs; system commissioning (i.e., monitoring the operation of an installed system to ensure that it meets design specifications); reporting of system results; design of energy conservation programs; implementation of energy conservation programs; provision of conditioned power services (i.e., services designed to prevent, control or mitigate adverse effects of power disturbances on a customer's electrical system to ensure the level of power quality required by the customer, particularly with respect to sensitive electronic equipment); and other similar or related activities.
• Consulting Services are defined as comprising: technical and consulting services involving technology assessments, power factor correction and harmonics mitigation analysis, commercialization of electro-technologies, meter reading and repair, rate schedule analysis and design, environmental services, engineering services, billing services including conjunctive billing, summary billing for customers with multiple locations and bill auditing, risk management services, communications systems, information systems/data processing, system planning, strategic planning, finance, feasibility studies, and other similar or related services.

III. Requested Authority related to InfraStructure Services

Cinergy represents that the Infrastructure Services contemplated in the description above are traditional types of services as authorized in other matters.³ Any one or more new IS Subsidiaries providing Infrastructure Services would be held as direct or indirect subsidiaries of Cinergy, provided that none of the subsidiaries would be held as direct or indirect subsidiaries of CG&E or PSI or any other Cinergy utility subsidiary. The IS Subsidiaries will derive substantially all of their operating revenues from the sale of Infrastructure Services, as defined above. In no case would Infrastructure Services include the acquisition or ownership of "utility assets" within the meaning of section 2(a)(18) of the Act.

Investments in any IS Subsidiary may take the form of an acquisition, directly or indirectly, of the stock or other equity securities of a new subsidiary or of an existing company and any subsequent purchases of additional equity securities and any loans or cash capital contributions to any such company. In addition, any guarantee provided by Cinergy in respect of any payment or performance obligation of any IS Subsidiary will be counted against the proposed investment limit. Cinergy will fund investments in IS Subsidiaries using available cash or the proceeds of financing, as authorized by Commission order dated June 23, 2000 (HCAR No. 27190) ("2000 Order"). Any guarantees provided by Cinergy in respect of any IS Subsidiary would also count against Cinergy's current guarantee authority in the 2000 Order.

Cinergy represents that it will not seek recovery through higher rates to its utility subsidiaries' customers for any losses Cinergy may sustain, or any inadequate returns it may realize, in respect of the proposed transactions.

Any Infrastructure Services performed by any IS Subsidiaries, directly or indirectly, for any associate or affiliate utility companies (as such terms are defined under the Act) will be conducted at cost and otherwise in accordance with the service agreements approved by Commission order dated May 4, 1999 (HCAR No. 27016).

For the purposes of compliance with rule 54, Cinergy states it currently does not meet the conditions of rule 53(a). As of June 30, 2002, Cinergy's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1,323 million. This amount is equal to approximately 99% of Cinergy's average "consolidated retained earnings," also as defined in rule 53(a)(1), for the four quarters ended June 30, 2002, of approximately $1,332 million, which exceeds the 50% "safe harbor" limitation contained in the rule.

By order dated May 18, 2001 (HCAR No. 27400) ("Rule 53(c) Order"), the Commission authorized Cinergy to increase its aggregate investment in EWGs and FUCOs to an amount equal to the sum of (1) 100% of Cinergy's average "consolidated retained earnings" plus (2) $2,000,000,000 (excluding any investments subject to the Restructuring Limit). At March 31, 2002, based on this new investment ceiling, Cinergy could have made an aggregate investment in EWGs and FUCOs of $3,332 million. Therefore, although Cinergy's aggregate investment at June 30, 2002 exceeds the 50% "safe harbor" limitation, it is well within the higher investment level granted by the May 2001 Order.

With respect to capitalization, there has been no material adverse impact on Cinergy's consolidated capitalization resulting from Cinergy's investments in EWGs and FUCOs. As of September 30, 1997, the most recent period for which financial statement information was evaluated in the 1998 Order, Cinergy's consolidated capitalization consisted of 44.1% equity and 55.9% debt. As of June 30, 2002, Cinergy's consolidated capitalization consisted of 42.5 % equity and 57.5 % debt. These ratios are within acceptable ranges, as further reflected by the fact that at June 30, 2002, Cinergy's senior unsecured debt was rated "investment grade" by all the major rating agencies. Cinergy has committed to maintain a 30% consolidated common equity ratio (subject to certain qualifications), and the proposed transactions will have no adverse impact on Cinergy's ability to meet that commitment.

With respect to earnings, Cinergy's interests in EWGs and FUCOs have made consistent and significant contributions to Cinergy's consolidated retained earnings. Cinergy satisfies all of the other conditions of paragraphs (a) and (b) of rule 53. Finally, rule 53(c) by its terms is inapplicable since the proposed transactions do not involve the issue or sale of a security to finance the acquisition of an EWG or FUCO.

Expenses in connection with the preparation of the Application are estimated not to exceed $15,000, and the fees for financing were authorized under the 2000 Order. Applicants state that no other state or federal regulatory approval, other than the approval of the Commission is required to consummate the proposed transactions.

Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Upon the basis of the facts in the record, it is found that, except as to those matters over which jurisdiction has been reserved, the applicable standards of the Act and rules are satisfied, and that no adverse findings are necessary.

IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that, except as to those matters over which jurisdiction has reserved, the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act, including filing a report for the six month period ended June 30 of each year (commencing June 30, 2003) to be filed no later than August 31 of the same year and a report for the six month period ended December 31 of each year (commencing December 31, 2002) to be filed no later than March 31 of the following year. Each report will list all Cinergy subsidiaries that are engaged in the business of providing Infrastructure Services, and include the following:

a. a list of the associate or affiliate utility companies that received Infrastructure Services from such subsidiary;

b. a description of the types of Infrastructure Services provided to each such recipient;

c. the dollar amount of the Infrastructure Services provided to each such recipient;

d. a description of the method used in charging each such recipient for such Infrastructure Services, i.e., cost or if permitted, other than cost (citing the authority for providing the service at other than cost); and

e. a reference to the agreement under which such Infrastructure Services were provided.

Except to the extent any such income statement or balance sheet is included within Cinergy's Annual Report on Form U5S, each report for the period ended December 31 will provide an income statement and balance sheet for each Cinergy subsidiary that provides Infrastructure Services for, and as of, the most recently completed fiscal year.

IT IS FURTHER ORDERED, that jurisdiction is reserved over any sales of Infrastructure Services in any country other than the United States, pending completion of the record.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

¹ Lawrenceburg sells and transports natural gas to approximately 20,000 people in a 60 square-mile area in southeastern Indiana. Miami owns a 138 kV transmission line running from the Miami Fort Power Station in Ohio to a point near Madison, Indiana.

² In the 2001 Order, the commission reserved jurisdiction over: (1) the provision of asset management services, project development and ownership, and consumer services outside of the United States (the services will be based on competitive market rates); (2) any nonutility subsidiary engaging in the brokering and marketing of energy commodities outside of the US and Canada, and (3) the request to invest up to $1 billion over a 10 year period in nonutility energy-related assets and the equity securities of companies substantially all of whose assets are comprised of energy related assets located anywhere in the world that are incidental to and used to support the nonutility subsidiaries energy commodity marketing businesses. The 2002 Order released jurisdiction over the brokering and marketing of energy commodities in Mexico.

³ See, GPU, Inc., et al., HCAR No. 27165 (April 14, 2000) (Approving acquisition of an existing business that provided infrastructure services, MYR Group, Inc.) and Exelon Corporation, HCAR No. 27256 (October 19, 2000) (Permitting retention of nonutility subsidiaries that provide a wide variety of infrastructure services throughout the United States.)

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