SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27654; International Series Release No. ; 70-9985)
E.ON AG et al.
Order Releasing Jurisdiction and Authorizing Changes in Corporate Structure
February 21, 2003
E.ON AG ("E.ON") of Dusseldorf, Germany and Powergen plc ("Powergen") of London, the United Kingdom, both registered holding companies under the Public Utility Holding Company Act of 1935, as amended ("Act"), have filed a post-effective amendment ("Amendment") to their application-declaration ("Financing Application") (70-9985) previously filed under sections 6(a), 7, 9(a), 10 and 12 of the Act and rules 45, 46, 52, 53, and 54 under the Act.
By order dated June 14, 2002 (E.ON AG et al., HCAR No. 27539) ("June Order") the Commission authorized E.ON's acquisition of Powergen ("Acquisition"). The June Order indirectly through Powergen authorized the acquisition of LG&E Energy Corp. ("LG&E Energy"), a public utility holding company exempt by order under section 3(a)(1) of the Act, that in turn owns two public utility companies, Louisville Gas and Electric Company ("LG&E Electric") and Kentucky Utilities Company ("KU"). The June Order also, in this file, approved terms of the financing of the E.ON holding company system as well as certain related transactions.1 E.ON's interest in LG&E Energy is held indirectly through several intermediate holding companies, including Powergen and Powergen US Investments Corp. ("PUSIC"), a US intermediate registered holding company.
The Financing Application requested that the Commission reserve jurisdiction over the issuance of a note by E.ON US Verwaltungs GmbH ("E.ON US")2 in connection with the transfer of PUSIC to E.ON US ("Transfer") until a fair value study is complete and the record has been supplemented to indicate the value assigned to PUSIC under the study and the amount and other terms of the note. To simplify its corporate structure, E.ON proposed to transfer PUSIC from the Powergen chain of companies to E.ON US, a German-organized registered holding company and a direct subsidiary of E.ON.
In the June Order the Commission reserved jurisdiction, pending completion of the record. This Amendment to the Financing Application completes the record with regard to the Transfer and seeks a release of jurisdiction so that E.ON may effect the Transfer. The June Order described the transaction as follows:
Powergen will continue to hold LG&E Energy through the Powergen Intermediate Holding Companies, each of which is a registered holding company, for a period of time not to exceed twelve months after the Acquisition. This will allow time for E.ON to accomplish a reorganization ("Reorganization") in which the ownership of PUSIC (one of the Powergen Intermediate Holding Companies and the immediate parent of LG&E Energy) will be transferred to E.ON US, a direct subsidiary of E.ON. The Merger Applicants state that the reorganized corporate structure will take into account international tax regulations and will clearly separate the domestic utility operations of the Utility Subsidiaries from the other businesses of E.ON and Powergen.
The Merger Applicants expect that the transfer of PUSIC will be made in exchange for cash and/or a note. If issued, it is expected that the note will be in an amount not to exceed the fair market value of PUSIC and will bear interest at a market-based rate. The Merger Applicants request the Commission to reserve jurisdiction over the transfer of PUSIC and the issuance of the note until the record in this matter has been supplemented to indicate the amount and other terms of the note.3
Currently, E.ON holds LG&E Energy through several intermediate registered holding companies. E.ON's first tier subsidiary is E.ON UK Verwaltungs GmbH ("E.ON UK"),4 a German-organized company. E.ON UK owns E.ON UK plc, a UK company, that in turn owns Powergen, also a UK company.5 Powergen owns Powergen US Holdings Limited ("PUSHL"), a UK company, which in turn owns Powergen US Investments ("PUSI"), also a UK company. PUSI owns Powergen Luxembourg sarl ("PLS"), a Luxembourg company, which in turn holds PUSIC, a Kentucky corporation.6 PUSIC owns LG&E Energy, also a Kentucky corporation.
The Transfer will be effected in several steps. First, PLS will transfer 99.5% of its 100% shareholding in PUSIC to E.ON US for market value consideration. E.ON US proposes to pay $1,791,000,000 in cash to PLS as consideration for approximately 99.5% of the outstanding equity of PUSIC. PUSIC's value was established by reference to a valuation report prepared by Standard & Poor's, which was based upon a fair value analysis it had performed to value all of Powergen's assets for purposes of allocating the price paid by E.ON for Powergen to its asset and goodwill accounts. To ensure that no Luxembourg tax is payable on this transfer, PLS is required to retain a shareholding in PUSIC with a value of at least Euro 6 million for more than 12 months.
PLS is expected to use the sale proceeds received on the disposal of its PUSIC interest to subscribe for non-voting shares issued by Powergen UK Securities ("PUKS"), a special purpose financing subsidiary held by Powergen. PUKS will loan these funds to PUSHL, thereby making these funds available to E.ON's UK group of companies.
In the next step, E.ON US contributes its shareholding in E.ON North America Inc. ("E.ON NA") that it had acquired from E.ON and VEBA Electronics US Holding GmbH, an indirect E.ON subsidiary, to PUSIC in exchange for PUSIC common stock.7
In the last step, PLS transfers its residual 0.5% shareholding in PUSIC to E.ON US for market value consideration in cash. PLS uses the sale proceeds to acquire non-voting securities of PUKS as described above. The timing of this last step will occur more than 12 months after the initial transfer of PUSIC to E.ON US described in the first step above.
After the consummation of the Transfer, E.ON will indirectly own LG&E Energy through two intermediate holding companies that are wholly owned directly or indirectly and fully controlled by E.ON: E.ON US and PUSIC. LG&E and KU will remain first-tier subsidiaries of LG&E Energy and will keep their names and headquarters locations. This corporate structure has the advantage of creating a clear separation between the U.S. utility operations in the E.ON group of companies and E.ON's UK businesses. It also involves only German and US corporations as holding companies with respect to the LG&E Energy group.
In connection with the Transfer, E.ON also expects to conduct a minor reorganization of E.ON NA under the authorization to reorganize certain nonutility companies granted in the June Order.8 E.ON NA, a Delaware corporation, has served in the past as the holding company for certain of E.ON's activities in North America, handling finance, legal, tax and other service functions. E.ON NA owns Fidelia Inc. ("Fidelia"), a finance company subsidiary organized under Delaware law.
As noted above, E.ON US will contribute its shareholding in E.ON NA to PUSIC in exchange for additional shares to be issued by PUSIC. Upon completion of this contribution, E.ON NA may distribute its shareholding of Fidelia to PUSIC. Applicants assert that the resulting flatter corporate structure achieves tax efficiencies through the formation of a single US consolidated tax group, and simplifies the overall corporate structure of the E.ON group.
The Transfer will not affect the subscription agreement that is currently in place between PUSIC and Powergen US Securities Ltd. ("PUSSL"). Under that subscription agreement, PUSIC subscribed for $10,000 of ordinary stock of PUSSL and a company that subsequently merged into PUSIC made an initial subscription of $5 million for 5 different classes of non-voting stock issued by PUSSL. The terms of the non-voting stock permit PUSSL to make calls for future subscriptions in respect of those shares of predefined amounts on future dates specified in the Subscription Agreement. PUSIC then sold the ordinary and non-voting PUSSL stock to Powergen Luxembourg Holdings sarl ("PLHS"), a subsidiary of PLS, but under the terms of the Sale and Purchase Agreement retained the obligation to meet the future calls on the non-voting stock. The price paid by PLHS for the non-voting stock ($3.1 billion) therefore amounted to the net present value ("NPV") of the future calls (i.e., effectively their market value on a discounted cash flow basis). The $3.1 billion consideration was used to repay the outstanding liabilities owing by Powergen USA (the former ultimate U.S. parent of LG&E Energy and formerly an intermediate holding company in the Powergen chain) to the intermediate Luxembourg holding companies under the loan notes put in place on the initial acquisition of LG&E Energy by Powergen.
PUSIC therefore has the ongoing commitment to make the calls. The timing and amounts of the calls (and related security arrangements) are very similar to those arising under a debt instrument. As a result, under US GAAP (and for the purposes of determining US taxable income) the payments under the calls (other than the final payment in respect of each class which is treated as a repayment of loan principal) are regarded as interest and the NPV of the obligation to make the future payments is recorded as debt.9
Fees, commissions and expenses of approximately $200,000 are expected to be incurred in connection with the preparation of the Amendment and the Transfer.
Based on the facts in the record, the Commission finds that the applicable standards pf the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and the rules under the Act, that the Application, as amended, be granted, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, under delegated authority.
1 The June Order consolidated and this application (the Financing Application) and File No. 70-9961 ("Acquisition Application"), both as amended.
2 E.ON US Verwaltungs GmbH is in the process of changing its name to E.ON US Holding GmbH.
3 June Order at 20.
4 E.ON UK Verwaltungs GmbH is in the process of changing its name to E.ON UK Holding GmbH.
5 E.ON UK plc and Powergen plc are also in the process of changing to UK private limited companies or "Ltd.s".
6 Since the acquisition of Powergen by E.ON, the following changes have occurred. Ownership of PUSIC has been transferred from Powergen Luxembourg Holdings sarl (10%) and Powergen Luxembourg Investments sarl (90%) to PLS. Powergen Luxembourg Investments sarl (formerly a wholly-owned subsidiary of Powergen Luxembourg Holdings sarl) has been liquidated. Under the June Order, changes to the intermediate holding company chain may be made provided that no change (i) will result in the introduction of any third party interests in the upper structure, (ii) will introduce a non-European Union or non-U.S. entity into the upper structure, or (iii) will have any material impact on the financial condition or operations of LG&E Energy or its public utility subsidiary companies.
7 At or about this point PUSIC will change its name to E.ON US Investments Corp.
8 See June Order at 88.
9 The Acquisition Application noted at 32, n. 27, that "in the event of the E.ON reorganization [i.e., the Transfer], the stock of PUSIC will be transferred from the Powergen Intermediate Holding Companies to E.ON US for value payable in the form of cash or a loan note. PUSIC's obligation in respect of the capital call described above will remain a continuing obligation of PUSIC."