SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27779; 70-10172)
Cinergy Corp, et al.
Order Authorizing Acquisitions of Nonutility Companies, Payment of Dividends, Reorganization, and Services
December 22, 2003
Cinergy Corp. ("Cinergy"), a registered holding company, Cinergy's direct nonutility subsidiaries, Cinergy Investments, Inc. ("Cinergy Investments") and Cinergy Global Resources, Inc. ("Global Resources"), CinTec LLC, ("CinTec"), Cinergy Technologies, Inc. ("Cinergy Technologies"), Cinergy Wholesale Energy, Inc. ("Cinergy Wholesale Energy"), KO Transmission Company ("KO"), South Construction Company, Inc. ("South Construction") and Tri-State Company ("Tri-State" and together with Cinergy, "Applicants"), all located in Cincinnati, Ohio, have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10, 12(c), 12(f), 13(b), 32, 33, and 34 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 43, 45, 46, 54, 83, 87, 90, and 91 under the Act. The Commission issued a notice of the Application on November 20, 2003 (HCAR No. 27766).
By order dated March 1, 1999 (HCAR No. 26984) ("1999 Order"), Cinergy1 and its nonutility subsidiaries, Cinergy Investments and Cinergy Global Resources were authorized to establish one or more special-purpose subsidiaries ("Intermediate Parents")2 through December 31, 2003, to hold Cinergy's direct or indirect interests in existing and future nonutility subsidiaries ("Nonutilty Subsidiaries").3
Cinergy states that it now owns numerous Nonutility Subsidiaries, which it holds through, Cinergy Investments, Cinergy Global Resources, CinTec, Cinergy Technologies and Cinergy Wholesale Energy, each of which is a direct, wholly owned Nonutility Subsidiary of Cinergy formed to act as an Intermediate Parent. Applicants state that through authority granted in previous orders4, applicable provisions of the Act and rules under the Act, Applicants have authority to invest in a variety of nonutility businesses, including:
(1) exempt wholesale generator ("EWG"), as that term is defined in section 32 of the Act;
(2) foreign utility company ("FUCO"), as that term is defined in section 33 of the Act;
(3) exempt telecommunications company ("ETC"), as that term is defined in section 34 of the Act;
(4) nonutility company, which, upon acquisition, would qualify for exemption from the Act under rule 58 ("Rule 58 Company");
(5) companies providing certain infrastructure services ("IS Company");
(6) companies providing energy management services and energy-related consulting services outside the United States;
(7) companies brokering and marketing energy commodities in Canada and Mexico; and
(8) certain nonutility energy-related assets ("Energy-Related Asset").
Applicants state that, (i) an "Authorized Nonutility Business" means any nonutility business in which Cinergy is currently authorized or may hereafter become authorized under the Act to invest, and includes, without limitation, the types of nonutility businesses enumerated in (1) through (8) above; (ii) a "Nonutility Subsidiary" means any existing or future associate company of Cinergy (including any Intermediate Subsidiary) formed for the purpose of engaging in an Authorized Nonutility Business; and (iii) a "Nonutility Investment" means any existing or future Authorized Nonutility Business in which Cinergy invests, but which investment does not cause such Authorized Nonutility Business to become an associate company of Cinergy.
II. Current Request
Applicants request authorization for Authorized Nonutility Businesses to engage in the following activities through March 31, 2007 ("Authorization Period"):
(i) acquire the securities of corporations, limited liability companies, partnerships, trusts or other entities that would be formed exclusively to acquire, hold, finance or facilitate the acquisition of, and/or sell goods, services or construction to Nonutility Subsidiaries and/or Nonutility Investments, whether directly or indirectly through one or more subsidiaries thereof formed exclusively for the same purpose ("Intermediate Subsidiaries");5
(ii) undertake internal corporate reorganizations or restructurings of Nonutility Subsidiaries and Nonutility Investments;
(iii) declaration and payment by Nonutility Subsidiaries and KO, South Construction, and Tri-State dividends out of capital or unearned surplus, subject to certain conditions; and
(iv) enter into agreements to perform certain services for certain specified categories of Nonutility Subsidiaries at other than cost under an exemption from section 13(b) under the cost standards of rules 90 and 91, as further detailed below.
B. Acquisition of Intermediate Subsidiaries
Applicants request authority to acquire Intermediate Subsidiaries. Applicants propose that an Intermediate Subsidiary may be organized, among other things: (i) in order to facilitate the making of bids or proposals to develop or acquire an interest in any exempt wholesale generator ("EWG"), as that term is defined in section 32 of the Act, foreign utility company ("FUCO"), as that term is defined in section 33 of the Act, exempt telecommunications company ("ETC"), as that term is defined in section 34 of the Act, or other nonutility company which, upon acquisition, would qualify for exemption from the Act under rule 58 ("Rule 58 Company") or other Authorized Nonutility Business; (ii) after the award of a bid proposal, in order to facilitate closing on the purchase or financing of the acquired company; (iii) at any time subsequent to the consummation of an acquisition of an interest in any of these companies in order, among other things, to effect an adjustment in the respective ownership interests in the business held by Cinergy and non-affiliated investors; (iv) to facilitate the sale of ownership interests in one or more acquired Authorized Nonutility Business; (v) to comply with applicable laws of foreign jurisdictions limiting or otherwise relating to the ownership of domestic companies by foreign nationals; (vi) as a part of tax planning in order to limit Cinergy's exposure to U.S. and foreign taxes; (vii) to insulate Cinergy and its utility subsidiaries from operational or other business risks that may be associated with investments in Authorized Nonutility Business; or (viii) for other lawful business purposes.
Applicants state that investments in Intermediate Subsidiaries may take the form of (i) purchases of capital shares, partnership interests, membership interests in limited liability companies, trust certificates or other forms of voting or non-voting equity interests; (ii) capital contributions; (iii) loans; or (iv) guarantees issued, provided or arranged in respect of the securities or other obligations of any Intermediate Subsidiaries. Applicants state that Cinergy will obtain funds for initial and subsequent investments in Intermediate Subsidiaries from available internal sources or external sources involving issuances of its securities authorized by order dated June 23, 2000 (HCAR No. 27190) ("2000 Order") or any future order supplementing or superseding the 2000 Order in whole or in part. The other Applicants will obtain funds for initial and subsequent investments in Intermediate Subsidiaries from available cash, capital contributions or loans from Cinergy, or external borrowings or sales of capital stock under the exemption afforded by rule 52(b). To the extent that Cinergy provides funds directly or indirectly to an Intermediate Subsidiary that are used for an investment in an EWG or FUCO, a Rule 58 Company, an IS Company, or an Energy-Related Asset, the amount of the funds will be included in Cinergy's "aggregate investment" in the appropriate entity, as calculated in accordance with rule 53 or rule 58, as applicable, or the terms of the Commission order authorizing Cinergy's investment in an IS Company or Energy-Related Asset, as applicable.
C. Nonutility Reorganizations
Applicants seek authority to effect corporate reorganizations or restructurings of Nonutility Subsidiaries and Nonutility Investments. Specifically Applicants request authority (i) for each Nonutility Subsidiary to sell or otherwise transfer the securities or assets (in whole or in part) of any Nonutility Subsidiary or Nonutility Investment to any other Nonutility Subsidiary or Nonutility Investment, and (ii) for each Nonutility Subsidiary to acquire these securities or assets. Alternatively, transfers of these securities or assets may be effected by share exchanges, share distributions or dividends followed by contribution of these securities or assets to the receiving entity, or by mergers or liquidations, or otherwise, and Applicants request approval for these forms of restructuring transactions as well.
Applicants state that the corporate reorganizations or restructurings of Nonutility Subsidiaries and Nonutility Investments would be undertaken in order to eliminate corporate complexities, to combine related business segments for staffing and management purposes, to eliminate administrative costs, to achieve tax savings, or for other ordinary and necessary business purposes. Applicants state that none of these reorganizations or restructurings will involve the sale or other disposition of any utility assets of the Utility Subsidiaries or any corporate reorganization involving the Utility Subsidiaries, nor does the approval sought in this subsection extend to the acquisitions of any new businesses or activities not constituting an Authorized Nonutility Business.
D. Payment of Dividends by Nonutility Subsidiaries
To the extent not otherwise exempt under the Act, Applicants request authority for each Nonutility Subsidiary and KO, South Construction, and Tri-State to declare and pay dividends out of capital or unearned surplus to its respective parent company, where permitted under applicable corporate law, and where the dividend will not be detrimental to the financial integrity or working capital of any company in the Cinergy holding company system. Additionally, Applicants state that, without further approval of the Commission, no Nonutility Subsidiary will declare or pay any dividend out of capital or unearned surplus if that Nonutility Subsidiary derives any material part of its revenues from sales of goods, services, electricity, or natural gas to any of the Utility Subsidiaries or if at the time of the declaration or payment, the Nonutility Subsidiary has negative retained earnings.
E. Exemptions from Section 13(b)
Applicants request authority for Nonutility Subsidiaries to enter into agreements to perform services. Applicants request authority for Nonutility Subsidiaries to perform certain services (namely, project development services and administrative services and other support services)6 for any Nonutility Subsidiary within any of the five categories enumerated immediately below at fair market prices determined without regard to cost, and therefore request an exemption from section 13(b) and the cost standards of rules 90 and 91.
(i) a FUCO or an EWG that derives no part of its income, directly or indirectly, from the generation, transmission, or distribution of electric energy for sale within the United States;
(ii) an EWG that sells electricity at market-based rates which have been approved by the Federal Energy Regulatory Commission ("FERC") or an appropriate state public utility commission, provided that the purchaser of the EWG's electricity is not an affiliated public utility or an affiliate that re-sells such power to an affiliated public utility;
(iii) a "qualifying facility" ("QF"), as defined under the Public Utility Regulatory Policies Act of 1978, as amended ("PURPA"), that sells electricity exclusively at rates negotiated at arm's length to one or more industrial or commercial customers purchasing such electricity for their own use and not for resale, or to an electric utility company other than an affiliated electric utility at the purchaser's "avoided cost" determined under PURPA;
(iv) an EWG or a QF that sells electricity at rates based upon its costs of service, as approved by FERC or any state public utility commission having jurisdiction, provided that the purchaser of the electricity is not an affiliated public utility; or
(v) a Nonutility Subsidiary that is a Rule 58 Company or any other Nonutility Subsidiary that (a) is partially owned, provided that the ultimate purchaser of goods or services is not an affiliated public utility, (b) is engaged solely in the business of developing, owning, operating and/or providing services or goods to Nonutility Subsidiaries described in (i) through (iv) above or (c) does not derive, directly or indirectly, any part of its income from sources within the United States and is not a public utility company operating within the United States.
F. Rule 54 Analysis
Applicants state that Cinergy currently does not meet the conditions of rule 53(a). At September 30, 2003, Cinergy's "aggregate investment," as defined in rule 53(a)(1) was approximately $776 million. At September 30, 2003, Cinergy's "consolidated retained earnings," also as defined in rule 53(a)(1) were approximately $1,479 million. Accordingly, at September 30, 2003, Cinergy's aggregate investment exceeded 50% of its consolidated earnings, the "safe harbor" limitation contained in rule 53(a).
However, Applicants state that Cinergy is within the authorization granted by order dated May 18, 2001 (HCAR No. 27400) ("2001 Order"). In the 2001 order, Cinergy was authorized to invest up to 100% of its consolidated retained earnings plus $2 billion7, or approximately $3.47 billion.
Applicants state that 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. At December 31, 2000, the most recent period for which financial statement information was evaluated in the May 2001 Order, Cinergy's consolidated capitalization consisted of 40.4% equity and 59.6% debt. Applicants state that at September 30, 2003, Cinergy's consolidated capitalization consisted of 40.1% equity and 59.9% debt. Further, at September 30, 2003, Cinergy's senior unsecured debt was rated "investment grade" by all the major rating agencies. Under the June 2000 Order, Cinergy committed to maintain a 30% consolidated common equity ratio and Applicants state that the proposed transactions will have no adverse impact on Cinergy's ability to meet that commitment. At September 30, 2003, Cinergy's consolidated common equity ratio was 39.4%.
Applicants state that Cinergy satisfies all of the other conditions of paragraphs (a) and (b) of rule 53. With reference to rule 53(a)(2), Cinergy maintains books and records in conformity with, and otherwise adheres to, the requirements thereof. With reference to rule 53(a)(3), no more than 2% of the employees of Cinergy's domestic public utility companies render services at any one time, directly or indirectly, to EWGs or FUCOs in which Cinergy directly or indirectly holds an interest. With reference to rule 53(a)(4), Cinergy will comply with the requirements concerning the furnishing of information to state regulators. With reference to rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and (3) have occurred.
G. Rule 24 Certificates
Applicants state that Cinergy will submit the following information to the Commission through certificates filed under rule 24 under the Act, on a semi-annual basis for the six-month periods ended June 30 and December 31 of each year. Applicants state that these reports will be submitted within 60 days after the end of the preceding semi-annual period, commencing with the first full semi-annual period following the issuance of the Commission's order regarding this Application:
(i) an organizational chart showing all of the Intermediate Subsidiaries and Nonutility Subsidiaries as of the end of the preceding semi-annual period, together with identification of any new Intermediate Subsidiaries and Nonutility Subsidiaries formed during such semi-annual period;
(ii) a consolidated balance sheet and income statement for each of Cinergy's first-tier Intermediate Subsidiaries as of the end of the preceding semi-annual period and for the year-to-date period then-ended;
(iii) information regarding any nonutility corporate reorganizations effected during such preceding semi-annual period; and
(iv) information regarding any transactions effected during such preceding semi-annual period pursuant to the exemption from section 13(b) requested in the Application.
Applicants estimate total fees and expenses not to exceed approximately $10,000, consisting chiefly of outside counsel fees and expenses, in connection the Application. Applicants further state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that, except as to the matter over which jurisdiction has been reserved, the applicable standards of the Act 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 the Application be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission by the Division of Investment Management, pursuant to delegated authority.
Jill M. Peterson
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