SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27788; 70-10171)
E.ON AG, et al.
Order Authorizing Modification of Nonutility Money Pool
December 29, 2003
E.ON AG ("E.ON"), a registered public-utility holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and Hibernia Industriewerte GmbH ("Hibernia"), a wholly owned nonutility subsidiary (together "Applicants"), both Düsseldorf, Germany, have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 6(a), 7, 9(a), 10 and 12(b) of the Act and rules 45 and 54. The Applicants request authorization to modify certain terms of the E.ON nonutility money pool ("E.ON Nonutility Money Pool") permitted by a previous Commission order, dated June 14, 2002 (Holding Co. Act Release No. 27539) ("June 2002 Order"). The Commission issued a notice of the filing of the Application on November 21, 2003 (Holding Co. Act Release No. 27767).
E.ON proposes (1) that the E.ON Nonutility Money Pool be administered by Hibernia, an E.ON subsidiary currently used to provide financing to all of the companies in the E.ON registered holding company system (the "E.ON Group"), and (2) that the interest rate paid to lenders to the pool be set at market rates.
By the June 2002 Order, the Commission authorized E.ON to acquire Powergen plc, a registered public-utility holding company, and, subsequent to the acquisition, E.ON registered as a public-utility holding company. The June 2002 Order also authorized E.ON and its subsidiaries to issue and sell securities and, further, authorized E.ON to establish three money pools, including the E.ON Nonutility Money Pool, to facilitate the financing of the E.ON Group.1 The E.ON Nonutility Money Pool, the subject of the Application, includes as participants all the companies in the E.ON Group, as borrowers and lenders to the pool, except E.ON, the registered holding company subsidiaries of E.ON, and LG&E Energy and its subsidiaries. E.ON and its registered holding company subsidiaries may lend funds to the E.ON Nonutility Money Pool.
Under the June 2002 Order, the E.ON Nonutility Money Pool was authorized to:
be administered by E.ON at no charge or by E.ON NA or its special purpose subsidiary at cost. The interest rate charged by the pool would be set according to the Market Rate Method2 and surplus funds would be invested in the same manner proposed for the Utility Money Pool. The interest rate paid on deposits to the E.ON Nonutility Money Pool [would] be a weighted average of the rates charged borrowers and the money pool investment rate.3
E.ON has proposed that the E.ON Nonutility Money Pool be administered by Hibernia, a different affiliate, and that the interest rate paid to lenders to the pool be set at market rates. First, with respect to the change in the money pool administrator, the Applicants state that Hibernia would receive financial management services from E.ON employees in connection with managing the pool, and conducting Hibernia's other functions, as an E.ON Group financing entity. The Applicants state that these services would be provided at no charge. In addition, the E.ON Nonutility Money Pool will operate as described in the June 2002 Order,4 with a cash management system that is being elaborated on and intended to manage cash efficiently.5
Hibernia is an internal financing subsidiary that borrows from and lends to E.ON Group companies. Hibernia's assets, at December 31, 2002, approximately Euro 9.5 billion, consist of long- and short-term loans that it has made to associate companies in the E.ON Group. Its liabilities consist of an approximately equivalent amount of debt owed to associate companies. These associate company loans to Hibernia were funded to a large degree by the proceeds of various asset divestitures conducted by the E.ON Group as it has restructured into a more focused energy and utility group. Hibernia has no external credit facilities other than the bank credit facility incorporated into the sweep account, part of the cash management system established.6 To the extent it needs additional funding, Hibernia will obtain funds from E.ON. Applicants state that it is not expected that Hibernia would raise funds by offering securities to the public or entering into bank credit facilities. Applicants also state that, although Hibernia functions as an internal source of credit for the E.ON Group, it is not a bank in the traditional sense because it does not accept deposits from or make loans to unaffiliated entities.
Deposits into and loans from the pool fall into two categories. First, when a pool participant expects a temporary cash surplus or deficit, it may make arrangements with Hibernia in advance to lend funds to, or borrow from, Hibernia. Hibernia would borrow from or lend to the pool participants at market rates in connection with these expected surpluses or deficits. Second, a pool participant may have an unexpected cash surplus or deficit. Unexpected deposits into the pool or loans would typically be handled automatically through cash sweeping arrangements. By managing cash balances to accommodate both the expected and unexpected cash flows, Hibernia is able to maximize the return on surplus cash and minimize the cost of cash deficits for the E.ON Nonutility Money Pool. Hibernia also could lend its funds, including funds borrowed from E.ON or other E.ON Group companies, to E.ON Group companies as provided in the June 2002 Order.7
Secondly, Applicants state that authorizing the proposed change in interest rates to the payment of market rates will avoid the transfer pricing issues that arise in loans between affiliated companies when transactions are not priced at market rates.8 Applicants state that the intercompany loans from pool participants to Hibernia for the E.ON Nonutility Money Pool should be priced at market rates in order to meet the transfer pricing and affiliate transactions requirements.9 Applicants state, furthermore, that changing to market interest rates on money pool deposits is fair to a lender because it provides the lender with an arm's-length interest rate that is better, or equivalent to, what a lender could earn in separate bank account.
The Applicants state that the requirement under German law that affiliate transactions be conducted at arm's length makes it important that Hibernia pay pool depositors interest at market rates. Applicants state that, in addition, new legislation recently introduced in the German parliament requires documentation of all transactions with affiliated companies to substantiate that the transactions are conducted at arm's length. Applicants further state that, operating the E.ON Nonutility Money Pool, as currently authorized, may cause Hibernia to pay interest at above-market rates and may conflict with this legislation. Applicants assert that having Hibernia operate the E.ON Nonutility Money Pool to pay market rates on both sides of the pool transactions will provide a solution consistent with the Market Rate Method financing authorization of the Commission in the June 2002 Order, consistent with requirements of German law and be fair to the E.ON Group participants in the pool.
Rule 54 provides that in determining whether to approve certain transactions other than those involving exempt wholesale generators ("EWGs") or FUCOs, as defined in sections 32(a) and 33(a) of the Act, respectively, if rule 53(a), (b) and (c) are satisfied, the Commission will not consider the effect of the capitalization or earnings of any subsidiary which is an EWG or FUCO. E.ON satisfies all of the conditions of rule 53 except rule 53(a)(1).
As of June 30, 2003, E.ON's "aggregate investment," as defined in rule 53(a)(l), in EWGs and FUCOs was approximately $12.5 billion. This amount is within the authorization granted to E.ON in the June 2002 Order. In that order, the Commission authorized E.ON to invest up to $25 billion, plus an additional $35 billion from proceeds of divestments, in EWGs and FUCOs and found that such an investment would not have either of the adverse effects set forth in rule 53(c). Applicants state that there has been no material change in the facts or circumstances surrounding E.ON's capitalization since the June 2002 Order was issued.
At June 30, 2003, E.ON's common equity as a percentage of capitalization was 53.8%. As of June 30, 2003, the common equity ratios of LG&E and KU, E.ON's indirect public-utility subsidiary companies, were 46.8% and 53.6%, respectively. Applicants state that the authorization requested in this Application will have no effect on the consolidated capitalization or retained earnings of E.ON, LG&E or KU. The Applicants assert that LG&E and KU, and their respective customers, will not be affected adversely by approval of the proposal.
The Applicants also state that the requested authorization will not have a material adverse effect on the financial integrity of the E.ON system, or an adverse impact on E.ON's public-utility subsidiaries, their customers or the ability of the state commissions to protect the utility customers within their respective states.10
The fees, commission's and expenses paid or incurred, or to be paid or incurred, directly or indirectly in connection with the proposed transaction by the applicants is expected to be approximately $10,000. The amount would be paid principally to nonaffiliated entities for legal services.
No state commission or any federal commission (other than the Securities and Exchange Commission) has jurisdiction over the proposed transaction.
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. Based on the facts in the record, the Commission finds that the applicable standards of the Act and rules are satisfied and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules, that the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act and provided that E.ON supplement its rule 24 certificates (provided on a semiannual basis, after the end of E.ON's fiscal year and fiscal second quarter) with:
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Jill M. Peterson
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