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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27876; 70-10228)

Cinergy Services, Inc.

Supplemental Order Authorizing Additional Accounting Standards; Amendments to Service Agreements

July 23, 2004

Cinergy Service, Inc., a Delaware corporation ("Cinergy Services" or "Applicant"), Cincinnati, Ohio, a service company subsidiary of Cinergy Corporation ("Cinergy"), a registered holding company, has filed an application ("Application") with the Securities and Exchange Commission ("Commission") under section 13(b) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 54, 90, 91 and 93(d) under the Act. The Commission issued a notice of the filing of the Application on June 18, 2004 (HCAR No. 27859).

Cinergy Services requests a waiver from the requirement under rule 93 of the Act that service companies maintain their books and records as prescribed by rule 257 in accordance with the accounts established in the Commission's Uniform System of Accounts for Mutual Service Companies and Subsidiary Service Companies ("System of Accounts").1 Specifically, Cinergy Services requests a waiver under rule 93(d) to use the chart of accounts in the Federal Energy Regulatory Commission's ("FERC") Uniform System of Accounts Prescribed for Public Utilities and Licensees Subject to Provisions of the Federal Power Act ("FERC Chart of Accounts"),2 instead of the System of Accounts, for all purposes for which Cinergy Services would otherwise use the System of Accounts. Cinergy Services states that the proposed adoption of the FERC Chart of Accounts, which contains additional accounts relevant to Cinergy Services functions not included in the System of Accounts, will permit the Cinergy system to realize process improvements and other efficiencies in its accounting system.3 Cinergy Services also requests authority to amend it existing service agreements to make conforming textual revisions reflecting the proposed use of the FERC Chart of Accounts. In all other respects, Cinergy Services states that it will continue to comply fully with rule 93 and the System of Accounts.4

Cinergy Services was organized to act as a service company subsidiary for Cinergy in connection with the merger that created the Cinergy holding company system.5 Cinergy Services renders its services under separate Commission-approved service agreements with Cinergy's utility and nonutility subsidiaries.6

Applicant states that the Cinergy system intends to implement a new accounting and reporting system in early 2005. Currently, the system maintains multiple charts of account, including the System of Accounts for Cinergy Services and the FERC Chart of Accounts for the FERC-jurisdictional companies. Under the proposed accounting system, the multiple charts of accounts now used throughout the system will be consolidated into a single chart of accounts. Cinergy states that the decision to consolidate the various charts of account into a single chart of accounts reflects Cinergy's view of industry "best practices," including avoidance of account rollup structures,7 and is expected to yield a number of other system benefits, including: 1) improving internal processes; 2) standardizing and streamlining processes; and 3) enhancing reporting system performance. Cinergy Services states that the proposed transactions only affect account-record keeping and reporting presentations and will provide greater transparency regarding its various reporting requirements.

Cinergy currently meets all of the conditions of rule 53(a), except for rule 53(a)(1), which limits Cinergy's "aggregate investment" in exempt wholesale generators ("EWGs"), as defined in section 32 of the Act, and foreign utility companies ("FUCOs"), as defined in section 33 of the Act, to 50% of the system's "consolidated retained earnings," provided that none of the adverse conditions specified in Rule 53(b) exist ("Safe Harbor Limitation").8

Fees and expenses in the estimated amount of $3,000 are expected to be incurred in connection with the proposed transactions. 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 in rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. On the basis of the facts in the record, it is found that the applicable standards of the Act and the rules under the Act are satisfied, and that no adverse findings are necessary.

IT IS ORDERED under the applicable standards of the Act and the rules under the Act that the Application, as amended, is 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.


Margaret H. McFarland
Deputy Secretary


Endnotes

However, regarding rule 53(a)(1), the Commission determined that Cinergy's investments in EWGs and FUCOs in amounts not exceeding the sum of 1.) 100% of its "average consolidated retained earnings," plus; 2.) $2 billion, excluding certain restructuring investments ("Investment Limitation"), would not have either of the adverse effects described in rule 53(c) (HCAR No. 27400; May 18, 2001) ("Rule53(c) Order"). At March 31, 2004, Cinergy's average consolidated retained earnings were approximately $1.5 billion, so that Cinergy's $818 million aggregate investment in EWGs and FUCOs remains below the Investment Limitation. Cinergy continues to be in compliance with the other provisions of rule 53(a) and none of the conditions enumerated in rule 53(b) exist.

The Rule 53(c) Order was predicated, in part, on an assessment of Cinergy's overall financial condition, which considered Cinergy's consolidated capitalization ratio and its retained earnings, both having improved since the order. In the aggregate, Cinergy's investments in EWGs and FUCOs have been profitable for all quarterly periods ending March 31, 2004. As of December 31, 2000, the most recent period for which financial statements were evaluated for the Rule 53(c) Order, Cinergy's consolidated capitalization consisted of 40.4 % common equity and 59.6% debt. As of March 31, 2004, Cinergy's consolidation capitalization consisted of 41.3% equity and 58.7% debt. For the last rating period ended December 31, 2003, Cinergy's senior unsecured debt was rated "investment grade" by all major rating agencies. Further, Cinergy states that its EWG and FUCO investments contributed positively to its consolidated earnings since the Rule 53(c) Order.


http://www.sec.gov/divisions/investment/opur/filing/35-27876.htm

Modified: 07/28/2004