SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27880; 70-10224)

Cinergy Corp., et al.

Order Authorizing Sale of Public Utility Company and Granting Exemption

July 29, 2004

The Cinergy Corporation ("Cinergy"), a Delaware corporation and a registered holding company under the Public Utility Holding Company of 1935, as amended, ("Act"), its subsidiary public utility company Cincinnati Gas & Electric Company, ("CG&E"), an Ohio corporation and INOH Gas, Inc., an Indiana corporation, ("INOH" and, together with Cinergy and CG&E, "Applicants"), all of Cincinnati, Ohio, have filed with the Securities and Exchange Commission ("Commission") an application-declaration, as amended ("Application"), under sections 3(a)(1) and 12(d) of the Act and rules 44 and 54 under the Act. The Commission issued a notice of the filing of the Application on June 2, 2004 (HCAR No. 27852).

Cinergy and CG&E request authority to sell to INOH all of the issued and outstanding common stock of CG&E's wholly-owned subsidiary gas utility company Lawrenceburg Gas Company ("Lawrenceburg"), an Indiana corporation. INOH requests an order under section 3(a)(1) of the Act exempting it from all provisions of the Act except section 9(a)(2).

Cinergy directly or indirectly owns all the outstanding common stock of five public utility companies, the most significant of which are CG&E and PSI Energy, Inc. ("PSI"), an Indiana corporation. PSI is a vertically integrated electric utility operating in Indiana, serving more than 700,000 customers in portions of 69 of the state's 92 counties. Cinergy is also engaged through other subsidiaries and investments in a variety of energy-related nonutility businesses authorized under the Act, by Commission order or otherwise.

CG&E is a combination electric and gas public utility and holding company that provides service in the southwestern portion of Ohio and, through subsidiaries, in nearby areas of Kentucky and Indiana. CG&E's principal subsidiary is The Union Light, Heat and Power Company, which provides electric and gas service in northern Kentucky. CG&E's other utility subsidiaries, Lawrenceburg and Miami Power Corporation, are insignificant to its results of operations. As of and for the year ended December 31, 2003, CG&E reported consolidated total operating revenues of approximately $2.4 billion and consolidated total assets of approximately $5.8 billion.

Lawrenceburg distributes and sells natural gas to approximately 6,100 residential, commercial, industrial and municipal customers over a 60-square mile area in southeastern Indiana. Lawrenceburg owns a gas distribution system located within Indiana consisting of 161 miles of mains and 26 miles of service lines. Lawrenceburg is connected with and sells gas at wholesale to the City of Aurora, Indiana, and is also connected with interstate gas pipeline systems owned by Texas Gas Transmission Corporation and Texas Eastern Transmission Corporation. As of and for the year ended December 31, 2003, Lawrenceburg had total operating revenues of approximately $10.9 million and total assets of approximately $19.4 million, including net property, plant and equipment of approximately $16.2 million. As a "public utility" under the laws of Indiana, Lawrenceburg is subject to regulation by the Indiana Utility Regulatory Commission ("IURC") with respect to such matters as retail rates, service and safety standards, accounts, acquisitions and sales of utility properties and issuance of securities.

INOH is a privately held Indiana corporation formed to acquire the common stock of Lawrenceburg. Upon consummation of the proposed transaction, Lawrenceburg will be a wholly-owned subsidiary of INOH. John S. Browner, the president of INOH, will own all of the voting common stock of INOH and two other individual investors will own all the non-voting preferred stock of INOH. The voting common stock and the non-voting preferred stock will constitute all of the outstanding equity of INOH. INOH owns, and upon consummation of the proposed transaction will own, no other public utility companies.

CG&E and INOH have entered into a Stock Purchase Agreement, dated as of February 27, 2004 ("Purchase Agreement"), in accordance with which CG&E has agreed to sell to INOH, and INOH has agreed to purchase, all of the outstanding shares ("Shares") of common stock, $50 par value per share, of Lawrenceburg. Subject to the terms and conditions of the Purchase Agreement, at the closing of the proposed transaction ("Closing"), INOH has agreed to pay CG&E a purchase price of $16,700,000 in cash for the Shares ("Purchase Price"), subject to potential increase or decrease to the extent that the working capital of Lawrenceburg at the Closing exceeds or is less than the adjusted working capital of Lawrenceburg as of a date shortly before signing of the Purchase Agreement. CG&E will use the net proceeds from the sale of Lawrenceburg to reduce outstanding short-term indebtedness and for general corporate purposes.

Upon consummation of the proposed transaction, INOH, by virtue of its ownership of all of the outstanding common stock of Lawrenceburg, will be deemed a "holding company" under the Act. INOH asserts that it will be entitled to the exemption afforded by section 3(a)(1) of the Act, and accordingly requests that the Commission issue an order under that section of the Act exempting INOH from all provisions of the Act except section 9(a)(2).

In support of that request, INOH states that upon consummation of the proposed transaction, Lawrenceburg will constitute its only public utility subsidiary. Both INOH and Lawrenceburg are incorporated under the laws of Indiana, the same state in which all of Lawrenceburg's public utility operations are conducted. All of Lawrenceburg's gas distribution facilities, which compose substantially all of its physical assets, are likewise located in Indiana, and all of its revenues are derived from sales in Indiana. All of Lawrenceburg's operating revenues for 2003 and for year-to-date 2004 have derived from its utility operations within the state of Indiana. With respect to 2002 and 2003, at least 95 percent of Lawrenceburg's operating revenues derived from its utility operations within the state of Indiana. INOH expects that this level of in-state utility operations (i.e., not less than 95 percent of operating revenues derived from utility operations within the state of Indiana) will continue following consummation of the proposed transaction, after which Lawrenceburg would remain subject to regulation by the IURC. INOH will file with the Commission a certificate under rule 24 within 90 days after December 31 of each year, stating Lawrenceburg's gross operating revenues, net operating revenues, utility operating income, net utility income and net utility plant as of such December 31 or for the year then ended, as appropriate, in each case breaking down (by percentage) the proportion of Lawrenceburg's gross operating revenues, net operating revenues, utility operating income, net utility income and net utility plant derived from activities (or, in the case of net utility plant, located) outside the state of Indiana.

Rule 54 provides that in determining whether to approve the issue or sale of a security by a registered holding company for purposes other than the acquisition of an exempt wholesale generator ("EWG") or a foreign utility company ("FUCO"), or other transactions by that registered holding company or its subsidiaries other than with respect to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of any EWG or a FUCO subsidiary on the registered holding company if paragraphs (a), (b) and (c) of rule 53 are satisfied. Applicants state that Cinergy meets that requirement.¹

The fees, commissions and expenses paid or incurred, or to be paid or incurred, directly or indirectly, by Cinergy and CG&E or any of their associate companies in connection with the proposed transaction are estimated not to exceed approximately $50,000. No state or federal commission, other than this Commission, has jurisdiction over the 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. On the basis of the facts in the record, it is found that the applicable standards of the Act and rules under the Act are satisfied, and 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, and hereby is, 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.

Endnotes

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¹ Applicants state that Cinergy's aggregate investment in EWGs and FUCOs currently exceeds the "safe harbor" afforded by rule 53(a) because its "aggregate investment" (as defined in rule 53(a)(1)) exceeded 50% of its "consolidated retained earnings" (also as defined in rule 53(a)(1)). At March 31, 2004, Cinergy's aggregate investment was approximately $818 million, while its consolidated retained earnings were approximately $1.536 billion. However, the Commission issued an order on May 18, 2001 (HCAR No. 27400 ("May 2001 Order")) authorizing Cinergy to increase its aggregate investment to an amount equal to the sum of 100% of its consolidated retained earnings and $2 billion, excluding certain restructuring investments. Accordingly, at March 31, 2004, Cinergy had the requisite authority under the Act for an aggregate investment totaling $3.536 billion. Therefore, although Cinergy's aggregate investment at that date exceeded the 50% "safe harbor" limitation of rule 53, it was within the higher investment level authorized in the May 2001 Order.

Applicants assert that 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. At March 31, 2004, Cinergy's consolidated capitalization consisted of 42.7% equity and 57.3% debt. Further, at March 31, 2004, Cinergy's senior unsecured debt was rated "investment grade" by all the major rating agencies. In accordance with an order of the Commission dated June 23, 2000 (HCAR No. 27190), Cinergy has committed to maintain a 30% consolidated common equity ratio (subject to certain qualifications), and Applicants assert that the proposed transactions will have no adverse impact on Cinergy's ability to meet that commitment. At March 31, 2004, Cinergy's consolidated common equity ratio was 42.0%.

Applicants state that Cinergy satisfies all of the other conditions of paragraphs (a) and (b) of rule 53. Applicants state that Cinergy maintains books and records in conformity with the requirements of rule 53(a)(2), and that, in incompliance with the limit in 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. Applicants state that in accordance with rule 53(a)(4), Cinergy will concurrently provide a copy of the Application to each regulator referred to there, and will comply with the rule's other requirements concerning the furnishing of information. Applicants state that none of the circumstances enumerated in subparagraphs (1), (2) and (3) of rule 53(b) have occurred.