SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27945; 70-10260)
E.ON AG and American Electric Power Company, Inc.
Order Authorizing Sale and Acquisition of Shares of a Public Utility Company
February 10, 2005
E.ON AG ("E.ON"), E.ON US Holding GmbH ("E.ON Holding"), Dusseldorf, Germany, E.ON US Investments Corp. ("EUSIC"), and LG&E Energy LLC, Louisville, Kentucky, ("LG&E Energy" and collectively with E.ON, E.ON Holding and EUSIC, the "E.ON Holding Companies"), registered holding companies under the Public Utility Holding Company Act of 1935, as amended ("Act"), Louisville Gas and Electric Company, Louisville, Kentucky, a public utility subsidiary of LG&E Energy ("LG&E" and together with the E.ON Holding Companies, the "E.ON Applicants"), and American Electric Power Company, Inc., Columbus, Ohio, ("AEP", together with the E.ON Applicants, the "Applicants"), a registered holding company not affiliated with E.ON, have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 8, 9(a), 10, 11(b) 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 November 23, 2004 (HCAR No. 27916).
Applicants seek authorization for the proposed acquisition by LG&E from AEP of 730 shares of common stock, $100 par value ("Shares") of Ohio Valley Electric Corporation ("OVEC"), an Ohio corporation and an electric utility company under the Act ("Transaction").
E.ON, an entity incorporated under the laws of the Federal Republic of Germany, registered as a holding company under the Act on July 1, 2002, as a result of its acquisition of Powergen Limited, formerly known as Powergen plc ("Powergen"). The Commission approved the acquisition of Powergen on June 14, 2002 (HCAR No. 27539 "Acquisition Order"). E.ON owns LG&E Energy, which in turn owns two public utility companies, LG&E and Kentucky Utilities Company ("KU" and together with LG&E, the "E.ON Utility Subsidiaries"). E.ON's interest in LG&E Energy is held indirectly through E.ON Holding and EUSIC, as intermediate holding companies.
AEP, a New York corporation registered as a holding company under the Act, owns, directly, and indirectly through AEP Utilities, Inc. (formerly Central and South West Corporation), a Delaware corporation and registered holding company under the Act, numerous utility and non-utility subsidiaries, including the following public utility subsidiaries: AEP Generating Company, AEP Texas Central Company (formerly Central Power and Light Company), AEP Texas North Company (formerly West Texas Utilities Company), Appalachian Power Company, Columbus Southern Power Company, Indiana Michigan Power Company, Kentucky Power Company, Kingsport Power Company, Ohio Power Company, Public Service Company of Oklahoma, Southwestern Electric Power Company, and Wheeling Power Company (collectively, the "AEP Utility Subsidiaries").
OVEC and its wholly-owned subsidiary, Indiana-Kentucky Electric Corporation ("IKEC"), own two generating stations located in Ohio and Indiana with a combined electric production capability of approximately 2,256 megawatts. OVEC and IKEC are both electric utility companies within the meaning of the Act. OVEC is currently owned by AEP (39.9%), Columbus Southern Power Company, a subsidiary of AEP (4.3%), LG&E (4.9%), KU (2.5%), Allegheny Energy, Inc. (12.5%), The Cincinnati Gas & Electric Company, a subsidiary of Cinergy Corp. (9.0%), The Dayton Power and Light Company, a subsidiary of DPL Inc. (4.9%), Ohio Edison Company, a subsidiary of FirstEnergy Corp. (16.5%), Southern Indiana Gas and Electric Company, a subsidiary of Vectren Corporation (1.5%), and the Toledo Edison Company, also a subsidiary of FirstEnergy Corp. (4.0%).
On April 8, 2004, LG&E and AEP entered into a stock purchase agreement ("Agreement"), under which the parties agreed, subject to certain conditions, including approval of the Transaction by the Commission, that AEP would sell, assign and transfer to LG&E, and that LG&E would purchase from AEP, the Shares upon closing of the Transaction (the "Closing"). LG&E agreed to pay $104,286 ("Purchase Price") for the Shares upon the Closing, which is subject to customary conditions for a transaction of this size and magnitude, all as set forth in the Agreement. LG&E will finance the Transaction with cash on hand.
On April 30, 2004, irrespective of the consummation of the proposed Transaction and not conditioned upon its approval, OVEC and its shareholders, including AEP (and/or its affiliates), LG&E and KU, entered into an Amended and Restated Inter-Company Power Agreement (the "Amended Power Agreement"), to be effective beginning March 2006, upon the expiration of the Power Agreement. In negotiation of the Amended Power Agreement, disputes arose between AEP and LG&E over a number of issues, including their respective ongoing rights to purchase power from OVEC. In order to avoid litigation, and the attendant cost, delay and uncertainty, AEP and LG&E settled these disputes. As part of the settlement, AEP agreed to sell, and LG&E agreed to purchase, the Shares, representing 0.73% of the outstanding common stock of OVEC, at the same price per share paid by AEP in 1990. Upon the effectiveness of the Amended Power Agreement, AEP (and/or its affiliates) and LG&E will receive allocations of marginal cost-based power from OVEC in an amount proportional to their respective ownership interests in OVEC after giving effect to the Transaction.
The proposed transaction is subject to rule 54 under the Act, and meets the requirements set forth in that rule. Rule 54 provides that, in determining whether to approve the issue or sale of any securities for purposes other than the acquisition of any "exempt wholesale generator" ("EWG") as defined in section 32(a) of the Act, or "foreign utility company" ("FUCO") as defined in section 33(a) of the Act, or other transactions unrelated to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs if the requirements of rule 53(a), (b) and (c) are satisfied.1
The fees, commissions and expenses incurred or to be incurred in connection with this Application by E.ON and LG&E are estimated at approximately $10,000. AEP does not expect to incur any out-of-pocket expenses in connection with this Application. Applicants 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 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 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.
Margaret H. McFarland
E.ON asserts that it satisfies all of the conditions of rule 53 except rule 53(a)(1). As of June 30, 2004, E.ON's "aggregate investment," as defined in rule 53(a)(l), in EWGs and FUCOs was approximately $13,672 million. This amount is within the authorization granted to E.ON in the Acquisition Order. In the Acquisition 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). E.ON states that there has been no material change in the facts or circumstances surrounding E.ON's capitalization since the Acquisition Order was issued.
As of June 30, 2004, E.ON's common equity as a percentage of capitalization was 54.8%. The common equity ratios of LG&E and KU as of June 30, 2004 were 49.41% and 53.53%, respectively.
Applicants assert that LG&E and KU and their respective customers would not be adversely impacted by the requested relief. They assert that the authorization requested in the Application (i) would not have a material adverse affect on the consolidated capitalization or retained earnings of E.ON; (ii) would not adversely affect the capitalization or retained earnings of LG&E or KU; and (iii) would not, considered in conjunction with the effect of the capitalization and earnings of E.ON's EWGs and FUCOs, have a material adverse effect on the financial integrity of the E.ON system, or an adverse impact on the E.ON Utility Subsidiaries, their customers or the ability of the state commissions to protect the utility customers within their respective states.
E.ON states that it currently complies with, and will comply with, the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the E.ON system's domestic public utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Further, none of the circumstances described in rule 53(b) has occurred or is continuing.
AEP states that it consummated the merger with Central and South West Corporation, now AEP Utilities, Inc. ("CSW"), on June 15, 2000 in accordance with an order dated June 14, 2000 (HCAR No. 27186), which further authorized AEP to invest up to 100% of its consolidated retained earnings, with consolidated retained earnings to be calculated on the basis of the combined consolidated retained earnings of AEP and CSW ("Rule 53(c) Order").
AEP asserts that it currently meets all of the conditions of rule 53(a), except for clause (1). At June 30, 2004, AEP's "aggregate investment", as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1.558 billion, or about 87.7% of AEP's "consolidated retained earnings", also as defined in rule 53(a)(1), for the four quarters ended June 30, 2004 ($1.777 billion).
With respect to rule 53(a)(1), however, the Commission has determined that AEP's financing of investments in EWGs and FUCOs in an amount greater than the amount that would otherwise be allowed by rule 53(a)(1) would not have either of the adverse effects set forth in rule 53(c). See the Rule 53(c) Order.
AEP asserts that it has complied and will continue to comply with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of operating company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. Further, AEP asserts that none of the circumstances described in rule 53(b)(1) or (3) has occurred or is continuing.
AEP states that circumstances described in rule 53(b)(2) have occurred. As a result of the recording of a loss with respect to impairment charges, AEP's consolidated retained earnings declined for the period ending December 31, 2003. The average consolidated retained earnings of AEP for the four quarterly periods ended June 30, 2004 was $1.777 billion, or a decrease of approximately 25.6% from the company's average consolidated retained earnings for the four quarterly periods ended June 30, 2004 of $2.388 billion. In addition, AEP's "aggregate investment" in EWGs and FUCOs as of June 30, 2004 exceeded 2% of the total capital invested in utility operations.
In the fourth quarter of 2003 AEP recorded pre-tax impairments of assets (including goodwill) and investments totaling $1.4 billion that reflected downturns in energy trading markets, projected long-term decreases in electricity prices, and other factors. The impairments consisted of $650 million related to asset impairments, $70 million related to investment value and other impairment losses, and $711 million related to discontinued operations. Of the discontinued operations, $577 million was attributable to the impairment of the fixed-asset carrying value of AEP's two coal-fired generation plants in the United Kingdom ("U.K. Generation"). AEP recorded a pre-tax impairment of $70 million on certain of its qualifying facilities, as defined under the Public Utility Regulatory Policies Act of 1978, as amended ("QFs"), in the third quarter of 2003.
AEP transferred its equity investments in two FUCOs, Empresa de Electricidade Vale Paranapanema S.A. and Vale and Caiua Servicos de Electricidade S.A. to a co-owner in October 2003, has selected an advisor for the disposition of the UK Generation and has entered into agreements to sell (i) AEP's domestic coal business; (ii) four domestic QFs; and (iii) certain gas pipelines, and continues to have periodic discussions with various parties on business alternatives for certain of its non-core investments. The ultimate timing for a disposition of one or more of these assets will depend upon market conditions and the value of any buyer's proposal.
AEP submits that it meets the requirements of rule 53(c). AEP asserts that if the effect of the capitalization and earnings of EWGs and FUCOs in which AEP has an ownership interest upon the AEP holding company system were considered, there would be no basis for the Commission to withhold or deny approval for the proposal made in the Application. AEP asserts that the authorization requested would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of AEP's EWGs and FUCOs, have a material adverse effect on the financial integrity of the AEP system, or an adverse impact on AEP's Utility Subsidiaries, their customers, or the ability of state commissions to protect such public utility customers. The Rule 53(c) Order was predicated, in part, upon an assessment of AEP's overall financial condition which took into account, among other factors, AEP's consolidated capitalization ratio and the growth trend in AEP retained earnings.
AEP states that as of December 31, 1999, the most recent period for which financial statement information was evaluated in the Rule 53(c) Order, AEP's consolidated capitalization (including CSW on a pro forma basis) consisted of 37.3% common and preferred equity, 61.3% debt and $335 million principal amount of certain subsidiary obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of such subsidiaries ("Trust Preferred Securities") representing 1.4%.
AEP states that as of June 30, 2004, its consolidated capitalization consisted of 63.0% debt, 37.0% common and preferred equity (consisting of common stock representing 36.4% and $133 million principal amount of preferred stock representing 0.6%).
AEP states that the ratio of common equity to total capitalization, net of securitization debt, of each of the Utility Subsidiaries will continue to be maintained at not less than 30% (except for AEP Texas Central Company which will maintain 25% so long as securitization bonds are outstanding). In addition, each of the Utility Subsidiaries is subject to regulation by one or more state commissions that are able to protect utility customers within their respective states.
AEP states that since the date of the Rule 53(c) Order, there has been a reduction in AEP's consolidated equity capitalization ratio; however, AEP asserts, it remains within acceptable ranges and limits of rating agencies for investment grade corporate credit ratings, and, in addition, the Utility Subsidiaries, which will have a significant influence on the determination of the AEP corporate rating, continue to show strong financial statistics as measured by the rating agencies.
AEP states that as of December 31, 1999, Standard and Poor's ("S&P") rating of secured debt for AEP's Utility Subsidiaries was as follows: Appalachian Power Company, A; Columbus Southern Power Company, A-; Indiana Michigan Power Company, A-; Kentucky Power Company, A; Ohio Power Company, A-; AEP Texas Central Company (formerly Central Power and Light Company), A; Public Service Company of Oklahoma, AA-; Southwestern Electric Power Company, AA-; and AEP Texas North Company, A. AEP did not have a long-term debt rating as of December 31, 1999.
AEP states that as of June 30, 2004, S&P's rating of secured debt for AEP's Utility Subsidiaries was as follows: Appalachian Power Company, BBB; Columbus Southern Power Company, BBB; Indiana Michigan Power Company, BBB; Kentucky Power Company, BBB, Ohio Power Company, BBB, AEP Texas Central Company (formerly Central Power and Light Company), BBB; Public Service Company of Oklahoma, BBB; Southwestern Electric Power Company, BBB; and AEP Texas North Company (formerly West Texas Utilities Company), BBB.