As filed with the Securities and Exchange Commission on June 11, 2002
File No. 70-09961
United States Securities and Exchange Commission
Washington, D.C. 20549
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Amendment No. 3
to
Form U-1
Application/Declaration
Under the
Public Utility Holding Company Act of 1935
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E.ON AG Powergen plc
E.ON-Platz 1 Powergen US Holdings Limited
40479 Dusseldorf Powergen US Investments
Germany Powergen Luxembourg sarl
Powergen Luxembourg Holdings sarl
Powergen Luxembourg Investments sarl
Powergen US Investments Corp.
City Point
1 Ropemaker Street
London EC2Y 9HT
United Kingdom
(Names of companies filing this statement
and addresses of principal executive offices)
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E.ON AG
(Name of top registered holding company)
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Ulrich Hueppe David Jackson
General Counsel, Executive Vice Company Secretary and General
President Counsel
Dr. Guntram Wuerzberg Powergen plc
Vice President General Legal Affairs City Point
E.ON AG 1 Ropemaker Street
E.ON-Platz 1 London EC2Y 9HT
40479 Dusseldorf United Kingdom
Germany Telephone: 011-44-207-826-2742
Telephone: 011-49-211-4579-388 Facsimile: 011-44-207-826-2889
Facsimile: 011-49-211-4579-610
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
Tia S. Barancik Peter D. Clarke
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Debra J. Schnebel
125 West 55th Street Jones, Day, Reavis & Pogue
New York, NY 10019-5389 77 West Wacker Drive, Ste. 3500
Telephone: (212) 424-8455 Chicago, IL 60601-1692
Facsimile: (212) 424-8500 Telephone: (312) 782-3939
Facsimile: (312) 782-8585
Markian M. W. Melnyk
LeBoeuf, Lamb, Greene & MacRae, L.L.P. Joseph B. Frumkin
1875 Connecticut Ave., N.W. Sullivan & Cromwell
Washington, D.C. 20009-5728 125 Broad Street
Telephone: (202) 986-8212 New York, NY 10004
Facsimile: (202) 986-8102 Telephone: (212)-558-4000
Facsimile: (212) 558-3588
TABLE OF CONTENTS
Item 1. Description of the Proposed Transaction................................2
A. Introduction.....................................................2
1. Background of the Transaction................................2
2. E.ON Generally...............................................3
a. Energy - E.ON Energie....................................4
b. Chemicals - Degussa AG...................................5
c. Real Estate - Viterra AG.................................6
d. Oil - VEBA Oel...........................................6
e. Telecommunications - E.ON Telecom GmbH and VIAG
Telecom Beteiligungs GmbH................................7
f. Distribution and Logistics - Stinnes AG and Klockner
& Co. AG.................................................7
g. Aluminum - VAW aluminium AG..............................7
h. Silicon Wafers - MEMC Electronic Materials Inc...........7
i. RAG......................................................8
j. Divestiture Program Generally............................8
3. Powergen Generally...........................................9
a. Powergen UK..............................................9
b. LG&E Energy.............................................10
c. Powergen International..................................12
B. Description of the Acquisition..................................12
1. Introduction................................................12
2. The Scheme..................................................12
3. The Offer...................................................13
4. Loan Note Alternative.......................................15
5. Conditions to the Offer.....................................15
C. Financing the Acquisition and the Resulting Financial and
Corporate Structure.............................................17
D. E.ON's Shareholders.............................................19
E. Management of the Combined System...............................19
F. Regulatory Environment..........................................20
1. Generally...................................................20
2. Restructuring Activity in the U.S...........................21
G. Service Company.................................................22
Item 2. Fees, Commissions and Expenses........................................22
Item 3. Applicable Statutory Provisions.......................................22
A. Legal Analysis of the Acquisition...............................23
B. Undue Concentration.............................................24
C. Reasonableness of Consideration.................................27
D. Capital Structure and Corporate Structure Complication..........30
E. Compliance with State Law.......................................43
F. Integrated Public Utility System................................44
G. Retention of Nonutility Subsidiaries............................50
1. E.ON's Nonutility Subsidiaries..............................50
a. Degussa.................................................51
b. Viterra.................................................54
c. RAG.....................................................56
2. Powergen's Nonutility Businesses............................66
H. EWG/FUCO-Related Financings.....................................66
I. Investments in TBD Subsidiaries.................................68
J. E.ON's Investments in Portfolio Securities......................69
K. Intrasystem Provision of Services...............................71
1. LG&E Services and the LG&E Energy Group.....................71
2. Services provided by Powergen Group and E.ON Group..........72
3. Exemptions for Transactions with Non-utility Companies......73
4. Interaction with Other Regulatory Agencies..................74
5. Restriction on Amendments...................................75
L. E.ON's Water Operations.........................................76
M. Reporting Requirements..........................................80
Item 4. Regulatory Approvals..................................................80
Item 5. Procedure.............................................................84
Item 6. Exhibits and Financial Statements.....................................84
Item 7. Information as to Environmental Effects...............................86
Certain Defined Terms
1. "Applicants" means E.ON, Powergen and the Powergen Intermediate Holding
Companies.
2. "E.ON" means E.ON AG.
3. "E.ON Energie" means E.ON Energie AG.
4. "E.ON Group" means E.ON and all of its direct and indirect subsidiary
companies.
5. "E.ON UK" means E.ON U.K. Verwaltungs GmbH.
6. "E.ON US" means E.ON U.S. Verwaltungs GmbH.
7. "GAAP" means generally accepted accounting principles.
8. "Intermediate Companies" means E.ON US and Powergen US Investments Corp.
("PUSIC"), following the transfer of PUSIC and the LG&E Energy Group
indirectly to E.ON U.S.
9. "KU" means Kentucky Utilities Company.
10. "LG&E" means Louisville Gas and Electric Company.
11. "LG&E Energy" means LG&E Energy Corp.
12. "LG&E Energy Group" means LG&E Energy and all of its direct and indirect
subsidiary companies.
13. "Nonutility Subsidiaries" means all of the subsidiary companies of LG&E
Energy except the Utility Subsidiaries.
14. "Powergen" means Powergen plc.
15. "Powergen Group" means Powergen and all of its direct and indirect
subsidiary companies.
16. "Powergen UK Group" means Powergen, Powergen Group Holdings Ltd. and all of
the direct and indirect subsidiary companies of Powergen Group Holdings
Ltd.
17. "Powergen Financing Entities" means Powergen US Holdings Limited, Powergen
US Funding LLC and the subsidiaries of Powergen US Holdings Limited,
following the transfer of PUSIC and the LG&E Energy Group indirectly to
E.ON U.S.
18. "Powergen Intermediate Holding Companies" means Powergen US Holdings
Limited, Powergen US Investments, Powergen Luxembourg sarl, Powergen
Luxembourg Holdings sarl, Powergen Luxembourg Investments sarl and Powergen
US Investments Corp.
19. "Utility Subsidiaries" means LG&E and KU.
This pre-effective Amendment No. 3 replaces and revises the Form U-1
Application - Declaration in this proceeding originally filed in File No.
70-9961 on September 4, 2001, and subsequently amended by Amendment No. 1, filed
on October 23, 2001 and Amendment No. 2, filed on December 21, 2001. It does not
replace exhibits previously filed.
Item 1. Description of the Proposed Transaction
A. Introduction
This Application/Declaration (the "Application") requests the
authorization of the Securities and Exchange Commission (the "Commission" or
"SEC") for the proposed acquisition of Powergen plc ("Powergen") by E.ON AG
("E.ON") (the "Acquisition"), and for certain related transactions. Commission
authorization of the Acquisition is required under Sections 9(a)(2) and 10 of
the Public Utility Holding Company Act of 1935 (the "1935 Act" or "Act") because
E.ON's acquisition of Powergen will result in E.ON's indirect acquisition of
Powergen's U.S. holding company, LG&E Energy Corp. ("LG&E Energy"), and its
public utility company subsidiaries Louisville Gas and Electric Company ("LG&E")
and Kentucky Utilities Company ("KU").
Following consummation of the Acquisition, E.ON will register with the
Commission as a holding company under Section 5 of the Act.
1. Background of the Transaction
E.ON seeks to become a leading global integrated energy and utility
company. The acquisition of Powergen is a natural step in furtherance of E.ON's
effort to build a global presence and will provide E.ON with a leading
pan-European position in energy utilities. Powergen also provides E.ON with a
significant presence in the U.K., the third largest European electricity market
and brings with it substantial energy trading experience.
At the same time, E.ON's indirect acquisition of LG&E Energy provides
a platform for E.ON to build a profitable position in the U.S. LG&E Energy has
been ranked number one in cross industry customer surveys and benefits from a
high quality asset base and regional price and cost advantages. E.ON expects to
utilize the high quality management of Powergen and LG&E Energy to expand its
presence in the U.S. In addition, E.ON's financial strength and utility
expertise can help to build LG&E Energy into a stronger company. For example,
the greater employment opportunities associated with a multinational corporation
such as E.ON should help attract (and keep) the most skilled and motivated
employees to LG&E Energy and its subsidiaries.
E.ON believes LG&E Energy is the ideal nucleus about which to expand
its U.S. energy and utility operations. The U.S. energy market is eight times
the size of the German energy market and the highly fragmented nature of the
U.S. energy and utility industry presents significant opportunities to grow,
both organically and by acquisition. E.ON is the right company to grow LG&E
Energy. E.ON brings unrivaled experience and resources to the task, as the
world's largest investor-owned utility. E.ON's market capitalization of
approximately Euro 39.5 billion (approximately $35.7 billion/1) as of April 6,
2001 (the last business day before the
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1 Throughout this Application, unless otherwise indicated, amounts
originally in Euros were converted at $0.88: Euro 1 and amounts in British
Pounds were converted at $1.43 : Pound 1. To maintain consistency with certain
previously published financial information, however, amounts stated in Euros as
of December 31, 2000, have been converted to dollars at the rate of 1 Euro =
$0.9388, and amounts as of September 30, 2001 and December 31, 2001, were
converted at the rate of 1 Euro = $0.9131 and 1 Euro = $0.8901, respectively.
2
public announcement of the preconditional offer), and its financial strength
equals or exceeds that of any company in the U.S. energy/utility industry./2
In addition to providing greater global scale, the acquisition of
Powergen will accelerate E.ON's strategic move towards a pure-play, globally
integrated energy and utility business. E.ON intends to divest its non-energy
and non-utility related assets over three to five years and to reinvest the
proceeds of these sales to grow core energy and utility activities. E.ON's
Management Board and Powergen's management share a common managerial philosophy,
comparable organizational cultures and strategic objectives. These key areas of
commonality should result in the rapid realization of the benefits of the
business combination. The Acquisition will also provide Powergen's shareholders
with a substantial premium to the market price of the Powergen stock and is
expected to provide E.ON's shareholders with immediate earnings enhancement
(pre-goodwill amortization).
E.ON's commitment to participate in the U.S. energy market is strong.
E.ON was one of the first utility companies on the European continent to list
its shares on the New York Stock Exchange and to publish financial statements
according to U.S. GAAP. E.ON's willingness to register as a holding company
under the 1935 Act and to submit to the ongoing regulation associated with that
status further evidences E.ON's commitment to develop its presence in the U.S.
2. E.ON Generally
E.ON is an Aktiengesellschaft, the equivalent of a U.S. stock
corporation, formed under the laws of the Federal Republic of Germany. E.ON's
shares are traded on all German stock exchanges, the Swiss Stock Exchange and as
American Depository Receipts ("ADRs") on the New York Stock Exchange, Inc.
("NYSE"). As of year end 2001, E.ON was Germany's fifth largest industrial group
measured on the basis of market capitalization at year end and it employed
151,953 people. E.ON had a market capitalization of approximately Euro 39.5
billion (approximately $35.7 billion) as of April 6, 2001, the last business day
prior to the announcement of the Acquisition. As of December 31, 2001, E.ON's
market capitalization was approximately $35.9 billion.
For the twelve months ended December 31, 2001, E.ON had revenues of
Euro 79.7 billion ($70.9 billion) and net income of Euro 2.0 billion ($1.8
billion). As of December 31, 2001, E.ON had net assets of Euro 24.5 billion
($21.8 billion). More detailed information concerning E.ON and its subsidiaries
is contained in E.ON's Annual Report on Form 20-F for the year ended December
31, 2001.
E.ON was formed in June 2000 as a result of the merger of German
conglomerates VEBA AG and VIAG AG, which trace their roots to the 1920s. E.ON
provides
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2 As of January 28, 2002, E.ON's market capitalization was approximately
$38.3 billion.
3
strategic management for group members and coordinates group activities. E.ON
also provides centralized controller, treasury, risk management and service
functions to group members, as well as communications, capital markets and
investor relations functions. E.ON currently is organized into six separate
business divisions: energy, chemicals, real estate, oil, telecommunications and
distribution/logistics. Each business division is responsible for managing its
own day-to-day business. E.ON's energy business division comprises 51% of E.ON's
total investments. A list of E.ON subsidiaries, based on the information
provided as part of E.ON's annual accounts, is attached as Exhibit G-1 hereto./3
The business divisions, including some recently divested units, are further
described below.
Upon completion of the Acquisition, E.ON will be the world's second
largest utility company and the largest investor-owned utility, based on
electricity sales of 323 trillion watt hours and approximately 30 million
electric and natural gas customers./4
a. Energy - E.ON Energie
In July 2000, following completion of the merger between VEBA AG and
VIAG AG, E.ON merged the two major energy divisions of former VEBA AG and VIAG
AG (PreussenElektra AG and Bayernwerk AG, respectively) to form E.ON Energie.
E.ON Energie, a wholly owned subsidiary of E.ON, supplies roughly one-third of
Germany's electricity. E.ON Energie's core business consists of the ownership
and operation of power generation facilities, the transmission and distribution
of electric power, gas and heat and energy-related businesses, including the
supply of water and water-related services.
E.ON Energie owns interests in and operates electric power generation
facilities in Germany and internationally with a total installed capacity of
more than 50,000 MW, its attributable share of which is approximately 34,000 MW
(not including mothballed, shut down or reduced power plants). The power
generation business division is subdivided into three wholly owned German
limited liability companies according to fuels used: E.ON Kraftwerke GmbH owns
and operates the power stations using fossil energy sources, E.ON Kernkraft GmbH
owns and operates the nuclear power stations and E.ON Wasserkraft GmbH owns and
operates the hydroelectric power plants.
The power transmission grid of E.ON Energie is located in the German
states of Schleswig-Holstein, Lower Saxony, North Rhine-Westphalia, Hesse,
Bavaria, Brandenburg, Saxony-Anhalt, Thuringia and Mecklenburg- Western
Pomerania and reaches from Scandinavia to the Alps. The grid is interconnected
with the western European power grid with links to the Netherlands, Austria,
Denmark and eastern Europe. With a system length of over 37,000 km (23,000
miles) and a coverage area of nearly 170,000 square km (66,000 square miles),
the grid covers more than one-third of the surface area of Germany. The
high-voltage network allows long-distance power transport at low transmission
losses. The system is operated from two main circuit control headquarters. In
addition, there are more than twenty smaller control and service
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3 Due to recent business divestitures, Exhibit G-1 may include some former
subsidiary companies, such as Klockner & Co. AG and VAW aluminium, that are no
longer part of the E.ON Group.
4 The amounts indicated include results from companies in which E.ON holds
less than a 50% interest.
4
units at decentralized locations within the grid area. The system is mainly, but
not completely (depending on regional locations), operated by E.ON Netz GmbH, a
wholly owned subsidiary of E.ON Energie.
E.ON Energie conducts its retail energy business through a number of
mostly majority-owned subsidiaries and its utility distribution and supply
business through a number of majority-owned subsidiaries in Germany which are
identified in Exhibit G-1. E.ON Energie supplied about one-third of the
electricity consumed in Germany in 2001. Its customers are interregional,
regional and municipal utilities and traders, large industrial and special-rate
customers and, mainly through regional distributors, standard-rate customers. In
2001, E.ON Energie sold 203.3 billion kWh of electricity in western Germany and
26.8 billion kWh in eastern Germany.
E.ON Energie conducts its marketing and energy trading business
through E.ON Sales & Trading GmbH ("E.ON Trading"), which is a wholly owned
subsidiary of E.ON Energie. E.ON Energie believes that its trading floor
provides E.ON Energie with valuable market insight and has strengthened its
competitive position in the European electricity market. E.ON Energie intends to
expand both third party trading on the trading floor and its own trading of
financial contracts of electricity products. During 2000, E.ON Energie was one
of the first participants in the newly-established Leipzig Power Exchange as
well as the European Energy Exchange in Frankfurt. In 1999, E.ON Energie became
a participant in the Scandinavian electricity exchange, Nordpool, as well as the
Amsterdam Power Exchange in the Netherlands. E.ON Energie's overall electricity
trading volume amounted to 188 billion kWh in 2001. In the summer of 2000, to
improve its gas trading capabilities and expand its gas trading business, E.ON
Energie formed a 75% - 25% joint venture with the management of D-Gas B.V., an
experienced British team of gas traders.
E.ON Trading has incorporated a complete risk management system in
compliance with requirements for trading businesses of the German Federal
Supervisory Office for Banking. As a consequence, there is an operational
separation between the functions of trading, transacting/handling and
controlling, so-called front-, middle- and back-office functions. Especially
important, the function of risk-management is not handled by E.ON Trading
itself, but by the separate risk controlling department within E.ON Energie. The
two major risks in the trading business, i.e. adverse effects of market price
changes on open trading positions and counter-party credit risk, are covered by:
(i) a limit system that is actualized daily by risk management and controlling
and (ii) credit limits on the basis of rating analysis for each contractual
partner.
E.ON intends to qualify E.ON Energie as a foreign utility company
("FUCO") under Section 33 of the Act at or before the time of the Acquisition.
b. Chemicals - Degussa AG
Degussa AG ("Degussa") was formed on February 9, 2001, as a result of
the merger of Degussa-Huls and SKW Trostberg, two major specialty chemical
companies. E.ON owns 64.55% of the equity of Degussa. The new company has
divided its specialty chemicals businesses into six business divisions: health
and nutrition, construction chemicals, fine and industrial chemicals,
performance chemicals, coatings and advanced fillers, and specialty
5
polymers. As discussed in greater detail below, E.ON proposes to divest its
interest in the chemicals business within 5 years of the date of the completion
of the Acquisition and the registration of E.ON as a holding company under the
Act.
c. Real Estate - Viterra AG
Viterra AG ("Viterra") is E.ON's real estate group and is engaged in
four strategic business units: residential investment, development and services
and commercial real estate investment and development. Viterra has a property
portfolio of approximately 164,500 housing units and 100 commercial units. As
discussed in greater detail below, E.ON proposes to divest its interest in the
real estate business subsidiaries within 5 years of the date of the completion
of the Acquisition and the registration of E.ON as a holding company under the
Act.
d. Oil - VEBA Oel
VEBA Oel manages interests in oil, gas and petrochemicals business
including the exploration for, and production of, hydrocarbons, refining of
crude oil, production of petrochemicals and the marketing of petroleum products
and petrochemicals. On July 16, 2001, E.ON and BP plc, announced that they had
reached an agreement to reorganize their oil and gas business. As part of this
reorganization and the related transactions, on February 7, 2002, BP became VEBA
Oel's majority shareholder (51%) by subscribing to a capital increase. Beginning
on April 1, 2002, E.ON will have the option to sell its remaining interest in
VEBA Oel (49%) to BP. Upon completion of this transaction (i.e., after
exercising the put option) E.ON would have divested its oil businesses
completely. E.ON proposes to divest its interest in VEBA Oel within 3 years of
the date of the completion of the Acquisition and the registration of E.ON as a
holding company under the Act./5
In addition, BP, through its subsidiary Gelsenberg AG ("Gelsenberg")
which directly and indirectly holds 25.5% of Ruhrgas AG ("Ruhrgas"), Germany's
largest natural gas transmission, storage, distribution and import company, has
agreed with E.ON that E.ON will acquire 51% of Gelsenberg by means of a capital
increase at the turn of the year at the earliest. Beginning on January 1, 2002,
BP will have the option to sell its remaining 49% interest in Gelsenberg to
E.ON./6 Detailed information concerning Ruhrgas is provided below.
E.ON's applications to the German Federal Cartel Office to purchase
Ruhrgas from its current owners, including BP, were rejected and E.ON has
subsequently submitted a special request to the German Economics Ministry to
receive a waiver of the German Federal Cartel Office decisions. Resolution of
the waiver request is pending.
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5 In consultation with BP, Veba Oel sold its entire exploration and
production business to Petro-Canada. The purchase price totals approximately
Euro 2.4 billion ($2.1 billion).
6 Gelsenberg is holding company with respect to BP's interest in Ruhrgas.
Gelsenberg neither holds nor conducts any other businesses.
6
e. Telecommunications - E.ON Telecom GmbH and VIAG Telecom
Beteiligungs GmbH
E.ON, through two intermediate holding companies, E.ON Telecom GmbH
(formerly VEBA Telecom) and VIAG Telecom Beteiligungs GmbH, has disposed of most
of its telecommunication business activities during 1999 and 2000 and holds
interests in cellular phone providers in Austria (50.1%) and France (17.5%).
E.ON currently intends to retain the cellular phone providers. The basis for the
retention of such business is set forth in Exhibit G-1.
f. Distribution and Logistics - Stinnes AG and Klockner & Co.
AG
E.ON's activities in distribution and logistics are conducted by
Stinnes AG ("Stinnes"). Previously it also conducted business through a
wholly-owned subsidiary Klockner & Co. AG ("Klockner"). E.ON holds 65.4% of
Stinnes, the remaining shares are publicly listed. Stinnes is active in
logistics services in the following areas: transportation, chemicals
distribution and materials. Transportation logistics include land, air and sea
freight, as well as logistics systems services. Klockner is a leading European
metal distributor (on the basis of sales and volume) with locations throughout
Europe and North America.
On August 8, 2001, E.ON announced that it had sold Klockner to Balli
group of London. The transaction is based on an enterprise value of
approximately Euro 1.1 billion ($0.97 bn), including approximately Euro 0.8
billion ($0.7 bn) in debt and pension provisions. E.ON expects to realize a book
gain of approximately Euro 150 million ($132 mm) from the disposal. The
transaction closed on October 16, 2001.
As discussed in greater detail below, E.ON proposes to divest its
interest in Stinnes within 3 years of the date of the completion of the
Acquisition and the registration of E.ON as a holding company under the Act.
g. Aluminum - VAW aluminium AG
VAW aluminium AG ("VAW") was a wholly owned subsidiary of E.ON. VAW is
active in the production and processing of aluminum into innovative, high
quality aluminum products and focuses its activities on the fabrication of
semi-finished and finished products for packaging and for specially selected
technical applications in the automotive, printing and construction industries.
VAW's business portfolio is divided into the following business segments:
primary materials, rolled products, flexible packaging and automotive products.
E.ON's sale of VAW to Norsk Hydro ASA was completed on March 15, 2002.
The price for VAW, Euro 3.1 billion ($2.7 billion), included financial
liabilities and pension provisions amounting to Euro 1.2 billion ($1.1 billion).
E.ON earned a tax-free profit of approximately Euro 1.1 billion ($1.0 billion)
from this sale.
h. Silicon Wafers - MEMC Electronic Materials Inc.
The U.S. based and listed MEMC Electronic Materials Inc. ("MEMC"), was
a 71.8% owned subsidiary of E.ON, is a leading worldwide manufacturer of silicon
wafers used in the manufacture of semiconductors that are utilized in all types
of microelectric applications,
7
including computer systems, telecommunications equipment, automobiles, consumer
electronics products, industrial automation and control systems, and analytical
and defense systems. MEMC operates manufacturing facilities in the United
States, Italy, Japan, Korea and Malaysia, has a joint venture in Taiwan, and
sells its products to most of the world's largest manufacturers of
semiconductors. MEMC was sold effective November 13, 2001.
i. RAG
E.ON directly owns 37.1 % of the shares of RAG AG ("RAG"), a unique
entity created under the auspices of the German government to own all operating
coal mines in Germany. E.ON also has a 2.1% indirect interest in RAG, through
its 21% interest in Montan-Verwaltungsgesellschaft mbH, which owns 10% of RAG.
RAG owns, indirectly through a subsidiary, RAG Coal International AG,
certain coal mines in the Appalachian, midwestern, and mountain west regions of
the U.S. that supply certain U.S. electric generating units.
j. Divestiture Program Generally
Degussa, Viterra, VEBA Oel, and Stinnes and their respective
subsidiaries are hereafter referred to as the "to-be-divested subsidiaries" or
"TBD Subsidiaries." The term "TBD Subsidiaries" also includes an additional
twelve small direct or indirect E.ON subsidiaries. All the TBD Subsidiaries are
listed and described in more detail in Part II of E.ON's list of subsidiaries
included in Exhibit G-1 to this Application.
The proposed Acquisition is significant not just because Powergen
provides E.ON with a foothold in the energy industry in the U.S. and the U.K.,
but also because the Acquisition marks E.ON's entry into the next stage of its
focus-and-growth-strategy by becoming a pure-play energy and utility company. As
described herein, the divestiture of non-core businesses and activities is an
integral part of the strategy for achieving E.ON's primary goal. Since the
announcement of E.ON's disposal program in 1999, major steps in the
transformation of E.ON to a pure-play energy and utility company have been
achieved and have resulted in proceeds to E.ON since 2000 in the amount of
approximately $20 billion from the sale of non-core assets.
The divestiture of such a significant component of E.ON's current
business is a major undertaking and, consequently, E.ON proposes to conduct the
divestiture over 3 to 5 years. Pending divestiture, E.ON will continue to invest
in the TBD Subsidiaries to preserve and protect shareholder value and to prevent
any diminution in the value or the prospects of the business until such time as
a sale or other exit strategy can be implemented, consistent with the order of
the Commission in this Application./7 For example, Degussa will be divested
after completion of its ongoing extensive restructuring plan. Accordingly, E.ON
intends to redeploy the proceeds of the divestitures in other TBD Subsidiaries
and in E.ON's core utility business. E.ON proposes to
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7 E.ON has realized substantial value via the disposals of its shares in
E-Plus, Cablecom, Switzerland's Orange Communications and VIAG Interkom, prior
to the re-rating of telecoms stocks. In addition to the divestitures already
mentioned, E.ON also fully disposed of VEBA Electronics, Gerresheimer Glas and
partially Schmalbach-Lubeca (the remaining indirect interest of 46.6% is also to
be divested). All in all, the divestitures have generated proceeds in total of
roughly $20 billion since the announcement of the VEBA/VIAG merger.
8
limit its additional investment in the TBD Subsidiaries to future credit support
(e.g., including capital contributions, guarantees and loans) not to exceed $4.0
billion over the 3-5 year time frame for the contemplated divestitures.
3. Powergen Generally
Powergen is an international integrated energy company with its
principal operations in the U.K. and the U.S. Following a Scheme of Arrangement
between the company now known as Powergen UK plc (which was previously the
ultimate holding company for the group) and its shareholders, Powergen became
the holding company for the Powergen Group on December 9, 1998. Through the
acquisition of LG&E Energy on December 11, 2000, and announced sales of assets
in the U.K. and overseas, Powergen has transformed itself into an Anglo-American
electricity and gas business.
Powergen's ordinary shares are listed on the London Stock Exchange
("LSE") and Powergen's American Depositary Shares ("ADSs") are listed on the
NYSE. Powergen, including its predecessor company, has been since 1995 a
reporting company under the Securities Exchange Act of 1934, as amended (the
"1934 Act"), and has filed reports with the Commission in accordance with the
requirements of the 1934 Act applicable to foreign private issuers. More
detailed information concerning Powergen and its subsidiaries is contained in
Powergen's Annual Report on Form 20-F for the year ended December 31, 2000. See
Exhibit F-2.
For the year ended December 31, 2001, Powergen had revenues of
(pound)5,659 million ($8,230 million) and net income under U.S. GAAP of
(pound)101 million ($147 million). As at December 31, 2001, Powergen had net
assets of (pound)2,024 million ($2,944 million) and a market capitalization of
approximately (pound)4.9 billion ($7.2 billion)./8
Powergen has two principal subsidiaries: Powergen Group Holdings Ltd.
("PGH") and Powergen US Holdings Limited ("US Holdings"). PGH, which is a FUCO,
is the holding company for Powergen's U.K. and international businesses. US
Holdings, a registered holding company under the Act, is the holding company for
Powergen's U.S. business, and is the indirect parent of LG&E Energy. All of
Powergen's direct and indirect non-utility subsidiary companies were reviewed by
the Commission in connection with the application filed by Powergen for
authorization to acquire LG&E Energy./9 A complete list of the subsidiaries of
Powergen, including the non-utility subsidiaries of LG&E Energy, and a
description of their respective businesses are contained in Exhibit G-2 hereto.
a. Powergen UK
Powergen UK plc ("Powergen UK") is one of the UK's leading integrated
electricity and gas businesses. Powergen UK, a public limited company under the
laws of England and Wales, was organized as one of the four successor companies
of the former Central Electricity Generating Board as part of the reorganization
of the electricity supply industry under
----------------
8 Amounts originally in Pounds were converted at $1.4543:1 Pound.
9 Powergen plc, Holding Co. Act Release No. 27291 (December 6, 2000),
(Authorizing the applications filed in SEC File No. 70-9671 and 70-9763) (the
"Powergen Order").
9
the Electricity Act of 1989. In 1998 Powergen UK acquired East Midlands
Electricity plc ("East Midlands"), one of the largest regional electricity
companies in England and Wales.
As of December 31, 2001, Powergen UK owned or operated approximately
8,200 MW of core generation capacity (of which around 7,400 MW is wholly owned
and the balance held through joint ventures), and served over 3 million customer
accounts. Powergen operates an integrated electricity and gas business in the UK
built on the following principles: marketing electricity, gas,
telecommunications and other essential services to domestic and business
customers; asset management in electricity production and distribution; and
energy trading to support these activities. Powergen's strategy in the UK is to
sustain and develop its asset businesses, and to build competitive trading and
retail businesses.
b. LG&E Energy
LG&E Energy, an indirect subsidiary of Powergen, is a public utility
holding company exempt by order under Section 3(a)(1) of the Act./10 LG&E Energy
owns subsidiaries that are engaged in power generation and project development;
retail gas and electric utility services; and asset-based energy marketing (LG&E
Energy, together with its subsidiaries, is referred to as the "LG&E Energy
Group"). LG&E Energy operates in domestic and international markets from
Powergen's North American headquarters in Louisville, Kentucky.
(i) LG&E Energy's Public Utility Subsidiaries
LG&E Energy has two public utility subsidiary companies,/11 LG&E and
KU (the "Utility Subsidiaries"). LG&E and KU have joint generation capacity of
approximately 6,863 MW and serve in the aggregate approximately 877,000
electricity customers and 305,000 gas customers over a transmission and
distribution network covering some 27,000 square miles.
LG&E engages in the generation, transmission, and distribution of
electricity to approximately 378,000 customers in Louisville and 16 surrounding
counties. LG&E also purchases, distributes and sells natural gas to
approximately 305,000 customers within this service area and in limited
additional areas. For the twelve months ended December 31, 2001, LG&E had
electric operating revenues of $705.9 million (net of provision for rate
refunds), gas operating revenues of $290.8 million, electric operating income of
$123.8 million and gas operating income of $18.0 million. LG&E is subject to
regulation by the Federal Energy Regulatory Commission ("FERC") and the Kentucky
Public Service Commission ("KPSC").
KU engages in the generation, transmission, and distribution of
electricity to approximately 469,000 customers in over 600 communities and
adjacent suburban and rural areas in 77 counties in central, southeastern and
western Kentucky, and to approximately 30,000 customers in five counties in
southwestern Virginia. In Virginia, KU operates under the name
----------------
10 LG&E Energy Corp., Holding Co. Act Release No. 26886 (April 30, 1998).
See also, the Powergen Order (confirming the exemption).
11 In File No. 70-9671, Electric Energy Inc. ("EEI") was described as a
public utility subsidiary of KU. In 92 F.E.R.C.P. 62,079 (August 1, 2000), EEI
was granted exempt wholesale generator ("EWG") status and thus is no longer a
public utility company. As a result, KU is no longer a holding company, within
the meaning of the Act.
10
Old Dominion Power Company. KU also sells electric energy at wholesale for
resale to twelve Kentucky municipalities and one Pennsylvania municipality. In
addition, KU owns and operates a small amount of electric utility property in
one county in Tennessee. For the year ended December 31, 2001, KU had electric
operating revenues of $859.5 million and operating income of $121.4 million. KU
is subject to regulation by the FERC, the KPSC and the Virginia State
Corporation Commission ("VSCC"). KU is also subject to the jurisdiction of the
Tennessee Regulatory Authority ("TRA").
LG&E and KU own 4.9% and 2.5%, respectively, of the common stock of
Ohio Valley Electric Corp. ("OVEC"), which in turn has one wholly owned
subsidiary, Indiana-Kentucky Electric Corp. ("IKEC"). OVEC and IKEC were
organized in 1952 by LG&E and other public utilities to supply the entire power
requirements of the U.S. Department of Energy's gaseous diffusion plant in Pike
County, Ohio. OVEC owns a 1,075 MW generating station near Cheshire, Ohio, and
IKEC owns a 1,290 MW generating station at Madison, Indiana. All of the
electricity sold by OVEC and IKEC is sold either to the U.S. Department of
Energy or to the owners of the stock of OVEC (or their subsidiaries, all of
which are utility companies). OVEC and IKEC do not sell electricity to private
consumers and do not have any securities outstanding in the hands of the public.
For each of the three years ended December 31, 1999-2001, LG&E and KU each
derived less than 0.2% of net income from their share of the earnings of
OVEC./12
(ii) LG&E Energy's Non-Utility Subsidiaries
LG&E Energy is engaged through subsidiaries in a variety of
non-utility businesses, the more significant of which are described below.
Through Western Kentucky Energy Corp. and its affiliates, LG&E Energy
has a 25-year lease of and operates the generating facilities of Big Rivers
Electric Corporation, and a coal-fired facility owned by the City of Henderson,
Kentucky. These plants generate a combined total of approximately 1,700 MW of
electricity.
Through other subsidiaries, LG&E Energy develops, operates, maintains
and owns interests in several U.S. independent power generation facilities.
LG&E Energy, through its subsidiaries, also owns stakes in three
Argentine gas distribution companies. The company owns a controlling interest in
Distribuidora de Gas del Centro ("Centro") and minority interests in
Distribuidora de Gas del Cuyana ("Cuyana") and Gas Natural BAN, S.A. LG&E Energy
also indirectly owns an interest in a wind power generation facility in Spain.
LG&E Energy, through its subsidiaries, also provides energy services,
commercial and industrial energy consulting, home maintenance and repair
services for customers' major appliances and markets energy-related retail
products. LG&E Energy also indirectly owns CRC-Evans Pipeline International,
Inc. ("CRC-Evans"), a provider of specialized equipment and services used in the
construction and rehabilitation of gas and oil
----------------
12 See In the Matter of Ohio Valley Electric Corporation, Holding Co. Act
Release No. 11578, 34 S.E.C. 323 (Nov. 7, 1952).
11
transmission pipelines. In compliance with the Powergen Order, LG&E Energy
intends to dispose of its interests in CRC-Evans by the end of 2003.
LG&E Energy markets power through LG&E Energy Marketing ("LEM"). LEM
conducts asset-based marketing which primarily involves the marketing of power
generated by physical assets owned or controlled by LG&E Energy and its
affiliates.
c. Powergen's International Interests.
Powergen holds interests in power projects in India, Thailand,
Australia and Indonesia through Powergen UK. These investments are described in
Exhibit G-2.
B. Description of the Acquisition
1. Introduction
On April 9, 2001, E.ON and Powergen announced that they had agreed to
the terms for the acquisition of Powergen by E.ON. As initially contemplated,
the Acquisition was to be effected through a recommended pre-conditional cash
offer made through Goldman Sachs International on behalf of E.ON for all the
issued and to be issued share capital of Powergen. It was agreed that the cash
offer would be made in accordance with the terms and conditions of the
pre-conditional offer announcement under which E.ON will offer to acquire the
outstanding capital stock of Powergen (the "Offer Announcement"), following
satisfaction or waiver of the pre-conditions set out in Appendix 1 of the Offer
Announcement. E.ON reserved the right, with the consent of Powergen, to elect to
effect the Acquisition by a court-supervised scheme of arrangement under Section
425 of the U.K. Companies Act 1985 (the "Scheme"). Applicants propose to effect
the Acquisition by such a scheme, as described below.
2. The Scheme
In a court-supervised scheme of arrangement, Powergen would make an
application to the High Court of Justice of England and Wales (the "High Court")
for the High Court to summon a shareholders' meeting. It is at the discretion of
the High Court to order this meeting. If the High Court orders the shareholders'
meeting, Powergen's shareholders will vote on the Scheme at two meetings, which
will be held on the same day at a single location.
The first meeting, (the "Court Meeting") is ordered by the High Court.
For the Scheme to be effective, the Scheme must receive the affirmative vote of
a simple majority in number of those Powergen shareholders present and voting
(either in person or by proxy) at the Court Meeting representing not less than
75% of the number of Powergen shares held by such Powergen shareholders. At the
second meeting, the Extraordinary General Meeting, the shareholders must pass a
special resolution approving the implementation of the Scheme. To pass this
resolution, not less than 75% of the votes cast by Powergen shareholders must be
in favor of the resolution.
After Powergen's shareholders have approved the Scheme, there will be
a further hearing before the High Court to sanction the Scheme at its direction.
The Scheme is effective
12
once the High Court order sanctioning the Scheme has been delivered to the
Registrar of Companies.
Powergen must submit to the High Court the document convening the
necessary shareholder meetings, which is referred to as the "Scheme Circular."
Powergen must send the Scheme Circular to its shareholders in advance of the two
shareholder meetings. A declaration under Section 12 of the 1935 Act and Rule 62
was filed and subsequently authorized by the Commission, permitting Powergen to
solicit proxies from its shareholders in connection with the Scheme./13
Powergen's shareholders approved the implementation of the Scheme at both the
Court Meeting and the Extraordinary General Meeting, both of which were held on
April 19, 2002.
The Scheme would be implemented on the same terms, as applicable and
described below, as those which would apply to the offer.
3. The Offer
Under the terms of the Offer Announcement, E.ON will pay (pound)7.65
for each Powergen share and (pound)30.60 for each Powergen ADS (representing
four Powergen shares). The terms of the offer extend to all existing issued
Powergen shares and to any Powergen shares which are unconditionally allotted or
issued prior to the date on which the offer closes including Powergen shares
issued pursuant to the exercise of options under the Powergen Share Option
Schemes or otherwise./14 The offer values the whole of Powergen's capital stock
at
----------------
13 Powergen plc, Holding Co. Act Release No. 27504 (March 19, 2002).
14 Powergen currently maintains three employee benefit plans pursuant to
which its employees may acquire ordinary shares of Powergen as part of their
compensation: (i) the Powergen ShareSave Scheme, (ii) the Powergen Executive
Share Option Scheme, and (iii) the Powergen Restricted Share Plan. The Powergen
ShareSave Scheme, which is available for all eligible employees of Powergen,
provides for the issuance of share options that are normally exercisable on
completion of a three or five year "save-as-you-earn" contract. The exercise
price of options granted may be at a discount of no more than 20% of the market
price at the date of grant. The Powergen Executive Share Option Scheme, which is
available to executive directors and other senior executives and managers
selected by the Remuneration Committee of the Board of Directors, grants options
which are generally exercisable between the third and tenth anniversaries of the
date of grant. These options are granted at the market price of Powergen's
shares at the time of the grant or, in certain previous instances, at a higher
price where options have previously been exercised at a higher rate. The
Powergen Restricted Share Plan involves two types of awards: (1) Medium Term
Bonus Awards and (2) Annual Bonus Enhancement Awards. The Medium Term Bonus
Awards are available to executive directors and senior managers selected by the
Remuneration Committee. Shares of equivalent value to the annual bonus received
by the participant are placed into trust. Subject to certain performance
conditions being met, shares vest into the ownership of the participant after
three and four years, and may be called for a year after that. The Annual Bonus
Enhancement Awards are available to executive directors and managers, who may
elect to forgo some or all of their cash Annual Bonus. Shares of equivalent
value to the bonus forgone are placed into trust, and if held in trust for a
period of three years, are enhanced by Powergen on the basis of one extra share
for every four shares so held. In connection with the Acquisition, these
programs will be terminated and will be replaced by employee benefit plans
administered by E.ON.
LG&E Energy has two present arrangements pursuant to which employees or
officers may acquire or be granted certain equity or equity-related interests in
Powergen. These are: (a) the Savings Plans, and (b) the Powergen Long-Term
Incentive Plan. The Savings Plans are maintained for general employee
participation and contain various investment options, including a Powergen ADS
sub-fund. Employees may direct amounts held in their account under the Savings
Plans to go into this sub-fund, which primarily invests in Powergen ADS's.
However, employees are not direct or beneficial owners of such Powergen ADS's.
Company profit-sharing contributions to employees during 2001 were also invested
in this sub-fund. The Powergen Long-Term Incentive Plan is available to senior
management and officers of LG&E Energy as selected by the Remuneration
Committee. Under this plan, participants receive option grants to purchase
Powergen ADS's, with exercise prices set at the market prices at the time of
grant. Options generally vest in one year and are exercisable during a 10 year
period. Under this plan, certain participants also receive grants of performance
units. Subject to achievement of performance goals, these performance units are
paid out at the end of a three year performance period. The payout is made 50%
in cash and 50% in Powergen ADS's. Finally, current employment agreements for
certain senior executive officers provide for certain additional grants of
Powergen ADS's, under the Powergen Long-Term Incentive Plan. Upon satisfaction
of a designated holding period of 24 months, these officers will receive one
Powergen ADS for every four Powergen ADS acquired by the executive upon (a)
exercise of prior options still held at the end of the period or (b) if such
prior options have been exercised, resultant Powergen ADS's which are still held
at that time. Additionally, the employment agreements provide for grants of
restricted Powergen ADS's, which restrictions will lapse upon completion of
designated employment periods. In connection with the Acquisition,
change-of-control events generally occur, or will occur, thereby resulting in
the acceleration of vesting or payment of awards under the Powergen Long-Term
Incentive plan. In connection with the Acquisition, certain of these plans or
agreements may be terminated and replaced by plans or agreements administered by
E.ON.
13
approximately (pound)5.1 billion ($7.3 billion) (assuming the exercise in full
of all outstanding options under the Powergen Share Option Schemes, discussed
above). E.ON will acquire Powergen including its outstanding debt as at closing.
On the basis of the Powergen debt outstanding as at December 31, 2000 of
(pound)4.5 billion ($6.4 billion) adjusted for divestitures announced by
Powergen prior to the date of the Agreement, the total value of the proposed
acquisition would be (pound)9.6 billion ($13.7 billion).
Before taking into account future dividends payable to Powergen
shareholders,/15 the offer represents a premium of 8.4% over the price of
Powergen shares as at the close of business on April 6, 2001 (the last trading
day prior to the announcement of the Acquisition); 25.8% over the closing price
of Powergen shares on January 16, 2001, the last business day before the
announcement of preliminary talks between E.ON and Powergen in relation to the
offer; and 35.2% over the average price of Powergen shares over the 6 months
ended January 16, 2001.
In connection with the offer, E.ON and Powergen have entered into a
letter agreement dated April 8, 2001 (the "Agreement") which, among other
things, provides that Powergen will not solicit competing proposals and
describes the steps that are to be taken to satisfy the pre-conditions to the
offer. Under the Agreement, certain fees may be payable by either E.ON or
Powergen to the other in certain circumstances. The Agreement is included as
Exhibit B-1 to this Application.
The Agreement will terminate (and the obligations of the parties,
including E.ON's obligation to make the offer, will lapse) if the pre-conditions
are not satisfied by July 9, 2002. In addition, there are a number of conditions
precedent to the offer, which are described below.
The Powergen shares will be acquired by E.ON fully paid or credited as
fully paid and free from all liens, charges, equities, encumbrances, rights of
preemption and any other
----------------
15 Calculating the premium before taking into account future dividends
payable avoids making necessarily subjective adjustments related to the amount
and timing of future dividends, given the relatively long period between the
announcement of the Acquisition and its completion.
14
rights of any nature. The Acquisition would be the first acquisition of a
U.K.-based registered holding company that has been considered under Section
9(a)(2) of the Act.
4. Loan Note Alternative
For U.K. tax purposes, some shareholders of Powergen might prefer
receiving a loan note rather than cash from E.ON in return for their Powergen
shares. Under U.K. tax law, such shareholders can defer recognition of any
capital gains from the sale of their Powergen shares until they redeem the loan
notes.
In the event the loan notes are used, accepting shareholders of
Powergen shares (other than U.S. and certain other overseas shareholders) will
be entitled to elect to receive loan notes to be issued by E.ON UK plc, instead
of some or all of the cash consideration which would otherwise be receivable
under the offer. The accepting shareholders would receive (pound)1 nominal of
loan notes for every (pound)1 of cash consideration. E.ON will guarantee the
loan notes issued by E.ON UK plc. The loan notes would be unsecured and would
not exceed, in aggregate principal amount issued, $7.3 billion.
The loan notes will bear interest from the date of issue to the
relevant holder of the loan notes at a rate of one-half of one percent per annum
below LIBOR for six month sterling deposits payable every six months in arrears.
The loan notes will be transferable, but no application will be made for them to
be listed or dealt in on any stock exchange.
The loan notes will be redeemable at par at the holder's option, in
part or in whole, on any interest payment date on or following the date falling
six months following the date of issue of the relevant loan notes. Any loan
notes not previously repaid, redeemed or purchased will be repaid in full at par
on the first interest payment date falling on or after the fifth anniversary of
the first issue of the loan notes.
If valid elections for the loan note alternative do not require the
issue of loan notes exceeding (pound)25 million in nominal value of loan notes,
no loan notes will be issued unless E.ON determines otherwise, and holders of
Powergen shares who have elected for the loan note alternative will receive cash
in accordance with the basic terms of the offer. The loan notes would be issued
solely to effect the Acquisition and would be adequately supported by the
earning power and the solid capital structure of E.ON.
The loan notes to be issued pursuant to the offer have not been, and
will not be, registered under the Securities Act of 1933, as amended (the "1933
Act"), and will not be offered to U.S. investors.
5. Conditions to the Offer
The offer is subject to various conditions typical to acquisitions in
Europe and the U.S. The conditions include approval of the Scheme of Arrangement
as described above. In addition, all required government and regulatory filings
must have been made and the respective approvals received, including:
15
o a decision by the European Commission not to initiate proceedings
under Article 6(1)(c) of the Council Regulation (EEC) 4064/89 (as
amended), which governs market concentration and competition in
the European Union, or, if such proceedings are initiated, a
finding that the concentration is compatible with the common
market. On November 26, 2001, the European Commission authorized
the Acquisition and found that the activities of the parties "do
not overlap in any of the EEA [European Economic Area] countries
where E.ON and Powergen are present, with the exception of
electricity trading in the Nordic markets and the Netherlands.
But even in those markets the increment in market shares is
negligible."/16
o an indication by the Director General of the Office of Gas and
Electricity Markets ("OFGEM") in the U.K. that he will not seek
modifications to any of the Powergen Group's licenses under the
Electricity Act 1989 or the Gas Act 1986 as amended by the Gas
Act 1995 and subsequent legislation, including the Utilities Act
2000; that he will not seek undertakings or assurances from any
member of the E.ON Group or the Powergen Group except, in each
case, on terms acceptable to E.ON acting reasonably; and that in
connection with the acquisition by E.ON of Powergen, he will give
such consents and/or directions (if any) and/or seek or agree to
such modifications (if any) as are, in the reasonable opinion of
E.ON, necessary in connection with such licenses. E.ON has given
certain assurances to OFGEM, relating to OFGEM's ability to
continue to effectively regulate the Powergen Group after the
Acquisition, and the OFGEM review is now concluded.
o the passing of applicable waiting periods under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act").
The waiting period expired on November 15, 2001.
o the termination of the review and investigation of the offer
under the Exon-Florio Amendment to the Defense Production Act of
1950. This process terminated on December 19, 2001.
o the approval of the states of Kentucky, Virginia and Tennessee
under applicable state utility law, the approval of the FERC
under the Federal Power Act and the approval of this Commission
under the 1935 Act. All three states and the FERC have approved
the Acquisition. See Item 4, infra.
In addition, the offer contains standard conditions restricting
Powergen and its subsidiaries from issuing additional securities, paying
dividends, bonuses or distributions, transferring assets not in the ordinary
course of business, changing loan capital, making capital expenditures and other
transactions of a long-term, onerous or unusual nature, changing director
remuneration, repurchasing shares, changing constitutive documents, instituting
bankruptcy and similar proceedings or entering into agreements to effect any of
the above transactions, matters or events, subject to certain conditions.
----------------
16 European Commission press release dated November 26, 2001.
16
The conditions also contain standard provisions regarding developments
material to the Powergen Group, taken as a whole, including adverse changes in
the assets, business, financial or trading position or profits of the Powergen
Group; legal proceedings having been threatened, announced or instituted by or
against or remaining outstanding against any member of the Powergen Group;
contingent or other liabilities having arisen; and steps having been taken which
are likely to result in the withdrawal, cancellation, termination or
modification of any license held by any member of the Powergen Group which is
necessary for the proper carrying on of its business.
The conditions to the offer are more fully set forth in Exhibit B-1 to
the Application.
C. Financing the Acquisition and the Resulting Financial and Corporate
Structure
E.ON has a conservative financial policy and has financed most of its
acquisitions out of equity. E.ON proposes to finance the Acquisition with cash
on hand, the proceeds of liquidating certain readily marketable assets, funds
from E.ON's existing lines of credit or the issuance and sale of long-term,
medium-term or short-term debt securities or bank lines of credit. Powergen,
LG&E Energy and its subsidiaries, including LG&E and KU, will not borrow or
issue any security, incur any debt or pledge any assets to finance any portion
of the purchase price paid by E.ON for Powergen shares.
The table below shows revenues, net income and total assets for E.ON
and Powergen for the year ended December 31, 2001, according to U.S. GAAP.
------------------------- -------------------------- --------------------------
E.ON ($ mm)* Powergen ($ mm)*
------------------------- -------------------------- --------------------------
Revenues 70,909 8,230
------------------------- -------------------------- --------------------------
Net Income 1,823 147
------------------------- -------------------------- --------------------------
Total Assets 88,161 15,314
------------------------- -------------------------- --------------------------
* Amounts originally in Euros were converted at $0.8901 : Euro 1. Amounts in
Pounds were converted at $1.4543: Pound 1.
The table that follows shows the capitalization of each company as of December
31, 2001 and the combined group on a pro forma basis, according to U.S. GAAP./17
----------------
17 Unless specifically noted, the pro forma information included in the
Application does not reflect the divestiture of the TBD Subsidiaries.
17
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
E.ON ($ E.ON (%) Powergen Powergen Adjustments Pro Forma Pro Forma
mm) Group Group (%) Combined Combined (%)
($ mm) ($ mm)
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Common stock 27,437 65.39 3,442 31.25 (3,289) 27,590 48.44
equity*
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Preferred 0 0 135 1.23 0 135 0.24
stock
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Long-term 8,285 19.74 5,496 49.90 7,271** 21,052 36.96
debt
(including
current
portion)
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Short-term 6,240 14.87 1,941 17.62 0 8,181 14.36
debt
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Total 41,962 100.00 11,014 100.00 3,982 56,958 100.00
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
* Common stock equity includes common stock (i.e., amounts received equal to the
par or stated value of the common stock), additional paid-in capital and
retained earnings, and minority interests of E.ON of $5.7 billion and of
Powergen of $153 million.
** The adjustment for long-term debt is based on the assumption that the
Acquisition is fully financed with debt, although the ultimate financial
structure for the transaction has not been finalized.
E.ON is financially sound and as shown above, its capital structure on
a pro forma basis as of December 31, 2001 would be comprised of 48.44% equity,
0.24% preferred stock and 51.32% debt. E.ON's fundamental financial strength is
also reflected in its very favorable credit ratings.
E.ON's long-term debt rating of Aa2 and short-term rating of Prime-1
have been confirmed by Moody's Investors Service. The outlook for the rating has
been changed from negative to stable after announcement of the Acquisition.
Standard & Poor's gives E.ON a long-term senior debt rating of AA- and a
short-term debt rating of A-1+./18
Moody's has placed the Baa1/Prime-2 issuer ratings of Powergen on
review for possible upgrade reflecting the anticipated support it will receive
from becoming a core part of the E.ON Group. Standard & Poor's has given
Powergen a senior debt rating of BBB+, a
----------------
18 Investment grade long-term debt is denoted by the Standard & Poor's
ratings of AAA, AA, A and BBB. The ratings may be modified by a plus (+) or
minus (-) to show relative standing within the rating categories. Moody's
ratings of Aaa, Aa, A and Baa denote investment grade long-term debt. Moody's
applies numerical clarifiers (1, 2 and 3) to denote relative ranking within a
generic rating category. Standard & Poor's short-term debt ratings range from
A-1 for the highest quality obligations to D for the lowest. Categories A-1 to
A-3 are investment grade. The A-1 rating may also be modified by a plus sign to
distinguish the strongest credits in that category. Moody's short-term issuer
ratings are Prime-1, Prime-2 and Prime-3, all of which are investment grade.
Fitch IBCA's ratings of AAA - BBB are denoted investment grade categories. A
plus (+) or minus (-) may be appended to a rating to denote relative status
within major rating categories.
18
corporate credit rating of BBB and a short-term issuer rating of A-2 and has
placed them on credit watch positive pending the Acquisition.
Each of LG&E Energy and LG&E Capital Corp. has a corporate credit
rating of BBB+ from Standard & Poor's. In addition, LG&E Energy has an issuer
rating from Moody's of A3. Moody's has confirmed the ratings of LG&E and KU at
their present levels of A2. All Moody's and S&P ratings for LG&E Energy and LG&E
Capital Corp. and S&P ratings for LG&E and KU are on credit watch for upgrade as
a result of the Acquisition announcement. Fitch IBCA has given LG&E Energy an
implied senior unsecured debt rating of BBB+ and has given the senior unsecured
debt of LG&E Capital Corp. a rating of BBB+ and the senior secured debt of LG&E
and KU ratings of A+. Fitch IBCA has placed LG&E Energy and LG&E Capital Corp.
on credit watch positive, and LG&E and KU on credit watch evolving, all
following the Acquisition announcement.
After the consummation of the Acquisition, E.ON expects to make LG&E
Energy an indirect subsidiary of E.ON through two intermediate holding companies
that are wholly owned directly or indirectly and fully controlled by E.ON; E.ON
U.S. Verwaltungs GmbH ("E.ON U.S.") and Powergen US Investments Corp. ("PUSIC").
LG&E and KU will remain first-tier subsidiaries of LG&E Energy and will keep
their names and headquarters locations. This corporate structure will take into
account international tax considerations and clearly separate the U.S. utility
operations of LG&E and KU from the other businesses of E.ON and Powergen.
Powergen will become an indirect subsidiary of E.ON through two intermediate
wholly-owned holding companies. Powergen's management team will be responsible
for the development and operation of LG&E's and KU's business and will support
the development of E.ON's Anglo-American energy and utility business within the
context of E.ON's overall group strategy. Yet, as explained more fully in this
Application, Powergen will cease to own any public utility companies. Due to its
continuing responsibility for LG&E and KU, Powergen will remain a registered
holding company after the Acquisition and the transfer of LG&E Energy to E.ON
U.S. E.ON will register as a holding company under the Act.
The financing arrangements and entities below Powergen that are used
to finance LG&E Energy provide certain tax-related efficiencies and are expected
to remain in place following the consummation of the Acquisition.
Charts depicting the corporate structure of Powergen, LG&E Energy and
E.ON after the transaction are included in Exhibits E-1 and E-1A to this
Application.
D. E.ON's Shareholders
Institutional and retail investors in Germany hold approximately 58%
of E.ON's shares. Shareholders in the rest of Europe hold approximately 30% and
those in the U.S. hold approximately 11% of E.ON's equity.
E. Management of the Combined System
E.ON attaches great importance to the skills and experience of the
existing management and employees of Powergen. Upon completion of the
Acquisition, Powergen will operate as a separate subsidiary of E.ON. Powergen's
management team will be responsible for
19
the development and operation of LG&E's and KU's business and will support the
development of E.ON's Anglo-American energy and utility business within the
context of E.ON's overall group strategy. The board of Powergen will be chaired
by Ulrich Hartmann, Chairman of the board of management and CEO of E.ON. Edmund
A. Wallis, Powergen's current chairman will be Deputy Chairman and CEO of
Powergen. Mr. Wallis will also join the E.ON Energie Supervisory Board. Nick
Baldwin, Powergen's current CEO has decided to leave the company once the
Acquisition is completed. Peter Hickson, Powergen's current CFO has also decided
to leave Powergen once the Acquisition is completed. Michael Soehlke, Executive
Vice President at E.ON, responsible for Corporate Planning and Control, will
become CFO of Powergen. Victor Staffieri, LG&E Energy's CEO, and Paul Golby,
Powergen's Executive Director, UK Operations, will serve as directors on
Powergen's board. They will be joined by Dr. Hans Michael Gaul, a member of
E.ON's Management Board, by Dr. Hans-Dieter Harig, the CEO of E.ON Energie, and
by an additional member of the E.ON Energie Management Board. Two independent
directors based in the U.K. will complete the Powergen board of directors. The
employment rights, including pension rights, of the Powergen Group employees
will be fully safeguarded in accordance with applicable law.
F. Regulatory Environment
1. Generally
The German and European utility regulations that affect the E.ON Group
apply only to its German and European operating companies and not to the parent
holding company which will register under the Act. Therefore, there is no
conflict between the regulatory scheme under the 1935 Act and German or European
regulation. Similarly, U.K. utility regulation affecting Powergen (and E.ON
following its acquisition of Powergen) would apply only to the U.K. operating
companies and not directly to the parent registered holding company. Therefore,
there also will be no conflict between the regulatory scheme under the 1935 Act
and U.K. regulation. In addition to the U.S. federal and state approvals
described in Item 4 herein, the transaction has been reviewed by the European
Commission and by OFGEM. The Acquisition was also subject to the prior approval
of the U.K. Financial Services Authority ("FSA"), due to the status of Powergen
Trading Ltd. under the U.K. Financial Services and Markets Act 2000. The FSA
approved the transaction effective April 30, 2002 by letter dated April 25,
2002. See Item 4, infra.
Applicants propose to effect the Acquisition by way of a Scheme of
Arrangement discussed in Item 1.B.2. The Scheme would involve the acquisition of
all the outstanding Powergen shares by virtue of an order of the English High
Court under the U.K. Companies Act 1985, given following approval of the Scheme
at two Powergen shareholders' meetings. The court will not issue its order
approving the Scheme if there are significant conditions outstanding and it may
not sanction the Scheme of Arrangement if there has been a substantial passage
of time between the date of the shareholders' meeting and the date of the court
hearing. Consequently, the timing of this Commission's issuance of its order
authorizing the proposed transaction is important. E.ON expects, therefore, that
some steps in the Acquisition process, would not occur until after an order by
the SEC authorizing this Application has been issued.
20
2. Restructuring Activity in the U.S.
As discussed in Powergen's application to acquire LG&E Energy, both
LG&E and KU implemented an earnings sharing mechanism ("ESM") for electric rates
in 2000. The ESM is intended to transition the utilities to a more competitive
structure. The ESM authorizes a threshold return on equity of 11.5% with a
"deadband" of 100 basis points above and below. If earnings fall within the
deadband range, customers are not charged an additional rate and do not receive
any rate credits. Over and under earnings outside the band are shared between
shareholders and ratepayers of the affected company on a 60/40 basis. The ESM
provides LG&E and KU with incentives to improve performance and, at the same
time, maintains the KPSC's regulatory authority and a fair regulatory
environment.
Restructuring legislation has not been passed in Kentucky. The
Kentucky legislature created a special task force on electricity restructuring
in March 1998, whose mission is to assess the desirability of deregulating and
restructuring electric service delivery. The task force submitted its final
report in September, 2000 and recommended that no action be taken during the
2000 legislative session of the General Assembly to restructure Kentucky's
electric utility industry. The task force also recommended that the General
Assembly continue to study the issue of retail competition, monitor actions
taken in other states to restructure and to address other issues such as
reliability of service, transmission, and consumer education.
The Virginia legislature enacted an electric restructuring
implementation law in March 1999. The VSCC and a legislative task force have
begun to implement the restructured framework and to resolve issues not
addressed by the law. Electric retail access under the new law is to commence
January 2002, but the law provides the VSCC with the option to accelerate or
delay implementation so long as it is in place by 2005. The law caps retail
electric rates from 2001 through 2007, but does not require rate reductions. The
law allows utilities to recover just and reasonable stranded costs, if any,
through the capped rates or, in the case of customers who choose alternative
generation suppliers, through a usage-based surcharge. There will be no explicit
determination of stranded costs by the VSCC. The law further provides for all
incumbent utilities to join a regional transmission entity ("RTE") and to
transfer operational control of their transmission assets to the RTE. The RTE
may be an independent system operator (e.g., the Midwest Independent System
Operator, of which LG&E and KU are members). The VSCC has established a
proceeding to investigate issues relating to the establishment of an RTE. The
restructuring law does not require divestiture of generation assets, but
utilities must functionally separate generation from transmission and
distribution by 2002. The effect of this restructuring law on KU should be
minimal, as its operations in Virginia are relatively small in nature and KU
anticipates seeking an exemption from the law.
21
G. Service Company
LG&E Energy Services Inc. ("LG&E Services"), the service company under
Section 13 of the Act for the Powergen Group, will become the service company
under Section 13 of the Act for the E.ON Group upon completion of the
Acquisition. LG&E Services will remain a first-tier, wholly owned subsidiary of
LG&E Energy. The services to be provided by LG&E Services and other affiliated
transactions are described in Item 3 below.
Item 2. Fees, Commissions and Expenses
The total fees, commissions, and expenses expected to be incurred in
connection with the Acquisition are estimated to be approximately $44 million.
Fees for investment bankers, lawyers, brokers, accountants, and other service
providers are included within the Acquisition-related fees, as detailed below.
----------------------------------------------- -------------------
Fee or Expense Type $ Millions
----------------------------------------------- -------------------
Investment bankers' fees and expenses 26.4
----------------------------------------------- -------------------
Legal fees and expenses 7.04
----------------------------------------------- -------------------
Execution of scheme of arrangement 2.64
----------------------------------------------- -------------------
Shareholder communication expenses, 1.76
and filing fees
----------------------------------------------- -------------------
Accountants' fees 0.88
----------------------------------------------- -------------------
Miscellaneous 5.28
----------------------------------------------- -------------------
Total $44.0
----------------------------------------------- -------------------
Item 3. Applicable Statutory Provisions
The following sections of the Act and the Commission's rules
thereunder are or may be directly or indirectly applicable to the proposed
transaction:
Sections of the Act Transactions to which section or rule is
------------------- -----------------------------------------
or may be applicable:
--------------------
2(a)(8) Exemption of RAG
4, 5 Registration of E.ON as a holding company,
following the consummation of the Acquisition.
Deregistration of the intermediate holding
companies.
22
9(a)(2), 10 Acquisition by E.ON of the common stock of
LG&E Energy, LG&E, KU, OVEC and IKEC.
13 Exemption of E.ON and its non-U.S. subsidiaries
to allow the provision of goods and services to
non-U.S. associate companies on an other than
cost basis.
14, 15 Reporting, books and records
Rules
-----
80-91 Affiliate transactions, generally.
93, 94 Accounts, records and annual reports by
subsidiary service company.
A. Legal Analysis of the Acquisition
Pursuant to Section 9(a) (2) of the Act, it is unlawful, without
approval of the Commission under Section 10 of the Act, "for any person . . . to
acquire, directly or indirectly, any securities of any public utility company,
if such person is an affiliate . . . of such company and of any other public
utility or holding company, or will by virtue of such acquisition become such an
affiliate." Under the definition set forth in Section 2(a)(11)(A) of the Act, an
"affiliate" of a specified company means "any person that directly or indirectly
owns, controls, or holds with power to vote, 5 per centum or more of the
outstanding voting securities of such specified company."
Because E.ON will indirectly acquire more than five percent of the
voting securities of LG&E, KU, OVEC and IKEC by virtue of the acquisition of
Powergen, E.ON must demonstrate that the Acquisition meets the criteria of
Section 10 of the Act and must obtain the Commission's authorization prior to
completing the Acquisition.
Section 10 of the Act incorporates the requirements and policies of
Sections 8 and 11 of the Act into the authorization process. Applicants address
the issues raised by the Acquisition under Sections 8, 9, 10 and 11 below and
demonstrate that the Acquisition and the related transactions for which
authority is sought herein satisfy the requirements, standards and policies of
the Act. For purposes of clarity and in order to avoid unnecessary repetition,
the discussion is organized by statutory issue, rather than tracking the statute
directly.
The Applicants note that this Application is based on substantially
the same pertinent facts under the Act and seeks substantially the same
authorizations under the Act previously granted by the Commission in The
National Grid Group plc, Holding Co. Act Release No. 27154 (March 15, 2000) (the
"National Grid Order") and, subsequent thereto, in the Powergen Order.
23
Based on the precedent of the Powergen Order and the National Grid
Order and as set forth more fully below, the Acquisition complies with all of
the applicable provisions of Section 10 of the Act and should be approved by the
Commission because:
- the Acquisition does not tend towards interlocking relations or the
concentration of control of public utility companies to the detriment of the
public interest or the interest of investors or consumers;
- the consideration to be paid by E.ON in connection with the
Acquisition is reasonable and fair in relation to the utility assets underlying
the Powergen securities to be acquired;
- the Acquisition will not result in an unduly complicated capital or
corporate structure for the E.ON system;
- the Acquisition will comply with all applicable state laws,
including state laws applicable to combination electric and gas utilities;
- the Acquisition tends towards the economical and efficient
development of an integrated public utility system and the additional gas system
may be retained; and
- the Acquisition is consistent with Sections 8 and 11 of the Act.
B. Undue Concentration
The Acquisition Does Not Tend Towards Interlocking Relations or the
Concentration of Control of Public Utility Companies to the Detriment
of the Public Interest or the Interest of Investors or Consumers.
Pursuant to Section 10(b)(1) of the Act the Commission shall approve
an acquisition unless it finds that "such acquisition will tend towards
interlocking relations or the concentration of control of public utility
companies, of a kind or to an extent detrimental to the public interest or the
interest of investors or consumers."
By its nature, any merger results in new links between theretofore
unrelated companies. Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (March 15,
1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992)
("interlocking relationships are necessary to integrate [the two merging
entities]"). The links that will be established as a result of the Acquisition
are not the types of interlocking relationships targeted by Section 10(b)(1),
which was primarily aimed at preventing business combinations unrelated to
improved operations. Indeed, the links to be established as a result of the
Acquisition are intended to enhance the operations of Powergen and ultimately of
the LG&E Energy Group. Upon consummation of the Acquisition, Powergen's
management team will remain responsible for the development and operation of
LG&E's and KU's business and will support the development of E.ON's
Anglo-American energy and utility
24
business within the context of E.ON's overall group strategy./19 Powergen's
board will be composed of U.K., U.S. and German citizens reflecting the
interests of Powergen, LG&E Energy and E.ON and one member of the current board
of Powergen will become a member of E.ON Energie's Supervisory Board.
More specifically, the board of Powergen will be chaired by Ulrich
Hartmann, Chairman of the board of management and CEO of E.ON. Edmund A. Wallis,
Powergen's current chairman will be Deputy Chairman and CEO of Powergen. Mr.
Wallis will also join the E.ON Energie Supervisory Board. Michael Soehlke,
Executive Vice President at E.ON, responsible for Corporate Planning and
Control, will become CFO of Powergen. Victor Staffieri, LG&E Energy's CEO, and
Paul Golby, Powergen's Executive Director, UK Operations, will serve as
directors on Powergen's board. They will be joined by Dr. Hans Michael Gaul, a
member of E.ON's Management Board, by Dr. Hans-Dieter Harig, the CEO of E.ON
Energie, and by an additional member of the E.ON Energie Management Board. Two
independent directors based in the U.K. will complete the Powergen board of
directors.
The interlocking board memberships are necessary to integrate Powergen
and LG&E Energy fully into the E.ON system and the representation of LG&E Energy
on Powergen's board will continue to assure a close relationship between E.ON
and the Anglo-American businesses. Forging such relations promotes the sharing
of best practices, investment opportunity identification, strategic and
operational coordination and is generally beneficial to the protected interests
under the Act. These types of interlocking relationships will therefore be in
the public interest and the interests of investors and consumers and are not
prohibited by the Act.
The Commission has administered the Act to avoid "an excess of
concentration and bigness" while preserving the "opportunities for economies of
scale, the elimination of duplicate facilities and activities, the sharing of
production capacity and reserves and generally more efficient operations"
afforded by the coordination of local utilities into an integrated system.
American Electric Power Co., 46 S.E.C. 1299, 1309 (1978). In applying Section
10(b)(1) to utility acquisitions, the Commission must determine whether the
acquisition will create "the type of structures and combinations at which the
Act was specifically directed." Vermont Yankee Nuclear Corp., 43 S.E.C. 693, 700
(1968). As discussed below, the Acquisition will not create a "huge, complex,
and irrational system," but rather will replace one registered holding company
with another without increasing or expanding the concentration of control over
U.S. utility operations. The increased size of the combined enterprise will
actually create opportunities for economies of scale and access to resources
that would not be available without a combination with E.ON. See WPL Holdings,
Inc., Holding Co. Act Release No. 24590 (Feb. 26, 1988), aff'd in part and rev'd
in part sub nom., Wisconsin's Environmental Decade, Inc. v. SEC, 882 F.2d 523
(D.C. Cir. 1989), reaffirmed, Holding Co. Act Release No. 25377 (Sept. 18,
1991).
The concern with concentration and bigness is in essence a concern
that overly large entities will restrict competition in the marketplace to the
detriment of consumers and the
----------------
19 See, Exhibit E-2 for a chart depicting the management and equity
relationship between Powergen, E.ON and LG&E Energy.
25
public interest. In Northeast Utilities, Holding Co. Act Release No. 25221 (Dec.
21, 1990), the Commission stated that "antitrust ramifications of an acquisition
must be considered in light of the fact that public utilities are regulated
monopolies and that federal and state administrative agencies regulate the rates
charged consumers." The effect of the Acquisition on competition will be fully
explored by several regulators. E.ON has filed Notification and Report Forms
with the Department of Justice ("DOJ") and the Federal Trade Commission ("FTC")
pursuant to the Hart-Scott-Rodino Antitrust Improvements Act ("HSR Act") and the
waiting period expired on November 15, 2001.
In addition, the competitive impact of the Acquisition has been
considered by the FERC pursuant to Section 203 of the Federal Power Act in its
review of the Acquisition. As explained more fully in the FERC application, a
copy of which is attached hereto as Exhibit C-5, the Acquisition will not have
an adverse effect on competition. Powergen and its subsidiary companies, on the
one hand, and E.ON and its related companies, on the other, do not have utility
facilities or sell electricity in any common geographic markets in the U.S. E.ON
owns no generation or transmission facilities in the U.S.
E.ON does, however, have a direct and an indirect ownership interest
in STEAG AG ("STEAG"), which has started a business of financing and
constructing independent power plants in the U.S. E.ON's interest in STEAG,
however, is non-controlling./20 No STEAG-owned power plants are under
construction or operating in the U.S. to date, and STEAG plans to sell its
interests in the plants before they become operational.
As the FERC application explains, the plants that STEAG has under
development or consideration are either in geographic markets different from
those in which LG&E Energy and its subsidiaries operate or the extent of any
overlapping operation would be de minimis. Consequently, horizontal market
concentration is not increased by the Acquisition.
With respect to vertical market power issues (i.e., control over the
inputs to production or the means to reach the market), E.ON has an ownership
interest in RAG, which owns indirectly, through RAG Coal International AG,
certain U.S. coal mines that supply various U.S. electric generating plants.
E.ON, however, owns only 37.1% of RAG's stock (39.2% if indirect interests are
included), and cannot control its management decisions. As the FERC application
demonstrates, even assuming that E.ON controlled RAG's U.S. coal operations the
Acquisition would have no adverse vertical competitive effects.
The FERC order authorizing the Acquisition concludes that, consistent
with the standards of Section 203(a) of the Federal Power Act, there would be no
adverse effect on competition, rates or regulation. See Exhibit C-6, hereto.
For these reasons, the Acquisition will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to the extent detrimental to
----------------
20 E.ON holds indirect ownership interests in STEAG, a company
headquartered in Essen, Germany that has been in the business of constructing,
owning, and operating power plants since 1937. E.ON has a 13% indirect interest
in STEAG through its 50.3% interest in Gesellschaft fur Energiebeteiligung mbH,
which owns 25.89% of STEAG. E.ON also has a 28.3% indirect interest in STEAG
through its 39.2% interest in RAG, which owns a 72.2% interest in STEAG.
26
the public interest or the interests of investors or customers within the
meaning of Section 10(b)(1). In addition, FERC has concluded that the
Acquisition does not raise competitive concerns. The Commission has found, and
the courts have agreed, that it may appropriately rely upon the FERC with
respect to such findings. See City of Holyoke v. SEC, supra at 363-364, quoting
Wisconsin's Environmental Decade, Inc. v. SEC, supra at 527.
C. Reasonableness of Consideration
The Consideration to be Paid by E.ON in Connection with the
Acquisition is Reasonable and Fair in Relation to the Utility Assets
Underlying the Powergen Securities to be Acquired.
Section 10(b)(2) of the Act requires the Commission to determine
whether the consideration to be given by E.ON to the holders of Powergen common
stock in connection with the Acquisition is reasonable and whether it bears a
fair relation to investment in and earning capacity of the utility assets
underlying the securities being acquired./21 Market prices at which securities
are traded have always been strong indicators as to values.
The price of (pound)7.65 per share which E.ON will offer to Powergen's
shareholders is a fair price. The price was reached through arm's-length
negotiations with Powergen and it includes a premium of 8.4 % relative to the
closing price of Powergen's common shares on April 6, 2001 (the last day of
trading before announcement of the Acquisition), a premium of 25.8 % relative to
the share price on January 16, 2001 (the last day of trading before the talks
with Powergen were confirmed), and a premium of 35.2 % relative to the average
price of the last 6 months preceding January 16, 2001.
The purchase price for 100% of Powergen's equity capital (assuming the
exercise in full of all outstanding options under the Powergen Share Option
Schemes) amounts to a total of Euro 8.2 billion ((pound)5.1 billion, $7.3
billion). The enterprise value amounts to Euro 15.3 billion ((pound)9.6 billion,
$13.7 billion) including debt (on the basis of Powergen debt outstanding as at
December 31, 2000, adjusted for divestitures announced prior to April 9, 2001).
This valuation is generally in line with current trading multiples of European
utilities.
As shown in the table below, the quarterly price data, in pence per
share, high and low, for Powergen common stock provide support for the
consideration of (pound)7.65 for each share of Powergen common stock.
----------------
21 Under Section 10(b)(2) of the Act the Commission shall approve an
acquisition unless it finds that "in the case of the acquisition of securities
or utility assets, the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or indirectly, in
connection with such acquisition is not reasonable or does not bear a fair
relation to the sums invested in or the earning capacity of the utility assets
to be acquired or the utility assets underlying the securities to be acquired."
27
-------------------------------- --------------------- ------------------------ --------------------------
all amounts in pence High Low Dividends
-------------------------------- --------------------- ------------------------ --------------------------
1998
First Quarter 893 760 10.00 (interim)
Second Quarter 858.5 755 14.10 (final)
Third Quarter 892 731
Fourth Quarter 887 778.5
-------------------------------- --------------------- ------------------------ --------------------------
1999
First Quarter 905 669.5 10.80 (interim)
Second Quarter 769.5 675 24.00 (second interim)
Third Quarter 699.5 570
Fourth Quarter 641.5 440.75
-------------------------------- --------------------- ------------------------ --------------------------
2000
First Quarter 496 328.25 10.80 (first interim)
Second Quarter 565 365 25.40 (second interim)
Third Quarter 615 489.5
Fourth Quarter 635 493
-------------------------------- --------------------- ------------------------ --------------------------
Powergen paid an interim and a second interim or final dividend during each
fiscal year and not necessarily at the end of a quarter. In 2001, dividend
payments have become quarterly.
As indicated above, the consideration is the product of extensive and
vigorous arm's-length negotiations between E.ON and Powergen./22 These
negotiations were preceded by appropriate due diligence, analysis and evaluation
of the assets, liabilities and business prospects of the respective companies.
Both parties received advice from internationally-recognized investment bankers.
E.ON was advised in the negotiations by Goldman Sachs International and NM
Rothschild & Sons Limited. Under the U.K. City Code on Takeovers and Mergers
("City Code"), the directors of Powergen are required to obtain competent
independent advice on any offer and the substance of such advice must be made
known to the shareholders of Powergen; the directors of Powergen were advised in
the negotiations by Dresdner Kleinwort Wasserstein and have received advice from
Dresdner Kleinwort Wasserstein that the terms of the offer are fair and
reasonable. The assistance of independent consultants in setting consideration
has been recognized by the Commission as evidence that the requirements of
Section 10(b)(2) have been met. Southern Co., supra; SV Ventures, Inc. Holding
Co. Act Release No. 24579A (February 26, 1988).
The Commission is charged generally with the protection of the
national public interest, the interest of investors in the securities of holding
companies and the interest of consumers./23 In particular, investor interests in
connection with the acquisition of public utility companies are protected by
Section 10(b)(2) of the Act which requires the consideration paid in connection
with an acquisition to be reasonable and fair. As demonstrated above, the
consideration to be paid by E.ON for the Powergen shares includes a significant
premium, will
----------------
22 As recognized by the Commission in Ohio Power Co., Holding Co. Act
Release No. 16753 (June 8, 1970), prices arrived through arm's length
negotiations are particularly persuasive evidence that Section 10(b)(2) is
satisfied. See also Southern Company, Holding Co. Act Release No. 24579 (Feb.
12, 1998).
23 Section 1(b) of the Act.
28
be paid in cash or in loan notes, has been found fair and reasonable by
financial advisors and, accordingly, the offer has been recommended by the
Powergen board. Powergen's shareholders also have approved the transaction./24
An evaluation of the reasonableness of the consideration under the Act
also involves an inquiry as to the reasonableness of the fees paid by the
acquiror in connection with the acquisition. As set forth in Item 2 of the
Application, Applicants together expect to incur a combined total of
approximately $44 million in fees, commissions and expenses in connection with
the Acquisition. This amount represents 0.6% (based on a purchase price of $7.3
billion) of the value of the consideration to be paid by E.ON to Powergen's
shareholders.
This percentage is consistent with percentages previously approved by
the Commission. See, e.g., Powergen plc, Holding Co. Act Release No. 27291 (Dec.
6, 2000) (fees and expenses of approximately $50.4 million represented
approximately 1.6% of the equity value of LG&E Energy common stock on Feb. 25,
2000, the last day of trading before the announcement of the merger); NiSource,
Inc., Holding Co. Act Release No. 27263 (Oct. 30, 2000) (fees and expenses of
approximately $50 million represented approximately 0.83% of the value of the
consideration to be paid for Columbia Energy Group); Exelon Corporation, Holding
Co. Act Release No. 27256 (Oct. 19, 2000) (fees and expenses of approximately
$87.4 million represented approximately 0.49% of the value of Unicom and PECO
common stock on Sep. 21, 1999); Xcel Energy, Holding Co. Act Release No. 27212
(Aug. 16, 2000) (fees and expenses of approximately $52 million represented
approximately 1.4% of the value of the consideration to be paid for New Century
Energies, Inc.); American Electric Power Co., Inc., Holding Co. Act Release No.
27186 (June 14, 2000) (fees and expenses of approximately $73 million
represented approximately 1.1% of the value of the consideration to be paid for
Central and South West Corporation); Entergy Corp., Holding Co. Act Release No.
25952 (Dec. 17, 1993) (fees and expenses represented approximately 1.7% of the
value of the consideration paid to the shareholders of Gulf States Utilities);
Northeast Utilities, Holding Co. Act Release No. 25548 (June 3, 1992) (fees and
expenses of approximately 2% of the value of the assets to be acquired).
Based on the above analysis, the overall fees, commissions and
expenses incurred and to be incurred in connection with the Acquisition are
reasonable, fair and consistent with SEC precedent. Furthermore, the aggregate
of the fees, expenses and consideration for the Acquisition bears a fair
relation to the sums invested in, and the earning capacity of, the utility and
other assets of Powergen.
----------------
24 Applicants provided prominent disclosure in the Scheme Circular
distributed to Powergen shareholders that the Commission's authorization of the
Acquisition would not be an endorsement of the Acquisition or a recommendation
by the Commission that Powergen's shareholders should approve the Scheme of
Arrangement. See 17 CFR 229.501(b)(7) (requiring the outside cover page of a
prospectus to include a legend indicating that neither the Securities and
Exchange Commission nor any state securities commission has approved or
disapproved of the securities offered by the prospectus or passed on the
accuracy or adequacy of the disclosures in the prospectus and that any contrary
representation is a criminal offense).
29
D. Capital Structure and Corporate Structure Complication
The Acquisition Does Not Cause the E.ON System to Have an Unduly
Complicated Capital Structure or Corporate Structure.
Sections 10(b)(3), 11(a) and 11(b)(2) of the Act impose various
requirements as to the corporate and capital structure of the E.ON system
subsequent to the Acquisition./25
E.ON's Corporate Structure
E.ON's corporate structure after the Acquisition will not be unduly
complicated and will not be detrimental to the public interest or the interest
of investors or consumers or the proper functioning of the resulting system.
Exhibits E-1 and E-1A to the Application illustrate E.ON's post-Acquisition
organizational structure. Cross border transactions require financial and
corporate structures designed to preserve the economic benefits of a transaction
under numerous, often changing tax laws. Because Powergen already has a tax
efficient financing structure in place with respect to its investment in LG&E
Energy, E.ON plans to structure its acquisition of Powergen in a manner that
preserves the benefits of this structure.
As a result of Powergen's acquisition of LG&E Energy, Powergen and the
Powergen Intermediate Holding Companies registered as public utility holding
companies under Section 5 of the Act. The Powergen Intermediate Holding
Companies consist of Powergen US Holdings Limited and Powergen US Investments,
corporations organized under the laws of England and Wales, Powergen Luxembourg
sarl, Powergen Luxembourg Holdings sarl and Powergen Luxembourg Investments
sarl, corporations organized under the laws of Luxembourg, and PUSIC, a Delaware
corporation. PUSIC currently holds all of the outstanding voting securities of
LG&E Energy.
To effect the Acquisition, E.ON has established a wholly-owned
subsidiary E.ON UK Verwaltungs GmbH ("E.ON UK"), a corporation organized under
German law. E.ON UK owns all the outstanding shares of an acquisition vehicle,
E.ON UK plc, a corporation organized under the laws of England and Wales, that
will acquire all of the outstanding Powergen shares. E.ON UK plc will survive
the Acquisition. Because Powergen will remain a registered holding company after
the Acquisition, E.ON UK and E.ON UK plc will also register under the Act.
----------------
25 Under Section 10(b)(3) of the Act the Commission shall approve an
acquisition unless it finds that "such acquisition will unduly complicate the
capital structure of the holding-company system of the applicant or will be
detrimental to the public interest or the interest of investors or consumers or
the proper functioning of such holding company system." Section 11(a) of the Act
requires the Commission to examine the corporate structure of a registered
holding company system "to determine the extent to which the corporate structure
of such holding-company system and the companies therein may be simplified,
unnecessary complexities therein eliminated, voting power fairly and equitably
distributed among the holders of securities thereof, and the properties and
business thereof confined to those necessary or appropriate to the operations of
an integrated public-utility system." Section 11(b)(2) requires the Commission
to guard against complicated corporate structures and the unfair distribution of
voting power among holding company security holders and, in that connection, to
take action as necessary to cause a holding company to "cease to be a holding
company with respect to each of its subsidiary companies which itself has a
subsidiary company which is a holding company." This is commonly referred to as
the "great grandfather clause."
30
As a result of the legal requirements relating to the Acquisition and
certain tax considerations, it may be necessary or desirable following the
consummation of E.ON's Acquisition of Powergen for E.ON to delay the transfer of
PUSIC and the LG&E Energy Group to E.ON US for up to 12 months./26 This period
will allow time for E.ON to accomplish a reorganization whereby the ownership of
PUSIC, the immediate parent of LG&E Energy would be transferred to E.ON US, a
wholly-owned direct E.ON subsidiary company. Mechanically, the transfer would be
effected by way of a direct transfer of the PUSIC shares, or by transferring the
shares of one of the other Powergen Intermediate Holding Companies to E.ON US
followed by the merger or liquidation of that company into E.ON US. The form of
the reorganization will be determined based on the legal requirements and tax
considerations in the jurisdictions involved. The role of the Powergen
Intermediate Holding Companies, the Intermediate Companies and the tax and other
considerations involved in the reorganization are further discussed in Exhibit
E-1B to the Application. Applicants request authorization to effect the
reorganization as proposed herein.
After the Acquisition and the reorganization, E.ON will hold all the
outstanding voting stock of LG&E Energy through PUSIC and E.ON US. PUSIC will
remain a registered holding company under the Act and E.ON and E.ON US will
register as such. The Powergen Intermediate Holding Companies will cease to own
voting securities directly or indirectly in PUSIC or LG&E Energy (or will be
merged or liquidated with E.ON US, as described above), although certain
arrangements to finance LG&E Energy will remain in place./27 Because the
----------------
26 Applicants currently expect to transfer LG&E from Powergen to E.ON
immediately after the Powergen acquisition. To ensure, however, that the
transfer is tax neutral in the U.K., Germany, U.S. and Luxembourg it is
important to retain flexibility regarding the steps necessary to implement the
intended final structure discussed in this Application. It may, for example,
become necessary to take into account a twelve month minimum holding period to
qualify for a capital gains exemption.
27 Powergen US Holdings Limited had aggregate debt outstanding on September
30, 2001, of approximately $4 billion. This debt was originally incurred to
finance Powergen's acquisition of LG&E Energy (approximately $3.25 billion) and
to fund amounts contributed at that time as capital to the LG&E Energy Group to
fund its operations (approximately $0.76 billion).
Powergen acquired LG&E Energy in December 2000. The acquisition cost
(approximately $3.25 billion), together with the simultaneous capital injection
to LG&E Energy (approximately $0.76 billion), required funds of approximately
$4.0 billion to be raised. As described in the Powergen Order, Powergen US
Holdings Limited raised $3.7 billion from a bank facility it negotiated for this
purpose (the "First Bank Facility"), and also borrowed $0.3 billion from
Powergen UK plc. The Powergen Order noted that Powergen intended to reduce the
debt incurred under the First Bank Facility "by, among other things, application
of available cash or the proceeds of asset sales by Powergen UK and its
subsidiaries, or by the issuance of debt securities or other instruments by
Powergen or its subsidiaries prior to, at or after the Merger." This original
debt has been repaid or refinanced in the following ways.
First, asset disposals by Powergen UK plc raised cash which was loaned to
Powergen US Holdings Limited to repay $1.1 billion of the First Bank Facility.
As a result, at September 30, 2001, the loan from Powergen UK plc had increased
to $1.4 billion.
Secondly, Powergen US Funding LLC, a wholly owned subsidiary of Powergen US
Holdings Limited, issued $1.0 billion of US commercial paper ("CP"). The
proceeds from the CP program were loaned to Powergen US Holdings Limited, which
in turn repaid further debt under the First Bank Facility.
As a result of these two actions, at September 30, 2001, the debt at
Powergen US Holdings Limited was comprised of $1.6 billion of debt under the
First Bank Facility, $1.4 billion of intra-system debt owed to Powergen
31
----------------
UK plc and $1.0 billion of CP issued by Powergen US Funding LLC.
Thirdly, in October 2001, Powergen US Funding LLC issued $1.2 billion
principal amount of notes due 2004 (the "Notes"). The proceeds from the Notes
were loaned to Powergen US Holdings Limited, and used to repay further debt
under the First Bank Facility. At this point the external bank debt was reduced
to $0.4 billion.
Finally, in December 2001, Powergen US Holdings Limited negotiated a new
bank facility (the "Second Bank Facility") to replace the First Bank Facility.
Following that, on December 13, 2001, there was approximately $0.25 billion
drawn under the Second Bank Facility, and the CP outstanding had increased to
$1.15 billion.
The results of the actions described above have been to reduce the amount
of external debt (i.e., the First and Second Bank Facilities, the CP and the
Notes) at Powergen US Holdings Limited (including Powergen US Funding LLC) from
$3.7 billion to $2.6 billion. In addition, the change in the composition of the
debt has resulted in a reduction in cost.
It is intended that the external debt at Powergen US Holdings Limited and
Powergen US Funding LLC (namely the CP, the Notes and the Second Bank Facility)
will remain in place following E.ON's acquisition of Powergen. As the debt
cannot be transferred, it will also remain in place following the proposed
reorganization by E.ON. If the Notes were to be prepaid, Powergen US Funding LLC
would be required to pay a substantial premium, which would ensure that the
prepayment was uneconomic. The Second Bank Facility requires the payment of
funding losses in the event that the loans thereunder are prepaid during an
interest period (this provides yield protection to the bank and protects it
against the loss or cost that it could incur in liquidating or deploying
deposits acquired to maintain the loan). In addition, it is not possible to
prepay the CP ahead of the maturity date, and the secondary market for these
instruments is illiquid.
In the event of E.ON's proposed reorganization, the indenture pursuant to
which the Notes were issued requires that E.ON, or E.ON US, guarantee the Notes.
The Second Bank Facility has a similar provision. The loans from Powergen UK to
Powergen US Holdings Limited may remain in place or may be repaid after the
reorganization.
The funds raised by Powergen US Holdings Limited have been passed down
through the Powergen Intermediate Holding Companies through a combination of
loans and equity holdings. Part of this arrangement was reorganized in October
2001 with the result that PUSIC became obligated to contribute capital with a
net present value of $3.1 billion to Powergen US Securities Limited ("PUSSL")
when future capital calls are made (discussed below). Under US GAAP this
obligation is treated as a loan from PUSSL to PUSIC. The balance of the funds
passed down represents equity.
Under the subscription agreement, PUSIC subscribed for $10,000 of ordinary
stock of PUSSL and a company that subsequently merged into PUSIC made an initial
subscription of $5 million for 5 different classes of non-voting stock issued by
PUSSL. The terms of the non-voting stock permit PUSSL to make calls for future
subscriptions in respect of those shares of predefined amounts on future dates
specified in the Subscription Agreement. See Exhibit FS-8, hereto for a schedule
showing the amount and timing of the calls. PUSIC then sold the ordinary and
non-voting PUSSL stock to Powergen Luxembourg Holdings sarl ("PLHS"), but under
the terms of the Sale and Purchase Agreement retained the obligation to meet the
future calls on the non-voting stock. The price paid by PLHS for the non-voting
stock ($3.1bn) therefore amounted to the net present value ("NPV") of the future
calls (i.e. effectively their market value on a discounted cash flow basis). The
$3.1bn consideration was used to repay the outstanding liabilities owing by
Powergen USA (the former ultimate U.S. parent of LG&E Energy and formerly a
Powergen Intermediate Holding Company) to the intermediate Luxembourg holding
companies under the loan notes put in place on the initial acquisition of LG&E
Energy.
PUSIC therefore has the ongoing commitment to make the calls. The timing
and amounts of the calls (and related security arrangements) are very similar to
those arising under a debt instrument. As a result, under US GAAP (and for the
purposes of determining US taxable income) the payments under the calls (other
than the final payment in respect of each class which is treated as a repayment
of loan principal) are regarded as interest and the NPV of the obligation to
make the future payments is recorded as debt.
In the event of the E.ON reorganization, the stock of PUSIC will be
transferred from the Powergen Intermediate Holding Companies to E.ON US for
value payable in the form of cash or a loan note. PUSIC's obligation in respect
of the capital call described above will remain a continuing obligation of
PUSIC.
Funds paid by PUSIC to PUSSL would be invested in non-voting shares of a UK
unlimited company, Powergen UK Securities ("PUKS"), which is owned (voting
control) by Powergen. PUKS then lends to Powergen US Holdings Limited.
32
Powergen Intermediate Holding Companies will either cease to hold direct or
indirect voting interests in LG&E Energy or be merged or liquidated into E.ON US
(which will register as a holding company under the Act as discussed herein),
they will cease to be holding companies under the Act and, consequently, they
request that the Commission unconditionally approve their deregistration under
Section 5(d) of the Act. Applicants request that the Commission reserve
jurisdiction over the deregistration of the Powergen Intermediate Holding
Companies until after the reorganization has been effected and the record with
respect to this matter is complete. LG&E Energy and the Utility Subsidiaries
survive the Acquisition and each retains its separate existence.
Accordingly, the Acquisition and reorganization will result in a
relatively simple chain of equity ownership between E.ON and LG&E Energy and
preserve the efficient financing arrangements in the Powergen Intermediate
Holding Company structure. The equity ownership structure is preferable from a
tax law perspective because it avoids holding a U.S. asset through another
foreign jurisdiction. Currently, German tax regulations with regard to
controlled foreign corporations discourage German corporations from holding
assets through multi-tier subsidiaries located in multiple jurisdictions. The
Powergen Intermediate Holding Company structure is maintained in whole or in
part because it provides efficient financing that is already in place. It would
be inefficient to unwind this structure post-Acquisition and to replace it with
other financing arrangements. Some of the financings currently in place
prohibit, or would involve penalties for, early repayment.
Maintaining an efficient post-Acquisition structure may require a
rapid response to changes in matters such as tax and accounting rules, including
by making appropriate revisions after consummation of the Acquisition to add or
subtract an intermediate holding company between E.ON and LG&E Energy, in the
E.ON US chain or the E.ON UK chain including the Powergen Intermediate Holding
Companies and the Powergen Financing Entities (subsequent to the transfer of
PUSIC to E.ON US). Such changes to the "upper structure" will not have any
material impact on the financial condition or operations of LG&E Energy or its
subsidiaries. Applicants request authorization to make corporate structure
changes without having to seek specific authority from the Commission for each
change, subject to the condition that no change (i) will result in the
introduction of any third party interests in the upper structure, (ii) will
introduce a non-European Union or non-U.S. entity into the upper structure or
(iii) will have any material impact on the financial condition or operations of
E.ON or LG&E Energy and its subsidiaries. Applicants note that the Commission
granted authority to make such changes subject to comparable conditions in the
Powergen Order and in the National Grid Order.
E.ON North America Inc., a Delaware corporation ("E.ON NA"), E.ON's
wholly-owned U.S. subsidiary, has served in the past as the holding company for
certain of E.ON's
33
activities in North America, handling certain finance, legal,
tax and other service functions. E.ON NA owns Fidelia Inc. ("Fidelia"), a
finance company subsidiary organized under Delaware law. Fidelia lends money to
E.ON Group companies, including the U.S. subsidiaries of Degussa AG, one of
E.ON's to-be-divested subsidiaries.
It is more efficient from an operations, tax and financing perspective
to integrate E.ON NA and Fidelia under the E.ON U.S. corporate structure
post-Acquisition. This structure would reduce costs by avoiding duplication of
corporate services and would simplify the overall corporate structure of the
E.ON Group. In addition, Fidelia holds the cash proceeds of certain divestitures
of E.ON's nonutility businesses in the U.S. It may be advantageous to continue
to hold such funds in Fidelia for use in future U.S. acquisitions as permitted
or authorized by the Commission. In addition, Fidelia may lend funds to other
companies in the E.ON Group, except as prohibited under the Act./28 This would
avoid repatriating the funds to Germany and exposure to the risks of currency
value fluctuations.
To effect the restructuring, E.ON would transfer the E.ON NA shares to
E.ON US. E.ON US would then transfer the E.ON NA shares to PUSIC./29 E.ON may
contribute cash, notes or similar financial assets to the capital of E.ON NA, in
connection with the restructuring transactions./30
The restructuring of E.ON NA after the Acquisition is part of E.ON's
overall efforts to restructure its businesses that is described more fully in
Item 3.G., infra. Applicants note, however, that after the restructuring E.ON NA
would not assume any of the functions performed by LG&E Energy, LG&E or KU and
no functions currently performed in Kentucky will be transferred to New York.
Moreover, neither the Acquisition nor the restructuring of PUSIC or E.ON NA will
change the capital structure of the Utility Subsidiaries.
Powergen will remain the immediate parent company of Powergen Group
Holdings Ltd., the current "umbrella" FUCO in the Powergen Group. Powergen will
remain responsible for the development and operation of LG&E's and KU's business
and will support the development of E.ON's Anglo-American energy and utility
business in the context of E.ON's overall group strategy. Although Powergen will
cease to continue to own any public utility companies, due to Powergen's
continuing responsibility for LG&E and KU, Powergen will remain a registered
holding company under the Act.
For German law reasons, it is impractical for E.ON to isolate its
non-utility businesses under a single "umbrella" FUCO, as was done in the
structuring of Powergen's acquisition of LG&E Energy and other cross-border
transactions. Rather, certification of FUCO status will be provided by filing
Form U-57 for certain existing E.ON first tier subsidiaries,
----------------
28 Applicants' application in SEC File No. 70-9985 describes the financing
plan for the E.ON Group, including Fidelia's role, in more detail.
29 Authorization to restructure nonutility holdings from time to time is
requested in Applicants' application in SEC File No. 70-9985. See Item 1.D.8 of
that application.
30 E.ON NA has approximately $87 million of debt outstanding to E.ON AG
(with various maturities through November 2003) which will likely remain
outstanding subsequent to the transfer of E.ON NA to PUSIC.
34
including E.ON Energie. E.ON Energie's activities have already been described
above. See Item 1.A.2.a.
Gelsenberg will also certify as a FUCO at such time as E.ON acquires
51% or more of Gelsenberg as the first step in the VEBA Oel divestiture
transaction described more fully in Item 1.A.2.d., above./31 Gelsenberg directly
and indirectly holds 25.5% of Ruhrgas.
E.ON presently owns a small (below 1%) direct interest in Ruhrgas.
That interest should be considered in the context of E.ON's broader strategy of
acquiring a controlling share of Ruhrgas. After E.ON acquires Gelsenberg E.ON
may, depending on tax considerations among other things, contribute its current
Ruhrgas stake to Gelsenberg, thereby combining all its Ruhrgas holdings under
one FUCO holding company.
E.ON also indirectly holds an additional 18% interest in Ruhrgas
through E.ON's interest in RAG./32 E.ON's indirect interests in Ruhrgas
participate in a voting pool that includes 59% of the voting power of Ruhrgas.
Ruhrgas is Germany's largest natural gas transmission, storage, and
import company, with total sales of approximately 600 billion kWh (approximately
50 billion cubic meters) of gas. These operations account for 88% of its total
revenues of Euro 7.3 billion ($6.4bn). Most of its remaining revenues of 12% are
generated in activities that support the import and transport of gas.
Ruhrgas owns a high-pressure grid that covers nearly all of western
Germany. In addition, it owns stakes in regional gas transmission companies, in
local gas distributors and in "Stadtwerke" (municipal utilities) in Germany and
elsewhere in Europe. As explained below, Stadtwerke frequently also sell
electricity, water and other services. Ruhrgas owns minor stakes of 5% to 9% in
four gas fields and a 5% stake in its main gas supplier, the Russian gas company
Gazprom. These stakes are usually held to secure supply. Ruhrgas supplies gas to
E.ON, among others. Ruhrgas also manufactures equipment for the gas industry,
such as meters, to assist its customers in their use of Ruhrgas gas and to
strengthen its relationship with those customers.33
Other E.ON direct subsidiaries, including Degussa and Viterra, will
continue as such and, in this Application, E.ON is seeking appropriate
Commission authorizations to own and operate such subsidiaries under the Act
pending their divestiture within 5 years of the completion of the Acquisition
and the registration of E.ON as a holding company.
----------------
31 E.ON cannot cause Gelsenberg to qualify as a FUCO until E.ON has
acquired a majority interest.
32 E.ON directly and indirectly owns 39.2% of the shares of RAG which is
engaged predominantly in the production of coal for power generation. As
described below and in Item 3.G.1.c. RAG is a unique entity under German law.
E.ON seeks a commission order under Section 2(a)(8) to the effect that RAG is
not a subsidiary of E.ON.
33 Ruhrgas owns a U.S. manufacturer of metering equipment, American Meter
Company of Horsham, Pennsylvania. American Meter Company sells meters to, among
others, LG&E. That metering equipment is used in connection with gas operations,
and American Meter Company is thus retainable consistent with Commission
precedent. Ruhrgas also is engaged in gas-related engineering activities in the
U.S., of the type authorized under Rule 58(b)(1)(vii).
35
Because E.ON will: (1) maintain the relationship among LG&E Energy and
its Utility Subsidiaries unchanged, (2) cause the Powergen Intermediate Holding
Companies to cease to be holding companies, (3) have large segments of its
business organized under FUCO subsidiaries, and (4) divest many nonutility
subsidiaries, it will not have an unduly complicated corporate structure. Its
corporate structure is consistent with that adopted by other foreign registered
holding companies and approved by the Commission. Moreover, the voting
securities of LG&E Energy will be wholly owned directly or indirectly by E.ON
and the Intermediate Companies, after the Acquisition and E.ON reorganization.
Consequently, as required under Section 11(b)(2) of the Act, there will be no
unequal distribution of voting power or the creation of minority interests as a
consequence of the Acquisition.
The post-Acquisition corporate structure also is not an unduly
complicated corporate structure under the "great grandfather" clause of Section
11(b)(2) of the Act that requires Commission simplification. After the
Acquisition, E.ON, and each of the Intermediate Companies will be a holding
company over LG&E Energy which itself would be an exempt holding company over
LG&E and KU.
The Commission reviewed and permitted a structure including holding
companies similar to this in the Powergen Order and the National Grid Order. In
the past, the Commission has recognized the necessity of permitting the
continued existence of intermediate holding companies to achieve economic and
tax efficiencies that would not otherwise be achievable in the absence of such
arrangements. The Intermediate Companies will not be a means by which E.ON seeks
to diffuse control of LG&E Energy and LG&E Energy's subsidiaries. Rather, the
Intermediate Companies will be created as special-purpose entities for the sole
purpose of helping the parties capture economic efficiencies that might
otherwise be lost in a cross-border transaction. The Intermediate Companies will
not issue securities to third parties and consequently can appropriately be
considered as mere conduits. Each of the Intermediate Companies will be wholly
owned, directly or indirectly and fully controlled by E.ON and the creation and
existence of the Intermediate Companies will not adversely affect the operation
of the LG&E Energy Group. Accordingly, this is not the type of situation that
concerned the drafters of the Act, and, in the Applicants' view, the Commission
should exercise its discretion to find that any apparent complexity of the
proposed transaction structure is neither undue nor unnecessary./34
----------------
34 Congress adopted section 11(b)(2) to address "the leverage and
pyramiding device that enabled holding companies to amass control over vast sums
contributed by others and realize for itself large earnings and profits without
proportionate investment -- the prime evil at which ss. 11(b)(2) is directed."
American Power Co. v. SEC, 329 U.S. 90, 110 (1946) (upholding constitutionality
of section 11(b)(2) of the Act). The extensive studies that preceded the passage
of the Act found that the most distinctive characteristic of the holding company
groups examined was the pyramided structure. As the United States Supreme Court
has explained: "In its most common form, the pyramiding device consisted of
interposing one or more subholding companies between the holding company and the
operating companies and issuing, at each level of the structure, different
classes of stock with unequal voting rights. Most of the financing of the
various companies in the structure occurred through the sale to the public of
bonds and preferred stock having low fixed returns and generally carrying no
voice in the management. Under such circumstances, a relatively small but
strategic investment in common stock (with voting privileges) in the higher
levels of a pyramided structure often resulted in absolute control of underlying
operating companies with assets of hundreds of millions of dollars. A tremendous
"leverage" in relation to that stock was thus produced . . . . In many instances
this created financially irresponsible managements and unsound capital
structures." Id at 100-01. See also, Entergy Corporation, Holding Co. Act
Release No. 27039 (June 22, 1999) (finding, with respect to the formation of
nonutility subsidiaries and holding companies and the issue of undue complexity
under Section 11(b)(2) of the Act, that "the organizational structure
contemplated by Entergy's Application has no relation to these historical
abuses. Rather than a "leverage and pyramiding device," the proposed use of
distinct special purpose subsidiaries offers various benefits. It facilitates
selective diversification, affords separation between the utility and nonutility
businesses, and provides additional flexibility for financing and for
maintaining appropriate capital ratios.").
36
E.ON UK, E.ON UK plc and Powergen will also be registered holding
companies after the Acquisition. All will be wholly-owned directly or indirectly
by E.ON. E.ON UK will not issue securities to third parties and, as with the
Intermediate Companies, should be considered merely a conduit for purposes of
Section 11(b)(2) of the Act.
E.ON UK plc, however, may issue and sell loan notes to Powergen's
shareholders to finance the Acquisition, in part. This limited issuance of
securities supported by Powergen, a valuable revenue generating asset, should be
authorized under the Act and deemed consistent with Section 11(b)(2). The loan
notes are designed to benefit Powergen's shareholders by minimizing their tax
exposure. Under U.K. tax law, such shareholders can defer recognition of any
capital gains from the sale of their Powergen shares until they redeem the loan
notes. Thus, this is not a case of a transaction that promotes an over leveraged
capital structure unsupported by sufficient assets to the potential detriment of
investors.
The loan notes would be guaranteed by E.ON and, consequently, can be
viewed as securities issued by E.ON. The loan notes would be unsecured and would
not exceed, in aggregate principal amount issued, $7.3 billion. Accepting
shareholders would receive (pound)1 nominal of loan notes for every (pound)1 of
cash consideration. The loan notes do not contribute to an overly leveraged
capital structure because the pro forma capital structure of the E.ON Group
post-Acquisition shows a very substantial equity level (48.44%) even assuming
the unlikely case that the entire Powergen purchase consideration is financed
with loan notes. The debt would be reflected in E.ON's consolidated financial
statements and, as provided in the Financing Application, E.ON will commit to a
minimum 30% equity to total capitalization level./35
The loan notes would not be outstanding beyond five years and may not
even be issued. If valid elections for the loan note alternative do not require
the issue of loan notes exceeding (pound)25 million in nominal value of loan
notes, no loan notes will be issued unless E.ON determines otherwise, and
holders of Powergen shares who have elected the loan note alternative will
receive cash in accordance with the basic terms of the offer. E.ON UK plc would
not issue other securities to third parties.
In addition, given the E.ON guarantee, E.ON UK plc could be viewed as
a financing subsidiary for E.ON./36 For these reasons, the E.ON UK plc debt
should be treated as E.ON debt for purposes of determining compliance with the
great grandfather clause of Section 11(b)(2) of the Act.
----------------
35 Compliance with the minimum 30% equity to total capitalization standard
will be measured based on U.S. GAAP financial statements when the books are
closed at the end of each month.
36 See e.g., The Southern Company, Holding Co. Act Release No. 27134 (Feb.
9, 2000) (authorizing Southern to use special purpose subsidiaries to issue
certain preferred and debt securities to provide the flexibility necessary to
achieve the lowest cost of capital).
37
Powergen also will not issue securities to third parties. It is a
holding company because of the management responsibility that it will retain
with respect to LG&E and KU. This continued role post-Acquisition simply
capitalizes on the existing management expertise at Powergen with respect to the
Anglo-American energy and utility business. Allowing E.ON to continue to use
Powergen's management team in this manner fosters stable, responsive and
effective management, it does not increase the E.ON Group's leverage or result
in diffused voting power. Powergen's role as a holding company in this structure
is comparable to that of a corporate division that is responsible for a specific
segment of the corporation's business.
The Intermediate Companies, the Powergen Intermediate Holding
Companies, and the Powergen Financing Entities will not engage in any other
business other than acting as financing conduits and the management role
described for Powergen above.
A comparison of E.ON's proposed structure to the structure authorized
by the Commission in the Powergen Order demonstrates that the proposed structure
is not unprecedented. In the Powergen Order, the Commission authorized a
structure of holding companies that featured Powergen as the ultimate parent,
Powergen US Holdings Ltd. as a first tier subsidiary holding company, several
intermediate holding companies and LG&E Energy as an exempt holding company
directly over LG&E and KU. Powergen, Powergen US Holdings Ltd. and LG&E Energy
were all authorized to issue securities to third parties. In the case of
Powergen US Holdings Ltd. and LG&E Energy, they would not issue equity to third
parties so as to avoid the creation of a minority interest. The other
intermediate holding companies were mere conduits and did not have authorization
to issue securities externally. Consequently, there were three levels of holding
companies with more substance than the mere conduits.
The Powergen Order notes that the intermediate companies "will exist
primarily to create an economically efficient structure for the Merger and the
ongoing operations of Powergen and the LG&E Energy Subsidiaries. Applicants
request that the Commission disregard the Intermediate Companies [including
Powergen US Holdings Ltd.], LG&E Energy and KU for purposes of section 11(b)(2)
of the Act."/37 Although the Powergen Order does not say more, it is reasonable
to infer that because Powergen US Holdings Ltd. functioned as a financing
subsidiary of Powergen it was also considered a conduit and disregarded. LG&E
Energy's status as an exempt holding company also made it appropriate to
disregard for purposes of Section 11(b)(2) where the concerns of the Act are not
presented./38
E.ON's proposed structure is similar. There are three levels of
holding companies with substance in the sense that they would have authorization
to issue securities to third parties, E.ON, E.ON UK plc and LG&E Energy.
Powergen also has some substance since it will remain
----------------
37 At the time of the Powergen Order, KU's subsidiary Electric Energy Inc.
was identified as a utility subsidiary and KU was an exempt holding company
under Section 3(a)(2) of the Act. EEI is now an exempt wholesale generator and,
consequently, KU is no longer a holding company.
38 Except as specifically provided by the Commission, an exempt holding
company is generally excused from all sections of the Act other than Section
9(a)(2). But cf., Public Service Corporation Of New Jersey, et al., Holding Co.
Act Release No. 8002 (February 26, 1948) (holding that an exemption under
Section 3 of the Act may be conditioned on a structural and financial overhaul
under Section 11(b)(2) of the Act if the Commission deems that such a condition
is required in the public interest or for the protection of investors).
38
involved in the management of LG&E and KU. E.ON UK plc is appropriately
disregarded since it will function for a limited purpose as a financing
subsidiary of E.ON. LG&E Energy will continue to be an exempt holding company
and as such should be disregarded for purposes of Section 11(b)(2). Powergen's
continuing management role is beneficial to the LG&E Energy Group and does not
raise the concerns of excessive leverage or the unfair distribution of voting
power and, consequently, it also is appropriately disregarded for purposes of
Section 11(b)(2) of the Act.
Nevertheless, even if Powergen is not disregarded, the E.ON holding
company structure would have only two holding companies (E.ON and Powergen) and
would comply with Section 11(b)(2), provided that E.ON UK, E.ON UK plc, LG&E
Energy and the Intermediate Companies are disregarded for purposes of Section
11(b)(2) based on the Powergen Order precedent.
Section 11(b)(2) of the Act requires the Commission to guard against
complicated corporate structures and the unfair distribution of voting power
among holding company security holders and, in that connection, to take action
as necessary to cause a holding company to "cease to be a holding company with
respect to each of its subsidiary companies which itself has a subsidiary
company which is a holding company." The great grandfather clause does not
prohibit E.ON's proposed corporate structure. E.ON's corporate structure and its
need to hold the acquired Powergen and LG&E Energy group companies efficiently
across borders are very similar to the corporate structure and facts presented
to, and approved by, the Commission in the Powergen Order and the National Grid
Order.
The Powergen Order is discussed above. In the National Grid Order, the
Commission decided "to 'look through' the Intermediate Companies (or treat the
Intermediate Companies as a single company) for purposes of the analysis under
Section 11(b)(2) of the Act," and found that the corporate structure did "not
unduly or unnecessarily complicate the structure" of National Grid. Applicants
respectfully submit that the same result should follow in the present case.
The Commission has in the past, consistent with its role as the
administrative agency with the expertise, authority and discretion to administer
the Act in a responsive manner, giving due regard to relevant policy
considerations, recognized the necessity of permitting the continued existence
of intermediate holding companies in registered holding company systems in order
to achieve economic and tax efficiencies that would not otherwise be achievable
in the absence of such arrangements. Thus, in specific cases where the issue was
considered, the Commission exercised reasonable discretion and, on the basis of
other relevant provisions of the Act, expressly permitted the continued
existence of intermediate holding companies in a registered holding company
system, apparently on a finding of "no harm, no foul" and giving due regard to
the economic desirability of the corporate structure and other arrangements.
See, e.g., West Penn Railways Co., Holding Company Act Release No. 953 (Jan. 3,
1938) (expressly authorizing the continued existence of an intermediate holding
company); and West Texas Utilities Co., Holding Co. Act Release No. 4068 (Jan.
25, 1943) (reserving jurisdiction under Section 11(b)(2) in connection with
acquisition that resulted in the creation of a "great grandfather" company). In
each of these matters, the Commission apparently concluded that the economic
benefits associated with the additional corporate layers in the holding company
system
39
outweighed the potential for harm and the possibility that there could be a
recurrence of the financial abuses that the 1935 Act was intended to eliminate.
See West Penn Railways ("The substantial traction interests of the West Penn
Railways Company make it impractical, from a financial standpoint, to eliminate
it as a separate corporation."); and West Texas Utilities Co. (noting likely
bankruptcy of acquired company in the event transaction not approved).
It is again worth emphasizing that none of the economic planning
reflected in the proposed transaction structure will result in any change in the
capital structure or corporate organization of the LG&E Energy Group or in the
financing transactions undertaken by LG&E Energy and its subsidiaries. Neither
LG&E Energy nor any of LG&E Energy's subsidiaries will borrow or issue any
security or pledge any assets to finance any part of the Acquisition. Thus,
there is no possibility that implementation and continuance of the proposed
corporate structure could result in an undue or unnecessarily complex capital
structure to the detriment of the public interest or the interest of consumers.
To summarize, the proposed corporate structure is not inconsistent
with Section 11(b)(2) because it does not promote excessive leverage or the
unfair or inequitable distribution of voting power among E.ON's security
holders.
o There are legitimate business reasons for the existence of each company in
the structure, particularly as in this case where the transaction involves
not one, but three countries: Germany, the U.K. and the U.S.;
o Voting power is not unfairly distributed and there are no minority
interests created because all the companies in the corporate structure will
be wholly-owned and controlled by E.ON;
o There is no danger of excessive leverage because the securities to be
issued are issued in return for fairly valued assets that will support the
securities; and in addition, the 30% consolidated equity commitments made
by E.ON, LG&E Energy and the Utility Subsidiaries assure that the capital
structure of the E.ON Group remains sound./39
E.ON's Capital Structure
The capital structure of E.ON will not be unduly complicated nor will
it be detrimental to the public interest, the interest of investors or consumers
or the proper functioning of the combined system. E.ON currently has a simple
capital structure and is proposing to acquire the outstanding Powergen shares
using its available cash resources, existing lines of credit, and possibly the
proceeds of debt issuances, in addition to the loan notes described in Item
1.B.3. In addition, none of Powergen, LG&E Energy or any of their subsidiaries,
including the Utility Subsidiaries, will borrow or issue any security, incur any
debt or pledge any assets to finance any portion of the purchase price paid by
E.ON for the Powergen shares.
E.ON's capital structure is sound as well as simple. E.ON's capital
structure as of December 31, 2000 and December 31, 2001 is summarized below:
----------------
39 See Exhibit E-1B to this Application for additional details regarding
the role of each of the companies discussed above in the corporate structure.
40
------------------------ ------------------------------------- ---------------------------------------
As of December 31, 2000 As of December 31, 2001
------------------------ ------------------------------------- ---------------------------------------
$mm % $mm %
------------------------ ----------------- ------------------- ------------------ --------------------
Common stock equity* 31,126 69.94 27,437 65.39
------------------------ ----------------- ------------------- ------------------ --------------------
Long-term debt 6,879 15.46 8,285 19.74
------------------------ ----------------- ------------------- ------------------ --------------------
Short-term debt 6,496 14.60 6,240 14.87
------------------------ ----------------- ------------------- ------------------ --------------------
Total 44,501 100.00 41,962 100.00
------------------------ ----------------- ------------------- ------------------ --------------------
*Common stock equity includes common stock (i.e., amounts received equal to the
par or stated value of the common stock), additional paid-in capital, retained
earnings and minority interests of $4.8 billion and $5.7 billion for December
31, 2000 and December 31, 2001, respectively.
As of April 18, 2002, Moody's and Standard and Poor's rate E.ON's
long-term bonds Aa2 and AA-, respectively. E.ON's short-term debt received
ratings of P-1 and A-1+, respectively, from Moody's and Standard & Poor's.
E.ON's excellent ratings underscore the E.ON Group's sound financial condition.
After the Acquisition, the E.ON Group will continue to have a sound
capital structure. The table below shows the capitalization of each company as
of December 31, 2001 and the combined group on a pro forma basis, according to
U.S. GAAP.
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
E.ON ($ E.ON (%) Powergen Powergen Adjust-ments Pro Forma Pro Forma
mm) Group Group (%) Combined Combined (%)
($ mm) ($ mm)
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Common stock 27,437 65.39 3,442 31.25 (3,289) 27,590 48.44
equity*
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Preferred 0 0 135 1.23 0 135 0.24
stock
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Long-term 8,285 19.74 5,496 49.90 7,271** 21,052 36.96
debt
(including
current
portion)
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Short-term 6,240 14.87 1,941 17.62 0 8,181 14.36
debt
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
Total 41,962 100.00 11,014 100.00 3,982 56,958 100.00
--------------- --------- --------- ------------ ------------ ------------ ------------ -------------
* Common stock equity includes common stock (i.e., amounts received equal to the
par or stated value of the common stock), additional paid-in capital and
retained earnings, and minority interests of E.ON of $5.7 billion and of
Powergen of $153 million.
41
** The adjustment for long-term debt is based on the assumption that the
Acquisition is fully financed with debt, although the ultimate financial
structure for the transaction has not been finalized.
E.ON's shares are listed on all German stock exchanges, the Swiss
Stock Exchange, and as ADRs on the NYSE (ticker symbol "EON"). E.ON's ADRs are
registered under the 1933 Act, and, as a foreign private issuer, the company
files Form 20-F and other periodic disclosure reports with the Commission./40
E.ON's financial statements are maintained in accordance with U.S. GAAP.
After the Acquisition, E.ON will have outstanding long-term debt at
the parent-company and subsidiary level. The presence of debt at more than one
level of the E.ON system does not "unduly complicate" the capital structure of
that company for purposes of Section 10(b)(3). To the contrary, E.ON's financing
system more appropriately reflects the optimal capitalization of its various
businesses to the greater benefit of the entire system by properly allocating
the cost of capital to each business segment based on its risk profile.
Moreover, in the first instance, to the extent that the debt is associated with
facilities that have been entered into before E.ON becomes a registered holding
company, such debt should be grandfathered for purposes of the Act. Second, and
more important, Section 7(c)(2)(D) expressly provides for the issuance of
nontraditional securities if "such security is to be issued or sold solely for
necessary or urgent corporate purposes of the declarant where the requirements
of the provisions of paragraph (1) would impose an unreasonable financial burden
upon the declarant and are not necessary or appropriate in the public interest
or for the protection of investors or consumers." Registered gas systems have
relied on this provision for years in connection with their routine financing
transactions. See, e.g., The Columbia Gas System, Inc., Holding Co. Act Release
No. 26634 (Dec. 23, 1996) (authorizing Columbia to issue external, long-term
debt which, in the aggregate with equity financing issued by Columbia, would not
exceed $5 billion at any one time outstanding through December 31, 2001). Based
on the same rationale, the Commission has permitted a registered electric system
to have long-term debt at the parent company level. Southern Co., Holding Co.
Act Release No. 27134 (Feb. 9, 2000). Following the Southern Co. decision, the
Commission similarly allowed investment grade long-term debt at the parent
company level in the National Grid Order and the Powergen Order. Third, as
described in this Application, E.ON is in the process of transforming itself
into a pure-play energy and utility company. Rationalization of E.ON's capital
structure will be a natural result of that process.
As a predicate to receiving such flexibility, registered holding
companies have generally committed to maintain an investment grade credit rating
and a minimum level of equity capitalization. See, e.g., Southern Co., Holding
Co. Act Release No. 27134 (February 9, 2000), the National Grid Order, the
Powergen Order, KeySpan Corp., Holding Co. Act Release No. 27272 (November 8,
2000), and Cinergy Corp., Holding Co. Act Release No. 27190 (June 23, 2000).
E.ON's capital structure and post-registration financing plans, including its
commitments regarding maintaining an investment grade credit rating and a
minimum capitalization ratio, are
----------------
40 As of December 31, 2001, E.ON had 692.0 million common shares issued and
approximately 687.3 million outstanding shares. E.ON recently completed the
repurchase of 76.3 million shares, approximately 10% of the company's capital
stock. E.ON has cancelled 71.3 million of the repurchased shares. The remaining
repurchased shares were partly used for the 2001 employee share purchase
program. In addition, E.ON intends to use them to hedge E.ON's stock
appreciation rights and/or as shares to be issued in the future in connection
with the employee share purchase program.
42
discussed in more detail in its separate application filed with the Commission
in SEC File No. 70-9985 (the "Financing Application").
For the reasons stated above the capital and corporate structure of
the E.ON system will not be unduly complicated by the proposed Acquisition. In
addition, for the reasons set forth above, and the assurances provided below in
the section "Compliance with State Law," Applicants believe that the proposed
Acquisition will, in fact, benefit the protected interests and enhance the
functioning of the resulting holding company system.
E. Compliance with State Law
All State Laws Applicable to the Acquisition Will be Complied With,
Including State Laws Applicable to Combination Electric and Gas
Utilities.
Consistent with the Act's purpose of supplementing effective state
utility regulation, Section 8 of the Act prevents holding companies, by use of
separate subsidiaries, from circumventing state restrictions on common ownership
of gas and electric operations./41
The Acquisition will not result in any new situations of common
ownership of "combination" systems within any state. LG&E is presently a
combination gas and electric public utility serving substantially the same
territory in Kentucky. After the Acquisition, LG&E will continue to serve both
gas and electric customers in Kentucky. No state law prohibits LG&E's combined
gas and electric operations, and no state law prohibits E.ON from indirectly
acquiring LG&E.
With respect to Section 10(f) of the Act, Applicants have made full
filings with the KPSC and the VSCC for approval of the Acquisition in accordance
with all applicable state laws. Applicants also provided the TRA with a copy of
the KPSC application and requested by letter that the TRA disclaim jurisdiction
over the Acquisition. The TRA instead asserted its jurisdiction and accepted the
letter and supporting materials as sufficient to meet the applicable filing
requirements. The authorizations of the KPSC, the VSCC and the TRA have been
granted./42 To provide a further measure of assurance that the Acquisition, in
particular E.ON's proposal to invest up to $67 billion in EWGs and FUCOs, will
not be detrimental to consumers, the Utility Subsidiaries or the ability of the
state commissions to protect the Utility Subsidiaries and their customers, the
Commission solicited the views of the KPSC, VSCC and TRA. Each of
----------------
41 Under Section 10(c)(1) of the Act, the Commission may not approve "an
acquisition of securities or utility assets, or of any other interest, which is
unlawful under the provisions of Section 8 or is detrimental to the carrying out
of the provisions of Section 11." Section 8 of the Act makes it unlawful for a
registered holding company or subsidiary to have or acquire an interest in an
electric and gas utility serving substantially the same territory if state law
would prohibit such combination ownership. Lastly, Section 10(f) of the Act
prohibits the Commission from approving an application regarding an acquisition
unless it appears that the applicants have complied with all applicable state
laws (except where such compliance would conflict with Section 11 of the Act).
42 See Item 4 infra and Exhibits C-2, C-4 and C-9; the orders of the KPSC,
VSCC and TRA, respectively.
43
the state commissions responded that the proposed investments would not have an
adverse effect./43
In addition, the response of the VSCC requested that the SEC clarify
that in any order issued in this matter that E.ON's public utility subsidiaries,
in furtherance of their public service obligations, have a priority claim on
capital from E.ON, over FUCO and EWG investments. Accordingly, E.ON commits to
maintain adequate capitalization of the Utility Subsidiaries so that they can
continue to meet their public service obligations. E.ON will provide capital to
the Utility Subsidiaries, as necessary to that end, on a priority basis before
it funds its EWG and FUCO investments. In addition, E.ON commits that it will
not seek recovery in higher rates to LG&E or KU ratepayers for any losses or
inadequate returns that may be associated with E.ON's nonutility investments.
The state commission authorizations and E.ON's supporting commitments
demonstrate that the interests of retail customers are adequately protected.
Accordingly, the Acquisition will be lawful under state law and the Act's
requirements regarding proper state authorization will be satisfied.
Based on similar facts and assurances, the Commission held in the
National Grid Order and the Powergen Order that the proposed acquisition would
not be detrimental to the public interest or the interest of investors or
consumers. Applicants therefore respectfully submit that the Commission make the
same finding with respect to the Acquisition.
F. Integrated Public Utility System
The Acquisition Tends Towards the Economical and Efficient Development
of an Integrated Public Utility System and the Additional Gas System
May Be Retained./44
To establish that the Acquisition has a tendency toward the economical
and efficient development of an integrated public utility system Applicants
demonstrate, first, that the transaction produces benefits to the operations of
the Utility Subsidiaries and, second, that the technical requirements of
integration continue to be satisfied post-Acquisition.
----------------
43 See letter from K. David Waddell, Executive Secretary, Tennessee
Regulatory Authority to Catherine Fisher, Assistant Director, Office of Public
Utility Regulation, Securities and Exchange Commission dated February 4, 2002;
letter from Martin J. Huelsmann, Chairman, Commonwealth of Kentucky Public
Service Commission to Catherine Fisher dated February 4, 2002 and; letter from
Philip R. De Haas, Counsel to the Commonwealth of Virginia State Corporation
Commission to Catherine Fisher dated February 8, 2002.
44 Under Section 10(c)(2) of the Act, the Commission may not approve "the
acquisition of securities or utility assets of a public utility or holding
company unless the Commission finds that such acquisition will serve the public
interest by tending towards the economical and efficient development of an
integrated public utility system." Section 11(b)(1) of the Act, requires the
Commission to limit the operations of the holding-company system to a single
integrated public-utility system and one or more additional integrated public
utility systems if the Commission finds that "(A) Each of such additional
systems cannot be operated as an independent system without the loss of
substantial economies which can be secured by the retention of control by such
holding company of such systems; (B) All of such additional systems are located
in one State, or in adjoining States, or in a contiguous foreign country; and
(C) The continued combination of such systems under the control of such holding
company is not so large (considering the state of the art and the area or region
affected) as to impair the advantages of localized management, efficient
operation, or the effectiveness of regulation."
44
Operational and Other Benefits
E.ON will supplement the existing management of LG&E Energy with its
own high quality management team with proven generation, transmission and
distribution expertise. In addition to its management expertise, due to its
financial strength and size, E.ON has expansive access to the international
capital markets. Its strong credit ratings and liquid assets allow it to attract
capital at reasonable rates. For example, Moody's and Standard & Poors's have
placed the credit ratings of LG&E Energy, LG&E Capital Corp., LG&E and KU on
review for possible upgrade reflecting the anticipated support these companies
will receive from becoming a core part of the E.ON System. E.ON's current
long-term debt rating of Aa2 and short-term rating of Prime-1 have been
confirmed by Moody's. The ratings of senior secured debt of LG&E and KU were
also confirmed by Moody's at their present levels of A-1.
E.ON has significant expertise in providing the infrastructure,
dispatch and power exchange necessary for providing reliable and efficient power
supply, transmission and distribution. E.ON is the fourth largest electricity
producer in the world ranked by electricity sales volume. E.ON supplies
electricity and gas to approximately 25 million customers. Through E.ON Energie
it owns interests in and operates electric power generation facilities with a
total installed generation capacity of more than 33,000 MW and an attributable
capacity of 25,000 MW. E.ON's power transmission grid extends from Scandinavia
to the Alps. The grid covers more than one-third of the surface area of Germany.
E.ON's power trading operations are sophisticated and incorporate a full risk
management system. The wealth and depth of E.ON's experience and expertise open
up a wide range of possibilities for improving operations, lowering costs and
environmental impacts and increasing efficiency and reliability.
The process of evaluating integration possibilities, aimed at
eliminating duplication and implementing best practices has just begun. E.ON's
significantly larger scale, both in financial and operational terms, will
enhance the ability of the LG&E Energy Group to utilize new developments in
transmission and distribution technology, information systems, and capital
markets, where these can be seen to bring economic benefit.
For the employees of LG&E Energy the transaction represents an
opportunity for growth as the company becomes the U. S. base of operations for a
large international group. E.ON's expressed intentions to expand and consolidate
its operations in this country will bring expanded opportunities for LG&E Energy
employees. Those opportunities will help to retain and attract the best
employees to the benefit of LG&E, KU and the Commonwealth of Kentucky. Powergen
shareholders will also benefit from the premium received for their shares upon
the closing of the transaction.
These opportunities represent a tangible net benefit to customers of
LG&E and KU, because not only does E.ON bring financial strength and managerial
experience to the Midwestern market, but future acquisitions may result in cost
savings to be shared with customers of LG&E and KU. The benefits to be provided
by the Acquisition are comparable to those presented in the Powergen Order. In
addition, as part of its decision regarding the Acquisition, the KPSC required
the applicants to file, within 60 days of closing any future utility merger or
acquisition in the United States over which KPSC approval would not be required,
a petition setting forth a formal analysis of any potential synergies and
benefits from the merger or
45
acquisition and a proposed methodology for allotting an appropriate share of the
potential synergies and benefits to LG&E's and KU's ratepayers.
Although some of the anticipated economies and efficiencies will be
fully realizable only in the longer term, they are properly considered in
determining whether the standards of Section 10(c)(2) of the Act have been met.
See American Electric Power Co., 46 S.E.C. 1299, 1320-1321 (1978). Further, the
Commission has recognized that while some potential benefits cannot be precisely
estimated, nevertheless they too are entitled to be considered: "[S]pecific
dollar forecasts of future savings are not necessarily required; a demonstrated
potential for economies will suffice even when these are not precisely
quantifiable." Centerior Energy Corp., Holding Co. Act Release No. 24073 (April
29, 1986) (citation omitted). See Energy East Corporation, Holding Co. Act
Release No. 26976 (Feb. 12, 1999) (authorizing acquisition based on strategic
benefits and potential, but presently unquantifiable, savings).
Moreover, E.ON's strategic vision is to become a pure-play global
utility, hence its commitment to divest numerous nonutility businesses. In
keeping with its global ambition, E.ON intends to expand into the U.S., the key
world energy market. E.ON views LG&E Energy's operations centered in Louisville,
Kentucky as ideally positioned to serve as the nucleus of its U.S. operations.
The Midwestern U.S. accounts for approximately 30% of the U.S. electricity
market.
Integrated Utility System
The Utility Subsidiaries form an integrated utility system in
compliance with the standards of the Act.45 In the Powergen Order the Commission
very recently found that the Utility Subsidiaries constituted an integrated
public utility system and that LG&E's gas operations constituted an additional
permissible gas system. No material changes in the composition or operations of
the Utility Subsidiaries has occurred since the date of the Powergen Order to
require a different conclusion today. As discussed above, the structure of the
Acquisition also would not change the integrated nature of the Utility
Subsidiaries since all such companies will remain intact in the LG&E Energy
Group after the Acquisition.
Because Section 2(a)(29) specifies separate definitions for gas and
electric systems, the Commission has historically taken the position that gas
and electric properties together cannot constitute a single integrated
public-utility system./46
However, it is equally clear that under the Act the Commission's
authority is not limited to approval of acquisitions resulting in only one
integrated system. "[W]e have indicated in the past that acquisitions may be
approved even if the combined system will not be a single
----------------
45 The FUCO holdings of E.ON, Powergen and LG&E Energy need not be included
in this analysis as Section 33(c)(3) of the Act explicitly provides that FUCOs
shall be considered to be consistent with the operation of a single integrated
public utility system.
46 See New Century Energies, Inc., Holding Co. Act Release No. 26748,
citing SEC v. New England Electric System, 384 U.S. 176,178 n.7; In the Matter
of Columbia Gas & Electric Corporation, Holding Co. Act Release No. 2477, 8
S.E.C. 443, 462-463 (Jan. 10, 1941) (rejecting an earlier interpretation to the
contrary in American Water Works and Electric Company, Inc., 2 S.E.C. 972, 983
(Dec. 30, 1937)).
46
integrated system. Section 10(c)(2) requires only that the acquisition tend
"towards the economical and the efficient development of an integrated
public-utility system."/47
In this case, the Acquisition will tend toward the economical and
efficient development of two integrated systems: the combined electric utility
system of LG&E and KU and the stand-alone gas utility system of LG&E.
Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the Act as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility companies, are
physically interconnected or capable of physical interconnection and
which under normal conditions may be economically operated as a single
interconnected and coordinated system confined in its operations to a
single area or region, in one or more States, not so large as to
impair (considering the state of the art and the area or region
affected) the advantages of localized management, efficient operation,
and the effectiveness of regulation.
On the basis of this statutory definition, the Commission has
established four standards that must be met before the Commission will find that
an integrated electric system will result from a proposed acquisition of
securities:
o the utility assets of the system are physically interconnected or
capable of physical interconnection;
o the utility assets, under normal conditions, may be economically
operated as a single interconnected and coordinated system;
o the system must be confined in its operations to a single area or
region; and
o the system must not be so large as to impair (considering the
state of the art and the area or region affected) the advantages
of localized management, efficient operation, and the
effectiveness of regulation.
LG&E and KU were integrated before the Acquisition and, after the
Acquisition, will continue to satisfy all four of these requirements.
----------------
47 Gaz Metropolitan, Inc., quoting In the Matter of Union Electric Company,
Holding Co. Act Release No. 18368, 45 S.E.C. 489, 505 (April 10, 1974), aff'd
without op. sub nom. City of Cape Girardeau, Missouri v. S.E.C., 521 F.2d 324
(D.C. Cir. 1975). See also, New Century Energies, File No. 70-8787.
Environmental Action, Inc. v. S.E.C., 895 F.2d 1255, 1263 (9th Cir. 1990)
(citing In re Electric Energy, Inc., Holding Co. Act Release No. 35-13781, 38
S.E.C. 658, 668 (Nov. 28, 1958)).
47
First, LG&E and KU are already physically interconnected. LG&E and KU
are directly connected through transmission lines that they own, including two
138 Kv transmission lines and two 69 Kv transmission lines. See Exhibit D-1.
Second, LG&E and KU will continue to be economically operated as a
single interconnected and coordinated system. The two companies are
interconnected by a transmission system which allows the transfer of power
between LG&E and KU. LG&E and KU will continue operating as a single system,
economically dispatched.
Third, this single integrated system will operate in a single area or
region, the area delineated on Exhibit D-1, covering portions of Kentucky,
Virginia, and Tennessee. In considering size, the Commission has consistently
found that utility systems spanning multiple states can satisfy the single area
or region requirement of the 1935 Act. For example, the Entergy system covers
portions of four states (Entergy Corp., Holding Co. Act Release No. 25952 (Dec.
17, 1993)); the Southern system provides electric service to customers in
portions of four states (Southern Co., Holding Co. Act Release No. 24579 (Feb.
12, 1998)); and New Century Energies served customers in six states (New Century
Energies, Holding Co. Act Release No. 26748 (Aug. 1, 1997)).
Fourth, the system is not so large as to impair the advantages of
localized management, efficient operations, and the effectiveness of regulation.
The Commission's past decisions on "localized management" show that the
Acquisition fully preserves the advantages of localized management. In these
cases, the Commission has evaluated localized management in terms of: (i)
responsiveness to local needs, see American Electric Power Co., Holding Co. Act
Release No. 20633, 46 S.E.C. 1299, 1312 (July 21, 1978) (advantages of localized
management evaluated in terms of whether an enlarged system could be "responsive
to local needs"), General Public Utilities Corp., Holding Co. Act Release No.
13116, 37 S.E.C. 28, 36 (Mar. 2, 1956) (localized management evaluated in terms
of "local problems and matters involving relations with consumers"); (ii)
whether management and directors were drawn from local utilities, see Centerior
Energy Corp., Holding Co. Act Release No. 24073, 35 S.E.C. Docket 769, 775 (Apr.
29, 1986) (advantages of localized management would not be compromised by the
affiliation of two electric utilities under a new holding company because the
new holding company's "management [would be] drawn from the present management"
of the two utilities); Northeast Utilities, Holding Co. Act Release No. 25221,
47 S.E.C. Docket 1270, 1285 (Dec. 21, 1990) (advantages of localized management
would be preserved in part because the board of a New Hampshire Utility, which
was to be acquired by an out-of-state holding company, included "four New
Hampshire residents"); (iii) the preservation of corporate identities, see Id.
(utilities "will be maintained as separate New Hampshire corporations. .
..[t]herefore the advantages of localized management will be preserved");
Columbia Gas & Electric Corporation, Holding Co. Act Release No. 2477, 8 S.E.C.
443 (Jan. 10, 1941)(benefits of local management maintained where the utility to
be added would be a separate subsidiary); and (iv) the ease of communications,
see American Electric Power Co., supra, at 1312 (distance of corporate
headquarters from local management was a "less important factor in determining
what is in the public interest" given the "present-day ease of communication and
transportation.")
The Acquisition satisfies all of the factors regarding "localized
management" noted above. LG&E and KU will continue to operate through regional
offices with local service
48
personnel and line crews available to respond to customers' needs. E.ON has no
current plans to change the existing management of LG&E or KU. After the
Acquisition, LG&E and KU will maintain their current offices as subsidiary
headquarters and as local operating headquarters for the areas they presently
serve, while LG&E Energy will maintain the LG&E Energy Group headquarters. KU
will maintain its Lexington headquarters and a substantial presence throughout
its service territory in order to conduct the state-wide operations of KU.
Furthermore the headquarters for E.ON's energy activities in the U.S. will be in
Louisville. Therefore the fact that the location of the corporate headquarters
of E.ON (Germany) and Powergen (U.K.) are distant from customers served by LG&E
and KU, is, as noted by the Commission in American Electric Power, supra, a
relatively unimportant factor given the present ease of transportation and
communications and the retention of the LG&E and KU headquarters at their
present locations. In addition, the Commission in the National Grid Order and in
the Powergen Order approved a substantially similar management arrangement.
Thus, the Acquisition will preserve all the benefits of localized management of
LG&E and KU.
Finally, the Acquisition will not impair the effectiveness of state
regulation. LG&E and KU will continue their separate existence as before and
their utility operations will remain subject to the same regulatory authorities
by which they are presently regulated, namely the KPSC, the VSCC, the TRA, and
the FERC.
Gas Utility System
Section 2(a)(29)(B) defines an "integrated public utility system" as
applied to gas utility companies as:
a system consisting of one or more gas utility companies which are so
located and related that substantial economies may be effectuated by
being operated as a single coordinated system confined in its
operations to a single area or region, in one or more States, not so
large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation: Provided, that gas
utility companies deriving natural gas from a common source of supply
may be deemed to be included in a single area or region.
The LG&E gas utility system will meet the standard set forth in
Section 2(a)(29)(B) and, therefore, will satisfy the integration requirements of
the Act and should be approved by the Commission.
LG&E's gas utility system will operate as a coordinated system
confined in its operation to a single area or region covering portions of
Kentucky. See Exhibit D-1. As shown by the maps in Exhibit D-1, there is
substantial overlap between the gas service territory of LG&E and the electric
service territories of LG&E and KU. The system also will not be so large as to
impair the advantages of localized management or the effectiveness of
regulation.
As discussed above, localized management will be preserved. The
centralized functions of LG&E's gas utility business will continue to be managed
from Louisville, Kentucky, and the local functions will continue to be handled
from several regional offices. Management
49
will, accordingly, remain close to the gas operations, thereby preserving the
advantages of local management.
As also discussed above, the Acquisition will not impair regulatory
effectiveness. The same regulators currently overseeing the LG&E gas operations
(i.e., the KPSC) will continue to have jurisdiction after the Acquisition. For
all of these reasons, the post-Acquisition gas operations satisfy the
integration requirements of the Act.
Retention of Additional Gas System
In the Powergen Order, the Commission found that the additional gas
integrated public utility system of LG&E was retainable by Powergen. In finding
the additional gas system to be retainable, the Commission reviewed a study of
the gas utility operations that analyzed the lost economies that these
operations would suffer upon divestiture as compared to retention by the
applicants. Powergen also demonstrated that certain non-quantifiable economies
would be lost if divestiture were required and that the divestiture of LG&E's
gas operations would cause a significant amount of damage to LG&E's ability to
compete in the marketplace. The study filed in that proceeding as Exhibit O-1,
File No. 70-9671, is incorporated herein by reference. No material changes to
the assets or operations of LG&E's gas operations have occurred since that study
was prepared and Applicants submit that it continues to demonstrate that LG&E's
gas utility operations should be permitted to be retained as an additional
system under the ABC Clauses of Section 11. Moreover, the KPSC in its order
approving the Acquisition specifically found that it was in the public interest
for LG&E to remain a combination gas and electric utility.
G. Retention of Nonutility Subsidiaries
Except for the To-Be-Divested Subsidiaries, E.ON's Nonutility
Subsidiaries are Reasonably Incidental, or Economically Necessary or
Appropriate to the Operations of the E.ON System and Should be
Retained./48
Finally, Section 11(b)(1) of the Act poses the question whether the
"nonutility subsidiaries" of E.ON and Powergen are retainable under the
standards of Section 11 and the statutory amendment thereto.
1. E.ON's Nonutility Subsidiaries
As noted previously the term "TBD Subsidiaries" includes major E.ON
subsidiaries such as Degussa, Viterra, VEBA Oel, and Stinnes and their
respective subsidiaries,
----------------
48 Section 11(b)(1) directs the Commission: "To require . . . that each
registered holding company, and each subsidiary company thereof, shall take such
take such action as the Commission shall find necessary to limit the operations
of the holding-company system of which such company is a part to a single
integrated public-utility system, and to such other businesses as are reasonably
incidental, or economically necessary or appropriate to the operations of such
integrated public-utility system. . . . The Commission may permit as reasonably
incidental, or economically necessary or appropriate to the operations of one or
more integrated public-utility systems the retention of an interest in any
business (other than the business of a public-utility company as such) which the
Commission shall find necessary or appropriate in the public interest or for the
protection of investors or consumers and not detrimental to the proper
functioning of such system or systems."
50
and an additional twelve small direct or indirect E.ON subsidiaries. The
additional twelve companies are engaged in businesses such as packaging, the
production of metals for the steel industry, holding securities in a bank, and
holding real estate in a passive capacity that is managed by Viterra. E.ON
commits to divest its interest in these companies within three years of the date
of the completion of the Acquisition and the registration of E.ON as a holding
company under the Act, except that with respect to the real estate companies
with holdings managed by Viterra the divestiture period would be five years. All
the TBD Subsidiaries are listed and described in more detail in Part II of
E.ON's list of subsidiaries included in Exhibit G-1 to this Application.
Except for the TBD Subsidiaries, E.ON's nonutility subsidiaries are of
a nature and character that has already been authorized by the Commission in
other filings. Their basis for retention is described in Part I of Exhibit G-1
to this Application. Generally these subsidiaries are businesses that are
related or incidental to E.ON's energy and utility business. For example, they
are holding companies for energy-related nonutility businesses, vehicles used to
finance E.ON Group businesses and companies that hold real estate acquired and
held in connection with E.ON's energy and utility businesses. None of the
retained nonutility subsidiaries, other than E.ON Energie and its subsidiaries,
is material to E.ON in terms of assets or revenues. Exhibit G-3 hereto lists the
to-be-retained subsidiaries.
In connection with becoming a registered holding company, E.ON will be
divesting its interest in the TBD Subsidiaries. These are E.ON's nonutility
subsidiaries that are not consistent with E.ON's strategy of becoming a
pure-play global energy and utility company. Consequently, after the
Acquisition, E.ON's registration under the Act and divestiture of the TBD
Subsidiaries as provided herein, it will have a corporate structure comprised of
energy-related businesses that is focused on growth in the energy and utilities
industry and that is not unduly complicated.
The retention/divestiture of E.ON subsidiaries and their businesses is
discussed in greater detail in Exhibit G-1; but the timing of divestiture of
Degussa and Viterra warrant some special mention below. In addition, in the
discussion that follows the Applicants note the need for E.ON to retain its
interest in RAG as well as E.ON's request that RAG be declared not to be a
subsidiary of E.ON under Section 2(a)(8).
a. Degussa
E.ON is committed to divest its chemicals business in order to realize
its overall global strategy of becoming a leading energy and utility company.
However, for a number of reasons, E.ON requires a five-year divestiture period
for the chemicals business./49 A five-year divestiture period is appropriate
because Degussa presents a unique situation as regards divestiture commitments
under the 1935 Act. With sales in 2001 of about Euro 17.3 billion
----------------
49 A five year divestiture period for compliance with conditions imposed by
the Commission under the Act is not unprecedented. In General Public Utilities
Corporation, Holding Company Act Release No. 15184, (February 9, 1965), the
Commission authorized GPU to acquire 50% of Laing-Vortex, Inc., a non-utility
business. GPU stated that it believed it needed to invest only through the
development and demonstration stages of Laing's products, and GPU agreed to
divest its interest after 3 years, unless the SEC granted a 2 year extension.
The Commission subsequently granted the extension, thereby allowing GPU five
years to divest this business.
51
($15.8 bn), it is an extremely large company, several times the size of any
business that has been the subject of a divestiture commitment before the
Commission./50 It was formed by a large merger that occurred in February 2001,
and time is needed to focus and rationalize the business if fair value is to be
obtained in the marketplace. In addition to its large absolute size, Degussa
operates in a specialized business area, such that the number of potential
buyers is limited and antitrust issues will require careful analysis. In these
unprecedented circumstances, allowing five years for the completion of
divestiture is appropriate.
Both of the companies that merged to create E.ON in mid-2000 had major
chemicals businesses. VEBA owned 64.7% of Degussa-Huls, and VIAG owned 63.97% of
SKW Trostberg. The two chemical companies were themselves the products of very
recent mergers between substantial chemical companies -- Degussa AG and Huls AG
in 1999 and SKW Trostberg AG and Goldschmidt AG, also in 1999. On February 9,
2001, Degussa-Huls and SKW Trostberg merged to create Degussa AG, which in 2001
had some 53,000 employees. Following the completion of an extensive
restructuring program, putting approximately Euro 6.5 billion ($5.7 bn) (plus
Euro 3.3 billion ($2.9 bn) precious metals trading) of revenues up for sale, the
reorganized, purely specialty chemicals company will generate revenues of
approximately Euro 11 billion ($9.7 bn).
The process of integrating what two years ago were four separate
chemicals companies into a single chemicals company has just begun and will take
time to achieve before the entire group can be sold to a willing purchaser. The
full integration of the former chemical subsidiaries will require substantial
time. The three mergers described above, which took place within a two year
period, have entailed significant corporate reorganizations. Those mergers will
yield substantial efficiency gains, which should eventually be reflected in the
value (and sales price) of the chemicals business. However, full realization of
those efficiency gains will require a great deal of effort and substantial
additional time. Moreover, it may take still more time before those gains will
be reflected in the price a buyer is willing to pay for the chemicals business.
Given the magnitude of the tasks involved, E.ON believes that a three-year
divestiture period would force it to sell the chemicals business at a price that
would not reflect the true value of the business.
----------------
50 Degussa's sales, internal operating profit and total assets for the year
ended December 31, 2001 were $15.8 billion, $494 million and $16.6 billion,
respectively. In contrast, in connection with its merger with CP&L Energy, Inc.,
the Commission recently required Florida Progress Corp. to divest within three
years its rail services and inland marine transportation subsidiaries. Progress
Energy, Inc., Holding Co. Act Release No. 27422 (June 27, 2001). Progress
Energy's rail services business had revenues, a segment net loss and total
assets for the year ended December 31, 2000 of $1,047 million, ($53 million),
and $802 million, respectively. Progress Energy's inland marine transportation
business had revenues, segment net income and total assets for the same period
of $170 million, $9 million, and $105 million, respectively. See Florida
Progress Corp. Form 10-K405, SEC File No. 001-08349, filed March 29, 2001. The
Commission also required Dominion Resources Inc. to divest its diversified
financial services company subsidiary, Dominion Capital, Inc., within three
years of the date of the Commission's order. Dominion Resources Inc., Holding
Co. Act Release No. 27112 (December 15, 1999). For the year ended December 31,
1999, Dominion Capital had revenue of $473 million, operating income of $265
million, net income of $78 million and assets under management of $4.8 billion.
See Dominion Resources Inc. Form 10-K405, SEC File No. 001-08489, filed March 7,
2000. The Degussa divestiture would be a transaction significantly larger and
more complex than these recent large divestitures ordered by the Commission.
52
That concern is compounded by E.ON's belief that the market currently
undervalues Degussa because of the mix of its businesses and the structure of
its operations. To address this, Degussa is in the process of implementing
measures that will combine, streamline and refocus its operations, including a
number of divestitures. The focus of the new Degussa is the specialty chemicals
business, which involves chemicals with a particularly high customer value
(relative to their cost) and low substitutability. Such specialty chemicals
usually offer higher margins with lower production quantities. E.ON expects
Degussa's market valuation to improve as Degussa implements its new strategic
focus./51
To illustrate, Degussa introduced a cost cutting program in the fall
of 2001 and has expanded its Best-At-Chem project, which covers restructuring,
synergy savings and process optimization./52 Best-At-Chem comprises more than
300 individual programs and is projected to contribute savings of Euro 500
million ($440 million) per year starting in 2004. Furthermore, in 2001 Degussa
embarked on a wide ranging disposal program of its non-specialty chemicals
operations. By the end of March 2002 more than 80% of the targeted divestitures
had been completed. Businesses still up for sale include Degussa Bank, SKW
Metallurgie, a producer of metallurgical and chemical products, and Oxxynova, a
producer of dimethyl therephthalate ("DMT"), a key feedstock in the production
of polyesters.
The cyclicality of the specialty chemicals business also makes a three
year divestiture period unlikely to result in a sale of E.ON's chemicals
business for full value. Market conditions must be such that they will be
conducive to a sale of the business at a fair price. A sale of E.ON's Degussa
shares to the market in a secondary placement is difficult to achieve under
current market conditions due to the mere size of the transaction. Chemical
industry cycles normally last between three to five years, and this cycle is
unstable and hard to predict. It therefore would be prejudicial to E.ON and the
other Degussa shareholders (who continue to own about 36 percent of the recently
merged company) to require that divestiture be completed within three years of
E.ON becoming a registered holding company.
Cyclicality in the chemicals business is driven by several factors.
Some chemical manufacturing processes are efficient only on a large scale and
the profitability associated with production of such chemicals follows a boom
and bust cycle as undercapacity leads to higher prices which attracts additional
capacity investment leading to increased or over-production and lower prices.
General economic cycles also influence demand for chemicals used in the
production of manufactured goods. The industry is currently in a downturn.
German chemical industry output fell 2.2% in 2001 and fourth quarter output fell
4.7% compared with the corresponding quarter in 2000./53 Cyclicality in the
stock markets also affects E.ON's ability to market its Degussa shares. In a
down market there are fewer buyers available because they have a decreased
ability or willingness to use their devalued stock as consideration in a
transaction rather than cash. In addition, due to the 1935 Act's diversification
restrictions, E.ON's inability
----------------
51 To further strengthen its specialty chemicals business, Degussa recently
acquired LaPorte plc, a U.K. fine chemicals specialist.
52 Chemweek, April 4, 2001, p. 23.
53 Chemweek.com, German, French Chemical Production Decline, March 27,
2002.
53
to acquire the stock of a chemical company acquiror in exchange for the sale of
Degussa limits the pool of bidders to cash purchasers. Providing sufficient
flexibility to time and structure the transaction around industry cycles and
market conditions is, therefore, necessary.
A five-year divestiture period is also necessary because E.ON could
well face substantial delays before it can close a transaction to sell its
chemicals business. Relatively few companies compete in the global chemicals
markets, and as to many potential buyers there may be questions regarding the
resulting levels of concentration with respect to certain chemicals or processes
in certain geographic areas. The inherent complexity of much of the chemicals
business, the production processes involved and related intellectual property
concerns could mean that a substantial period of time would be required to work
through any such concerns with antitrust authorities and craft solutions that
will permit the sale to be completed.
E.ON cannot, of course, at this stage predict whether or to what
extent such issues will arise, nor how difficult and time-consuming it will
prove to resolve them. However, it is clear that E.ON must anticipate the
possibility of such delays occurring even after it is possible to reach
agreement to sell the business on terms that will permit E.ON to recover the
value of its investment "in an orderly fashion, consistent with market
conditions and the financial interests" of its shareholders./54
In this regard, E.ON notes that the merger of Dow Chemical and Union
Carbide -- which was announced on August 4, 1999 -- did not receive clearance
from the Federal Trade Commission under the Hart-Scott-Rodino process until
February 2001. In other words, antitrust review of that major chemicals
transaction took approximately eighteen months. While E.ON certainly hopes and
expects that any HSR review of the sale of its chemicals business can be
completed within a shorter time, the Dow/Carbide experience clearly underscores
the appropriateness of allowing a longer period for the divestiture of a large
chemicals business.
b. Viterra
For the reasons set forth below, E.ON also requires five years to
dispose of Viterra. In addition, during the divestiture period, Viterra requires
the ability to refocus its business consistent with current business plans,
which necessarily involve an increase in its commercial properties and an
upgrading of its residential holdings. These actions are appropriate and
necessary for E.ON to preserve the value of its investment in Viterra and to
place the business in a more saleable form so that E.ON and its shareholders can
receive a fair price for it. If the five-year refocusing process and the
possibility of further investment in Viterra were not permitted, it would be
extremely difficult for E.ON to market Viterra to potential purchasers as an
independently viable real estate business with reasonable growth prospects.
Thus, in the absence of the requested relief, the realizable value of Viterra to
E.ON would be significantly depressed.
The special considerations relevant to Viterra stem from (i) its
unique history, (ii) its unique tax characteristics and (iii) the lack of ready
buyers for a company of Viterra's current size, nature and tax characteristics.
Viterra's historical role as a provider of low-income
----------------
54 See HSBC Holdings, SEC No-Action Letter (Mar. 15, 2000).
54
housing has shaped the company. Viterra's business consists primarily of
housing. It owns about 164,500 housing units, including approximately 36,000
housing units of Deutschbau, in which Viterra owns a 50% shareholding; on the
other hand, it owns only about 100 commercial units.
E.ON's real estate activities originated in the 1930s in order to
provide subsidized housing primarily in the Ruhr area for workers in the coal
and steel industries. As a result of its historical origins, approximately
100,000 of Viterra's housing units (including those held by Deutschbau) were
more than 40 years old at the end of 2001. The majority of the housing units are
located in North Rhine-Westphalia. As of October 1, 2001, Viterra acquired
another 44.99 percent of Wohnbau Rhein-Main AG, which owns approximately 13,500
housing units. As of January 1, 2002, Viterra purchased a 86.3% shareholding in
Frankfurter Siedlungsgesellschaft GmbH, which has approximately 10,000 housing
units. The remaining shares are held by the city of Frankfurt. The activities of
both companies are concentrated around the Rhine-Main and Bonn regions, thus
diversifying further Viterra's portfolio.
Viterra's business was highly regulated until 1990 because it provided
publicly subsidized housing. In the past, the majority of Viterra's housing was
built with low interest rate public financing and with low interest rate
financing from third parties in exchange for perpetual tenancy rights
(Belegungsrechte). As a result, approximately 45% of Viterra's housing units are
subject to a wide variety of rent controls, some governmental and some
contractually imposed by third parties with perpetual tenancy rights. Although
some of these rent controls expire over time, their existence and the
geographical concentration of the housing units impose practical restrictions on
the ability of Viterra to dispose of substantial quantities of housing units on
reasonable terms.
E.ON doubts that the business as presently constituted can be sold at
a fair price to E.ON or its shareholders. For this reason, E.ON is already
engaged in a process to restructure Viterra to put it in a more saleable form.
It intends to accomplish this by refocusing Viterra's activities away from the
low-income housing market. This process has three main objectives. First,
Viterra is selling low-income housing units and reinvesting a portion of those
proceeds in upgraded residential units, particularly in more affluent areas of
Germany. Viterra increased the number of housing units sold from approximately
4,500 units in 2000 to approximately 6,700 units in 2001. The five-year
divestiture period provides the opportunity to continue the portfolio
transformation to include fewer rent controlled units and more geographically
dispersed holdings.
Second, Viterra is expanding the commercial side of its business. E.ON
currently believes that, notwithstanding the quality of Viterra's housing
portfolio, Viterra does not appear readily saleable absent an expansion of its
commercial real estate holdings. Third, Viterra's management is in the process
of developing the skills required to compete in a free market economy, while
shedding the regulatory mindset that prevailed in the company during the time it
operated in the highly regulated low-income housing environment. This process
requires the management to move from administration to active management of
Viterra's portfolio and from a focus on regulatory compliance to an emphasis on
value optimization and investor returns.
55
E.ON believes that these three changes will gradually transform the
business into a far more attractive asset, allowing Viterra to be sold at a much
higher -- and, given E.ON's investment in the business, a far fairer -- price
than Viterra could command in the near future. E.ON anticipates that Viterra
will be in substantially better shape to sell in five years than it will be in
three years, since it has much to accomplish with respect to restructuring the
business and transforming its management. To support the restructuring E.ON
needs authorization to continue to invest in Viterra as necessary pending the
divestiture, although any expansion of Viterra would first be financed with
Viterra's available funds.
The relative size of Viterra also makes it exceedingly difficult -- if
not impossible -- to sell the business at a fair price within a three-year time
frame, although E.ON will continue to seek the earliest opportunity to divest
Viterra, consistent with the preservation of shareholder value. Viterra's
revenues in 2001 were Euro 1.3 billion ($1.1 bn). It is the largest privately
owned real estate company in Germany. The sheer size of the business
significantly reduces the number of potential buyers. Indeed, E.ON believes that
the number of potential buyers may be limited to only a few international
insurance groups or financial investors.
The universe of potential buyers also is affected by tax/dividend
situation confronting Viterra. Due to differences in valuation under applicable
German GAAP and tax law as a result of Viterra's history as a non-taxable
corporation until January 1, 1990, Viterra currently records losses for tax
purposes and is projected to begin to show only a very low taxable income within
the next couple of years. However, if it were to pay dividends during the next
15 years to the owner of its common stock, whether that be E.ON or a new third
party, they would be taxed at a tax rate of about 43% of the dividend, despite
Viterra's negative or very low taxable income. If, on the other hand, Viterra
does not pay dividends, its untaxed reserves would stay in its balance sheet.
Then, at the end of 15 years, it could pay those reserves out as dividends
without incurring any tax on the dividend payments. E.ON believes that this
unusual tax situation will further reduce the number of potential buyers.
In seeking a five-year divestiture period for Viterra and the ability,
for itself and for Viterra, to invest funds in Viterra and to continue the
refocusing of that business, E.ON seeks merely the ability to conclude a
business process that has already begun -- a process designed to make Viterra
more attractive to a larger universe of ready buyers.
c. RAG
E.ON seeks to retain its ownership interest in RAG after becoming a
registered holding company and seeks an order of the Commission under Section
2(a)(8) of the Act declaring RAG not to be a subsidiary company of E.ON under
the Act. The unique nature of E.ON's ownership interest in RAG and the unique
nature of RAG itself justify its retention as a non-subsidiary interest.
RAG is unique and distinguishable from other entities in Germany and
under German law. RAG, which was created as a single coal mining company in the
Ruhr region of Germany, was created as a direct and immediate result of the coal
mining disaster in Germany in the mid 1950s. At that time, the decrease in
demand for coal as fuel (caused mainly by the steady rise in oil consumption)
led to a heavy growth of coal stockpiles. The private and publicly owned coal
mining companies at the time attempted to economize by reducing
56
workweeks and otherwise slowing down production with the result that the entire
region suffered an economic depression; coal mining work forces and overall
salaries were reduced which produced macro-economic effects for the entire
region.
In response to this situation, the public domain and especially the
miners union, IG Bergbau und Energie, demanded the creation of a single coal
mining company for the region in 1958 subject to the strong influence of state
regulation. The creation of RAG was, in some ways, inevitable in the face of
mounting labor unrest and serious economic problems in the region. After lengthy
negotiations, an agreement in principle (the Grundvertrag) was signed in 1969.
This agreement formed and still forms today the basis of the existence and
business activities for RAG. The parent companies of RAG at the time, including
VEBA which was the predecessor to E.ON, undertook to provide RAG with share
capital, made by contribution agreements (Einbringungsvertrage), according to
which they transferred their own mining activities into RAG and in consideration
for which they received shareholdings in RAG. The members of the workforce had
to be kept on and could not be dismissed. A provision of the Grundvertrag states
that "profit is not the principal aim of RAG".
Unfortunately, the value of these initial contributions was negative.
For RAG to continue in operation, heavy subsidies from the state had to be
granted which continue to be granted today. In 2001, the annual amount of state
subsidies to RAG was approximately DM 8 billion ($3.6 billion). The overall
amount of all state subsidies prior to that time was above DM 100 billion ($45.5
billion).
As part of the initial agreements and arrangements forming RAG and in
consideration for the many subsidies that were to be paid to RAG, the state was
to play a continuing role in managing the business direction of RAG. To that
end, the state implemented various instruments to control the business of RAG.
In the so-called coal compromise of 1997, it was agreed between RAG and the
state authorities that state subsidies would decrease to an annual amount of DM
5.3 billion ($2.4 billion) in 2005. At this time all state subsidies would cease
unless a new arrangement is agreed. Such a new compromise would have to be
negotiated and approved not only by the German federal authorities but also by
the European Commission and the European Council of Ministers, i.e. by all
governments of the European Union. Furthermore, the parties in interest agreed
that no more than a fixed amount of mining volume (32 million tons) would be
mined until 2005. The consequence of this arrangement is that after 2005 all
remaining coal mining capacity will be shut down unless a new compromise
arrangement is reached and approved by the requisite authorities. A third
important part of the coal compromise was that deficits from the coal mining
activities of RAG would be partly compensated through its non-coal mining
business (the so-called white area). RAG's interest in certain businesses such
as Rutgers AG (chemicals), RAG Coal International (coal mining in foreign
countries, mining technology), STEAG AG (independent power production) and RAG
Immobilien (real estate in the Ruhr area) are all in the white area.
The coal compromise of 1997 states, that the white area is obligated
to contribute Euro 100 million ($89 million) annually to the repayment or
diminution of subsidies commencing in 2001 and lasting until 2005. According to
the statutes of RAG the business activities are clearly defined to be coal
mining and the described activities of the white area. Any other activity of the
management board of RAG would be either illegal or need prior
57
approval by the state and the Supervisory Board of RAG. Furthermore the coal
compromise does not allow for RAG to pay any dividends as long as RAG receives
state subsidies.
In order to ensure that these agreements and arrangements are adhered
to, the German Government through its Ministry of Economic Affairs and the
Government of North Rhine-Westphalia has the power to review and approve all
related business transactions of RAG which could in any way influence the coal
compromise of 1997 by means of a special approval committee called
Interministerieller Ausschu(beta) (Committee of Ministerial Inter-Relationship).
This committee has the power to approve all transactions above a threshold of 10
million Euros or which generally affect the relationship between RAG and its
participation in the white area and is further tasked with securing the flow of
agreed compensations from the white area to the black area as mentioned above.
The Government also has the ability to control the timing and amount of any
dividends to shareholders, although through today no dividend ever has been
declared by RAG. For example any sale of RAG subsidiaries, such as a sale of
RAG's interest in Ruhrgas must be approved by the committee. Additionally, the
state is represented strongly on the Supervisory Board of RAG: amongst the
Supervisory Board representatives of the shareholders (as opposed to Supervisory
Board representatives of the employees) there are 4 state representatives,
whereas E.ON only has 3, its competitor RWE has 2 and ThyssenKrupp also has 2
representatives./55
As the above discussion demonstrates, E.ON is not in a position to
control or exert a controlling influence over RAG or the business activities in
which RAG engages nor may E.ON simply walk away from or divest its interest in
RAG. At the same time, RAG is looking for means to increase the contributions
made to RAG by the white area and to become more like a "normal" commercial
enterprise by the year 2005 when the state subsidies will cease. By looking and
behaving more like a "normal" commercial enterprise it is hoped that RAG would
be in a position to attract private capital and eventually to develop a public
market for its shares. This in turn would enable RAG's existing shareholders to
liquidate their interests in RAG.
While the companies that contributed assets into RAG received shares
in the company, those shares do not have the economic benefits normally
associated with equity ownership. RAG has been effectively forbidden to pay
dividends to its shareholders largely as a result of the government subsidies
that RAG has received over the years. Thus, although E.ON holds a 39.2% direct
and indirect interest in RAG, E.ON does not receive cash distributions from
RAG./56
While RAG's shares give their owners no economic benefits, they also
impose no ongoing burdens or risks. Indeed, the ability to cut off the
liabilities associated with money-losing coal operations in-part motivated RAG's
shareowners to contribute mining and mining-related assets into RAG in the first
place. RAG's shareholders - including E.ON - have no obligations to make any
further capital contributions, or otherwise contribute any funds into RAG.
Except as discussed below in connection with the guarantee in support of the
Degussa-
----------------
55 See infra, note 58.
56 RAG is accounted for on E.ON's books under the equity method and was
valued at Euro 184 million ($162 million) as of December 31, 2001. The
investment was initially made by Hibernia in 1968, the year RAG was formed, for
Euro 454,129 ($399,634).
58
RAG transaction, E.ON commits that it will not make additional investments in
RAG unless authorized by the Commission.
While E.ON owns some 39.2% of the shares, under RAG's corporate
governance arrangements that does not and cannot give it power to control the
company. E.ON is represented only on the Supervisory Board and not on the
Management Board of RAG. The powers and duties of Supervisory Board members are
narrowly limited by German corporate law. Importantly, Supervisory Board members
have no say in the day-to-day management and operations of the company and
cannot compel the Management Board members, who direct and manage the company,
to follow their instructions.
E.ON has only three out of 21 seats on the RAG Supervisory Board, and
thus has no approval or veto power with respect to the limited issues on which
the Supervisory Board votes./57 Further, E.ON's 39.2% ownership interest is
offset by a comparable 30.2% interest held by RWE AG, a large German utility and
a direct competitor of E.ON. Indeed, only six entities, including E.ON, own all
of RAG's outstanding voting stock./58
Most importantly, however, the substantial participation of the German
government in the formation and ongoing operation of RAG through four seats on
the Supervisory Board held by politicians and its ability to block transactions
through the power of the Committee of Ministerial Inter-Relationship show that
RAG is principally an instrument of the state that has been and continues to be
used to implement a state policy of gradually transitioning Germany's coal
miners to other employment.
As the foregoing demonstrates, there is little economic benefit
associated with E.ON's RAG interest and E.ON's role is passive, limited to
participation on the RAG Supervisory Board. It is appropriate to characterize
the RAG interest as a social obligation rather than an investment. As such,
E.ON's continued ownership of RAG is necessary and publicly expected. Given the
central role RAG has played in the social compact for handling employment and
other issues in the post-war German coal mining industry, a sale would be
incompatible with E.ON's social obligations. In addition, RAG shares cannot be
sold without the approval of the owners of 75% of its shares./59 Lastly, RAG's
owners are economically precluded from divesting
----------------
57 Eight of the seats on the Supervisory Board are held by employee
representatives, nine are held by shareholders, including 3 held by E.ON, and
four seats are held by politicians.
58 RAG's shareholder structure is as follows:
E.ON AG - 37.10% plus 2.1% indirect participation through
Montan-Verwaltungsgesellschaft mbH,
BGE Beteiligungsgesellschaft fur Energieunternehmen mbH - 21.95% (a 100%
subsidiary of RWE AG),
Societe Nouvelle Sidechar, Paris - 8.25% (a 100% subsidiary of RWE AG),
ThyssenKrupp Stahl AG - 12.69%,
Montan-Verwaltungsgesellschaft mbH - 10% (79% held by ThyssenKrupp Stahl AG
and 21% held by E.ON)
Verwaltungsgesellschaft Ruhrkole Beteiligung mbH - 10% (35% held by the RAG
group, 65% held by ARBED S.A.).
59 RAG Articles of Association, Section 5.
59
their shares by the absence of any market for the shares, due to RAG's inability
to distribute profits to its owners.
RAG's businesses are consistent with its heritage and social purpose.
They are also largely energy-related. Consequently, allowing retention of the
RAG investment would not frustrate the policies of the Act. At the time E.ON
acquired its interest in RAG, RAG's activities consisted exclusively of coal
operations and related activities, and RAG continues to engage largely in such
activities. While RAG has acquired other businesses since its formation by the
German government those businesses grew out of RAG's coal and related
activities.60 Accordingly, RAG is akin to energy-related companies that the
Commission has allowed registered holding companies to retain under Rule 58 (in
particular, subsections (b)(1)(ix) and (b)(1)(x) of that rule).
As of December 31, 2001, RAG was engaged in the following businesses
in the proportion indicated, based on total revenues of Euro 15.3 billion ($13.5
billion).
----------------
60 STEAG AG, which was founded as
Steinkohle-Elektrizitat-Aktiengesellschaft, is principally involved in
constructing, owning and operating power plants. Rutgers began as a coal-tar and
coal-tar derivatives business and is now a chemical and plastics company. RAG
Saarberg AG, which originally held Saarland coal mines, operates power plants,
provides heating and water service, distributes mineral oil, manufactures rubber
products and provides coal mining technical services and environmental services.
RAG Immobilien handles RAG's real estate holdings, which are principally used
for operations and (both historically and today) employee housing. In addition,
RAG has "service companies" that provide training, data processing services and
insurance. RAG also owns 18% of Ruhrgas, a German gas utility company. STEAG and
Ruttgers have U.S. operations in the manufacturing and plastics industries, but
neither holds any U.S. utility interests. In addition, RAG's coal operations
have expanded geographically. While RAG produces coal principally in Germany, it
now also has substantial working mines in the U.S. and Australia.
60
Business Type Percentage of Revenues
Coal/61 63.3%
Chemicals / plastics / rubber 20.1%
Power generation 8.5%
Real estate 4.7%
Environmental services 2.6%
Other 0.8%
Total 100%
At the time RAG was formed and E.ON effectively became locked in as a
shareholder, RAG's operations were focused solely on coal mining and other
coal-related activities. Then and now, as a passive minority shareholder, E.ON
could not control the activities of RAG. It is clear, however, that sensible
diversification was part of RAG's social role as a quasi-public organization.
The changing economics of fuel supply had adversely affected the economics of
domestic coal production in Germany, with the result of serious social
dislocation.
To mitigate these dislocations, the German government subsidizes RAG
to support the process of structural change in the coal mining regions. For
example, RAG Bildung is a RAG entity that provides pre-vocational training,
apprenticeship opportunities, occupational retraining, job training and career
counseling. It employs 950 trainers at 40 training centers and administers
approximately 2,000 on-the-job training positions that are financed by grants
from state and federal governments. From 1958 to the end of 1990, during which
time the number of employees in the German coal mining industry dropped from
607,000 to 130,000, not one miner was discharged via the unemployment office.
Any profits made by RAG businesses other than German mining will, for the
foreseeable future, be used to reduce government subsidization.
E.ON also should be permitted to retain its interest in RAG because
that interest is analogous to so-called "good citizen" investments, which the
Commission has approved under Section 9(c)(3) and Rule 40(a)(5). See, e.g., WPL
Holdings, Holding Co. Act Release No. 26856 (Apt. 14, 1998) (permitting
retention of 54.55% interest in a company organized to
----------------
61 RAG owns, indirectly through a subsidiary, RAG Coal International AG,
certain coal mines in the Appalachian, midwestern and mountain west regions of
the U.S. that supply certain U.S. electric generating units. Additional detail
about RAG's U.S. coal operations is included in the Applicants' FERC application
included as Exhibit C-5 hereto. In particular, Exhibit B and the testimony of
Dr. William Hieronymous included in the FERC application demonstrate the lack of
any significant effect on competition of these coal operations in the relevant
U.S. markets.
61
promote local economic development); Exelon Corp., Holding Co. Act Release No.
27256 (Oct. 19, 2000) (allowing retention of interest in local development
company); Georgia Power Co., Holding Co. Act Release No. 25949 (Dec. 15, 1993)
(allowing investment in limited partnership formed to provide venture capital to
high-technology companies); Hope Gas, Inc., Holding Co. Act Release No. 25739
(Jan. 26, 1993) (allowing investment in venture capital partnership designed to
provide venture capital to local businesses); The Potomac Edison Co., Holding
Co. Act Release No. 25312 (May 14, 1991) (permitting investment in for-profit,
economic development corporation created to stimulate and promote growth and
retain jobs); Consol. Natural Gas Co., Holding Company Act Release No. 23799
(Aug. 20, 1985) (authorizing registered holding company to acquire a partnership
interest in a nonprofit partnership to encourage and finance local high risk
entrepreneurial ventures); The Connecticut Light & Power Co., Holding Company
Act Release No. 17136 (May 20, 1971) (authorizing acquisition of long-term notes
of nonprofit development corporation.); 17 C.F.R.ss. 250.40(a)(5) (allowing
investments in securities of certain "local enterprises" which promote industry
and development in the service territory of the registered holding company
system).
Because RAG is not controlled by E.ON and it is not necessary or
appropriate in the public interest or for the protection of investors or
consumers that RAG be subject to the obligations, duties and liabilities imposed
under the Act upon subsidiary companies of holding companies, the Commission
should find under Section 2(a)(8) of the Act that RAG is not a subsidiary of
E.ON. Under Section 2(a)(8)(B), the Commission, upon application, shall by order
declare that a company is not a subsidiary company of a specified holding
company under clause (A) if the Commission finds that:
(i) the applicant is not controlled, directly or indirectly, by such
holding company (either alone or pursuant to an arrangement or
understanding with one or more other persons) either through one or
more intermediary persons or by any means or devise whatsoever,
(ii) the applicant is not an intermediary company through which such
control of another company is exercised, and
(iii) the management or policies of the applicant are not subject to a
controlling influence, directly or indirectly, by such holding company
(either alone or pursuant to an arrangement or understanding with one
or more other persons) so as to make it necessary or appropriate in
the public interest or for the protection of investors or consumers
that the applicant be subject to the obligations, duties and
liabilities imposed in this title upon subsidiary companies of holding
companies.
In response to the first criterion, as demonstrated above, RAG is not
controlled directly or indirectly by E.ON. E.ON's Supervisory Board seats do not
give it control because the powers of the Supervisory Board are narrowly limited
under German law and also because other RAG shareholders and the German
government have a significant presence on the Supervisory Board. In prior
orders, the Commission has found companies not to be subsidiaries of holding
companies despite the holding company's ownership of more than ten percent of
the other company's voting securities. In these cases, a significant factor in
the Commission's
62
decision was the existence of another holder of voting securities to prevent the
holding company from exercising a controlling influence./62
Similarly, E.ON is prevented from exercising a controlling influence
over RAG because all RAG's other shareholders are all substantial German
corporations that can be expected to guard their interests on RAG's Supervisory
Board. As described in footnote 58 above, E.ON holds an aggregate RAG interest
of 39.2%. RWE AG, an E.ON competitor, holds an aggregate interest of
approximately 30%, ThyssenKrup Stahl AG holds an aggregate interest of
approximately 20.6%, and ARBED S.A. controls a 10% RAG interest through its 65%
interest in Verwaltungsgesellschaft Ruhrkole Beteiligung mbH. Therefore, E.ON's
interest does not provide a controlling influence because the other shareholders
have significant blocks. In contrast, it would be reasonable to infer a
controlling influence if E.ON's RAG interest was the only significant
concentration of shares and the other RAG shares were widely distributed. The
influence of the German government through four seats on the Supervisory Board
and the power of the Committee of Ministerial Inter-Relationship only add to the
force of this argument.
The Commission has recognized the role of other significant
shareholders as one factor in favor of a determination that a holding company
does not exercise a controlling influence in relation to a subsidiary./63 In
prior orders, the Commission also identified the ability to prevent the
convening of a quorum and the appointment to the subsidiary's board of persons
with concurrent or prior relationships to the holding company as factors that
may contribute to a finding that a holding company does exercise a controlling
influence./64 E.ON does not own sufficient shares to prevent the formation of a
quorum. In addition, although E.ON has appointees on RAG's Supervisory Board no
current or former E.ON employees or board members are on RAG's Management Board.
These factors support the conclusion that E.ON does not exercise a controlling
influence. E.ON also does not control RAG pursuant to an arrangement or
understanding with one or more other persons. Accordingly, for all these
reasons, it is appropriate to find that E.ON meets the first requirement of
Section 2(a)(8)(B) and does not exert a controlling influence over RAG.
In response to the second and third criteria, RAG is not an
intermediary company through which E.ON exercises control of other companies./65
Lastly, because RAG is not a
----------------
62 See e.g., BeeBee Island Corporation, Holding Co. Act Release No. 2239
(Aug. 14, 1940) (finding that a company in which the holding company held 22.19%
of the voting securities was not a subsidiary); Canton Electric Light and Power
Co., Holding Co. Act Release No. 3799 (Sept. 15, 2942) (finding that a company
in which the holding company held 34.64% of the voting securities was not a
subsidiary). The Commission has reaffirmed in a more recent case the BeeBee
Island Corporation methodology in an application under Section 2(a)(7). See
Filtration Sciences Corporation, Holding Co. Act Release No. 24933 (Aug. 3,
1989).
63 See Panhandle Eastern Pipe Line Co., Holding Co. Act Release No. 2778
(May 27, 1941).
64 See Koppers United Co., Holding Co. Act Release No. 3812 (Sept. 29,
1942); Pacific Gas and Electric Co., Holding Co. Act Release No. 2988 (Sept. 11,
1941).
65 E.ON does hold 18% of Ruhrgas through its interest in RAG. If E.ON's
pending acquisition of Ruhrgas is approved, E.ON would acquire a controlling
interest in Ruhrgas through the acquisition of Gelsenberg from BP. E.ON would
certify Gelesenberg as a FUCO when it acquired control. The regulation of
controlling interests in public utility companies, not FUCOs, is the principal
regulatory purpose of defining a company as a subsidiary under Section 2(a)(8)
of the Act. Consequently, any indirect control of Ruhrgas through RAG should be
irrelevant for purposes of the analysis under Section 2(a)(8).
63
public utility company or a company that controls public utility companies in
the U.S.,/66 even if the Commission found that E.ON's insignificant
representation on the Supervisory Board gave it a minor role in the management
or direction of RAG, this role does not rise to the level that it would be
necessary or appropriate in the public interest or for the protection of
investors or consumers for the Commission to subject RAG to the obligations,
duties and liabilities imposed under the Act upon subsidiary companies of
holding companies.
It is consistent with the purposes of the Act to find that RAG is not
a subsidiary of E.ON. For example, the exemption that E.ON seeks with respect to
RAG is very similar to the exemptions granted to many companies under Rule 16.
Rule 16 exempts from subsidiary status certain companies engaged in the
exploration, transportation or delivery of natural or synthetic gas, provided
that a registered holding company does not own more than a 50% voting interest
in such companies. In the release announcing the final rule, the Commission
explained that the impetus behind the rule was to remove impediments to
registered holding companies and unregulated companies jointly developing
meritorious projects such as those promoting the development of a synthetic
fuels industry in the U.S. as envisaged by the Energy Security Act of 1980./67
Although RAG is not a creation of US energy policy, its role in German energy
and economic policy is similar. RAG is a quasi-governmental organization created
by the German government and the participants in the coal industry in response
to disruptive market changes. Their objective was to find a socially acceptable
manner of protecting or reducing the number of workers employed in the coal
industry. While a goal of the German rather than the U.S. government, RAG is
nevertheless a government-endorsed project requiring the participation of
industry, including E.ON. Accordingly, in the absence of countervailing reasons
why such a continued interest would be detrimental to the interests of
investors, consumers and the public, it is consistent with the Act to find that
RAG is not a subsidiary of E.ON.
As noted above, E.ON has proposed to divest its interest in Degussa
within five years of the date of the completion of the Acquisition and the
registration of E.ON as a holding company under the Act. On May 20, 2002, E.ON
and RAG entered into an agreement to exchange part of E.ON's Degussa interest
for RAG's interest in Ruhrgas (the "Transaction"). The objective of the
Transaction would be for RAG to acquire a majority, 50.1%, of Degussa's
outstanding shares and for E.ON to acquire an additional 18.5% stake in Ruhrgas,
shares which are presently owned by RAG. Such a Transaction would enable E.ON to
reduce its holdings in Degussa almost immediately while at the same time
providing RAG with a significant interest in a white area business with
substantial revenues. E.ON and RAG have structured the Transaction as follows:
1. RAG would commence a tender offer for all of the outstanding shares of
Degussa (E.ON holds 64.55% of Degussa's shares; the balance is publicly
traded) subject to a minimum condition that at least 30% of Degussa's
shares are tendered in response to such offer.
2. E.ON and RAG would simultaneously enter in an agreement whereby both
parties agree to hold equal stakes in Degussa as a result of the public
tender offer and thereby E.ON would
----------------
66 RAG's subsidiary STEAG owns and operates power plants in Germany's Ruhr
area and Saarland, in addition to one power plant in Columbia.
67 Holding Co. Act Release No. 21797 (Nov. 19, 1980).
64
guarantee that RAG would have at least as many shares in Degussa as are
retained by E.ON. (For example, if RAG acquires public traded shares of
Degussa constituting 20% of the shares of Degussa as a result of the tender
offer then E.ON would deliver shares of Degussa equal to 22.25% to RAG such
that each of E.ON and RAG would hold 42.25% of the outstanding shares of
Degussa. Or, if RAG acquires publicly traded shares of Degussa constituting
30% of the shares of Degussa as a result of the tender offer, then E.ON
would deliver shares of Degussa equal to 17.25% to RAG such that each of
E.ON and RAG would hold 47.25% of the outstanding shares of Degussa).
3. In a second step E.ON would transfer as many Degussa shares to RAG as are
necessary for RAG to acquire a majority, 50.1 %, of Degussa's outstanding
shares.
4. In consideration for the shares of Degussa that RAG receives from E.ON, RAG
would deliver to E.ON the 18.5% of the shares of Ruhrgas that RAG presently
owns. These Ruhrgas shares are part of the historic investment portfolio of
RAG and were acquired when Ruhrgas was a company active purely in the
exploitation of coking coal (gasification of coal). As one of the major
suppliers of coking coal for this business RAG held shares in Ruhrgas.
RAG will finance the acquisition of Degussa shares under the tender
offer through a loan of up to Euro 2 billion granted by a consortium of several
banks headed by Deutsche Bank and Morgan Stanley. The loan will enable RAG to
finance the purchase of those parts of the Degussa shares which can not be paid
by the transfer of RAG's 18.5% stake in Ruhrgas. The loan would mature on
December 31, 2004 and bear interest at EURIBOR +60 basis points (up to 85 basis
points depending on E.ON's credit rating). The current EURIBOR rate is 3.395%.
The loan would be secured in the following manner:
A. All Degussa shares RAG acquires by means of the loan would be
transferred as security to the banks. E.ON will execute a put option in favor of
the banks to purchase as much of the secured shares from the banks on maturity
as necessary to cover outstanding loan repayments by RAG. The put option would
not be triggered until the banks first were unsuccessful in selling the secured
shares to third parties.
B. RAG would establish a depositary cash account with the creditor
banks to bridge any gap in value for the Degussa shares arising from a possible
fall in the market value of Degussa shares in the future. The account would be
established with an initial up-front payment of Euro 150 million to be made by
RAG. Further payments would be calculated on a monthly basis taking into account
the actual price of Degussa shares and may be made RAG either in cash or with a
pledge of additional Degussa shares.
C. In case the above mentioned security measures are insufficient to
cover any outstanding repayment obligation of RAG at maturity E.ON will provide
a subordinated guarantee to the banks for payment of any then outstanding
amounts. Given the collateral to be provided and the strong value of Degussa
shares it is economically highly unlikely that the E.ON guarantee will ever be
called upon.
The final maturity of the bank loan, December 31, 2004, would be
approximately two and one-half years prior to the date by which E.ON has
committed to divest its interest in
65
Degussa. The loan and E.ON's guarantee are intended to provide RAG with the
financial ability to acquire the Degussa shares in the tender offer and also to
equalize the values of the Degussa and Ruhrgas shares (the Degussa shares are
more valuable than the Ruhrgas shares). It is expected that RAG will be in a
position to repay the bank loan from the from funds RAG gains from the
divestiture of certain non-core assets, such as RAG's participation in STEAG.
The Transaction furthers E.ON's commitment to divest Degussa and
enables RAG to expand its activities in the white area. This expansion
facilitates RAG's transition to a "normal" commercial enterprise that can
attract private capital in a public market for its shares. This would, in turn,
set the stage for a time when RAG's existing shareholders, including E.ON, could
liquidate their interests in RAG. Accordingly, E.ON requests that the Commission
authorize E.ON to issue the guarantee in connection with the Transaction.
In an effort to further mitigate any concern that the Commission may
have over E.ON's ownership interest in RAG, E.ON will undertake to advise the
Commission annually in its report on Form U5S of any changes in the current
attributes of its ownership interest in RAG (e.g., inability to receive
dividends). In addition, other than as described above, E.ON commits to not
increase, directly or indirectly, its investment in RAG without the prior
approval of the SEC.
2. Powergen's Nonutility Businesses
The nonutility businesses of Powergen and the LG&E Energy Group are
retainable under the Powergen Order.68 The business of each of these
subsidiaries and the basis for their retention was set forth in detail in
Exhibit F-1.2 and Exhibit F-2.2 to File No 70-9671. Attached as Exhibit G-2 is a
list of the non-utility subsidiaries of Powergen and the basis of their
retention as approved in the Powergen Order, and a list of the non-utility
subsidiaries of Powergen that commenced operations after the Powergen Order and
the basis of their retention.
In the event that the Applicants seek to reactivate any inactive
company after completion of the Acquisition, the Applicants will file a
post-effective amendment seeking authority to engage in the proposed activities
if such authorization is required under the Act.
H. EWG/FUCO-Related Financings/69
In the Financing Application Applicants seek authorization (i)
to retain existing investments in foreign utility and energy-related businesses;
(ii) to invest the proceeds from divestitures (including any completed
divestitures as well as future divestitures), which may total approximately $35
billion, in EWG and FUCO activities without including those investments in
----------------
68 In the Powergen Order the Commission reserved jurisdiction over the
retention pursuant to Section 11(b)(1) of the Act of the following companies:
CRC-Evans International, Inc.; CRC-Evans Pipeline International, Inc.; CRC-Key,
Inc.; CRC-Evans B.V.; CRC-Evans Canada Ltd.; PIH Holdings Ltd.; and Pipeline
Induction Head Ltd. The Applicants will take appropriate steps to divest these
companies within three years after the date of the order in that proceeding.
69 For purposes of this analysis, FUCOs is deemed to include all foreign
businesses which qualify for FUCO-status, but for the fact that the appropriate
notice has not yet been provided to the Commission. E.ON intends to provide all
such notices to the Commission at the time of the consummation of the
Acquisition.
66
E.ON's Aggregate EWG/FUCO Financing Limitation (as defined below);/70 and (iii)
to enter into transactions to finance additional investments in EWGs and FUCOs
in an amount up to $25 billion, which is approximately equal to 200% of E.ON's
consolidated retained earnings as of December 31, 2001, on a pro forma basis
reflecting the Acquisition, determined in accordance with U.S. GAAP./71 The
authorization requested in (ii), above, would also include the flexibility for
E.ON to issue and sell securities to finance EWG and FUCO investments pending
the receipt of divestiture proceeds ("Bridge Loans"), provided that upon the
receipt of such proceeds the Bridge Loans or securities with an equivalent
principal amount are retired, redeemed or otherwise paid down such that the
aggregate EWG and FUCO investment under the authorization requested in (ii) does
not exceed the cash proceeds from divestitures.72 The $35 billion Bridge Loan
authorization plus the $25 billion additional investment amount referred to in
(iii) above, are in the aggregate referred to as the "Aggregate EWG/FUCO
Financing Limitation".
The Financing Application contains a complete discussion of E.ON's
compliance with Rule 53 under the Act with respect to E.ON's proposed EWG and
FUCO investments, an analysis of the effect of such investments on E.ON's key
financial ratios, and a description of E.ON's review process for new
investments. The Financing Application also explains that the proposed
investments would not have an adverse effect on the Utility Subsidiaries. In
addition, an analysis of E.ON's compliance under Rule 54 is also provided. E.ON
incorporates the EWG and FUCO investment discussion in the Financing Application
herein by reference.
----------------
70 Although the proceeds of divestitures may be invested in EWGs and FUCOs
they would not be limited to such uses and could be used to finance the
activities of the E.ON Group generally, as authorized or permitted under the
Act.
71 E.ON's pro forma consolidated retained earnings amounted to $13.8
billion (excluding accumulated other comprehensive income ("OCI")) as of
December 31, 2000. As of September 30, 2001 E.ON's pro forma consolidated
retained earnings, including OCI, would be $12.5 billion. OCI as of December 31,
2000 was $813 million. Until 2002, E.ON did not calculate OCI on a quarterly
basis and, consequently, a consolidated retained earnings figure as of September
30, 2001 is unavailable. Dividends of approximately $888 million paid in May
2001 and a loss on the disposition of MEMC of approximately $755 million
contributed to the reduction in retained earnings through September 30, 2001.
E.ON's pro forma consolidated retained earnings as of December 31, 2001 amounted
to $10.5 billion.
72 The amount of Bridge Loan authorization requested would be automatically
reduced by the fair market value of any TBD Subsidiary that E.ON exchanges for
non-cash consideration. Bridge Loans could be any combination of securities that
E.ON is authorized to issue under the Act. The issuance of such securities would
be subject to all the restrictions and commitments applicable to securities
issuances by E.ON including E.ON's commitment to maintain a minimum equity
capitalization ratio and E.ON's commitment to maintain an investment grade
credit rating. In addition, E.ON has committed that prior to issuing debt,
preferred securities or equity, E.ON will evaluate the relevant financial
implications of the issuance, including without limit, the cost of capital, and
select the security that provides the most efficient capital structure
consistent with sound financial practices and the capital markets. Likewise,
when E.ON is considering what securities to retire, redeem or otherwise pay down
with divestiture proceeds it will employ a similar analysis with the objective
of securing the most efficient capital structure consistent with sound financial
practices and the capital markets.
67
I. Investments in TBD Subsidiaries
E.ON has committed to divest the TBD Subsidiaries, which are not
consistent with its global pure-play energy and utility strategy, over a 3-5
year period. However, pending such divestitures, it is essential that E.ON be
permitted to continue to manage its investment in those businesses as it has
done in the past to preserve and protect the value of that investment. Any
immediate cessation of credit support for or investment in those companies would
deprive the companies of the capital they need to maintain their current
business lines and manage their ongoing affairs and would result in a definite
and immediate diminution of their value, both real and as perceived by the
market and potential purchasers.
This situation is directly analogous to the situation involving the
divestiture of Dominion Capital, Inc. by Dominion Resources, Inc., and E.ON
seeks similar relief./73 In this connection, E.ON is willing to agree to
restraints on its future investment in the TBD Subsidiaries. E.ON will commit to
an aggregate limitation on such investments of $4.0 billion prior to
divestiture, which represents less than 10% of the $70 billion annual revenues
of these businesses in 2000. The $4.0 billion amount is based both on historical
investments in the TBD Subsidiaries and on assumptions E.ON has made regarding
the need for future investments. E.ON's approximate level of investment in the
TBD Subsidiaries over the last three years was $2.9 billion. E.ON expects that
its future investments in these businesses may well exceed historical
investments to properly prepare them for disposition. E.ON will be guided by
normal considerations of prudence and business management in making future
investments, up to the $4.0 billion limit.
The authority requested is necessary to protect and preserve the value
of E.ON's investment in these businesses and to prevent any diminution in the
value or the prospects of the business pending divestiture. Under Section 11 of
the Act, the Commission may permit the retention of businesses that are
"reasonably incidental, economically necessary or appropriate to the operations
[of an integrated public utility system that the Commission finds] necessary or
appropriate in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning of such system or
systems." The Act seeks to protect holding company system investors and utility
consumers from the risks of nonutility ventures by limiting the extent to which
registered holding companies and their subsidiaries could engage in these
businesses./74 In this case, E.ON has already agreed that divestiture of the TBD
Subsidiaries is consistent with its utility and energy focus and growth
strategy. Consequently, an order of the Commission requiring divestiture is not
necessary. The Act's deference to the interests of investors and the financial
soundness of the holding company system favors an orderly sale and this
implicitly includes the right to manage the TBD Subsidiaries as ongoing concerns
pending their divestiture. Managing a business as an ongoing concern also may
include
----------------
73 See Dominion Resources, Inc., Holding Co. Act Release No. 27112 (Dec.
15, 1999) (approving future investments of up to $1.6 billion in businesses
which Dominion Resources had committed to divest within three years). See also,
New England Electric System, Holding Co. Act Release No. 26057 (May 25, 1994)
(stating that a subsidiary of NEES would divest its interest in a company
developing an uninterruptible power system on or before January 1, 2005, but
requesting authorization to invest an additional amount in such company in the
interim).
74 The Regulation of Public Utility Holding Companies, SEC Division of
Investment Management study, June 1995, at 77.
68
the acquisition of additional businesses or assets that improve or better
position a TBD Subsidiary for sale./75 Any business acquired by a TBD Subsidiary
would be similar in character to the business of the acquiring TBD Subsidiary
and be acquired to complement the TBD Subsidiary's core business as discussed
herein. Funding needed investments that enhance business value is part of
maintaining an ongoing business. Therefore, permitting investments pending sale,
is consistent with the voluntary posture of the divestitures in this proceeding
and furthers the interest of investors and the financial soundness of the
holding company system. The requested relief is also consistent with Rule
45(b)(4), permitting capital contributions or open account advances without
interest by a company to its subsidiary company.
J. E.ON's Investments in Portfolio Securities
E.ON Group companies, particularly E.ON Energie, hold significant
investments as reserves against long-term liabilities, specifically, pension and
-- for E.ON Energie only -- nuclear decommissioning obligations. These
investments, which currently total roughly Euro 9 billion ($7.9 bn), include
publicly traded common stocks of other companies. While such stocks currently
comprise about 50% of the total investment, E.ON is willing to commit that they
will comprise no more than 25% of future aggregate net investments. The
remaining 50% of the investments is made up of fixed income bonds, including a
small portion of non-Euro currency fixed income bonds. Large parts of the
investments are held through investment funds. Applicants request that the
Commission authorize E.ON and its FUCO and nonutility subsidiaries located in
Germany to retain these investments "in the ordinary course of business" of a
German company under Section 9(c)(3) of the Act. The relief requested in this
section would not apply to the Powergen Group or the LG&E Energy Group.
Section 9(c)(3) permits registered holding companies and their
subsidiaries to acquire "other securities, within such limitations, as the
Commission may by rules and regulations or order prescribe as appropriate in the
ordinary course of business of a registered holding company or subsidiary
company thereof and as not detrimental to the public interest or the interest of
investors or consumers." As explained in detail below, investments held by E.ON
are appropriate in the ordinary course of business for a German company and will
not have a detrimental effect on the protected interests under the Act. E.ON's
request is limited to investments by it and its German subsidiaries in
connection with reserving against certain identified business liabilities. This
practice is in the ordinary course of business for E.ON and its German
subsidiaries and is common business practice for all similarly situated German
companies. Reserves are also held by E.ON Energie to cover nuclear
decommissioning obligations and those held by E.ON and its subsidiaries to
support pension obligations.
E.ON Energie operates a number of nuclear power stations in Germany
and Sweden. E.ON Energie and its subsidiaries are required under their
respective European accounting principles, especially under German GAAP, to make
provision (i.e., set up reserves) for the decommissioning of these facilities.
German law does not require that the financial provision made for the
decommissioning of nuclear facilities be set aside in a separate segregated
----------------
75 See the discussion of the divestiture of Degussa and Viterra generally
in Item 3.G. supra and footnote 51 regarding Degussa's acquisition of the
specialty chemicals business of LaPorte as part of Degussa's transformation into
a company focused on specialty chemicals.
69
fund. In this respect German law is similar to the law of a number of countries
outside of the U.S., including England, Canada, Denmark, France and Portugal./76
However, under German law and accounting standards, E.ON is required to
establish and show these provisions in its financial statements.
In a number of jurisdictions, including the U.S., investment in equity
securities is recognized as being a prudent investment policy for nuclear
decommissioning funds, given that the time periods over which the
decommissioning costs may be incurred may be as long as 80 to 150 years and
equity returns are not particularly volatile when viewed over such long time
periods. Indeed, the U.S. Nuclear Regulatory Commission ("NRC") does not
prohibit external decommissioning trusts from being invested in common stocks;
instead, NRC guidance indicates that speculative issues (e.g., stocks of
companies with limited operating history or that have low "safety" rankings from
rating agencies) should be avoided and that a licensee's own stock, as well as
those of other power reactor licensees, are inappropriate./77 Accordingly, a
number of U.S. utilities have invested a portion of such trust funds in common
stocks./78
It is reasonable to conclude, therefore, that investment in common
stocks of amounts set aside by E.ON Energie to meet part or all of the costs of
decommissioning of its nuclear facilities is entirely appropriate and in the
ordinary course of its business. Such investments are clearly for the purpose of
meeting nuclear power station decommissioning obligations and are functionally
related to the utility business. The investments are not for speculative
purposes or for the independent purpose of engaging in the investment management
business. E.ON Energie's investments are made in accordance with applicable law
in the jurisdiction which regulates its nuclear activities. The investments
represent a prudent business practice which contribute to the overall financial
soundness of the E.ON Group because they assist in protecting E.ON's other
assets from being burdened by the costs of decommissioning. The investments are
appropriate because investment in common stocks is a practice that is accepted
by the NRC and that is employed by U.S. utility companies.
E.ON and its affiliates also have invested in equity securities to
fund employee benefit obligations. As with nuclear decommissioning obligations,
it has not been customary in Germany for corporations to establish segregated
funds to meet liabilities to pay pensions and other employee benefits. U.S. law,
on the other hand, provides for the establishment of segregated funds to meet
pension obligations of U.S. corporations. However, U.S. public utility holding
companies that do business in parts of the world which do not recognize such
segregated
----------------
76 See the European Commission's publication "Nuclear Safety and the
Environment: Schemes for Financing Radioactive Waste Storage and Disposal"(EUR
18185 EN, 1999) for a survey of the regimes for funding decommissioning of
nuclear facilities in a variety of jurisdictions.
77 See the Nuclear Regulatory Commission's "Standard Review Plan on Power
Reactor Licensee Financial Qualifications and Decommissioning Funding Assurance"
(NUREG-SR1577r1) and Regulatory Guide 1.159.
78 See, e.g., Form 10-K of Duke Energy Corp. filed on April 2, 2001, under
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Liquidity and Capital Resources - Equity Price Risk" ("Duke Energy
maintains trust funds, as required by the Nuclear Regulatory Commission, to fund
certain costs of nuclear decommissioning. (See Note 11 to the Consolidated
Financial Statements.) As of December 31, 2000 and 1999, these funds were
invested primarily in domestic and international equity securities, fixed-rate,
fixed-income securities and cash and cash equivalents.").
70
funds would find themselves faced with the same requirement as E.ON to
make financial provision to meet pension and other employee benefit liabilities.
To make such investments to fund future liabilities is prudent business practice
and in the ordinary course of business. Where a substantial proportion of the
employees to which the liabilities relate are not yet near retirement, it also
would be normal prudent business practice to invest a significant portion of the
overall investment in equity securities./79 German law does not require and
German companies including E.ON do not in practice segregate the
investments/funds they hold with respect to these kinds of liabilities (i.e.,
nuclear decommissioning and pension liabilities). To ensure that the relief
requested is appropriately matched to a continuing need in the ordinary course
of business, E.ON proposes to make equity investments for the purposes of
funding future employee benefit and nuclear decommissioning expenditures only
if, at the time of investment, the actuarial value of the prospective
obligations exceeds the aggregate of the investments that will be held by E.ON
immediately after the investment has been made. Further, E.ON will not
accumulate an affiliate interest in the equity of any company purchased to fund
the reserves. During the year 2002, E.ON will divest shares held in companies in
which E.ON holds an affiliate interest to reduce that interest below 5%./80
Furthermore, on a going forward basis, E.ON's additional net investments in its
reserves will be limited to 25% common stocks./81 E.ON's annual report on Form
U5S will include a statement reconciling the reserve investments with the
related long-term liabilities that indicates the asset class breakdown of the
reserves. The proposed relief is therefore narrowly designed to allow E.ON to
continue its historical practice of maintaining reserves to support its
long-term liabilities to fund employee benefits and its nuclear decommissioning
obligations.
K. Intrasystem Provision of Services
1. LG&E Services and the LG&E Energy Group
After the Acquisition, LG&E Energy Services Inc. ("LG&E Services"),
which was previously approved by the Commission as meeting the requirements of
Section 13(b) of the Act in the Powergen Order, will continue to provide
services to the members of the LG&E Energy Group. It is also contemplated that
LG&E Services may provide services to companies in the E.ON Group. Any such
services would be provided at cost in accordance with the service agreement.
Except as otherwise described in this Application or reflected in the form of
service agreement attached hereto as Exhibit J-1, the operation of LG&E Services
will be in conformity with the authorization granted in the Powergen Order.
----------------
79 To underscore the prudent nature of such investments, we note that the
average yield of E.ON's long-term investments during 1998-2000 was about 9.5%,
whereas the average yield of money market investments during the same period was
roughly 4%. Thus, if E.ON were restricted to money market investments, it would
lose the 5.5% spread between these figures, which we estimate would amount to a
loss of roughly Euro 500 million ($440 mm) annually on its current investments.
80 E.ON holds an interest above 5% in a company that it plans to divest in
2002 by either selling the stock or issuing a bond that would be exchangeable
for the stock of such company or cash. The terms of the exchange offer,
including when the exchange would be triggered, have not been determined at this
time. E.ON seeks authorization to issue securities, including exchangeable
bonds, in its application for financing authorization in SEC File No. 70-9985.
81 This limit will be applied over the course of E.ON's fiscal year and
will be based on the value of the investments at the time they were made.
71
2. Services provided by Powergen Group and E.ON Group
It is intended that after the Acquisition Powergen and members of the
Powergen UK Group will continue to provide services to the LG&E Energy Group.
For example, members of the Powergen UK Group will provide management services
in the areas of internal audit, tax and treasury and consultation regarding
engineering, research and development projects and transmission best practices.
It is also expected that E.ON and other members of the E.ON Group, especially
E.ON Energie, will provide services to LG&E Services and other members of the
LG&E Energy Group after the Acquisition./82 Those services would generally be
limited to high-level management, administrative and technical services.
Because they will be registered holding companies after the
Acquisition, E.ON and Powergen do not intend to render services to their
subsidiaries at a charge and will not allocate to or charge the LG&E Energy
Group for any general overhead costs incurred at the E.ON or Powergen level. If
in the future E.ON would seek to charge the costs for general administrative
services relating to corporate-wide objectives, policies and activities incurred
by E.ON or Powergen, including costs of senior management, shareholder services,
investor relations, corporate affairs, strategic planning and business
development, E.ON would file an application setting forth allocation methods and
describing such transactions in further detail.
To the extent that costs for services provided by members of the
Powergen UK Group or the E.ON Group (other than E.ON and Powergen) can be
attributed to a specific member of the LG&E Energy Group, such member will be
directly charged such cost. Billing and coordination of services would be
performed by LG&E Services as described below. The costs for such service will
be directly assigned, distributed or allocated by activity, project, program,
work order or other appropriate basis. The service provider will use appropriate
policies and procedures to assure that all costs are identified and attributed
to particular projects, programs or work orders for purposes of direct cost
allocation. As required by Rule 91 under the 1935 Act, the costs allocated
across the businesses served by any such service provider will represent the
total true cost of providing the corporate service. The costs considered in the
allocation will include: (1) total payroll and associated costs; (2) materials
and consumable costs; (3) building and facilities costs; (4) information systems
infrastructure costs; and (5) other departmental costs. Records related to
services provided by any service provider to the LG&E Energy Group companies
will be made available to the Commission staff for review.
To the extent that any services cannot be directly attributed to a
specific LG&E Energy Group company, members of the LG&E Energy Group will pay a
share of the costs of services that benefit them. The portion of the costs
attributable to the LG&E Energy Group companies will be determined using
measures that reflect the relevant contribution and size of the individual
businesses. With respect to costs incurred at the Powergen Group level, the
allocation of group costs will use four measures (revenues, operating profit,
employee numbers and net assets) and allocate the group costs equally across the
four. Revenues will be adjusted to exclude the income resulting from sales of
purchased power within the LG&E Energy Group. Powergen will use figures from the
latest published accounts to calculate the percentage of
----------------
82 It is not expected that significant services or goods would be provided
by other members of the E.ON Group to LG&E Services or other companies in the
LG&E Energy Group.
72
revenues, operating profit, employee numbers and net assets on an annualized
basis, and these four percentages will be averaged to calculate the group
allocation.
LG&E Services will generally act as the gatekeeper or coordinator for
services flowing to and from the LG&E Energy Group. Applicants expect that the
majority of costs billed by members of the Powergen UK Group to the LG&E Energy
Group will be paid initially by LG&E Services which will then charge the
appropriate service recipient. LG&E Services will allocate the costs of service
among the LG&E Energy Group using one of several methods. The method of cost
allocation varies based on the department rendering the service. The cost
allocation methods used by LG&E Energy Services are described in Exhibit J-1
hereto.
Except as otherwise authorized by the Commission, all services
provided by members of the E.ON Group and/or the Powergen UK Group to LG&E
Services and the other members of the LG&E Energy Group will be billed at cost
and pursuant to fair allocation methods, in accordance with Section 13 of the
Act and the rules thereunder./83 If a service provider provides services for the
benefit of a specific LG&E Energy company, the charge applicable to that company
will be specifically identified in the invoice. Otherwise, the service
provider's charges will be allocated to individual LG&E Energy companies through
LG&E Services' allocation procedures.
3. Exemptions for Transactions with Non-utility Companies
Each member of the E.ON Group, the Powergen Group and the LG&E Energy
Group (including LG&E Services) requests authorization under Section 13(b) of
the Act to provide services and sell goods to non-utility companies in the LG&E
Energy Group, the Powergen Group and the E.ON Group, at fair market prices
determined without regard to cost, and requests an exemption under Section 13(b)
of the Act from the cost standards of Rules 90 and 91 as applicable to these
transactions, in any case in which the non-utility subsidiary purchasing these
goods or services is:
(1) a FUCO or foreign EWG which derives no part of its income,
directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale within the United States.
(2) an EWG which sells electricity at market-based rates which have
been approved by the FERC, provided that the purchaser is not a public
utility company in the LG&E Energy Group;
(3) a "qualifying facility" ("QF") within the meaning of the Public
Utility Regulatory Policies Act of 1978, as amended ("PURPA") that
sells electricity exclusively (a) at rates negotiated at arms' length
to one or more industrial or commercial customers purchasing the
electricity for their own use and not directly
----------------
83 As stated above, any services provided by E.ON or Powergen to the LG&E
Energy Group would be provided at no charge. Accordingly, those transactions
would not be considered "services" within the meaning of Section 13 and would be
exempt from regulation under the Act. See Rule 80(a), adopted under Section 13
of the Act ("Service means any managerial, financial, legal, engineering,
purchasing, marketing, . . . or any other service . . . which is sold or
furnished for a charge.").
73
for resale, and/or (b) to an electric utility company other than a
public utility in the LG&E Energy Group at the purchaser's "avoided
cost" as determined in accordance with PURPA regulations;
(4) a domestic EWG or QF that sells electricity at rates based upon
its cost of service, as approved by FERC or any state public utility
commission having jurisdiction, provided that the purchaser is not a
public utility company in the LG&E Energy Group;
(5) a subsidiary engaged in Rule 58 activities or any other
non-utility subsidiary that (a) is partially owned by a member of the
LG&E Energy Group, the Powergen UK Group or the E.ON Group, (b) is
engaged solely in the business of developing, owning, operating and/or
providing services or goods to the non-utility subsidiaries described
in clauses (1) through (4) immediately above, or (c) does not derive
any part of its income from a public-utility company within the LG&E
Energy Group.
See Energy East Corporation Holding Company Act Release No. 27228 (Sep. 12,
2000), and Powergen plc Holding Company Act Release No. 27291 (Dec. 6, 2000).
4. Interaction with Other Regulatory Agencies
E.ON is aware that questions concerning the FERC's policy in this area
are likely to arise with respect to affiliate transactions involving the LG&E
Energy subsidiaries that are public utilities under the Federal Power Act. In
connection with the requested FERC authorization, the applicants in that matter
have committed "to be subject to the [FERC's] policy on intra-corporate
transactions with respect to any transaction involving the sale of non-power
goods and services between or among any of the LG&E Companies and E.ON or any of
its subsidiary or affiliated companies." See FERC Application, included as
Exhibit C-5. The FERC intra-corporate transactions policy, with respect to
non-power goods and services, generally requires that affiliates or associates
of a public utility not sell non-power goods and services to the public utility
at a price above market; and sales of non-power goods and services by a public
utility to its affiliates or associates be at the public utility's cost for such
goods and services or market value for such goods and services, whichever is
higher.
The Applicants recognize that, unless exempt, transactions among
E.ON's associate companies and other companies in the holding company system
will be subject to the jurisdiction of the Commission under Section 13(b) of the
Act and the rules and regulations thereunder. Section 13(b) generally requires
that affiliate transactions involving system utilities be "at cost, fairly or
equitably allocated among such companies." See also Rule 90. Nonetheless, E.ON
believes that, as a practical matter, there should not be any irreconcilable
inconsistency between the application of the Commission's "at cost" standard and
the FERC's policies with respect to intra-system transactions as applied to
E.ON.
On this basis, the applicants believe that E.ON will be able to comply
with the requirements of both the FERC and the "at cost" and fair and equitable
allocation of cost requirements of Section 13, including Rules 87, 90 and 91
thereunder, for all services, sale and
74
construction contracts between associate companies and with the holding company
parent unless otherwise permitted by the Commission by rule or order./84
Section 6 of the Service Agreement contains language that clarifies
the scope of the jurisdiction of the Kentucky Commission and the Virginia
Commission, as follows:
Louisville Gas and Electric Company ("LG&E") and Kentucky
Utilities Company will not seek to overturn, reverse, set
aside, change or enjoin, whether through appeal or the
initiation or maintenance of any action in any forum, a
decision or order of the Kentucky Public Service Commission,
or the Virginia State Corporation Commission which pertains to
recovery, disallowance, allowance, deferral or ratemaking
treatment of any expense, charge, cost or allocation incurred
or accrued by LG&E or KU in or as a result of a contract,
agreement, arrangement, or transaction with any affiliate,
associate, holding, mutual service or subsidiary company on
the basis that such expense, charge, cost or allocation: (1)
has itself been filed with or approved by the SEC or (2) was
incurred pursuant to a contract, agreement, or allocation
method which was filed with or approved by the SEC.
As noted above, Applicants recognize that affiliate transactions among
the member companies of the E.ON Group will be subject to the jurisdiction of
the Commission under Section 13(b) of the Act and the rules and regulations
thereunder. Applicants do not believe that the above-quoted language in Section
6 of the Service Agreement is in conflict with the Commission's jurisdiction
under the Act. However, in the event that a state commission were to take action
that would preclude LG&E, KU or an affiliate from providing a service in
compliance with Section 13(b) of the Act or the Commission rules thereunder,
Applicants will cause the utility or affiliate to cease rendering the service
until the dispute can be resolved.
5. Restriction on Amendments
No change in the organization of LG&E Services, the type and character
of the companies to be serviced, the methods of allocating costs to associate
companies, or in the scope or character of the services to be rendered subject
to Section 13 of the Act, or any rule, regulation or order thereunder, shall be
made unless and until LG&E Services shall first have given the Commission
written notice of the proposed change not less than 60 days prior to the
proposed effectiveness of any such change. If, upon the receipt of any such
notice, the Commission shall notify LG&E Services within the 60-day period that
a question exists as to whether the proposed change is consistent with the
provisions of Section 13 of the Act, or of any rule, regulation or order
thereunder, then the proposed change shall not become effective unless and until
LG&E Services shall have filed with the Commission an appropriate declaration
regarding such proposed change and the Commission shall have permitted such
declaration to become effective.
----------------
84 Under circumstances of divergent cost and market prices such that both
the FERC and SEC pricing standards could not be reconciled if the transaction
was performed, E.ON will comply by refraining from performing the affected
service, sales or construction contract. See Powergen Order.
75
L. E.ON's Water Operations
E.ON's Water Operations are Related to and Integrated With its Foreign
Electric and Gas Utility Businesses and Should Be Retainable Under
Section 33 of the Act.
As part of E.ON's strategy to become a global pure-play utility and to
focus on its core energy/utility business, E.ON is committed to retain and
expand its multi-utility business, which under prevailing European industry
practice, includes not only electric and gas service but also water, waste
management and other services. In Germany and in many other parts of Europe -
and from the perspective of local utility regulators - it is typical for a
utility to offer such a complement of services. For example, privatized utility
functions that E.ON has acquired from municipalities have often included
electric, gas, heat and water as part of a bundled service. Acquiring water
operations can also provide an entree into the electric and gas businesses.
E.ON Energie's principal water-related activities are centered in the
German stock exchange-listed company Gelsenwasser AG ("Gelsenwasser").
Gelsenwasser provides water and natural gas to 4.1 million inhabitants and
industrial users within the Ruhr, Munster, Lower Rhine, eastern Westphalia,
Lower Saxony, Saxony-Anhalt, Brandenburg, Mecklenburg and Western Pomerania
regions of Germany and the Czech Republic. Gelsenwasser is also involved in
sewage disposal and treatment. The supply of water accounted for 54% of
Gelsenwasser's revenues in 2001; natural gas, 41%, and other, 5%. After
purchasing RWE's 28.1% equity interest in Gelsenwasser in January 2001, E.ON
Energie holds an 80.5% equity interest through its wholly owned subsidiary E.ON
Aqua GmbH. Though water deliveries by the E.ON Energie group as a whole,
including Gelsenwasser, decreased 9.1% to 235.5 million cubic meters in 2001,
Gelsenwasser is still the largest privately held water utility in Germany (based
on volume of water deliveries).
E.ON Energie also holds stakes in various regional electricity and gas
distributors and in municipal utilities ("Stadtwerke"). Therefore, its ability
to select which utility services to provide is often limited. E.ON Energie's
water, heating, engineering and waste management services are closely tied to
its local utility operations. They not only provide synergies but in most cases
share facilities and customers. The context in which E.ON acquired these
operations underscores how integral they are to the utility service expected by
E.ON's European customers. For historical and political reasons E.ON Energie
rarely owns 100% of the regional utilities or Stadtwerke. E.ON's expansion of
its electric and gas business through the acquisition of regional utilities and
Stadtwerke brought with it other services that these companies traditionally
provided, including water, heating, waste management and other services./85
Continued provision of those services was typically a condition of acquiring the
electric and gas operations. Indeed, the continuing shareholdings of counties,
municipalities and other local shareholders in their former Stadtwerke or
regional utilities serve to ensure that municipal and regional customers will
continue to have those services available and enjoy the efficiencies of
integrated service.
E.ON is not unique in providing multi-utility service. For example,
64% of gas distribution in Germany is provided by companies that also provide
water services. This allows
----------------
85 In this regard, the situation is similar to that presented in Middle
South Utilities, Inc., Holding Co. Act Release No. 11782 (March 20, 1953) in
which the Commission did not preclude Middle South from continuing to provide
bus service within New Orleans.
76
a high degree of cost savings in operations, maintenance, customer care, billing
and sales. Operations and maintenance are performed by skilled craftsmen who
have to study both gas and water installations. For this reason, the integration
of electricity, gas and water services has been increasing in Germany and many
other European countries, such as Austria and Italy. The three businesses
require many of the same skills to deliver an essential commodity to residential
and industrial customers in an economical and efficient manner. All three
businesses require operating and maintaining infrastructure assets that deliver
the commodity directly to the customer, measure and meter the amount delivered
and bill and collect revenues. There is also consumer demand for such
integration, as many European customers are used to receiving multiple utility
services from one source.
Given the historical development of this linkage through traditional
municipal and regional services and labor training practices, and the economic
advantages of continuing to provide such services in an integrated manner, E.ON
could not readily split its water services from the gas and electricity
business. The interests of other shareholders in Stadtwerke and regional
utilities, including the municipalities and other local authorities themselves,
also prevent such a separation, particularly where such shareholders are capable
of blocking corporate actions.
In 2001, E.ON Energie had total revenues of approximately Euro 18.4
billion ($16.4 bn), including Euro 694 million ($618 million) in electricity
taxes, attributable to the following activities:
77
Activity Percent of Year 2001 Revenues
Electricity 77.5%
Gas 14.6%
Water 1.3%
Other:
Access fees 1.6%
Heat 2.0%
Disposal services 0.5%
Supplemental charges 0.5%
Miscellaneous 2.0%
Other total 6.6%
Total 100%
Retention of the water interests also is consistent with the
Commission's decision in WPL Holdings, Inc., Holding Co. Act Release No. 26856
(April 14, 1998), in that there is an overlap in service territories between the
water and other utility operations and, further, the water and gas or electric
operations have long been under common ownership.
It should be noted that Section 33(a)(3) of the Act, which defines the
term "foreign utility company," does not by its terms or in any way, limit the
type or extent of the types of businesses in which a FUCO or its subsidiaries
may engage. By contrast, Section 32(a)(1) of the Act, which defines the term
"exempt wholesale generator" ("EWG") and was also enacted with FUCOs as part of
the Energy Policy Act of 1992 ("EPACT"), expressly requires an EWG to be engaged
exclusively in the business of owning and/or operating certain types of utility
facilities and selling electricity at wholesale. It seems apparent to Applicants
from the legislative history of EPACT that Congress did not intend to place any
limitations on the activities of a FUCO. Applicants are not seeking in this
Application for the Commission to define all of the parameters of investments by
FUCOs in non-utility businesses. This is demonstrated by E.ON's commitment to
sell the TBD Subsidiaries. E.ON believes however, that its water utility
business conforms to the "other businesses" standards of the Act as held by the
Commission. E.ON's water utility activities will not be detrimental to the
public interest or the interests of investors. Rather, as shown above, such
business is beneficial to investors,
78
consumers and the public at large at least to the same extent as was present in
WPL Holdings, supra.
Finally, the original framers of the Act appear to have contemplated
the possibility that a water company could be a nonutility subsidiary in a
registered holding company system. Rule 49 of the Act provides an exemption from
Section 9(a) of the Act, under specific circumstances, for the acquisition of
the securities of a water company, without prior Commission approval. Rule 49
provides in pertinent part that:
(a) Companies Exempted. - The exemptions provided by this section shall
apply to any subsidiary of a registered holding company which subsidiary is
not-
(1) A holding company,
(2) A public utility company,
(3) A company engaged in the business of performing services or
construction for or selling goods to associate holding or public
utility companies, or
(4) A company controlling, directly or indirectly, any company
specified in paragraphs (a) (1) to (3) of this section. . . .
(d) Exemption from section 9(a).
(2) Any such subsidiary company which is subject to regulation as a
water, telephone, common carrier or other public service company,
under the laws of the State in which it operates, shall be exempt
from section 9(a) of the Act with respect to any acquisition
expressly authorized by the State Commission of such State
provided that such acquisition does not include utility assets,
securities of a public utility or holding company, or any other
interest in any class of business other than that in which such
public service company is engaged.
Rule 49 has been amended as recently as 1994 and neither the SEC staff
nor the commenters to the proposed amendment to the rule voiced any concerns
regarding the Rule 49(d)(2) self-executing exemption regarding the acquisition
of the securities of a water company without prior SEC approval. In addition,
Rule 82 of the 1935 Act even allows for an exemption to the at cost provisions
of Section 13 for the performance of services or the sale of goods relating to
the sale of water by such company. The enactment in 1935 of Rule 49 demonstrates
that the retention of water properties was not one of the evils that the Act was
intended to prohibit. To the contrary, under the right set of circumstances, the
Act intended that the acquisition of U.S. water properties by registered holding
companies would not require SEC authorization. Therefore, it seems reasonable to
conclude that the acquisition of or the retention of water properties by a FUCO,
which by definition is not a holding company, public utility company or a
service company in a registered holding company system, and which derives no
part of its income from U.S. utility companies, is that much more removed from
regulation under the Act.
79
For all these reasons, E.ON requests authorization to continue to own
and acquire water businesses in the context of its FUCO operations.
M. Reporting Requirements
The Applicants will file Form U5S annually within 180 days of the
close of E.ON's fiscal year./86 In addition, as required by the 1934 Act and the
1933 Act, respectively, E.ON will file Form 20-F and reports on Form 6-K
containing material announcements as made.
The Applicants also will report annually, as a supplement to the Form
U-13-60 filed by LG&E Services, service transactions among E.ON Group companies
(excepting the LG&E Energy Group) and the LG&E Energy Group. The report will
contain the following information:
a. a narrative description of the services rendered by members of the
E.ON Group or the Powergen Group for the LG&E Energy Group, by the
members of the LG&E Group for the E.ON Group or the Powergen Group,
and by the members of the LG&E Energy Group for each other (other than
as reported on Form U-13-60);
b. disclosure of the dollar amount of services rendered in (a) above
according to category or department;
c. identification of companies rendering services described in (a) above
and recipient companies, including disclosure of the allocation of
services costs among the companies of the LG&E Energy Group; and
d. disclosure of the number of LG&E Energy Group employees engaged in
rendering services to other E.ON Group companies on an annual basis,
stated as an absolute and as a percentage of total employees.
Item 4. Regulatory Approvals
Any German or European utility regulation affecting E.ON would apply
only to its respective German or European operating companies and not to the
parent registered holding company; therefore, there is no conflict between the
regulatory scheme under the 1935 Act and German regulation. Similarly, U.K.
utility regulation affecting Powergen (and E.ON following its acquisition of
Powergen) would apply only to its U.K. operating companies and not directly to
the parent registered holding company; therefore, there is no conflict between
the regulatory scheme under the 1935 Act and U.K. regulation. In addition to the
U.S. federal and state approvals described below, the transaction has been
reviewed by the European Commission and OFGEM. The transaction was also subject
to the review of the FSA.
OFGEM has reviewed the Acquisition to determine whether it has any
adverse effect on the Powergen Group's licenses under the Electricity Act 1989
or the Gas Act 1986 as
----------------
86 Assuming that the Commission issues its order authorizing the
Acquisition in June 2002, E.ON will file its registration statement on Form U5B
in the Fall of 2002. Consequently, E.ON's first filing on Form U5S, covering the
year 2002, would not be made until on or before May 1, 2003.
80
amended by the Gas Act 1995 and subsequent legislation, including the Utilities
Act 2000. E.ON has given certain assurances to OFGEM, relating to OFGEM's
ability to continue to effectively regulate the Powergen Group after the
Acquisition, and the OFGEM review is now concluded.
The European Commission has reviewed the Acquisition to determine
whether it would result in undue market concentration within the scope of
European Council Regulation (EEC) 4064/89 (as amended). The European Commission
has authorized the Acquisition./87
On December 1, 2001, Powergen Trading Limited (a direct subsidiary of
Powergen UK plc and thus a member of the Powergen Group), became authorized (an
"authorised person") under the UK's Financial Services and Markets Act 2000
("FSMA"), the UK's principal piece of legislation dealing with the regulation of
the provision of financial services. Powergen Trading Limited obtained
authorization because certain of its business activities (in the area of energy
market trading) required it to be so authorized.
Under the FSMA, any acquisition of more than 10% of share capital in
either (i) an authorized person itself or (ii) any parent company of an
authorized person, requires the prior approval of the UK's financial services
regulator, the FSA. Thus, due to the acquisition of the shares of Powergen
(Powergen Trading Limited's ultimate parent company) the E.ON/Powergen
acquisition requires the FSA's approval.
Such approval is sought by filing the requisite forms (Controllers
Forms A and B) with the FSA. These forms contain information about the proposed
acquirer companies (in this case, E.ON UK plc and its parent companies),
including details regarding certain directors of each company. These forms were
filed with the FSA on March 5, 2002. The FSA approved the change in control
effective April 30, 2002 by letter dated April 25, 2002.
Set forth below is a summary of the U.S. federal and state regulatory
approvals that E.ON and Powergen expect to obtain in connection with the
Acquisition.
Antitrust
The Acquisition is subject to the requirements of the HSR Act and the
rules and regulations thereunder, which provide that certain acquisition
transactions may not be consummated until certain information has been furnished
to the Antitrust Division of the Department of Justice (the "Antitrust
Division") and the Federal Trade Commission (the "FTC") and until certain
waiting periods have been terminated or have expired. Applicants have filed
their premerger notifications and the applicable waiting periods expired on
November 15, 2001.
----------------
87 See note 16, supra.
81
Federal Power Act
Section 203 of the Federal Power Act (the "FPA") provides that no
public utility may sell or otherwise dispose of its facilities subject to the
jurisdiction of the FERC or, directly or indirectly, merge or consolidate such
facilities with those of any other person or acquire any security of any other
public utility without first having obtained authorization from the FERC.
Because this transaction involves a change in ownership and control of
Powergen's Utility Subsidiaries, the prior approval of the FERC under FPA
Section 203 is required in order to consummate the Acquisition.
Under Section 203 of the FPA, the FERC is directed to approve
acquisition if it finds that it is "consistent with the public interest." In its
review, the FERC generally evaluates: (1) whether the transaction will adversely
affect competition; (2) whether the transaction will adversely affect rates; and
(3) whether the transaction will impair the effectiveness of regulation. In its
order dated October 15, 2001, the FERC authorized the Acquisition under Section
203. See Exhibit C-6.
Exon-Florio
The Committee on Foreign Investment in the United States ("CFIUS") may
review and investigate the Acquisition under the Exon-Florio Amendment to the
Defense Production Act of 1950, and the President of the United States or his
designee is empowered to take certain actions in relation to mergers,
acquisitions and takeovers by foreign persons that could result in foreign
control of persons engaged in U.S. interstate commerce. In particular, the
Exon-Florio Amendment enables the President to block or reverse acquisitions by
foreign persons that threaten to impair U.S. national security. Before the
Acquisition may be consummated, any CFIUS review and investigation of the
Acquisition must have terminated, and the President must not have taken any of
his authorized actions. An Exon-Florio Amendment notice to CFIUS regarding the
Acquisition was filed on November 16, 2001. On December 19, 2001, the Department
of Treasury determined that there are no issues of national security sufficient
to warrant an investigation under section 721, and that action under that
section had concluded with respect to this transaction. See Exhibit C-7.
In a letter by Fred W. Baumann Jr. of Lexington, Kentucky to Catherine
Fisher, Assistant Director of the SEC's Division of Investment Management,
Office of Public Utility Regulation from dated July 26, 2001, Mr. Baumann
expresses his concern with the proposed acquisition of Powergen and LG&E Energy
by E.ON, "a large foreign corporation who plans not only to own Powergen/LG&E
but many American Power Companies all across the heartland of the United
States." Mr. Baumann requests that the Commission deny E.ON authorization to
complete the Acquisition.
The Commission addressed the issue of whether the Act prohibits the
acquisition of a U.S. public utility by a foreign holding company in The
National Grid Group plc, Holding Co. Act Release No. 27154 (March 15, 2000). The
Commission found that the 1935 Act contains no such prohibition. In that matter,
several commenters also expressed discomfort at the prospect of foreign
ownership of a domestic utility. The Commission's order notes that CFIUS reviews
and, if necessary, investigates, foreign acquisitions of U.S. businesses to
determine their national security implications and that the President may
suspend or prohibit a
82
transaction that threatens national security. The Commission concluded in
National Grid that "In view of the role of CFIUS, we do not believe that it is
necessary for us to consider, in this matter, whether national security concerns
implicate the Act's public interest standard." As noted above, CFIUS has
reviewed the proposed E.ON - Powergen transaction and determined that there are
no issues of national security sufficient to warrant an investigation.
Accordingly, as in National Grid, the Commission should find that the
requirements of the 1935 Act are satisfied.
Because Mr. Baumann's letter does not request a hearing and he has not
raised any issue of law or fact that cannot be addressed on the basis of the
record in this matter, there is no reason for a hearing in this matter. Further,
Applicants note that a letter that does not request a hearing does not prevent
the staff of the Commission from authorizing the Acquisition by delegated
authority./88
State Regulatory Approval
The Acquisition requires the approval of the KPSC, VSCC and TRA.
The KPSC has jurisdiction over the Acquisition due to LG&E's and KU's
status as public utility companies in Kentucky. E.ON, Powergen, LG&E Energy,
LG&E and KU filed a joint application with the KPSC on May 14, 2001. The KPSC
approved the Acquisition on August 6, 2001, subject to the acceptance of various
business and operational conditions regarding E.ON, Powergen, LG&E Energy, LG&E
and KU. The parties notified the KPSC of their acceptance of the conditions
through letters dated August 14, 2001 and filings on August 29, 2001 and
September 7, 2001, and on September 17, 2001, following a review of the record,
the Commission issued an order approving the Acquisition.
The VSCC has jurisdiction over the Acquisition because of KU's utility
operations in Virginia under the name Old Dominion Power Company. E.ON,
Powergen, LG&E Energy and KU filed a joint application with the VSCC on May 24,
2001, which was accepted June 12, 2001. The VSCC approved the Acquisition on
October 5, 2001 subject to the same or similar conditions and commitments
imposed by the VSCC on Powergen's acquisition of LG&E Energy.
Consistent with previous acquisitions of holding companies that had
owned and controlled KU, KU, E.ON and Powergen requested by letter that the TRA
disclaim jurisdiction with respect to the Acquisition and provided the TRA with
a copy of their application before the KPSC for informational purposes. The TRA,
however, declined to not take jurisdiction over the proposed Acquisition and on
October 23, 2001 voted in an open session to approve the transaction. The TRA
issued an order on December 14, 2001 confirming its decision; its decision to
approve the Acquisition is effective as of October 23, 2001.
----------------
88 Rule 30-5(f) of the Commission's Rules of Practice, 17 CFR 200.30-5(f),
delegates to the Director of the Division of Investment Management or his or her
designees the authority "to authorize the issuance of orders where a notice has
been issued and no request for a hearing has been received from any interested
person within the period specified in the notice and the matter involved
presents no issue that the director believes has not previously been settled by
the Commission and it does not appear to the director to be necessary in the
public interest or the interest of investors or consumers that a hearing be
held."
83
In addition, under Section 33(a)(2) of the Act, the Commission has
sought letters from each of the affected State Commissions certifying that each
State Commission has the authority and resources to protect ratepayers. Each
affected state commission has responded favorably to the Commission's
request./89
The Applicants represent that the Acquisition proposed in this filing
shall be carried out in accordance with the terms and conditions of, and for the
purposes stated in, the declaration-application no later than 260 days after the
issuance of an order granting and permitting the Application to become
effective.
Item 5. Procedure
Applicants respectfully request the Commission to issue and publish
the requisite notice under Rule 23 with respect to the filing of this
Application as soon as possible, such notice to specify the minimum period
allowed under the Commission's rules during which comments may be entered. It is
submitted that a recommended decision by a hearing or other responsible officer
of the Commission is not needed for approval of the Acquisition. The Division of
Investment Management may assist in the preparation of the Commission's
decision. There should be no waiting period between the issuance of the
Commission's order and the date on which it is to become effective.
Item 6. Exhibits and Financial Statements
Exhibit List
------------
A-1 Articles of Association and Bylaws of E.ON AG.
A-2 Memorandum and Articles of Association of Powergen plc.
B-1 Letter Agreement dated April 8, 2001.
C-1 Application to the Kentucky Public Service Commission.
C-2 Orders of the Kentucky Public Service Commission.
C-3 Application to the Virginia State Corporation Commission.
C-4 Order of the Virginia State Corporation Commission.
C-5 Application to the Federal Energy Regulatory Commission.
----------------
89 See letter from K. David Waddell, Executive Secretary, Tennessee
Regulatory Authority to Catherine Fisher, Assistant Director, Office of Public
Utility Regulation, Securities and Exchange Commission dated February 4, 2002;
letter from Martin J. Huelsmann, Chairman, Commonwealth of Kentucky Public
Service Commission to Catherine Fisher dated February 4, 2002 and; letter from
Philip R. De Haas, Counsel to the Commonwealth of Virginia State Corporation
Commission to Catherine Fisher dated February 8, 2002.
84
C-6 Order of the Federal Energy Regulatory Commission.
C-7 Letter from the Committee on Foreign Investment in the United States.
C-8 Letter to the Tennessee Regulatory Authority.
C-9 Order of the Tennessee Regulatory Authority.
D-1 Map of the Utility Service Territory of the LG&E Energy Group, filed in
paper format under cover of Form SE.
E-1 Corporate Chart of the Combined E.ON and Powergen Group, filed in paper
format under cover of Form SE.
E-1A Revised Corporate Chart E.ON, Post Acquisition and Reorganization, filed in
paper format under cover of Form SE.
E-1B Description of Companies in the E.ON Corporate Structure Post-Acquisition
and Reorganization (confidential treatment requested).
E-2 Management of LG&E Energy Corp., filed in paper format under cover of Form
SE.
F-1 Annual Report of E.ON AG on Form 20-F, filed in paper format under cover of
Form SE.
F-2 Annual Report of Powergen plc on Form 20-F, filed in paper format under
cover of Form SE.
G-1 Description of E.ON's Subsidiary Companies, Including To-Be-Divested
Subsidiaries (revised).*
G-2.2 Description of Powergen's Subsidiary Companies (revised).*
G-2.3 Description of LG&E Energy's Nonutility Subsidiary Companies (revised).*
G-3 Description of E.ON's To-Be-Retained Subsidiary Companies.*
H-1 Proposed Form of Notice.
I-1 Appointment of Agent for Service of Process.
J-1 Services Agreements, incorporated by reference to Exhibit B-1, SEC File No.
074-00049, Form U-9C-3, filed May 30, 2001.
K-1 Opinion of Counsel - E.ON.
K-2 Opinion of Counsel - Powergen.
85
K-3 Past Tense Opinion of Counsel.**
K-4 Subscription Letters from Powergen US Securities Ltd. to Powergen Holdings
LLC (confidential treatment requested).
Financial Statements
--------------------
FS-1 E.ON AG Consolidated Financial Statements for the Year Ended and As of
December 31, 2000.
FS-2 E.ON AG Consolidated Financial Statements As of September 30, 2001.
FS-3 Powergen plc Consolidated Financial Statements for the Year Ended and As of
December 31, 2000, incorporated by reference to Exhibit D of SEC File No.
1-13620, Form U5B, filed March 9, 2001.
FS-4 Powergen plc Consolidated Financial Statements As of September 30, 2001.
FS-5 Pro Forma Consolidated Balance Sheet and Income Statement for the Year
Ended and As of December 31, 2000, including Notes.
FS-6 LG&E Energy Consolidated Financial Statements for the Year Ended and As of
December 31, 2000.
FS-7 LG&E Energy Consolidated Financial Statements As of December 31, 2001
(confidential treatment requested).
FS-8 Subscription Agreement Call Details (confidential treatment requested).
FS-9 E.ON AG Consolidated Financial Statements As of December 31, 2001.*
FS-11 Powergen US Investments Corp. Financial Statements (confidential treatment
requested).
* Filed herewith.
** To be filed by Amendment.
Item 7. Information as to Environmental Effects
The Acquisition neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. Consummation of the Merger will not result in changes in the
operations of Powergen and its subsidiaries that would have any
86
impact on the environment. No federal agency is preparing an environmental
impact statement with respect to this matter.
87
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicants have duly caused this Application-Declaration to be
signed on their behalf by the undersigned thereunto duly authorized. The
signature of the Applicants and of the persons on their behalf are restricted to
the information contained in this application which is pertinent to the
application of the respective companies.
Date: June 10, 2002 E.ON AG
By: Hans Gisbert Ulmke
Name: Hans Gisbert Ulmke
Title: Financial Director, Executive Vice
President
By: Guntram Wuerzberg
Name: Dr. Guntram Wuerzberg
Title: Vice President General Legal Affairs
Date: June 10, 2002 Powergen plc
Powergen US Holdings Limited
Powergen US Investments
Powergen Luxembourg sarl
Powergen Luxembourg Holdings sarl
Powergen Luxembourg Investments sarl
Powergen US Investments Corp.
By: David Jackson
Name: David Jackson
Title: Company Secretary and General Counsel
88
EXHIBIT INDEX
G-1 Description of E.ON's Subsidiary Companies, Including To-Be-Divested
Subsidiaries (revised).
G-2.2 Description of Powergen's Subsidiary Companies (revised).
G-2.3 Description of LG&E Energy's Nonutility Subsidiary Companies (revised).
G-3 Description of E.ON's To-Be-Retained Subsidiary Companies.
FS-9 E.ON AG Consolidated Financial Statements As of December 31, 2001.