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SECURITIES AND EXCHANGE COMMISSION(Release No. 35-27539 ; International Series Release No. 1260; 70-9961 and 70-9985) E.ON AG, et al. Order Authorizing the Acquisition of Foreign Registered Holding Company and Related Transactions; Approving Other Related Requests; Declaring Company Not to Be a Subsidiary; Discussing Individual Comments on the Acquisition; Approving Financings and Intrasystem Service Transactions; and Reserving Jurisdiction June 14, 2002 E.ON AG ("E.ON"), Düsseldorf, Germany, a German public-utility holding company exempt from registration by rule 5 under the Public Utility Holding Company Act of 1935, as amended ("Act"), and Powergen plc ("Powergen"), London, U.K., a U.K. registered public-utility holding company, together with certain direct and indirect wholly owned subsidiaries of Powergen, all registered holding companies, specifically, Powergen US Holdings Limited ("Powergen US Holdings"), Powergen US Investments, Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl, Powergen Luxembourg Investments sarl, Powergen US Investments Corp. ("PUSIC"), London, U.K. (collectively, the "Powergen Intermediate Holding Companies," and, together with E.ON and Powergen, the "Merger Applicants") have filed a joint application-declaration, as amended (the "Merger Application"), under sections 2(a)(8), 4, 5, 9(a)(2), 10, 13(b), 14 and 15 of the Act and rules 80 through 91, 93 and 94 in connection with E.ON's proposed acquisition of the outstanding voting securities of Powergen ("Acquisition") and related transactions. The Acquisition would result in E.ON's indirect acquisition of Powergen's indirect subsidiary, LG&E Energy Corp. ("LG&E Energy"), a Kentucky public-utility holding company exempt from registration by order under section 3(a)(1) of the Act, and LG&E Energy's public-utility subsidiary companies, Louisville Gas and Electric Company ("LG&E") and Kentucky Utilities Company ("KU", and, together with LG&E, the "Utility Subsidiaries").1 Following the Acquisition, E.ON would register as a holding company under section 5 of the Act. In addition, E.ON and certain of its subsidiaries, E.ON UK Verwaltungs GmbH ("E.ON UK"), E.ON UK plc, E.ON US Verwaltungs GmbH ("E.ON US"), all of Dűsseldorf, Germany; Fidelia, Inc., ("Fidelia"), a Delaware finance company subsidiary and E.ON North America Inc. ("E.ON NA"), a Delaware corporation; and Powergen, the Powergen Intermediate Holding Companies, Powergen US Funding LLC ("Powergen US Funding"), a financing vehicle for Powergen US Holdings, all of London, U.K.; LG&E Energy, the Utility Subsidiaries and LG&E Energy's nonutility subsidiaries, all of Louisville, Kentucky (the "LG&E Energy Nonutilities" and, together with LG&E Energy and the Utility Subsidiaries, the "LG&E Energy Group") (collectively, the "Financing Applicants"), have filed a declaration-application, as amended, under sections 6(a), 7, 9(a), 10, 12, 13, 32 and 33 of the Act and rules 45, 46, 52, 53, 54, 90 and 91 requesting authority for various financing transactions and service agreements related to the proposed Acquisition (the "Financing Application"). The Commission issued a notice of the filing of the Merger Application on December 21, 2001.2 The Commission received comments from two individuals. The Commission issued a notice of the Financing Application on March 12, 2002.3 No comments or requests for hearing were received concerning the Financing Application. Table of Contents
Appendix A - Companies to be retained. Certain Defined Terms"Applicants" means E.ON and its direct and indirect subsidiary companies, except its FUCO subsidiaries, and Powergen and its direct and indirect subsidiaries, except its FUCO subsidiaries. "E.ON" means E.ON AG. "E.ON Energie" means E.ON Energie AG. "E.ON Group" means E.ON and all of its direct and indirect subsidiary companies. "E.ON UK" means E.ON U.K. Verwaltungs GmbH. "E.ON US" means E.ON U.S. Verwaltungs GmbH. "E.ON US Intermediate Holding Companies" means E.ON US and Powergen US Investments Corp. ("PUSIC"), following the Acquisition and the Reorganization in which PUSIC and the LG&E Energy Group will be transferred to E.ON US. "E.ON UK Intermediate Holding Companies" means E.ON UK, E.ON UK plc, Powergen, Powergen US Holdings Limited ("Powergen US Holdings"), Powergen US Investments, Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl and Powergen Luxembourg Investments sarl. "KU" means Kentucky Utilities Company. "LG&E Energy Group" means LG&E Energy and all of its direct and indirect subsidiary companies. "LG&E Energy" means LG&E Energy Corporation. "LG&E" means Louisville Gas and Electric Company. "Powergen" means Powergen plc. "Powergen Group" means Powergen and all of its direct and indirect subsidiaries. "Powergen Group Holdings is the "umbrella" foreign utility company ("FUCO") in the Powergen Group. "Powergen Financing Entities" means Powergen US Funding LLC and Powergen US Holdings and its subsidiaries: Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl and Powergen Luxembourg Investments sarl. "Powergen Intermediate Holding Companies" means Powergen US Holdings, Powergen US Investments, Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl and Powergen Luxembourg Investments sarl and PUSIC. Following the Acquisition and Reorganization, Powergen US Holdings, Powergen US Investments, Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl and Powergen Luxembourg Investments sarl (but not PUSIC) will be included among the E.ON UK Intermediate Holding Companies. "Utility Subsidiaries" means LG&E and KU. I. Summary of Merger ApplicationE.ON seeks authorization to acquire all of the issued and outstanding common stock of Powergen, and, through the acquisition, LG&E Energy and the Utility Subsidiaries.4 Following the Acquisition, LG&E Energy would continue to claim exemption from registration under section 3(a)(1) of the Act and E.ON would register as a holding company under section 5 of the Act. E.ON also requests authorization, following the Acquisition: 1) to make certain corporate structure changes in a reorganization without having to seek specific authority for each change, subject to certain conditions; 2) to own E.ON's and Powergen's foreign utility operations as foreign utility companies ("FUCOs"), as defined in section 33 of the Act; 3) to own certain other existing and to be acquired nonutility businesses; 4) to retain, and continue to make, investments held as reserves against long-term liabilities regarding employee benefits and nuclear plant decommissioning, as being "in the ordinary course of business" under section 9(c)(3) of the Act, in accordance with German corporate practice; 5) to invest up to $4 billion in certain nonutility businesses that E.ON intends to divest within a certain period following the Acquisition; 6) for E.ON and its subsidiaries, Powergen and its subsidiaries, and LG&E Energy and its subsidiaries to engage in intrasystem service transactions, subject to certain conditions; and 7) to exempt from the at-cost requirements of section 13 of the Act certain intrasystem service transactions. In addition, the Merger Applicants request the Commission: 1) to issue an order under section 2(a)(8) of the Act declaring RAG AG, a partially owned German nonutility subsidiary of E.ON, not to be a subsidiary; and 2) to disregard certain intermediate holding companies for purposes of applying section 11(b)(2) of the Act. II. BackgroundA. PartiesE.ON is an Aktiengesellschaft, the equivalent of a U.S. stock corporation, under the laws of the Federal Republic of Germany. E.ON was formed in June 2000 as a result of the merger of two German conglomerates, VEBA AG ("VEBA") and VIAG AG ("VIAG"), which traced their roots to the 1920s. E.ON's shares are traded on all German stock exchanges and the Swiss Stock Exchange and as American Depository Receipts ("ADRs") on the New York Stock Exchange. As of year end 2001, E.ON was Germany's fifth largest industrial group, based on market capitalization of approximately $35 billion as of December 31, 2001. For the year ending December 31, 2001, E.ON had revenues of €79.7 billion ($70.9 billion) and net income of €2 billion ($1.8 billion).5 As of December 31, 2001, E.ON had total assets of €99.05 billion ($88.2 billion).6 E.ON's corporate subsidiaries are organized into six separate business divisions: energy, chemicals, real estate, oil, telecommunications and distribution/logistics. Each division is responsible for managing its own day-to-day business. E.ON and its direct and indirect subsidiaries are referred to as the "E.ON Group." E.ON provides strategic management for E.ON Group members and coordinates E.ON Group activities. E.ON also provides centralized controller, treasury, risk management and service functions to E.ON Group members, as well as functions relating to communications, capital markets and investor relations. The subsidiary through which E.ON conducts its energy business is discussed in the following section. E.ON's other nonutility interests are discussed in section V,C, infra. 2. E.ON Energie (Proposed FUCO) E.ON Energie AG ("E.ON Energie"), a wholly owned subsidiary, heads E.ON's energy division, which accounts for 51% of E.ON's total investments. E.ON Energie was formed in July 2000, when E.ON merged the two major energy divisions of VEBA and VIAG. E.ON Energie's core business consists of the ownership and operation of power generation facilities, and the transmission and distribution of electric power, gas and heat and energy-related businesses, including the supply of water and water-related services. At the time of, or prior to, the Acquisition, E.ON will claim FUCO status for E.ON Energie by filing Form U-57 under rule 57. 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.7 E.ON Energie supplied about one-third of the electricity consumed in Germany in 2001, when E.ON Energie sold 203.3 billion kilowatt hours ("kWh") of electricity in western Germany and 26.8 billion kWh in eastern Germany.8 E.ON Energie also conducts a marketing and energy trading business through its wholly owned subsidiary, E.ON Sales & Trading GmbH. E.ON Energie holds stakes in various regional electricity and gas distributors and in municipal utilities ("Stadtwerke").9 For historical and political reasons, E.ON Energie rarely owns 100% of the regional utilities or Stadtwerke. E.ON Energie's principal water-related activities are centered in the German stock exchange-listed company Gelsenwasser, the largest privately held water utility in Germany based on volume of water deliveries. Gelsenwasser also provides gas utility services. E.ON Energie holds an 80.5% equity interest in Gelsenwasser through its wholly owned subsidiary, E.ON Aqua GmbH. In 2001, E.ON Energie had total revenues of approximately €18.4 billion ($16.4 billion), including €694 million ($618 million) in electricity taxes. Gas and electricity revenues (including district heating) accounted for 89% of these revenues. Of the remaining revenues, 1.6% were attributable to water activities and 9.4% were derived from other sales. B. PowergenPowergen is a U.K. integrated energy company, with principal operations in the U.K. and the U.S. Powergen's ordinary shares are listed on the London Stock Exchange and its American Depository Shares ("ADSs") are listed on the New York Stock Exchange. Powergen, including its predecessor company, has been a reporting company under the Securities Exchange Act of 1934, as amended (the "1934 Act"), since 1995 and has filed reports with the Commission in accordance with the requirements of the 1934 Act applicable to foreign private issuers. For the year ending December 31, 2001, Powergen had revenues of £5.659 billion ($8.23 billion) and net income under U.S. generally accepted accounted principles ("GAAP") of £101 million ($147 million). As of December 31, 2001, Powergen had total assets of £10.52 billion ($15.3 billion) and a market capitalization of approximately £4.9 billion ($7.2 billion). Powergen and all of its direct and indirect subsidiary companies are referred to below as the Powergen Group.10 Powergen's two principal subsidiaries are Powergen Group Holdings and Powergen US Holdings, both U.K. companies. Powergen Group Holdings, a FUCO, is the holding company for Powergen's U.K. and international businesses. Powergen Group Holdings' wholly owned subsidiary, Powergen UK plc, is one of the U.K.'s largest integrated electricity and gas businesses. As of December 31, 2001, Powergen UK plc owned or operated approximately 8,200 megawatts ("MW") of core generation capacity (of which approximately 7,400 MW is wholly owned and the balance held through joint ventures), and served over three million customer accounts. Powergen's operations in the U.K. include the marketing of electricity, gas, telecommunications and other essential services to domestic and business customers; asset management in electricity production and distribution; and energy trading to support those activities. Through Powergen International Ltd., Powergen holds interests in power projects in India and the Asia Pacific Region. Powergen US Holdings, a registered holding company, is the holding company for Powergen's U.S. business, and is the indirect parent, through the chain of the Powergen Intermediate Holding Companies (Powergen US Investments, Powergen Luxembourg sarl, Powergen Luxembourg Holdings sarl, Powergen Luxembourg Investments sarl and PUSIC), of LG&E Energy, which Powergen acquired on December 11, 2000, in accordance with the Powergen Order.11 PUSIC holds all of the outstanding voting securities of LG&E Energy. C. LG&E EnergyLG&E Energy is a holding company exempt by order under section 3(a)(1) of the Act.12 It is engaged, through its subsidiaries, in power generation and project development; retail gas and electric utility services; and asset-based energy marketing. Its public-utility subsidiary companies, LG&E and KU, serve in the aggregate approximately 857,000 electricity customers and 299,000 gas customers over a transmission and distribution network covering some 27,000 square miles.13 LG&E Energy also is engaged through subsidiaries in a variety of nonutility businesses, including independent power generation, foreign utility operations, energy services, and commercial and industrial energy consulting.14 LG&E Energy and all of its direct and indirect subsidiary companies are referred to below as the LG&E Energy Group. LG&E engages in the generation, transmission, and distribution of electricity to approximately 364,000 customers in Louisville and 16 surrounding counties. LG&E also purchases, distributes and sells natural gas to approximately 299,000 customers within this service area and in limited additional areas. 15 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 million. LG&E is subject to regulation by the Federal Energy Regulatory Commission (the "FERC") and the Kentucky Public Service Commission (the "Kentucky Commission"). KU engages in the generation, transmission, and distribution of electricity to approximately 464,000 customers in over 600 communities and adjacent suburban and rural areas in 77 counties in central, southeastern and western Kentucky, and to approximately 29,000 customers in five counties in southwestern Virginia.16 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 Kentucky Commission, the Virginia State Corporation Commission (the "Virginia Commission") and the Tennessee Regulatory Authority (the "Tennessee Commission"). III. The Proposed AcquisitionA. ImplementationOn April 9, 2001, E.ON and Powergen announced that they had agreed to the terms for the Acquisition. Applicants propose to effect the Acquisition by means of a court-supervised Scheme of Arrangement under Section 425 of the U.K. Companies Act 1985 ("Scheme").17 In a Scheme of Arrangement, the company to be acquired makes an application to the High Court of Justice of England and Wales ("High Court") for the High Court to summon a meeting of shareholders. It is at the discretion of the High Court to order this meeting. If the meeting is ordered, the shareholders vote on the Scheme at two meetings, which will be held on the same day at a single location. The High Court orders the first meeting (the "Court Meeting"). To be effective, the Scheme must receive the affirmative vote of a simple majority of those shareholders present and voting (either in person or by proxy) at the Court Meeting, representing at least 75% of the shares held by those shareholders present and voting. At the second meeting, the Extraordinary General Meeting, the shareholders must pass a special resolution approving the implementation of the Scheme. At meetings held on April 19, 2002, Powergen's shareholders voted to approve the proposed Acquisition. There will be a further hearing before the High Court to sanction the Scheme at the court's discretion. The Scheme will be effective once the High Court order sanctioning the Scheme has been delivered to the U.K. Registrar of Companies. Powergen must submit to the High Court the document convening the necessary shareholder meetings. This document, the "Scheme Circular," must be sent to shareholders in advance of the meetings. Powergen filed with the Commission a declaration under section 12 of the Act and rule 62 to obtain authorization to solicit proxies from its shareholders in connection with the Scheme and the Commission issued an order permitting the declaration to become effective.18 E.ON will pay £7.65 for each Powergen share and £30.60 for each Powergen ADS (representing four Powergen shares). The offer values the whole of Powergen's capital stock at approximately £5.1 billion ($7.3 billion) (assuming the exercise in full of all outstanding options under Powergen's employee benefit plans). E.ON will acquire Powergen, including its outstanding debt. On the basis of the Powergen debt outstanding as at December 31, 2000 of £4.5 billion ($6.4 billion), adjusted for divestments announced by Powergen prior to the date of the Agreement, the total value of the proposed acquisition would be £9.6 billion ($13.7 billion).19 The Merger Applicants state that, for U.K. tax purposes, some shareholders of Powergen may prefer to receive a loan note rather than cash in return for their Powergen shares. Under U.K. tax law, Powergen shareholders can defer recognition of any capital gains from the sale of their shares until they redeem the loan notes. In the event that loan notes are used, accepting Powergen shareholders would receive £1 nominal of loan notes for every £1 of cash consideration.20 The loan notes would be unsecured, and would not exceed $7.3 billion in aggregate principal amount issued.21 If E.ON elects to make the offer through another E.ON Group company, E.ON UK plc, E.ON would guarantee the loan notes.22 None of Powergen, LG&E Energy or any of their 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. B. Regulatory ApprovalsAs noted above, the requisite European Commission and U.K. approvals have been obtained. In addition, the Kentucky, Virginia and Tennessee Commissions have granted their approvals. The FERC has approved the Acquisition under section 203 of the Federal Power Act. The Merger Applicants made the applicable filings with the Antitrust Division of the U.S. Department of Justice and the Federal Trade Commission under the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the applicable waiting periods expired on November 15, 2001. The Committee on Foreign Investments in the United States has concluded that there are no issues of national security with respect to the Acquisition to warrant an investigation under the Exon-Florio Amendment to the Defense Production Act of 1950.23 C. Domestic and Foreign Utility RegulationThe Merger Applicants state that the German and European utility regulations that affect the E.ON Group apply only to the German and European operating companies and not to E.ON, which will register under the Act. There is therefore no conflict between regulation under the Act and German or European regulation. Similarly, U.K. utility regulation affecting Powergen (and E.ON following the Acquisition) would apply only to the U.K. operating companies and not directly to E.ON. Therefore, there also will be no conflict between regulation under the Act and U.K. regulation. D. Corporate StructureTo effect the Acquisition, E.ON has established a wholly owned German subsidiary, E.ON UK Verwaltungs GmbH ("E.ON UK"), which in turn owns all the outstanding shares of an acquisition vehicle, E.ON UK plc, that will acquire all of the outstanding Powergen shares and survive the Acquisition. E.ON, E.ON UK and E.ON UK plc will register as holding companies. As a subsidiary of E.ON UK and E.ON UK plc, Powergen will remain the immediate parent company of Powergen Group Holdings, the "umbrella" FUCO in the Powergen Group. 2. Proposed Reorganization Following the Acquisition Powergen will continue to hold LG&E Energy through the Powergen Intermediate Holding Companies, each of which is a registered holding company, for a period of time not to exceed twelve months after the Acquisition. This will allow time for E.ON to accomplish a reorganization (the "Reorganization") in which the ownership of PUSIC, (one of the Powergen Intermediate Holding Companies and the immediate parent of LG&E Energy) will be transferred to E.ON US, a direct subsidiary of E.ON. The Merger Applicants state that the reorganized corporate structure will take into account international tax regulations and will clearly separate the domestic utility operations of the Utility Subsidiaries from the other businesses of E.ON and Powergen. The Merger Applicants expect that the transfer of PUSIC will be made in exchange for cash and/or a note. If issued, it is expected that the note will be in an amount not to exceed the fair market value of PUSIC and will bear interest at a market-based rate. The Merger Applicants request the Commission to reserve jurisdiction over the transfer of PUSIC and the issuance of the note until the record in this matter has been supplemented to indicate the amount and other terms of the note. Following the Reorganization, E.ON will hold all the outstanding voting stock of LG&E Energy through E.ON US and PUSIC (together, the "E.ON US Intermediate Holding Companies").24 E.ON US will register as a holding company and PUSIC will remain a registered holding company.25 Although Powergen will cease to own any public-utility companies, it will also remain a registered holding company because it will have responsibility 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. 3. Deregistration of Certain Powergen Intermediate Holding Companies Because certain Powergen Intermediate Holding Companies, i.e., Powergen US Investments, Powergen Luxembourg sarl, and Powergen Luxembourg Holdings sarl, will cease to hold voting interests in LG&E Energy directly or indirectly following the Reorganization, Applicants request that the Commission unconditionally approve the deregistration of these companies under section 5(d) of the Act. Applicants further request that the Commission reserve jurisdiction over the proposed deregistration until the Reorganization has been effected and the record is complete in this regard. 4. Modifications to the Intermediate Holding Company Structures The Merger Applicants state that maintaining an efficient structure after the Acquisition and the Reorganization may require a rapid response to changes in matters such as tax and accounting rules. It may be appropriate to add or subtract an intermediate holding company in the E.ON US Intermediate Holding Company chain or the E.ON UK Intermediate Holding Company chain. The Merger Applicants assert that such changes to the "upper structure" would not have any material impact on the financial condition or operations of LG&E Energy or its subsidiaries. The Merger Applicants request authorization to make structural changes, 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 LG&E Energy or the Utility Subsidiaries. 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 activities in North America, handling certain finance, legal, tax and other service functions. E.ON NA owns Fidelia, a Delaware finance company subsidiary. 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. The Merger Applicants propose that, following the Acquisition, E.ON NA and Fidelia will be placed in the E.ON U.S. corporate structure. To effect the restructuring, E.ON would transfer the E.ON NA shares to E.ON US, which, in turn, would transfer the shares to PUSIC. For tax reasons, debt of E.ON NA held by E.ON may be cancelled in whole or in part, or E.ON may contribute assets to the capital of E.ON NA in connection with the restructuring transactions. In addition, Fidelia, which holds the cash proceeds of certain divestments of E.ON's nonutility businesses in the U.S., will continue to hold those funds for use in future U.S. acquisitions, as permitted by the Act and rules thereunder or authorized by the Commission. Further, Fidelia may lend funds to other companies in the E.ON Group, consistent with the requirements of the Act and rules.26 This measure would avoid repatriation of the funds to Germany and exposure to the risks of currency value fluctuations. IV. Financing of the AcquisitionE.ON intends to finance the Acquisition with cash on hand, proceeds from the liquidation of certain readily marketable assets, funds from E.ON's existing lines of credit or the issuance and sale of long-term or short-term debt securities or bank lines of credit. V. Discussion of the AcquisitionA. IntroductionBecause the Acquisition would result in E.ON's direct acquisition of Powergen and its indirect acquisition of LG&E Energy and its utility subsidiaries, LG&E and KU, the transaction requires prior authorization under sections 9(a)(2) and 10 of the Act. The Commission has reviewed the proposed Acquisition and finds that it satisfies the standards of the Act. The Commission wishes to discuss in particular the ownership by E.ON Energie, a proposed FUCO under section 33 of the Act, of water operations; and the requirements of section 11(b) of the Act concerning the nonutility businesses and corporate structure of registered holding companies. As a related matter, we wish to discuss the proposed financing of the continuing operations of the E.ON subsidiaries, to be divested, pending divestment. B. Water Operations of E.ON Energie (Proposed FUCO)Section 33(a)(3) of the Act in pertinent part defines the term "foreign utility company" to mean "any company that owns or operates facilities that are not located in any State and that are used for the generation, transmission, or distribution of electric energy for sale or the distribution at retail of natural or manufactured gas for heat, light, or power."27 Section 33(c)(3) of the Act further provides in pertinent part that "any interest in the business of 1 or more foreign utility companies . . . shall for all purposes of this Act, be considered to be - (A) consistent with the operation of a single integrated public utility system, within the meaning of section 11, and; (B) reasonably incidental, or economically necessary or appropriate, to the operations of an integrated public utility system, within the meaning of section 11." Unlike the definition of "exempt wholesale generator" in section 32(a) of the Act, the definition of "foreign utility company" does not require this type of exempt entity to be "exclusively" engaged in the business described in the definition. The Commission, however, has noted its concern that the activities of a FUCO have an appropriate relationship to the activities described in section 33(a)(3).28 Although a test of this type may not be as strict as the test under section 11 to determine whether registered holding companies may engage in nonutility businesses, we continue to believe that permitting FUCOs owned by registered holding companies to engage in any business would subvert limitations imposed on registered holding companies by the Act in a way that Congress could not have intended when it passed section 33. Because, as described below, E.ON's foreign water-related activities are closely related to its foreign utility operations, we are able to conclude that E.ON should be permitted to retain these businesses without first determining the full scope of businesses in which a registered holding company can engage through a FUCO. E.ON Energie's principal water-related activities are centered in the German stock exchange-listed company Gelsenwasser AG ("Gelsenwasser").29 Although 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 the largest privately held water utility in Germany (based on volume of water deliveries). Gelsenwasser provides water and natural gas to 4.1 million inhabitants and industrial users in 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. Of Gelsenwasser's revenues in 2001, the supply of water accounted for 54%, natural gas for 41% and other for 5%. As noted above, E.ON Energie also holds stakes in various regional electricity and gas distributors and Stadtwerke (municipal utilities). In 2001, E.ON Energie had total revenues of approximately €18.4 billion ($16.4 billion), including €694 million ($618 million) in electricity taxes, attributable to the following activities:
The Merger Applicants state that E.ON Energie's water, heating, engineering and waste management services are closely tied to its local utility operations. These bundled services not only provide synergies but also share facilities and customers in most cases. The Merger Applicants state that 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. Continued provision of these 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 integrated services available. The Merger Applicants note that in Germany and in many other parts of Europe, it is typical for a utility to offer a complement of services, including not only electric and gas service but also water, waste management and other services, as part of a bundled service. For example, 64% of gas distribution in Germany is provided by companies that also provide water services. This combination of services allows 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. The Merger Applicants state that, in view of 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 view of the facts and circumstances of this matter, the Commission finds that E.ON Energie may engage in the activities described above, without forfeiting its claim to FUCO status. The Commission does not discern the potential for detriment to the investors or consumers of the registered holding company from these activities.30 C. Section 11(b)(1) of the Act: Nonutility Businesses1. Nonutility Subsidiaries to Be Divested (the "TBD Subsidiaries") As part of a general divestment program, E.ON intends to divest certain nonutility subsidiaries and their respective subsidiaries following the Acquisition.31 E.ON explains that its goal is to become a leading global integrated energy and utility company. The activities of the TBD Subsidiaries include chemicals (Degussa AG), real estate (Viterra AG), oil (VEBA Oel), and distribution and logistics (Stinnes AG).32 Section 11(b)(1) of the Act limits the nonutility interests of a registered holding company to those that are "reasonably incidental, or economically necessary or appropriate to the operations of [the] integrated public-utility system." In addition, for a nonutility business to be retained, the Commission must find that its retention is "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." As noted previously, E.ON plans to divest the TBD Subsidiaries, whose activities include chemicals (Degussa AG), real estate (Viterra AG) and oil (VEBA Oel). We therefore do not need to determine whether the Act would permit E.ON to retain any of these businesses indefinitely. However, we are required to discuss the manner and timing of E.ON's divestment of these subsidiaries. Specifically, E.ON proposes to divest Degussa AG and Viterra AG within five years of the date of registration of E.ON as a holding company, and VEBA Oel within three years of that date. E.ON currently owns 64.55% of the equity of Degussa AG ("Degussa"). As noted above, E.ON proposes to divest this interest within five years of registration as a holding company. The Commission has generally permitted retention of businesses that are to be divested for a period of up to three years.33 The Merger Applicants believe that a three-year divestment period would force a sale of the chemicals business at a price that would not reflect its true value. The Merger Applicants explain that Degussa is an extremely large, recently formed company. In 2001, it had sales of approximately €19 billion ($15.8 billion) and 53,000 employees.34 The Merger Applicants also believe that the market currently undervalues Degussa because of the mix of its business and structure of its operations. They state that time is needed to complete the process of integrating the four formerly separate chemical companies comprised by Degussa to realize anticipated efficiency gains, if fair value is to be obtained in the marketplace. The Merger Applicants state that Degussa is implementing measures that will combine, streamline and refocus its operations, including a number of divestments. The focus of the new Degussa is the specialty chemicals business. Finally, the Merger Applicants state that the number of potential buyers is limited and that antitrust issues will require careful analysis. The Merger Applicants explain that relatively few companies compete in the global chemicals markets. 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 would permit the sale to be completed. The chemical industry's unpredictable business cycles of three to five years will complicate the timing of a sale. A five-year divestment period is not unprecedented.35 Moreover, although we must enforce the limits that section 11 places on the types of businesses that a registered holding company may own, we also believe that when a new company comes within the scope of the Act, we should allow it a reasonable amount of time to realize full value for the businesses and assets that it must divest. Doing so is fully consistent with the statutory goals of protecting utility investors and consumers. Based on the facts and circumstances of this matter, particularly the complexity involved in selling Degussa, the Commission finds that E.ON may retain the company following the Acquisition for a period of up to five years following E.ON's registration as a holding company. On May 20, 2002, E.ON and one of its subsidiaries, RAG AG ("RAG") entered into an agreement to exchange part of E.ON's Degussa interest for RAG's interest in Ruhrgas AG ("Ruhrgas").36 The Merger Applicants also request a five-year period for E.ON to dispose of its real estate group, Viterra AG ("Viterra"). Viterra has predominantly been a provider of low-income residential housing; its assets are concentrated in highly industrialized areas of Germany. Prior to 1990, its business was publicly subsidized and highly regulated. Viterra has four strategic business units: residential investment, development and services, and commercial real estate and development. Its property portfolio consists of approximately 164,500 housing units and 100 commercial units. Its residential holdings date mainly from the 1950s and 1960s. The Merger Applicants state that the size of Viterra alone would make it difficult to sell the business at a fair price with a three-year time frame. Viterra's revenues in 2001 were €1.3 billion ($1.1 billion). It is the largest privately owned real estate company in Germany. E.ON believes that the number of potential buyers may be limited to a few international insurance groups or financial investors. In addition, the pool of potential buyers is affected by Viterra's tax/dividend situation. Because of differences in valuation under applicable German GAAP and tax law resulting from Viterra's status as a non-taxable corporation until January 1, 1990, Viterra currently records losses for tax purposes. It is expected to begin to show a very low taxable income within the next few years. If Viterra were to pay dividends during the next 15 years to the owner of its common stock, whether to E.ON or to a new third party, the dividends would be taxed at a rate of about 43%, despite Viterra's negative or very low taxable income. In contrast, if Viterra did not pay dividends, its untaxed reserves would remain on its balance sheet, and at the end of 15 years, it could pay those reserves out as dividends without any tax being levied on the payments. E.ON believes that this unusual tax situation will further reduce the number of potential buyers. The Merger Applicants state that E.ON is already engaged in a process to restructure Viterra to make it more saleable. First, Viterra is selling low-income units and reinvesting a portion of the proceeds in upgraded residential units, particularly in more affluent areas. Second, Viterra is expanding the commercial side of its business. Third, Viterra's management is developing the skills required to complete in a free market economy. E.ON believes that these changes will gradually transform the business and allow Viterra to be sold at a much higher price than it could command in the near future. Based on these facts and circumstances, the Commission finds that the Merger Applicants may also retain Viterra for up to a five-year period following E.ON's registration as a holding company. VEBA Oel manages interests in oil, gas and petrochemicals businesses. British Petroleum plc ("BP") became the majority shareholder (51%) of VEBA Oel on February 7, 2002, by subscribing to a capital increase. E.ON has the option to sell its remaining interest in VEBA Oel (49%) to BP. Upon completion of this transaction, E.ON will have divested its oil businesses completely. E.ON proposes to divest its interest in VEBA Oel within three years of the date of E.ON's registration as a holding company.37 (iv) Distribution and Logistics: Stinnes AG Stinnes AG ("Stinnes") is active in logistics in transportation, chemicals, distribution and materials. E.ON proposes to divest its interest in Stinnes within three years of the date of E.ON's registration as a holding company. (v) Other Companies Hibernia Gamma Beteiligungsgesellschaft mbH ("Hibernia") is a subsidiary of E.ON Energie. Its sole purpose is to acquire and own a minimum of 10% of the nominal capital of the Commerzbank Europe (Ireland), a bank organized as an unlimited company under Irish law with authorized nominal capital of €1 billion; Hibernia currently owns 31% of that entity. E.ON will divest Hibernia 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. E.ON will also divest the following five subsidiary companies, all passive investment vehicles whose real estate holdings are managed by Viterra AG, 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: ERKA Vermögensverwaltungsgesellschaft mbH vorm. Reichs-Kredit-Gesellschaft holds and manages real estate acquired in connection with a former banking business, including the rental of real estate to VAW aluminium AG, a now-divested E.ON subsidiary, and other companies. Its book value is approximately €7.4 milliion. Projektgemeinschaft Humboldtpark München II GbR holds real estate and real estate rights with a book value of approximately €6.5 million. Hibernia Industriewerte GmbH & Co. KG, Humboldt-Verwaltungsgebäude Mülheim company holds an office building leased to Stinnes AG, a TBD Subsidiary. Induboden GmbH & Co. Grundstücksgesellschaft holds real estate and real estate rights. Induboden GmbH & Co. Industriewerte holds real estate belonging to E.ON Group companies, including the headquarter buildings of E.ON Energie in Hanover, Germany), and Stinnes AG and VEBA Oel, both TBD Subsidiaries. c. Investment in TBD Subsidiaries Pending Divestment In addition to the retention periods discussed above, E.ON requests authorization to invest up to $4 billion in the TBD Subsidiaries pending their divestment in order to preserve and protect the value of the businesses and to prevent any diminution in their value or prospects. The Merger Applicants state that any immediate cessation of credit support for, or investment in, the companies would deprive them of the capital they need to maintain their current business lines and manage their ongoing affairs, and would diminish their value, as perceived by the market and potential purchasers. The Merger Applicants further note that, to maintain an ongoing business, it is necessary to fund needed investments that enhance business value. The Commission has previously authorized investments pending sale in businesses to be divested in order to permit the management of the businesses as ongoing concerns and an orderly sale.38 In general, permitting further investments in businesses that are to be divested is consistent with the goals that underlie allowing the newly-registered company to retain these businesses for a period of time - namely, that the interest of investors and consumers are both furthered by permitting the registered company to take reasonable steps to maximize the value of the businesses that the Act requires ultimately to be divested. The requested investment authority of $4 billion is based both on previous levels of investment in the TBD Subsidiaries and on assumptions that E.ON has made concerning the need for future investments. The requested authority represents less than 10% of the $70 billion annual revenues of the TBD Subsidiaries for the year 2000. Finally, nothing in the record suggests that this level of investment will risk the financial integrity of the registered system or any utility subsidiary of the system. We therefore conclude that the requested level of investment is reasonable and should therefore be permitted. D. Nonutility Interests (Other than E.ON Energie) Sought to be Retained391. Exempt Telecommunications Companies Through two intermediate holding companies, E.ON Telecom GmbH (formerly VEBA Telecom) and VIAG Telecom Beteiligungs GmbH, E.ON holds interests in telecommunications and cellular phone providers in Austria (50.1%) and France (17.5%). E.ON disposed of most of its telecommunications activities during 1999 and 2000, but it currently intends to retain the cellular phone providers. The two companies will apply to the Federal Communications Commission for status as "exempt telecommunications companies" ("ETCs") under section 34 of the Act. 2. Other Nonutility Subsidiaries Except for E.ON Energie, the TBD Subsidiaries and the ETCs, E.ON's nonutility subsidiaries are generally of a character that the Commission has previously authorized. The basis for their retention is described in Appendix A to this Order. Generally, the businesses of these companies are related or incidental to E.ON's energy and utility businesses.40 Exhibit G-2.3 to the Merger Application lists the nonutility subsidiaries of LG&E Energy and states the basis for their retention. The nonutility businesses of Powergen and those of the LG&E Energy Group that were considered in the Powergen Order are retainable on the same basis as noted in that order. Excluded are certain nonutility businesses over which the Powergen Order reserved jurisdiction.41 E. RAG: Request for Order Declaring Nonutility Not to Be a Subsidiary As noted above, E.ON directly owns 37.1 % of the shares of RAG AG ("RAG").42 E.ON proposes to retain its ownership interest and seeks an order under section 2(a)(8) of the Act declaring RAG not to be a subsidiary company. RAG is a unique entity created under the auspices of the German government to own all operating coal mines in Germany. RAG was formed to address the adverse effects upon coal production and the resulting social dislocation caused by changing economics of fuel supply during the 1950s.43 The public, and especially the miners' union, demanded the creation of a single coal mining company for the region in 1958. After lengthy negotiations, an agreement in principle was signed in 1969. This agreement still forms the basis for the existence and operations of RAG. The parent companies of RAG at the time, including VEBA, a predecessor of E.ON, undertook to provide RAG with share capital made by contribution agreements, 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 agreement in principle states that "profit is not the principal aim of RAG." Six entities, including E.ON, own all of RAG's outstanding voting stock. The other shareholders are BGE Beteiligungsgesellschaft für Energieunternehmen mbH, a wholly owned subsidiary of RWE AG - 21.95%; Société Nouvelle Sidechar, Paris, a wholly owned subsidiary of RWE AG - 8.25%; ThyssenKrupp Stahl AG - 12.69%; Montan-Verwaltungs GmbH, of which 79% is held by ThyssenKrupp Stahl AG and 21% is held by E.ON - 10%; and Verwaltungsgesellschaft Ruhrkole Beteiligung mbH, of which 35% is held by the RAG group and 65% is held by ARBED S.A. - 10%. The RAG shares cannot be sold without the approval of the owners of 75% of its shares. In addition, RAG's shareholders are economically precluded from divesting their shares by the absence of any market for the shares, due to RAG's inability to distribute profits to its owners. The value of the initial contributions was negative. For RAG to continue in operation, heavy subsidies from the state were necessary. In 2001, RAG received some $3.6 billion in subsidies.44 The overall amount of all state subsidies prior to that time was above $45.5 billion.45 The state has played a continuing role in managing the business direction of RAG. In 1997, it was agreed that state subsidies would decrease to an annual amount of $2.4 billion (DM 5.3 billion) in 2005. At this time, all state subsidies will cease unless a new arrangement is agreed. Under the 1997 agreement also, deficits from the coal mining activities are to be partly compensated through RAG'S non-coal mining businesses.46 Specifically, these businesses are obligated to contribute €100 million ($89 million) annually to the repayment or diminution of subsidies commencing in 2001 and lasting until 2005. The 1997 agreement does not allow RAG to pay dividends so long as RAG receives state subsidies. The German government has the power indirectly to review and approve all business transactions of RAG that could in any way influence the 1997 agreement. The government also has the ability to control the timing and amount of any dividends to shareholders. Any sale of RAG subsidiaries must be approved. The state is represented on the Supervisory Board of RAG: among the Supervisory Board representatives of the shareholders, as opposed to representatives of the employees, there are four state representatives. E.ON has 3, its competitor RWE has 2 and ThyssenKrupp also has 2. RAG is looking for means to increase the contributions made by its nonutility businesses and to become more like a "normal" commercial enterprise by 2005, when the state subsidies will cease. It is hoped that RAG will be in a position to attract private capital and eventually to develop a private market for its shares. This, in turn, would enable RAG's existing shareholders to liquidate their interests in the company. While the RAG shares provide no economic benefits, they also impose no ongoing risks or burdens. The ability to cut off the liabilities associated with money-losing coal operations motivated RAG's shareowners in part to contribute mining and mining-related assets to 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, to RAG. Except as discussed below in connection with the guarantee in support of the Degussa-RAG transaction, E.ON commits that it will not make additional investments in RAG unless authorized by the Commission. RAG is a subsidiary company of E.ON within the meaning of section 2(a)(8)(A) of the Act.47 Section 2(a)(8)(B) authorizes the Commission to declare by order that a company is not a subsidiary company of a given holding company under section 2(a)(8)(A) if the Commission finds that: (i) the subsidiary is not controlled, directly or indirectly, by the 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 device whatsoever, (ii) the subsidiary is not an intermediary company through which control of another company is exercised, and (iii) the management or policies of the subsidiary are not subject to a controlling influence, directly or indirectly, by the 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 subsidiary be subject to the obligations, duties and liabilities imposed in this title upon subsidiary companies of holding companies. The unique features of RAG support a declaratory order under section 2(a)(8) of the Act. RAG is not an intermediate company through which E.ON exercises control of other companies. It appears that it is neither controlled nor subject to a controlling influence by E.ON.48 Rather RAG is a quasi-public, subsidized entity that serves to carry out certain policies of the German government. Because E.ON effectively cannot receive dividends from RAG and cannot obtain any economic benefit by selling its interest in RAG, E.ON's interest in RAG is fundamentally different from the type of interest that a company would normally have in a subsidiary. Initially, therefore, E.ON's interest in RAG does not appear to be the type of interest section 2(a)(8) was intended to regulate. In addition, based on the record, it appears that E.ON, like RAG's other shareholders, has little ability to affect the management, policies or operations of RAG.49 In previous matters, the Commission has pointed to a number of factors as proof that a particular entity exercises a controlling influence. 50 The sole feature of RAG that may require examination under this precedent is its corporate governance arrangements. E.ON has 3 out of 21 seats on RAG's Supervisory Board.51 The Merger Applicants note that German corporate law narrowly limits the powers and duties of Supervisory Board members. They have no direct influence on the day-to-day management and operations of the company and cannot compel the Management Board members, who manage the company, to follow their instructions. Because E.ON has only 3 of 21 seats on the RAG Supervisory Board, it has no approval or veto power with respect to the limited issues on which the Supervisory Board votes. 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 direct competitor of E.ON. 52 As noted previously, only six entities, including E.ON, own all of RAG's outstanding voting stock. E.ON has no arrangement with any of these persons concerning RAG. Based on these facts, we find that E.ON does not exert a controlling influence over RAG. Even if it did, it would not appear to be necessary or appropriate in the public interest or for the protection of investors or consumers to subject RAG to the obligations, duties and liabilities imposed under the Act upon subsidiary companies of holding companies. Because E.ON treats RAG as having virtually no value and is not obligated to make further investments in it, RAG does not pose a threat to the financial health of E.ON or any of its utility subsidiaries. On the facts of this matter, no public policy would be served by regulating RAG as a subsidiary of E.ON. Accordingly, this Order declares under section 2(a)(8) of the Act that RAG is not a subsidiary of E.ON. E.ON has undertaken that it will 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. the inability to receive dividends) and that it will not, directly or indirectly, increase its investment in RAG without prior approval of the Commission. F. Sale of RAG'S Interest in Ruhrgas to E.ON and Related Guarantee by E.ON As noted above, E.ON has proposed to divest its interest in Degussa within five years of the date of E.ON's registration as a holding company. 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"). Through the Transaction, RAG would acquire a majority of Degussa's outstanding shares, 50.1%, and E.ON would acquire an additional 18.5% stake in Ruhrgas, shares currently owned by RAG. RAG would finance the acquisition of Degussa shares under a tender offer through a loan of up to €2 billion granted by a consortium of banks. All shares acquired by means of the loan would be transferred as security to the banks. Various other security measures would be taken. In the event that these measures should be insufficient to cover any outstanding repayment obligation of RAG at the maturity of the loan on December 31, 2004, E.ON will provide a subordinated guarantee to the banks. The Merger Applicants state that, given the collateral to be provided and the value of Degussa shares, it is highly unlikely that the E.ON guarantee would ever be called upon. It is expected that RAG will be able to repay the bank loan from funds gained from the divestment of certain non-core assets. The Transaction would enable E.ON to reduce its holding in Degussa almost immediately, while at the same time it would give RAG a significant interest in a business with substantial revenues. E.ON requests authorization to issue the guarantee in connection with the Transaction. G. Section 11(b)(2) of the Act: Intermediate Holding Companies Section 11(b)(2) of the Act requires the Commission to ensure that "the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of such holding company system." Section 11(b)(2) directs the Commission to require each registered system company "to take such action as the Commission shall find necessary in order that such holding company shall 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," in other words, to eliminate "great-grandfather" holding companies.53 As a result of the interposition of the E.ON US Intermediate Holding Companies (E.ON US and PUSIC) between E.ON and LG&E Energy following the Acquisition and the Reorganization, and the interposition of the E.ON UK Intermediate Holding Companies (E.ON UK and E.ON UK plc) between E.ON and Powergen, E.ON will be a holding company with respect to subsidiaries which "[themselves have] a subsidiary company which is a holding company." E.ON US, PUSIC, E.ON UK, E.ON UK plc and Powergen will all be holding companies over LG&E Energy, which itself will be an exempt holding company over LG&E and KU.54 The Commission reviewed and permitted similar structures in the Powergen Order and in the National Grid Order.55 As in those matters, the intermediate holding companies in the Merger Application will not be a means by which E.ON seeks to diffuse control of LG&E Energy and the Utility Subsidiaries. Rather, these 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.56 The E.ON US and UK Intermediate Holding Companies will not issue securities to third parties and consequently may appropriately be considered as mere conduits. Each will be wholly owned, directly or indirectly, and fully controlled, by E.ON. The creation and existence of the intermediate holding companies will not adversely affect the operation of the LG&E Energy Group. E.ON UK plc may, however, issue and sell loan notes to Powergen's shareholders to finance the Acquisition in part. The loan notes would benefit Powergen's shareholders by minimizing their tax exposure.57 E.ON UK plc would not issue other securities to third parties. In view of the function of this company as a financing subsidiary for the limited purpose of issuing loan notes to finance the Acquisition, the Commission believes that it too may be considered to be essentially a conduit and may be disregarded for purposes of section 11(b)(2). E.ON UK plc will not issue equity to third parties, and so will avoid the creation of a minority interest.58 This corporate structure does not appear to implicate the abuses that section 11(b)(2) was designed to address. Accordingly, the Commission concludes that it is appropriate to "look through" the intermediate holding companies in the Merger Application for purposes of section 11(b)(2) of the Act. VI. Investments by E.ON and Its German Subsidiaries in Portfolio SecuritiesThe E.ON Group companies, particularly E.ON Energie, a proposed FUCO, hold significant investments as reserves against two types of long-term liabilities: their pension obligations, and, for E.ON Energie only, its nuclear decommissioning obligations.59 These investments, which currently total approximately €9 billion ($7.9 billion), include publicly traded common stocks of other companies.60 Large parts of the investments are held through investment funds. Like a number of foreign jurisdictions, but unlike the U.S., German law does not require that these reserves be placed in a separate segregated fund.61 The Merger Applicants request the Commission to authorize E.ON and its German subsidiaries to retain, and continue to make, these investments under section 9(c)(3) of the Act as being in the ordinary course of business.62 Under section 9(c)(3), registered holding companies and their subsidiaries may 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." To ensure that the requested relief corresponds 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 amount of the investments that will be held by E.ON immediately after the investment has been made. Further, E.ON will not create an affiliate relationship with any company within the terms of section 2(a)(11) of the Act by acquiring 5% or more of the voting securities of any issuer.63 During the year 2002, E.ON will reduce any stakes that it has that exceed 5% of a single company to below 5%.64 Further, on a going forward basis, E.ON's additional net investments in its reserves will be limited to 25% common stocks.65 E.ON's annual report on Form U5S will include a statement that reconciles the reserve investments with the related long-term liabilities. The statement will indicate the asset class breakdown of the reserves. Based upon these commitments, and in recognition of the differences between U.S. and German law governing the establishment of reserves against these liabilities, the Commission finds that it is appropriate to grant the requested relief. VII. Intrasystem ServicesA. LG&E ServicesIn the Powergen Order, the Commission found that LG&E Energy Services, Inc. ("LG&E Services"), a direct wholly owned subsidiary of LG&E Energy, met the requirements of section 13(b) of the Act. LG&E Services will continue to provide services to the LG&E Energy Group companies. It is also contemplated that LG&E Services may provide services to E.ON Group companies following the Acquisition. Any such services would be provided at cost in accordance with the service agreement. Except as otherwise described in the Merger Application or reflected in the form of service agreement attached to the Merger Application as Exhibit J-1, the operation of LG&E Services will conform to the authorization granted in the Powergen Order.66 B. Services provided by the Powergen Group and the E.ON GroupApplicants propose that, following the Acquisition and Reorganization, Powergen and other Powergen Group companies (i.e. Powergen Group Holdings and all of its direct and indirect subsidiaries) will continue to provide services to the LG&E Energy Group. For example, the companies 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 E.ON Group companies will provide services to LG&E Services and other LG&E Energy Group companies.67 Those services would generally be limited to high-level management, administrative and technical services. E.ON and Powergen do not intend to render services to their subsidiaries for a charge and they will not allocate to the LG&E Energy Group companies, or charge them for, any general overhead costs incurred at the E.ON or Powergen level.68 The Merger Applicants state that, to the extent that costs for services provided by companies of the Powergen Group or the E.ON Group (other than E.ON and Powergen) can be attributed to a specific LG&E Energy Group company, that company will be charged such cost directly. Billing and coordination of services would be performed by LG&E Services, as described below. The costs for the 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 Act, the costs allocated across the businesses served by any service provider will represent the total true cost of providing the corporate service. The costs considered in the allocation will include: (i) total payroll and associated costs; (ii) materials and consumable costs; (iii) building and facilities costs; (iv) information systems infrastructure costs; and (v) 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. The Merger Applicants state that, to the extent that any services cannot be directly attributed to a specific LG&E Energy Group company, LG&E Energy Group companies 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, allocation of group costs will by done using four measures (revenues, operating profit, employee numbers and net assets) and the costs will be allocated equally across the four measures. 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 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. The Merger Applicants expect that the majority of costs billed by Powergen Group companies to the LG&E Energy Group companies 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 companies using one of several methods. The method of cost allocation varies based on the department rendering the service.69 The Merger Applicants state that, except as otherwise authorized by the Commission, all services provided by E.ON Group companies and/or Powergen Group companies to LG&E Services and the other LG&E Energy Group companies will be billed at cost and in accordance with fair allocation methods, as required by section 13 of the Act and related rules. If a service provider provides services for the benefit of a specific LG&E Energy Group 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 Group companies through LG&E Services' allocation procedures. The Merger Applicants propose that LG&E Services also provide services to companies in the E.ON Group. Any services would be provided at cost. C. Exemption for Transactions with Nonutility CompaniesEach company in 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 nonutility companies in the LG&E Energy Group, the Powergen Group and the E.ON Group at fair market prices determined without regard to cost. To that end, each company 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 nonutility 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 arm's-length to one or more industrial or commercial customers purchasing the electricity for their own use and not directly for resale, and/or (b) to an electric utility company other than a public-utility company 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; or 5) a subsidiary engaged in rule 58 activities or any other nonutility 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 nonutility 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. The Commission has granted substantially identical exemptions under section 13(b) of the Act in previous matters.70 We find it appropriate to grant E.ON the same relief. VIII. Comments on the AcquisitionThe Commission received letters commenting on the proposed acquisition from two individuals. 71 Mr. Fred W. Baumann, Jr. expressed concern about foreign ownership of U.S. utilities and asked the Commission to reject the Acquisition.72 Mr. Cecil R. Hamblin also expressed concern about foreign ownership and noted his preference for an acquisition of LG&E Energy by American Electric Power Company, Inc. ("AEP"), a registered holding company. Mr. Hamblin objected to the tax consequences of Powergen's acquisition of LG&E Energy. 73 The Commission considered similar views in approving the acquisition of New England Electric System, a U.S. registered holding company, by National Grid plc, a U.K. holding company.74 As we concluded in National Grid, concerns about the national security implications of acquisitions of U.S. utilities are not relevant under the Act. Instead, as we indicated in National Grid, concerns about foreign ownership of U.S. utilities are more appropriately addressed by the Committee on Foreign Investment in the United States ("CFIUS") under the Exon-Florio Amendment to the Defense Production Act of 1950.75 As noted previously, the Merger Applicants were informed on December 19, 2001, that CFIUS concluded that there were no issues of national security sufficient to warrant an investigation. In view of the role and greater expertise of CFIUS, the Commission does not believe that it is necessary to consider whether national security concerns implicate the public interest standard of the Act. Concerning Mr. Hamblin's preference for an acquisition of LG&E Energy by AEP rather than E.ON, the Act requires the Commission only to determine whether a proposed transaction meets the applicable standards. The Act does not require the Commission to determine whether a potential alternative transaction is preferable to the one for which authorization is sought.76 Finally, the issue of the tax consequences of Powergen's acquisition of LG&E is moot because the Powergen Order authorized the transaction. In addition, as the Commission noted in the National Grid Order: The tax consequences of the Merger for any particular investor or group of investors will vary depending upon the investor's tax situation. It would therefore be impracticable for us to incorporate the tax consequences of the Merger into our analysis of the fairness of the Merger.77 To the extent that Mr. Hamblin and Mr. Baumann have raised issues of law under the Act, we are able to address them on the basis of the record before us. It is well settled that evidentiary hearings are required only when there exists a genuine issue of material fact.78 A proponent of a hearing must make a minimal showing that material facts are in dispute; an intervenor cannot rely on bald or conclusory allegations that a dispute exists.79 On the basis of our review, we are satisfied that no hearing is needed in this matter. IX. Financing ApplicationThe Financing Application requests authorization for certain financing activities of E.ON and its subsidiaries through May 31, 2005 (the "Authorization Period"), specifically: 1) various financings by E.ON, including the issuance of common stock and ADSs, preferred stock, short and long-term debt, currency and interest rate swaps and guarantees; 2) certain financings by (a) the direct and indirect holding company parents of LG&E Energy, (b) the LG&E Energy Group companies and (c) E.ON UK and its holding company subsidiaries and the Powergen Financing Entities; 3) the continuation by the Utility Subsidiaries of their respective receivables factoring programs; 4) the creation of money pools and certain intercompany financing arrangements; 5) the payment of dividends out of capital or unearned surplus; 6) the LG&E Energy Group tax allocation agreement; 7) changes to the terms of any wholly owned E.ON Group company's authorized capital stock, the issuance of additional shares, or alteration of the terms of any then existing authorized security; 8) the formation of, and the issuance by, financing entities of securities otherwise authorized to be issued and sold under this Order or exemptions available under the Act; 9) investments in exempt wholesale generators ("EWGs"), as defined in section 32 of the Act and FUCOs; and 10) investments in energy-related companies doing business outside the U.S. X. General Financing ParametersThe Financing Applicants state that the specific terms and conditions of securities that may be issued in accordance with the requested authority are not known at this time. They propose that the financing transactions will be subject to the following general terms and conditions (the "Financing Parameters"):
The Financing Applicants state that the requested authorizations will give them flexibility to respond quickly and efficiently to their financing needs and to changes in market conditions, and will thus benefit investors and consumers. The Commission has previously approved similar proposals.80 XI. Use of ProceedsThe proceeds from the sale of securities in external financings by E.ON will be used for general corporate purposes, including: 1) financing investments by, and capital expenditures of, the E.ON Group, including the funding of future investments in EWGs, FUCOs and TBD Subsidiaries and ETCs, as well as companies engaged or formed to engage in energy-related businesses, as authorized by this Order; 2) the repayment, redemption, refunding or purchase by any E.ON Group company of its own securities under rule 42 or as authorized by this Order; 3) the financing or refinancing of the capital requirements of the E.ON Group; and 4) other lawful purposes. The $75 billion External Financing Limit represents investments in the following areas, generally: 1) $25 billion of investments in EWGs and FUCOs; 2) $35 billion of investments in EWGs and FUCOs financed by bridge loans ("Bridge Loans") pending the receipt of divestment proceeds; 3) $4 billion for investments in TBD Subsidiaries pending their divestment, as discussed in section V, C, 1,c, supra; 4) $10 billion for investments in energy-related subsidiaries doing business outside the U.S., as discussed in section XIII, C, 9, k, infra. The Financing Applicants note that the proposed investments in EWGs and FUCOs financed by Bridge Loans represent merely the redeployment of the existing capital that is currently invested in the TBD Subsidiaries, because the Bridge Loans (or other outstanding debt in an equivalent amount) will be repaid with the proceeds of the divestments. Consequently, the aggregate level of new capital expenditures that will be financed under the requested authorization is approximately $39 billion. In addition to the capital expenditure program described above, as of December 31, 2001, E.ON and Powergen had debt securities outstanding in the amount of approximately $14.5 billion and $7.5 billion, respectively. Funds raised under the requested authority, and subject to the External Financing Limit, will also be used to refinance, repay, redeem or refund some of this debt during the Authorization Period. No financing proceeds will be used to acquire a new subsidiary unless the acquisition is consummated in accordance with an order of the Commission or an available exemption under the Act. The proceeds of external financings will be allocated to companies in the E.ON Group in various ways through intrasystem financings discussed below. XII. Existing Financing ArrangementsA. Arrangements Related to Powergen's Acquisition of LG&E EnergyAfter the Acquisition, certain arrangements made to finance Powergen's acquisition of LG&E Energy and LG&E Energy's operations will remain in place. Powergen acquired LG&E Energy in December 2000 for approximately $3.25 billion. There was a simultaneous capital injection in LG&E Energy of approximately $0.76 billion. As described in the Powergen Order, Powergen US Holdings, one of the Powergen Intermediate Holding Companies, raised $3.7 billion from a bank facility negotiated for this purpose and borrowed $0.3 billion from Powergen UK plc. The Powergen Order noted that Powergen intended to reduce the debt incurred under the bank facility in various ways.81 This original debt has been repaid or refinanced. As a result, external debt of Powergen US Holdings (including Powergen US Funding LLC) has been reduced 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. Applicants intend that the external debt at Powergen US Holdings and Powergen US Funding LLC will remain in place following E.ON's acquisition of Powergen and the proposed Reorganization As of December 2001, the aggregate amount of debt outstanding was $4 billion, of which $2.6 billion was external debt. The funds raised by Powergen US Holdings 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. Under U.S. GAAP, this obligation is treated as a loan from PUSSL to PUSIC. The balance of the funds passed down represents equity. The timing and amounts of PUSIC's obligations to meet 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 U.S. 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 net present value of the obligation to make the future payments is recorded as debt. In the event of the 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 and/or a note.82 PUSIC's obligation in respect of the capital call described above will remain a continuing obligation of PUSIC. Funds paid by PUSIC to PUSSL will be invested in non-voting shares of a U.K. unlimited company owned by Powergen, Powergen UK Securities, which will lend to Powergen US Holdings. B. E.ON's Current Capital StructureAs of December 31, 2001, E.ON had 692 million common shares issued and approximately 687.3 million outstanding shares. E.ON recently completed the repurchase of 76.3 million common shares, approximately 10% of the company's capital stock. E.ON has cancelled 71.3 million of the repurchased shares. 83 As of December 31, 2001, E.ON had financial liabilities to banks and third parties totaling €12,987 million ($11,560 million) consisting of bonds (€1,689 million, $1,503 million), bank loans (€9,167 million, $8,160 million), liabilities related to banking operations (€1,110 million, $988 million) bills payable (€30 million, $27 million) and other financial liabilities (€991 million, $882 million). E.ON's bank loans have maturities ranging from 2002 to 2040. E.ON raises funds through lines of credit, commercial paper, medium term notes, and other means. E.ON's capital structure on a pro forma basis taking the Acquisition into account as of December 31, 2001 would be composed of 48.44% equity, 0.24% preferred stock and 51.32% debt.84 E.ON's financial strength is also reflected in its credit ratings.85 XIII. Proposed Financing ProgramA. E.ON External Financing ($75 billion)E.ON proposes to issue and sell securities and to guarantee the obligations of its subsidiaries in an aggregate amount outstanding at any one time during the Authorization Period not to exceed the $75 billion External Financing Limit.86 The various securities would be subject to the following dollar sublimits: no more than $25 billion would consist of equity securities, including preferred stock, options and warrants (the "Equity Sublimit"); no more than $40 billion would consist of debt securities (the "Debt Sublimit"); and no more than $40 billion would consist of guarantees (the "Guarantee Limit"). B. Equity Securities ($25 billion)E.ON seeks authorization to issue and sell common stock from time to time during the Authorization Period: (i) through underwritten public offerings; (ii) in private placements; (iii) in exchange for securities or assets being acquired from other companies; (iv) under its dividend reinvestment, stock-based management incentive and employee benefit and employee share purchase plans; or (v) through subscription rights. E.ON also proposes to issue and sell options, warrants or other stock purchase rights.87 The authorization to issue and sell common stock would also apply to the issuance of common stock directly or through the ADR program and, for purposes of this request, the ADRs would not be considered separate securities from the underlying common stock. All sales of common stock and other equity instruments would be made at rates or prices and under conditions negotiated, based upon, or otherwise determined by, competitive capital markets. E.ON requests authorization to use its common stock as consideration for acquisitions that are authorized under the Act, such as the exchange of equity securities for securities of the company being acquired in order to provide the seller with certain tax advantages. The E.ON ordinary shares to be exchanged may, among other things, be purchased on the open market under rule 42 or may be original issue. E.ON ordinary shares used to fund an acquisition would be valued at market value based upon the closing price on XETRA, Germany's official electronic trading system, on the day before the execution of a definitive agreement or, in the case of a tender offer, on the day of commencement of the offer. E.ON also requests authorization to use its common stock and other equity instruments to fund employee benefit plans and in connection with dividend reinvestment plans that currently exist or may be formed during the Authorization Period. E.ON requests authorization to issue preferred stock from time to time during the Authorization Period in accordance with the applicable Financing Parameters. Preferred stock would have dividend rates or methods of determining the same, redemption provisions, conversion or put terms and other terms and conditions as E.ON may determine at the time of issuance. C. Debt Securities ($40 billion)E.ON requests authorization to issue and sell long-term unsecured debt securities from time to time during the Authorization Period in accordance with the applicable Financing Parameters. E.ON may also maintain and establish long-term bank lines of credit. Subject to the Financing Parameters, any long-term debt security would have the maturity, interest rate(s) or methods of determining the same, interest payment terms, redemption provisions, sinking fund terms, and other terms and conditions as E.ON may determine at the time of issuance. E.ON seeks authorization to issue and sell short-term securities through bank lines of credit, institutional debt, commercial paper and bid notes. Short-term debt will be issued in accordance with the applicable Financing Parameters. E.ON may sell commercial paper, from time to time, in established commercial paper markets. E.ON may engage in other types of short-term financing generally available to borrowers with comparable credit ratings, as it may deem appropriate in light of its needs and market conditions at the time of issuance. 3. Interest Rate and Currency Risk Management Devices E.ON seeks authorization to enter into, perform, purchase, and sell financial instruments that are intended to manage the volatility of interest rates and currency exchange rates, including, but not limited to, swaps, caps, floors, collars, and forward agreements or any other similar agreements ("Hedging Instruments"). The Financing Applicants state that E.ON would employ Hedging Instruments as a means of prudently managing the risk associated with any of its outstanding debt issued under this Order or an applicable exemption by, for example: (i) converting variable rate debt to fixed rate debt; (ii) converting fixed rate debt to variable rate debt; and (iii) limiting the impact of changes in interest rates resulting from variable rate debt. In no case will the notional principal amount of any Hedging Instrument exceed that of the underlying debt instrument and related interest rate or currency exposure. The Financing Applicants state that E.ON will not engage in "leveraged" or "speculative" transactions. The underlying interest rate indices of a Hedging Instrument will closely correspond to the underlying interest rate indices of E.ON's debt to which the Hedging Instrument relates. Hedging Instruments would be entered into on-exchange or off-exchange with counterparties whose senior debt ratings are investment grade ("Approved Counterparties"). In addition, E.ON requests authorization to enter into Hedging Instruments with respect to anticipated debt offerings ("Anticipatory Hedges"), subject to certain limitations and restrictions. Anticipatory Hedges would only be entered into on-exchange or off-exchange with Approved Counterparties, and would be used to fix and/or limit the interest rate or currency exchange rate risk associated with any proposed new issuance. Anticipatory Hedges may include: (i) a forward sale of U.S. or European Economic Area ("EEA") Treasury futures contracts, U.S. or EEA Treasury obligations and/or a forward swap (each, a "Forward Sale"); (ii) the purchase of put options on U.S. or EEA Treasury obligations (a "Put Options Purchase"); (iii) a Put Options Purchase in combination with the sale of call options on U.S. or EEA Treasury obligations (a "Zero Cost Collar"); (iv) transactions involving the purchase or sale, including short sales, of U.S. or EEA Treasury obligations; or (v) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar, and/or other derivative or cash transactions, including, but not limited to, structured notes, caps, and collars, appropriate for the Anticipatory Hedges. Hedging Instruments and Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions, the opening of over-the-counter positions with one or more Approved Counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. E.ON will determine the optimal structure of each Hedging Instrument or Anticipatory Hedge transaction at the time of execution. E.ON will comply with SFAS 133 ("Accounting for Derivatives Instruments and Hedging Activities") and SFAS 138 ("Accounting for Certain Derivative Instruments and Certain Hedging Activities") or any other standards relating to accounting for derivative transactions that are adopted and implemented by the Financial Accounting Standards Board ("FASB"). To the extent that such securities are not exempt under rule 52(a), the Utility Subsidiaries request authorization to enter into the transactions described in this section on the same terms applicable to E.ON. The E.ON US Intermediate Holding Companies, the Powergen Intermediate Holding Companies and the Powergen Financing Entities propose to enter into hedging transactions with E.ON or each other to hedge interest rate or currency exposures. These transactions would be on market terms. The E.ON Financing Entities, as defined in section XIII, C,9,f, infra, request authority to enter into hedging transactions with third parties or E.ON to hedge interest rate or currency risk in connection with financings authorized in this Order. These transactions would be on the same terms applicable to E.ON. No gain or loss on a hedging transaction entered into by E.ON or its subsidiaries will be allocated to the Utility Subsidiaries, except that a gain or loss may be allocated to a Utility Subsidiary where a hedging transaction is entered into by a Utility Subsidiary in connection with a Utility Subsidiary financing. E.ON requests authorization to enter into guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support ("Guarantees") with respect to the obligations of the E.ON Group companies, as may be appropriate or necessary to enable them to carry on in the ordinary course of their respective businesses. The aggregate amount of Guarantees will not exceed the Guarantee Limit (not taking into account obligations that are exempt under rule 45). All debt guaranteed will comply with the Financing Parameters, as applicable. Included in the Guarantee Limit are Guarantees previously issued for the benefit of E.ON Group companies.88 E.ON proposes to charge each company a fee for each Guarantee provided on its behalf. The fee will not exceed the cost, if any, of the liquidity necessary to perform the Guarantee. As of December 31, 2001, E.ON had contingent liabilities from Guarantees issued and outstanding on behalf of E.ON Group companies in an aggregate amount of €282 million ($251 million). 5. Profit and Loss Transfer Agreements Although E.ON and its German subsidiaries will file a consolidated German income tax return, they have not entered into a tax agreement relating to either federal or state taxes as provided by rule 45(c) under the Act. E.ON and its German subsidiaries do, however, allocate the taxes paid by the consolidated German group among themselves that have income and they compensate the companies with losses on a current basis, pursuant to profit and loss transfer agreements under the German Stock Corporation Act.89 Applicants request the Commission to authorize these profit and loss transfer agreements and the consolidated tax filing of E.ON and its German subsidiaries discussed in this Order and in Exhibit G-1 to the Financing Application under section 12(b) of the Act. The profit and loss transfer agreements allow E.ON to cause the subsidiaries to distribute their profits or to hold them as retained earnings. If the subsidiaries have losses, E.ON assumes the losses. Although E.ON's potential exposure under the agreements is uncertain, E.ON, on a consolidated basis, has a history of profitability and its core non-U.S. regulated utility business is stable. Because a profit and loss transfer agreement is in some respects like a financial guarantee from a parent to its subsidiary, E.ON proposes to treat its net exposure under the agreements as a Guarantee subject to the Guarantee Limit. E.ON's exposure is not capable of exact quantification until year end, when the accounting for the financial performance of each company subject to a profit and loss transfer agreement is complete. Accordingly, E.ON will review its aggregate exposure under all of these agreements during the year for purposes of measuring compliance with the Guarantee Limit and will estimate projected potential payment amounts based on prior experience and interim information. The projected amounts will count against the Guarantee Limit. When the year end results are available, E.ON will true-up the estimated exposure with its actual experience and will adjust the amount charged against the Guarantee Limit accordingly. D. Subsidiary Company FinancingAs discussed previously in section V, B, supra, the Financing Applicants seek authorization to retain existing investments in their foreign utility operations and energy-related businesses.90 The Financing Applicants further seek authorization to invest the proceeds from divestments (including any completed divestments as well as future ones), which may total approximately $35 billion, in EWG and FUCO activities, without including those investments in E.ON's Aggregate EWG/FUCO Financing Limitation, as defined below.91 The requested authorization would also include the ability for E.ON to issue and sell up to $35 billion of securities to finance EWG and FUCO investments pending the receipt of divestment proceeds (the "Bridge Loans"); provided that upon the receipt of those proceeds, the Bridge Loans or debt securities with an equivalent principal amount would be retired, redeemed or otherwise paid down, so that the EWG and FUCO investment under the requested authorization would not exceed the cash proceeds from divestments.92 In addition, the Financing Applicants propose to enter into transactions to finance additional investments in EWGs and FUCOs in an amount up to $25 billion.93 The $25 billion, plus the $35 billion Bridge Loan authorization described above, are togetner referred to as the "Aggregate EWG/FUCO Financing Limitation." The proposed amount of E.ON's securities issuances for the purpose of financing EWG and FUCO investments is included in E.ON's External Financing Limit. The $25 billion amount is approximately equal to 238% 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.94 These proposals are discussed in section XIII, C, 6, a, infra. 2. TBD Subsidiaries and Retained Nonutility Subsidiaries The E.ON Group companies (other than the LG&E Energy Group companies) propose to finance the TBD Subsidiaries and E.ON's nonutility subsidiaries that are not now or hereafter held as part of a FUCO or the LG&E Energy Group (the "Retained Nonutility Subsidiaries"), and these companies propose to finance one another throughout the Authorization Period, through capital contributions, loans, guarantees, the purchase of equity or debt securities, or other methods.95 In connection with the financing of the TBD Subsidiaries, investments would not exceed $4 billion. In connection with the financing of the Retained Nonutility Subsidiaries, investments would not exceed the amount of financing authorization sought in the Financing Application, i.e., $75 billion. The requested authorization would not apply to any company in the LG&E Energy Group. The Financing Applicants request this authorization to allow the E.ON Group, other than the LG&E Energy Group companies, to finance the TBD Subsidiaries and the Retained Nonutility Subsidiaries at market rates, where required by German law or regulation. Where the law or regulations do not require market rate financing, the E.ON Group (other than the LG&E Energy Group companies) would finance the TBD Subsidiaries and the Retained Nonutility Subsidiaries at the lending company's cost of capital. 3. Powergen Financing Entities As discussed previously in section III,D,2, supra, it may be necessary or desirable following the consummation of the Acquisition of Powergen for E.ON to delay the transfer of the LG&E Energy Group to E.ON US (one of the E.ON U.S. Intermediate Holding Companies) for up to twelve months ("Interim Period"). The Financing Applicants request that, during the Interim Period, Powergen and the Powergen Intermediate Holding Companies continue to have the financing authority granted to Powergen in the Powergen Order.96 The Financing Applicants further request that the Powergen Financing Entities - specifically, the Powergen Intermediate Holding Companies that are left after PUSIC is transferred to E.ON US and Powergen US Funding, a special purpose entity that is not and will not be a holding company -- be authorized to maintain, repay, refund and otherwise refinance the outstanding debt in place as of the date of the transfer of the LG&E Energy Group companies (the "Transfer Date") through the Authorization Period, so long as the aggregate principal amount thereof does not at any time exceed the amount outstanding as of the Transfer Date. As noted above, the aggregate amount outstanding as of December, 2001 was $4 billion. The Financing Applicants further request that the Powergen Financing Entities be authorized to loan any proceeds from the issuance of securities pursuant to the requested refinancing authorization to any of the E.ON US Intermediate Holding Companies and the LG&E Energy Group companies through the Authorization Period. Each of the Powergen Financing Entities requests authorization to issue and sell securities to the other Powergen Financing Entities, Powergen, E.ON UK, E.ON UK plc, and E.ON, and to acquire securities from the other Powergen Financing Entities, the E.ON US Intermediate Holding Companies and the LG&E Energy Group companies. Each of the Powergen Financing Entities also seeks authority to issue guarantees and other forms of credit support to the other Powergen Financing Entities, the E.ON US Intermediate Holding Companies and the LG&E Energy Group companies. The Powergen Financing Entities would not acquire voting securities of LG&E Energy, its subsidiaries or the E.ON US Intermediate Holding Companies. The authorizations are requested through the Authorization Period. The proposed financings by the Powergen Financing Entities would be used to finance the capital requirements of the LG&E Energy Group and any exempt or subsequently authorized acquisition. The Powergen Financing Entities will not use the financings to carry on business activities within the Powergen Financing Entities. As discussed in section III,A, supra, it is expected that the Powergen Intermediate Holding Companies would transfer PUSIC, the U.S. parent of the LG&E Energy Group companies, to E.ON US in exchange for cash and/or a note. The Financing Applicants request the Commission to reserve jurisdiction over the transfer of PUSIC and the issuance of the note pending the completion of the record. Powergen, E.ON UK plc and E.ON UK request authorization to issue and sell securities to E.ON (or a special purpose financing entity) and to their direct and indirect parent companies. Powergen, E.ON UK plc and E.ON UK also request authorization to acquire securities from their subsidiaries, including the Powergen Financing Entities, and to issue guarantees and provide other forms of credit support to, or for the benefit of, their subsidiaries. Powergen and E.ON UK would not issue securities to third parties. 4. E.ON US Intermediate Holding Companies The Financing Applicants propose that E.ON hold its interest in LG&E Energy through E.ON US and PUSIC. E.ON US and PUSIC each request authorization to issue and sell securities to each other and to E.ON (or a special purpose financing entity), and to acquire securities from their direct or indirect E.ON US Intermediate Holding Company subsidiaries, E.ON NA and LG&E Energy and its subsidiaries. In no case would a holding company borrow, or receive any extension of credit or indemnity, from any of its respective direct or indirect subsidiaries. Upon consummation of the Reorganization of the E.ON Group and the transfer of PUSIC to E.ON US, E.ON or one of the E.ON US Intermediate Holding Companies may be required to guarantee certain of the debt issued by the Powergen Financing Entities according to the terms of the applicable debt instruments. The Financing Applicants seek authority for the E.ON US Intermediate Holding Companies to issue guarantees and other forms of credit support to, or for the benefit of, the Powergen Financing Entities. Any guarantees issued by E.ON and the E.ON US Intermediate Holding Companies will count against the Guarantee Limit. The Financing Applicants state that the guarantees from E.ON US or PUSIC to the Powergen Financing Entities are necessary to reduce the credit risk for the holders of the outstanding debt of the various Powergen Financing Entities. These guarantees are part of the documentation of the relevant debt, and currently cannot be withdrawn. A direct guarantee from E.ON would not always be sufficient, because increasingly the capital markets are requiring that issuers support debt issues with not only the issuer's assets but also the assets of the issuer's affiliated group. Each of the E.ON US Intermediate Holding Companies is intended to function as a financial conduit to facilitate E.ON's U.S. investments. For reasons of economic efficiency, the terms and conditions of any securities issued by the E.ON US Intermediate Holding Companies would be market-based, determined under the Market Rate Method, as defined in Section XIV,B,infra. The E.ON Intermediate Holding Company financings would be used to finance the capital requirements of E.ON NA and the LG&E Energy Group and any exempt or subsequently authorized activity that is hereafter acquired. The financings will not be used to carry on business or investment activities within the E.ON US Intermediate Holding Companies. E. LG&E Energy Group CompaniesLG&E Energy requests authorization to obtain funds through sales of short-term debt securities to meet its funding requirements. Specifically, LG&E Energy proposes to have outstanding at any time during the Authorization Period external short-term debt in an aggregate amount of up to $400 million. LG&E Energy may engage in short-term financing as it deems appropriate in light of its needs and market conditions at the time of issuance. Financing could include, without limitation, commercial paper sold in established commercial paper markets, lines of credit with banks or other financial institutions, and debt securities issued under an indenture or a note program. All transactions will be at rates or prices, and under conditions, negotiated under, based upon, or otherwise determined by, competitive market conditions. Any securities issued by LG&E Energy will comply with the Financing Parameters. 2. Utility Subsidiaries of LG&E Energy The Financing Applicants request authorization for the Utility Subsidiaries to undertake the following transactions: LG&E and KU propose to issue debt with maturities of two years or less to one or more associate or nonassociate companies in an aggregate principal amount at any one time outstanding during the Authorization Period of up to $400 million for each of LG&E and KU.97 Each Utility Subsidiary may engage in these financings as it may deem appropriate to do in light of its needs and market conditions at the time of issuance, subject to the applicable Financing Parameters. Such financing could include, without limitation, commercial paper sold in established U.S. or European commercial paper marke | ||||||||||||||||||||||||||