File No. 70-10171
United States Securities and Exchange Commission
Washington, D.C. 20549
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Amendment No. 1 to
Application on Form U-1
Under
The Public Utility Holding Company Act of 1935
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E.ON AG
Hibernia Industriewerte GmbH
E.ON-Platz 1
40479 Dusseldorf
Germany
(Names of companies filing this statement
and addresses of principal executive offices)
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E.ON AG
(Name of top registered holding company)
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Karl-Heinz Feldmann
Vice President General Legal Affairs
E.ON AG
E.ON-Platz 1
40479 Dusseldorf
Germany
Telephone: 011-49-211-4579-388
Facsimile: 011-49-211-4579-610
(Names and addresses of agents for service)
The Commission is also requested to send copies
of any communication in connection with this matter to:
Tia S. Barancik
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
125 West 55th Street
New York, NY 10019-5389
Telephone: (212) 424-8455
Facsimile: (212) 424-8500
Markian M. W. Melnyk
LeBoeuf, Lamb, Greene & MacRae, L.L.P.
1875 Connecticut Ave., N.W.
Washington, D.C. 20009-5728
Telephone: (202) 986-8212
Facsimile: (202) 986-8102
AMENDMENT NO. 1 TO FORM U-1
APPLICATION UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
On September 23, 2003, E.ON AG filed an Application on Form U-1 under File No.
70-10171. This Amendment No. 1 to the Application amends and restates Items 1
and 6 of the Application previously filed.
Item 1. Description of Proposed Transaction
A. Introduction
By order dated June 14, 2002, (Holding Co. Act Release No. 27539)
("June Order"), the Commission authorized E.ON AG ("E.ON"), to acquire Powergen
plc, a registered holding company. E.ON registered as a holding company under
the Public Utility Holding Company Act of 1935 (the "Act") subsequent to the
acquisition. The June Order also authorized E.ON and its subsidiaries to issue
and sell securities and further authorized E.ON to establish three money pools
for purposes of facilitating the financing of the E.ON group. Specifically, E.ON
was authorized to organize: (1) a Utility Money Pool to include E.ON's public
utility subsidiary companies, Louisville Gas and Electric Company and Kentucky
Utilities Company as borrowers and lenders to the pool, and certain other
companies as lenders only; (2) a U.S. Nonutility Money Pool to include the
nonutility subsidiaries of LG&E Energy Corp. ("LG&E Energy"), as borrowers and
lenders to the pool, and certain other companies as lenders only, and; (3) the
E.ON Nonutility Money Pool to include all the companies in the E.ON registered
holding company system (the "E.ON Group") as borrowers and lenders to the pool,
except E.ON, the registered holding company subsidiaries of E.ON, and LG&E
Energy and its subsidiaries. E.ON and its registered holding company
subsidiaries could, however, lend funds to the E.ON Nonutility Money Pool.
In this application, E.ON requests a modification to the terms of the
E.ON Nonutility Money Pool. Under the June Order, "The E.ON Nonutility Money
Pool would be administered by E.ON at no charge or by E.ON NA or its special
purpose subsidiary at cost. The interest rate charged by the pool would be set
according to the Market Rate Method and surplus funds would be invested in the
same manner proposed for the Utility Money Pool. The interest rate paid on
deposits to the E.ON Nonutility Money Pool will be a weighted average of the
rates
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charged borrowers and the money pool investment rate."/1 E.ON proposes that the
E.ON Nonutility Money Pool would be administered by Hibernia Industriewerte GmbH
("Hibernia"), a wholly-owned E.ON subsidiary that is currently used to provide
financing to E.ON Group companies. In addition, E.ON proposes that the interest
rate paid on deposits to the pool would be set at market rates. Accordingly,
funds borrowed from the pool would accrue interest charges at rates set
according to the Market Rate Method/2 and funds deposited in the pool would earn
interest at market rates.
B. Description of Proposed Transactions
The E.ON Nonutility Money Pool would operate as follows. Many of
E.ON's major direct and indirect non-utility subsidiaries would operate a cash
management system to manage cash efficiently with their respective direct and
indirect subsidiaries ("Subgroups"). Such arrangements would involve loans of
the temporary cash surpluses of Subgroup members to the Subgroup parent and
borrowings by Subgroup members that have temporary cash deficits, all on a daily
basis./3 To the extent the Subgroup parent has a net surplus or net cash deficit
for the Subgroup in the aggregate, the Subgroup parent would deposit funds with,
or borrow funds from the E.ON Nonutility Money Pool by making a deposit with, or
borrowing from, Hibernia. Any E.ON subsidiary that is not part of a Subgroup
could deposit funds with or borrow funds from the E.ON Nonutility Money Pool
directly, as necessary.
Hibernia is an internal financing subsidiary that borrows from and
lends to E.ON group companies./4 Hibernia's assets, at December 31, 2002, of
approximately Euro 9.5 billion
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1 June Order at 83.
2 In determining a lending rate under the Market Rate Method, Hibernia
would review the nature of each borrowing subsidiary's business, evaluate its
capital structure, the particular risks to which it is subject, and generally
prevailing market conditions, all in the context of information from third
parties such as banks that would indicate the prevailing market rates for
similar businesses. Information on the range of rates used by one or more banks
for loans to similar businesses would serve as an index against which an
appropriate market rate could be determined. This analysis is referred to as the
Market Rate Method and would be provided to the Commission upon request. June
Order at 109.
3 Subgroup arrangements were authorized by the June Order at 81, n. 101.
4 The June Order at 35 and A-7 notes that Hibernia acts as managing partner
for Hibernia Industriewerte GmbH & Co. KG, Humboldt-Verwaltungsgebaude Mulheim
("Hibernia Industriewerte"). This company holds an office building leased to
Stinnes AG, a former E.ON subsidiary. The June Order requires E.ON to divest
Hibernia Industriewerte within five years of the date of the completion of the
Powergen acquisition. Hibernia also holds an interest in E.ON Academy GmbH, an
E.ON subsidiary engaged in providing educational training services, principally
to E.ON employees. Hibernia's income from this interest is minimal
(approximately Euro 50,000 per year).
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consist of long and short-term loans that it has made to associate companies in
the E.ON Group. Its liabilities consist of an approximately equivalent amount of
debt owed to associate companies. These associate company loans to Hibernia were
funded to a large degree by the proceeds of various asset divestitures conducted
by the E.ON Group as it has restructured into a more focused energy and utility
group. Hibernia has no external credit facilities other than the bank credit
facility incorporated into the sweep account described below. To the extent it
needs additional funding Hibernia will obtain funds from E.ON. It is not
expected that Hibernia would raise funds by offering securities to the public or
entering into bank credit facilities. Although Hibernia functions as an internal
source of credit for the E.ON Group it is not a bank in the traditional sense
because it does not accept deposits from or make loans to unaffiliated entities.
Deposits into and loans from the pool would be handled in two ways.
First, when a pool participant expects to have a temporary cash surplus or
deficit, it may make arrangements with Hibernia in advance to lend funds to, or
borrow from, Hibernia. Hibernia would borrow from or lend to the pool
participants at market rates in connection with these expected surpluses or
deficits.
Second, a pool participant may have an unexpected cash surplus or
deficit. Unexpected deposits into the pool or loans would typically be handled
automatically through cash sweeping arrangements. In connection with agreeing to
participate in the pool, each participant would agree that Hibernia could sweep
the surplus cash in the designated bank accounts of each participant on a daily
basis into a central pool account maintained at a bank and supervised by
Hibernia. Likewise unexpected deficits in the pool participants' individual bank
accounts would be covered by the sweeping arrangement, like checking account
overdraft protection. The sweep account would earn interest on its positive
balance and bear interest charges to the extent of any negative account balance,
in each case at market rates.
By managing cash balances to accommodate both the expected and
unexpected cash flows, Hibernia is able to maximize the return on surplus cash
and minimize the cost of cash deficits for the E.ON Nonutility Money Pool.
Expected cash surpluses held by Hibernia could be invested in: (i) obligations
issued or guaranteed by a European or the U.S. government and/or its agencies
and instrumentalities, including obligations under repurchase agreements; (ii)
obligations issued or guaranteed by any state or political subdivision thereof,
provided that such obligations are rated not less than A by a nationally
recognized rating agency; (iii) commercial
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paper rated not less than A-1 by S&P or P-1 by Moody's, or their equivalent by a
nationally recognized rating agency; (iv) money market funds; (v) bank deposits
and certificates of deposit; (vi) Eurodollar funds; and (vii) such other
investments as are permitted by Section 9(c) of the Act and Rule 40 thereunder.
Hibernia also could lend its funds, including funds borrowed from E.ON or other
E.ON Group companies, to E.ON Group companies as provided in the June Order./5
Expected cash deficits among the pool participants could be covered by a loan
from Hibernia to the E.ON Group pool participant company experiencing the cash
deficit. Unexpected cash surpluses or deficits can be managed, as described
above, through a cash sweeping arrangement with a bank. Because sweep account
deposits or loans are for relatively small amounts and, due to the lack of
advance notice, there is a limited opportunity for the bank to invest such funds
or to fund borrowings, the returns on a sweep account are relatively low and the
borrowing cost is relatively high.
In recognition of these differences, Hibernia would compensate for
balances and charge money pool participants for loans at market rates in
two-steps. In the first step, expected deposits or cash surpluses made by pool
participants would earn interest at market rates that are higher than the rate
earned on sweep account deposits. These market rates are indicative of the
better returns associated with the investments listed above that are possible
with advance notice. Expected loans would, similarly, bear interest at a rate
that is lower than the loan rate that the bank would charge on the sweep
account./6
In the second step, after receiving the monthly bank statement,
Hibernia would allocate the interest earned on the sweep account balances or the
interest charges in connection with sweep account borrowings to each pool
participant pro rata, based on each pool participant's daily balance and the
interest rate paid or charged by the bank. Allocations to the pool
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5 The June Order at 71-72 provides that the E.ON Group companies (other
than the LG&E Energy Group companies) may finance the to-be-divested
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, and these companies may finance
one another, through capital contributions, loans, guarantees, equity purchases
and other methods. Such financings may be at market rates where required by
German law or regulation and, where not so required, would be at the lending
company's cost of capital.
6 For example, under current market rates, Hibernia would pay interest on a
loan from an E.ON Group company at a rate of LIBOR minus 3 basis points, while
the bank would pay interest on sweep account balances of LIBOR minus 40 basis
points. An E.ON Group company would pay, on average under the Market Rate
Method, an interest rate of LIBOR plus 20 basis points to borrow from Hibernia,
while the interest rate charged by the bank on a loan made through the sweep
account would cost LIBOR plus 45 basis points. As the market moves, these rates
would be expected to change.
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participants would reflect any bank charges associated with maintaining the
account, but would not reflect any costs related to Hibernia's administration of
the pool./7
Participants would establish their participation in the pool by
executing the E.ON Nonutility Money Pool Agreement, the form of which is
included as Exhibit A to this application. No participant would be required to
borrow from the pool if it determines that more favorable terms are available in
an alternative financing transaction such as the issuance of commercial paper.
Transactions in the money pool would be evidenced by confirmation statements
sent by Hibernia to each participant on a monthly basis indicating activity in
the pool account.
C. Analysis
The payment of market interest rates on money pool deposits is fair to
a depositor because it provides the depositor with an arm's-length interest rate
that is better or equivalent to what it could earn in separate bank account. In
addition, the payment of market interest rates avoids transfer pricing issues
that arise in loans between affiliated companies when transactions are not
priced at market rates.
The transfer pricing issues were described in E.ON's application in
SEC File No. 70-9985, which formed the basis in part for the June Order. E.ON's
application explained that in transactions between German companies and their
foreign subsidiaries, German tax law assumes market rate financing between
companies in the same corporate group because market rate pricing assures that
intercompany loans will not be used to transfer profits from one related entity
to another (including, to transfer profits to entities based outside Germany in
jurisdictions with lower tax rates)./8 The E.ON Nonutility Money Pool results in
intercompany loans from the pool participants to Hibernia that should be priced
at market rates to avoid violations of the transfer pricing and affiliate
transactions rules.
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7 Hibernia would receive financial management services from E.ON employees
in connection with managing the pool and conducting Hibernia's other functions
as an E.ON Group financing entity. These services would be provided at no charge
unless a Commission exemption from the restrictions of Section 13(a) is
obtained.
8 Section 1 of the German Foreign Tax Law provides: "If the income of a
taxpayer resulting from his transaction with the related party is reduced
because the taxpayer has, in the transaction with the foreign related party,
agreed on terms and conditions which deviate from those which unrelated third
parties would have agreed to upon under the same or similar circumstances, then
the taxpayer's income shall, not withstanding other provisions, be so determined
as if such income would have been earned under terms and conditions agreed upon
between unrelated parties."
7
German corporations also are required by corporate law to conduct
affiliate transactions on an arm's-length basis. German corporate law requires
all joint stock companies to provide a dependency statement that addresses
affiliate relationships in their annual financial reports. The dependency
statement almost always concludes that all transactions with affiliated
companies have been conducted on an arm's length basis and not to the reporting
company's disadvantage because a failure to follow arm's length terms could
subject the company to a shareholder suit.
German joint stock company law sets additional specific requirements
for the conduct of business between group companies. Any disadvantageous
influence of the parent company on its subsidiary is restricted and any damage
caused by the parent must be compensated./9 If not compensated, the parent and
its legal representatives, i.e. the management board and the supervisory board,
would be subject to damage claims./10 Under Section 57 of the Joint Stock
Company Act (Germany) a German joint stock company may not repay to its
shareholders any capital contributed by them. Any payments to shareholders must
be made only from company profits as shown in the balance sheet. A prohibited
repayment of capital can occur implicitly if a transaction between a company and
its shareholder shows a disproportion or incongruity between consideration and
performance. This would be the case if there are market prices or rates for the
respective consideration and these are not taken into account in the relevant
transaction. The legal consequence under the Joint Stock Company Act of any such
repayment of capital is that the respective transaction or contract would be
legally void, overpayments must be reimbursed and the management board may be
subject to damage claims./11 Interest payments on funds loaned to affiliated
companies that are either above or below market can, therefore, raise difficult
issues under German law and in many cases would be prohibited.
For these reasons, the June Order authorized the E.ON Nonutility Money
Pool to observe the Market Rate Method in setting the interest rate on loans by
the pool. The requirement under German law that affiliate transactions be
conducted at arm's-length also makes it important that Hibernia pay pool
depositors interest at market rates. The June Order, however, would require the
administrator of the E.ON Nonutility Money Pool to pay interest to
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9 Section 311, Joint Stock Company Act.
10 Section 317, Joint Stock Company Act.
11 Section 93 III no. 2, Joint Stock Company Act.
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depositors that is the weighted average of the pool investment rate and the rate
charged on pool borrowings. Because the investment rate and the rate charged for
borrowings from the pool will generally be higher than the rate paid on deposits
in a market transaction with an unaffiliated entity, the resulting weighted
average rate would also be above market. Legislation recently adopted in the
German parliament requires the documentation of all transactions with affiliated
companies to substantiate that such transactions are conducted at arm's-length.
Operating the E.ON Nonutility Money Pool as currently authorized would cause
Hibernia to pay interest at above market rates and would conflict with this
legislation.
Accordingly, E.ON proposes that Hibernia would operate the E.ON
Nonutility Money Pool such that market rates would be paid on both sides of the
pool transactions. This solution is consistent with the Market Rate Method
financing authorization granted by the Commission in the June Order, is fair to
the E.ON Group participants in the pool, and is consistent with the requirements
of German law.
D. Rule 54
Rule 54 provides that in determining whether to approve certain
transactions other than those involving exempt wholesale generators, as defined
in Section 32(a) of the Act ("EWGs"), or foreign utility companies, as defined
in Section 33(a) of the Act ("FUCOs"), the Commission will not consider the
effect of the capitalization or earnings of any subsidiary which is an EWG or
FUCO if Rule 53(a), (b) and (c) are satisfied. E.ON satisfies all of the
conditions of Rule 53 except Rule 53(a)(1).
As of June 30, 2003, E.ON's "aggregate investment," as defined in Rule
53(a)(l), in EWGs and FUCOs was approximately $12.5 billion. This amount is
within the authorization granted to E.ON in the June Order. In the June Order,
the Commission authorized E.ON to invest up to $25 billion, plus an additional
$35 billion from proceeds of divestments, in EWGs and FUCOs and found that such
an investment would not have either of the adverse effects set forth in Rule
53(c). There has been no material change in the facts or circumstances
surrounding E.ON's capitalization since the June Order was issued.
At June 30, 2003, E.ON's common equity as a percentage of
capitalization was 53.8%. The common equity ratios of Louisville Gas and
Electric Company ("LG&E") and Kentucky Utilities Company ("KU"), E.ON's indirect
public utility subsidiary companies, as of
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June 30, 2003 were 46.8% and 53.6%, respectively.
LG&E and KU and their respective customers will not be adversely
impacted by the requested relief. The authorization requested in this
Application will have no affect on the consolidated capitalization or retained
earnings of E.ON, LG&E or KU. The requested authorization will not have a
material adverse effect on the financial integrity of the E.ON system, or an
adverse impact on E.ON's public-utility subsidiaries, their customers or the
ability of the state commissions to protect the utility customers within their
respective states.
E.ON currently complies with, and will comply with, the record-keeping
requirements of Rule 53(a)(2), the limitation under Rule 53(a)(3) on the use of
the E.ON's system's domestic public-utility company personnel to render services
to EWGs and FUCOs, and the requirements of Rule 53(a)(4) concerning the
submission of copies of certain filings under the Act to retail regulatory
commissions. Further, none of the circumstances described in Rule 53(b) has
occurred or is continuing.
E. Reporting
Under the June Order E.ON currently provides Rule 24 certificates on a
semiannual basis, after the end of E.ON's fiscal year and fiscal second quarter,
that report various items of information. E.ON proposes to supplement these
semiannual reports with a schedule indicating the companies that are
participants in the E.ON Nonutility Money Pool. The schedule would indicate the
month-end money pool balance for each participant, showing whether it was a net
borrower or depositor in the pool at the end of each month covered by the
report. In addition, E.ON would provide Hibernia's year-end balance sheet and
income statement in the Rule 24 certificate filed following the end of the year.
* * * * *
Item 6. Exhibits and Financial Statements
Exhibits
A Form of E.ON Nonutility Money Pool Agreement.
B Opinion of Counsel.
C Past-tense Opinion of Counsel (to be filed under Rule 24).
D Form of Notice.
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Financial Statements
FS-1 Balance Sheet and Income Statement of Hibernia Industriewerte GmbH as of
December 31, 2002 (to be filed by amendment).
* * * * *
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicants have duly caused this Amendment No. 1 to their
Application to be signed on their behalf by the undersigned thereunto duly
authorized.
Date: December 23, 2003 E.ON AG
By: /s/ Karl-Heinz Feldmann
Name: Karl-Heinz Feldmann
Title: General Counsel
By: /s/ Stefan Hloch
Name: Stefan Hloch
Title: Treasurer
Date: December 23, 2003 Hibernia Industriewerte GmbH
By: /s/ Hans Gisbert Ulmke
Name: Hans Gisbert Ulmke
Title: Executive Vice President - Finance
By: /s/ Dr. Michael Bangert
Name: Dr. Michael Bangert
Title: Vice President - Finance
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