File No. 70-
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United States Securities and Exchange Commission
Washington, D.C. 20549
________________________________________
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)
________________________________________
E.ON AG
(Name of top registered holding company)
________________________________________
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
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FORM U-1
APPLICATION UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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 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
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1 June Order at 83.
3
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 Method2
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.
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
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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.
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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 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.4 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
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4 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.
5
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.5
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 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.6
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
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5 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.
6 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.
6
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).7 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.
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.8 If not compensated, the parent and
its legal representatives, i.e. the management board and the supervisory board,
would be subject to damage claims.9 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
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7 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."
8 Section 311, Joint Stock Company Act.
9 Section 317, Joint Stock Company Act.
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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.10 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 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. New legislation recently introduced in the
German parliament would require 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 proposed 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.
Item 2. Fees, Commissions and Expenses
The fees, commission's and expenses paid or incurred, or to be paid or
incurred, directly or indirectly in connection with the proposed transaction by
the applicants is expected to be approximately $10,000. Such amount would be
paid principally to nonaffiliated entities for legal services.
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10 Section 93 III no. 2, Joint Stock Company Act.
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Item 3. Applicable Statutory Provisions
Sections 6(a), 7, 9(a), 10 and 12(b) under the Act are applicable to
the extensions of credit in connection with the operation of the E.ON Nonutility
Money Pool and the issuance and sale of securities and the acquisition thereof
in connection with deposits with and borrowing from the money pool.
Item 4. Regulatory Approval
No State commission or any Federal commission (other than the
Securities and Exchange Commission) has jurisdiction over the proposed
transaction.
Item 5. Procedure
Applicants respectfully request that the Commission issue a notice
with respect to the proposed transaction and order granting the application as
soon as possible. It is submitted that a recommended decision by a hearing or
other responsible officer of the Commission is not needed for approval of the
application. The Division of Investment Management may assist in the preparation
of the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. Exhibits and Financial Statements
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.
Financial Statements
Not applicable.
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Item 7. Information as to Environmental Effects
The proposed transaction involves neither a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
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SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicants have duly caused this Application to be signed on their
behalf by the undersigned thereunto duly authorized.
Date: September 23, 2003 E.ON AG
By: /s/ Karl-Heinz Feldmann
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Name: Karl-Heinz Feldmann
Title: General Counsel
By: /s/ Stefan Hloch
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Name: Stefan Hloch
Title: Treasurer
Date: September 23, 2003 Hibernia Industriewerte GmbH
By: /s/ Hans Gisbert Ulmke
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Name: Hans Gisbert Ulmke
Title: Senior Vice President - Finance
By: /s/ Dr. Michael Bangert
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Name: Dr. Michael Bangert
Title: Vice President - Finance
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Exhibit Index
A Form of E.ON Nonutility Money Pool Agreement.
B Opinion of Counsel.
D Form of Notice.
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