[Federal Register Volume 66, Number 250 (Monday, December 31, 2001)]
[Notices]
[Pages 67565-67575]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-32074]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 35-27482; International Release Series No. 1253]


Filings Under the Public Utility Holding Company Act of 1935, as 
Amended (``Act'')

December 21, 2001.
    Notice is hereby given that the following filing(s) has/have been 
made with the Commission pursuant to provisions of the Act and rules 
promulgated under the Act. All interested persons are referred to the 
application(s) and/or declaration(s) for complete statements of the 
proposed transaction(s) summarized below. The application(s) and/or 
declaration(s) and any amendment(s) is/are available for

[[Page 67566]]

public inspection through the Commission's Branch of Public Reference.
    Interested persons wishing to comment or request a hearing on the 
application(s) and/or declaration(s) should submit their views in 
writing by January 17, 2002, to the Secretary, Securities and Exchange 
Commission, Washington, DC 20549-0609, and serve a copy on the relevant 
applicant(s) and/or declarant(s) at the address(es) specified below. 
Proof of service (by affidavit or, in the case of an attorney at law, 
by certificate) should be filed with the request. Any request for 
hearing should identify specifically the issues of facts or law that 
are disputed. A person who so requests will be notified of any hearing, 
if ordered, and will receive a copy of any notice or order issued in 
the matter. After January 17, 2002, the application(s) and/or 
declaration(s), as filed or as amended, may be granted and/or permitted 
to become effective.

E.ON AG, et al. (70-9961)

    E.ON AG (``E.ON''), a German holding company exempt from 
registration by rule 5 under the Act, located at E.ON-Platz 1, 40479 
Dusseldorf, Germany, and Powergen plc (``Powergen''), a U.K. registered 
holding company located at City Point, 1 Ropemaker Street, London ECY 
9HT, United Kingdom, together with subsidiaries of Powergen listed 
below, have filed a joint application-declaration, as amended, 
(``Application'') under sections 2(a)(8), 4, 5, 6(a), 7, 9(a)(2), 10, 
13, 14, 15, 32 and 33 of the Act and rules 42, 45(a), 52, 53, 54, 80 
through 91, 93 and 94 under the Act.
    The Application seeks authorizations in connection with E.ON's 
proposed acquisition of the outstanding voting securities of Powergen 
(the ``Acquisition'').\1\ Authorization is required under sections 
9(a)(2) and 10 of the Act because the Acquisition would result in 
E.ON's indirect acquisition of Powergen's indirect subsidiary LG&E 
Energy Corp. (``LG&E Energy''), a Kentucky holding company exempt from 
registration 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'').\2\ 
Following the Acquisition, E.ON would register as a holding company 
under the Act. The other applicants, all registered holding companies, 
are direct and indirect wholly owned subsidiaries of Powergen: Powergen 
US Holdings Limited, Powergen US Investments, Powergen Luxembourg sarl, 
Powergen Luxembourg Holdings sarl, Powergen Luxembourg Investments 
sarl, Powergen US Investments Corp. (``PUSIC'') (collectively, the 
``Powergen Intermediate Holding Companies,'' and, together with E.ON 
and Powergen, ``Applicants''), all at City Point, 1 Ropemaker Street, 
London EC2Y 9HT, United Kingdom.
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    \1\ E.ON has also filed a separate application with the 
Commission for approval of its proposed external financing program 
(File No. 70-9985, ``Financing Application'').
    \2\ The Commission authorized Powergen to acquire LG&E Energy by 
order dated December 6, 2000. See PowerGen plc. Holding Co. Act 
Release No. 27291 (``Powergen Order'').
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I. Summary

    E.ON seeks authorization to acquire all of the issued and 
outstanding common stock of Powergen. Through the acquisition, E.ON 
would indirectly acquire LG&E Energy and its direct and indirect 
subsidiary companies, including its electric utility subsidiary 
companies, LG&E and KU.\3\ E.ON seeks to retain LG&E Energy as a 
public-utility holding company subsidiary exempt from registration 
under section 3(a)(1) of the Act. E.ON will register as a holding 
company following the Acquisition.
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    \3\ Through the Acquisition, E.ON would also indirectly acquire 
the common stock that LG&E and KU own (4.9% and 2.5%, respectively) 
of Ohio Valley Electric Corp. (``OVEC''), an electric utility. OVEC 
in turn has one wholly owned electric utility subsidiary, Indiana-
Kentucky Electric Corp. (``IKEC'').
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    In addition, E.ON requests authorization:
    (1) To issue loan notes and make certain guarantees in connection 
with the Acquisition;
    (2) To own its existing utility operations as foreign utility 
companies (``FUCOs''), as defined in section 33 of the Act, and certain 
nonutility businesses and other businesses to be acquired;
    (3) To invest the proceeds from a planned divestiture of certain of 
its existing nonutility businesses, which may total approximately $35 
billion, in exempt wholesale generators (``EWGs''), as defined in 
section 32 of the Act, and FUCOs;
    (4) To obtain bridge loans to finance those EWG and FUCO 
investments pending receipt of divestiture proceeds;
    (5) To issue securities in an amount up to $25 billion for the 
purpose of making additional investments in EWGs and FUCOs;
    (6) To invest up to $5.5 billion in the nonutility businesses that 
E.ON plans to divest during the three to five years over which E.ON 
plans to effect their divestiture;
    (7) To retain, and continue to make, investments held as reserves 
against long-term liabilities regarding pensions and nuclear plant 
decommissioning as being ``in the ordinary course of business'' under 
section 9(c)(3), in accordance with German corporate practice;
    (8) 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;
    (9) To exempt from the at-cost requirements of section 13 of the 
Act certain intrasystem service transactions; and
    (10) To make certain corporate structure changes in a restructuring 
after the Acquisition without having to seek specific authority for 
each change, subject to certain conditions.
    In addition, Applicants request the Commission:
    (1) To issue an order under section 2(a)(8) of the Act declaring 
Ruhrgas AG, a partially owned German subsidiary of E.ON, not to be a 
subsidiary of a registered holding company viz., E.ON;
    (2) To disregard certain intermediate holding companies for 
purposes of the analysis under section 11(b)(2) of the Act; and
    (3) To grant an exemption from rule 26(a)(1) under the Act 
regarding the maintenance of financial statements in conformance with 
Regulation S-X for any subsidiary of E.ON organized outside the U.S.

II. Parties

A. E.ON
    E.ON is an Aktiengesellschaft, the equivalent of a U.S. stock 
corporation, under the laws of the Federal Republic of Germany. E.ON's 
shares are traded on all German stock exchanges, the Swiss Stock 
Exchange and as American Depository Receipts (``ADRs'') on the New York 
Stock Exchange. E.ON was formed in June 2000 as a result of the merger 
of German conglomerates VEBA AG (``Veba'') and VIAG AG (``Viag''), 
which trace their roots to the 1920s. As of December 31, 2000, E.ON was 
Germany's third largest industrial group, with a market capitalization 
of approximately Euro 39.5 billion (approximately $35.7 billion) as of 
April 6, 2001, the last business day before the announcement of the 
Acquisition.
    For the nine months ended September 30, 2001, E.ON had revenues of 
Euro 64.3 billion ($58.7 billion) and net income of Euro 1.0 billion 
($0.9 billion). As of September 30, 2001, E.ON had net assets of Euro 
23.2 billion ($21.2 billion) and a market capitalization of 
approximately Euro 43.4 billion ($39.6 billion).

[[Page 67567]]

    E.ON's corporate subsidiaries are currently organized into eight 
separate business divisions: Energy, chemicals, real estate, oil, 
telecommunications, distribution/logistics, aluminum and silicon 
wafers. E.ON and all its direct and indirect subsidiaries are referred 
to as the ``E.ON Group.'' Each business division is responsible for 
managing its own day-to-day business, while 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 group members, as well as functions 
relating to communications, capital markets and investor relations.
1. E.ON Energie (Proposed FUCO)
    E.ON's energy division, which accounts for 54% of E.ON's total 
investments, is headed by its wholly owned subsidiary, E.ON Energie AG 
(``E.ON Energie''). E.ON Energie was formed in July 2000, following 
completion of the merger between VEBA and VIAG, when E.ON merged the 
two major energy divisions of those companies. 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 intends to qualify E.ON Energie as a ``foreign 
utility company'' (``FUCO'') as defined in section 33 of the Act.
    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.\4\ E.ON Energie supplied about one-third of the electricity 
consumed in Germany in 2000. In 2000, E.ON Energie sold 125.9 billion 
kWh of electricity in western Germany and 24.1 billion kWh in eastern 
Germany and exported 19.9 billion kWh.\5\ E.ON Energie also conducts a 
marketing and energy trading business through its wholly owned 
subsidiary, E.ON Trading GmbH.
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    \4\ These companies are identified in Exhibit G-1 to the 
Application.
    \5\ E.ON Energie's power transmission grid is located in the 
German states of Schleswig-Holstein, Lower Saxony, North Rhine-
Westphalia, Hesse, Bavaria and Mecklenburg-Western Pomerania and 
reaches from Scandinavia to the Alps. The grid is interconnected 
with the western European power grid with links to the Netherlands, 
Austria, Switzerland and eastern Europe. With a system length of 
over 37,000 km (23,000 miles) and a coverage area of nearly 170,000 
square km (66,000 square miles), the grid covers more than one-third 
of the surface area of Germany.
    E.ON Energie owns interests in and operates electric power 
generation facilities with a total installed capacity of more than 
37,000 MW, its attributable share of which is approximately 29,000 
MW (not including mothballed, shut down or inactive power plants). 
On July 12, 2001, E.ON Energie and Verbund, an Austrian utility 
company, signed a Memorandum of Understanding concerning the 
establishment of a combined company for hydroelectric power 
production. To form European Hydro Power (``EHP''), E.ON Energie 
will contribute its subsidiary, E.ON Wasserkraft GmbH, and Verbund 
will contribute its stake in Austrian Hydro Power. E.ON Energie will 
have a 40% share in EHP and Verbund will own the remaining 60%. The 
new company will own some 200 hydroelectric power plants with a 
capacity of 9,600 MW. EHP is expected to commence operations by 
January 1, 2002.
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    Applicants state that E.ON is committed to retain and expand its 
multi-utility business, which under prevailing European industry 
practice, includes not only electric and gas service but also water, 
waste management and other services. Privatized utility functions that 
E.ON has acquired from municipalities have often included electric, 
gas, heat and water as part of a bundled service.
    E.ON Energie holds stakes in various regional electricity and gas 
distributors and in municipal utilities (``Stadtwerke''). 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 through its wholly owned 
subsidiary E.ON Aqua GmbH.
    In 2000, E.ON Energie had total revenues of approximately Euro 11 
billion ($9.7 billion). Gas and electricity revenues (including 
district heating) accounted for 89% of these revenues. Of the remaining 
revenues, 2% were attributable to water activities and 9% were derived 
from other sales.
2. Gelsenberg AG (Proposed FUCO)
    On July 16, 2001, E.ON and BP plc announced that they had reached 
an agreement to reorganize their oil and gas business. As part of this 
reorganization and the related transactions, British Petroleum and E.ON 
have agreed that E.ON will acquire, after January 1, 2002, 51% of 
Gelsenberg AG (``Gelsenberg''), currently a wholly owned subsidiary of 
British Petroleum, by means of a capital increase.\6\ Beginning on 
January 1, 2002, British Petroleum will have the option to sell its 
remaining 49% interest in Gelsenberg to E.ON.
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    \6\ E.ON will acquire Gelsenberg as part of a transaction with 
BP plc by which E.ON will divest its subsidiary Veba Oel, as 
described below.
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    Gelsenberg directly and indirectly owns 25.5% of Ruhrgas AG 
(``Ruhrgas''), Germany's largest natural gas transmission, storage, 
distribution and import company, with total sales of approximately 50 
billion cubic meters of gas.\7\ These operations account for 88% of 
Ruhrgas' total revenues of Euro 7.3 billion ($6.4 billion). Most of 
Ruhrgas' remaining revenues of are generated by activities that support 
the import and transport of gas.
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    \7\ E.ON currently owns less than a 1% interest in Ruhrgas. E.ON 
also indirectly holds an additional 18% interest in Ruhrgas through 
E.ON's interest in RAG AG, discussed below. E.ON's indirect 
interests in Ruhrgas participate in a voting pool that includes 59% 
of the voting power of Ruhrgas.
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    Ruhrgas owns a high-pressure grid that covers nearly all of western 
Germany. In addition, it owns stakes in regional gas transmission 
companies, local gas distributors and Stadtwerke in Germany and 
elsewhere in Europe. Stadtwerke frequently also sell electricity, water 
and other services. Ruhrgas owns minor stakes of 5% to 9% in four gas 
fields and a 5% stake in its main gas supplier, the Russian gas 
company, Gazprom. Ruhrgas supplies gas to E.ON, among others. Ruhrgas 
also manufactures equipment for the gas industry, such as meters, to 
assist its customers in their use of Ruhrgas gas and to strengthen its 
relationship with those customers.
    Ruhrgas owns a U.S. manufacturer of metering equipment, American 
Meter Company of Horsham, Pennsylvania. Applicants state that Ruhrgas 
is also engaged in gas-related engineering activities in the United 
States of the type permitted to be acquired under rule 58(b)(1)(vii).
    Applicants state that Gelsenberg will certify as a FUCO after the 
completion of the VEBA Oel divestiture transactions discussed below.
3. Other Nonutility Interests Proposed To Be Retained
    a. Cellular Telephone Providers. 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 
has disposed of most of its telecommunications business activities 
during 1999 and 2000, but currently intends to retain the cellular 
phone providers. Exhibit G-1 to the application states that these two 
companies will apply to the Federal Communications Commission for 
status

[[Page 67568]]

as ``exempt telecommunications companies'' under section 34 of the Act.
    b. RAG AG. E.ON directly and indirectly owns 39.2 % of the shares 
of RAG AG (``RAG''), a unique entity created under the auspices of the 
German government to own all operating coal mines in Germany.\8\ RAG 
owns 18% of Ruhrgas, described above. E.ON proposes to retain its 
ownership interest in RAG after becoming a registered holding company 
and requests an order of the Commission under section 2(a)(8) of the 
Act declaring RAG not to be a subsidiary company of E.ON under the Act.
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    \8\ E.ON has a 37.1% direct interest in RAG; E.ON also has a 
2.1% indirect interest in RAG, through its 21% interest in Montan-
Verwaltungsgesellschaft mbH, which owns 10% of RAG. RAG owns, 
indirectly through a subsidiary, RAG Coal International AG, certain 
coal mines in the Appalachian, Midwestern, and Mountain western 
regions of the United States that supply certain electric generating 
units.
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    c. E.ON North America Inc. and Fidelia Inc. E.ON North America Inc. 
(``E.ON NA''), a wholly owned subsidiary of E.ON, 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 Inc. (``Fidelia''), a finance company 
subsidiary organized under Delaware law. Fidelia lends money 
exclusively to E.ON Group companies in the U.S., including the U.S. 
subsidiaries of Degussa AG, one of E.ON's to-be-divested subsidiaries, 
discussed below.
    Applicants state that it would be efficient from an operations, tax 
and financing perspective to integrate E.ON NA and Fidelia under the 
E.ON U.S. corporate structure post-Acquisition. The proposed 
restructuring is discussed in section III, infra.
4. Nonutility Subsidiaries To Be Divested (``TBD Subsidiaries'')
    E.ON intends to divest certain nonutility subsidiaries and their 
respective subsidiaries following the Acquisition as part of E.ON's 
general divestiture program. E.ON explains that its goal is to become a 
leading global integrated energy and utility company. The TBD 
Subsidiaries are indicated in E.ON's list of subsidiaries included in 
Exhibit G-1 to the Application. The activities of the TBD Subsidiaries 
include chemicals (Degussa AG), real estate (Viterra AG), oil (VEBA 
Oel), distribution and logistics (Stinnes AG) and aluminum (VAW 
aluminium AG).\9\
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    \9\ Effective October 16, 2001, E.ON sold Klockner & Co. AG, a 
wholly owned subsidiary and leading European metal distributor with 
locations throughout Europe and North America to Balli group of 
London. Effective November 13, 2001, E.ON sold MEMC Electric 
Materials Inc., a 71.8% U.S. based-owned subsidiary and a leading 
worldwide manufacture of silicon wafers.
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    The divestiture of such significant components of E.ON's current 
business is a major undertaking. Consequently, 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 VEB Oel, Stinnes AG and VAW aluminium 
AG within three years of that date.\10\
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    \10\ As part of the reorganization of their oil and gas 
businesses agreed to by E.ON and BP plc, BP plc will become VEBA 
Oel's majority shareholder (51%) by subscribing to a capital 
increase after January 1, 2002. Beginning April 1, 2002, E.ON will 
have the option to sell its remaining interest in VEBA Oel (49%) to 
BP plc. Upon completion of this transaction (i.e., after exercising 
the put option), E.ON will have divested its oil businesses 
completely.
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    Pending divestiture, E.ON proposes to continue to invest in the TBD 
Subsidiaries to preserve and protect shareholder value and to prevent 
any diminution in the value or the prospects of the business, until 
such time as a sale or other exit strategy can be implemented, 
consistent with the requested order. Accordingly, E.ON intends to 
redeploy the proceeds of the divestitures in other TBD Subsidiaries and 
in E.ON's core utility business. E.ON proposes to limit its investments 
in the TBD Subsidiaries to up to $5.5 billion over the 3-5 year time 
frame for the contemplated divestitures.
B. Powergen
    Powergen is an international integrated energy company with its 
principal operations in the U.K. and the U.S. Powergen's ordinary 
shares are listed on the London Stock Exchange and its American 
Depositary 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 ended December 31, 2000, Powergen had revenues of 
*4,191 million ($6,268 million) and net income under US GAAP of 
<brit-pound>430 million ($643 million). As at December 31, 2000, 
Powergen had net assets of <brit-pound>2,286 million ($3,419 million) 
and a market capitalization of approximately <brit-pound>4.6 billion 
($6.9 billion). For the nine months ended September 30, 2001, Powergen 
had revenues of <brit-pound>4,230 million ($6,210 million) and net 
income under U.S. GAAP of <brit-pound>152 million ($223 million). As at 
September 30, 2001, Powergen had net assets of <brit-pound>2,332 
million ($3,423 million) and a market capitalization of approximately 
<brit-pound>4.8 billion ($7 billion).\11\ Powergen and all of its 
direct and indirect subsidiary companies are referred to below as the 
Powergen Group.\12\
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    \11\ Amounts originally in pounds were converted at $1.4955:1 
pound.
    \12\ A complete list of the subsidiaries of Powergen and a 
description of their respective businesses are contained in Exhibit 
G-2 to the Application.
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    Powergen's two principal subsidiaries are Powergen Group Holdings 
and Powergen US Holdings Ltd. (``Powergen US Holdings''), both UK 
companies. Powergen Group Holdings, a FUCO, is the holding company for 
Powergen's U.K. and international businesses. Powergen Group Holding's 
wholly owned subsidiary, Powergen UK plc (``Powergen UK'') is one of 
the UK's leading integrated electricity and gas businesses. As of March 
31, 2001, Powergen UK owned or operated approximately 8,200 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 UK include 
marketing electricity, gas, telecommunications and other essential 
services to domestic and business customers; asset management in 
electricity production and distribution; and energy trading to support 
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, via 
the chain of the Powergen Intermediate Holding Companies, of LG&E 
Energy, which Powergen acquired on December 11, 2000, in accordance 
with the Powergen Order. PUSIC, one of the Powergen Intermediate 
Holding Companies, holds all of the outstanding voting securities of 
LG&E Energy.
    LG&E Energy is a holding company exempt by order under section 
3(a)(1) of the Act.\13\ 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 (the ``Utility Subsidiaries''), serve 
in the aggregate approximately 857,000 electricity customers and 
299,000 gas customers over a transmission and

[[Page 67569]]

distribution network covering some 27,000 square miles.\14\ 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.\15\ LG&E Energy and all of its direct and indirect 
subsidiary companies are referred to below as the LG&E Energy Group.
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    \13\ See Powergen Order, supra note 2. See also LG&E Energy 
Corp., Holding Co. Act Release No. 26886 (Apr. 30, 1998) (confirming 
the exemption).
    \14\ As noted previously, LG&E and KU own 4.9% and 2.5%, 
respectively, of the common stock of OVEC, which in turn has one 
wholly owned subsidiary, IKEC. See supra note 2. LG&E and other 
public utilities organized OVEC and IKEC in 1952 to supply the 
entire power requirements of the U.S. Department of Energy's gaseous 
diffusion plant in Pike County, Ohio. All of the electricity sold by 
OVEC and IKEC is sold either to the U.S. Department of Energy or to 
the owners of the stock of OVEC (or their subsidiaries, all of which 
are utility companies). See Ohio Valley Electric Corp., 34 S.E.C. 
323 (Nov. 7, 1952). Applicants state that, for each of the three 
years ended December 31, 1998-2000, LG&E and KU each derived less 
than 0.2% of net income from their share of the earnings of OVEC.
    \15\ The Commission approved Powergen's ownership of LG&E 
Energy's nonutility businesses in the Powergen Order.
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    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.\16\ For the twelve months ended 
December 31, 2000, LG&E had electric operating revenues of $711.0 
million (net of provision for rate refunds), gas operating revenues of 
$272.5 million, electric operating income of $131.5 million and gas 
operating income of $17.4 million. For the nine months ended September 
30, 2001, LG&E had electric operating revenues of $557.9 million (net 
of provision for rate refunds), gas operating revenues of $216.1 
million, electric operating income of $50.8 million and a gas operating 
loss of $7.7 million. LG&E is subject to regulation by the Federal 
Energy Regulatory Commission (``FERC'') and the Kentucky Public Service 
Commission (the ``Kentucky Commission'').
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    \16\ The Commission approved Powergen's ownership of LG&E's gas 
utility business in the Powergen Order.
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    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.\17\ In Virginia, 
KU operates under the name Old Dominion Power Company. KU also sells 
electric energy at wholesale for resale to twelve Kentucky 
municipalities and one Pennsylvania municipality. In addition, KU owns 
and operates a small amount of electric utility property in one county 
in Tennessee. For the year ended December 31, 2000, KU had electric 
operating revenues of $851.9 million and operating income of $128.1 
million. For the nine months ended September 30, 2001, KU had electric 
operating revenues of $647.5 million and operating income of $58.4 
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'').
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    \17\ KU was formerly an exempt holding company by reason of its 
partial ownership of Electric Energy Inc. (``EEI''). On August 1, 
2000, EEI was granted EWG status. See 92 F.E.R.C. para. 62,079. 
Consequently, under section 32(e) of the Act, EEI is no longer a 
public-utility company and KU is no longer a holding company under 
the Act.
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III. The Proposed Acquisition

    Applicants state that acquisitions of U.K. public companies are 
normally effected by way of tender offer. There is no statutory merger 
concept in U.K. law. Tender offers for U.K. public companies are 
regulated by the U.K. City Code on Takeovers and Mergers (the ``City 
Code'') administered by the Panel on Takeovers and Mergers (the 
``Panel'').\18\ Although Applicants cannot satisfy the timetable 
required for tender offers by the City Code, the City Code provides 
that the Panel may permit the offeror to make a pre-conditional offer 
announcement, under which the offeror will commence its tender offer 
only if and when specified conditions, such as receipt of regulatory 
clearances, are met. In this case, the Panel agreed to the making of a 
pre-conditional offer announcement by E.ON, under which E.ON will 
commence its tender offer for Powergen only if and when the relevant 
United States, European Community and U.K. regulatory approvals have 
been obtained.\19\
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    \18\ Applicants state that the City Code has no statutory basis 
but is, in practice, adhered to by parties to takeovers of U.K. 
public companies.
    \19\ Requisite approvals include:
    (1) A decision by the European Commission not to initiate 
proceedings under Article 6(1)(c) of the Council Regulation (EEC) 
4064/89 (as amended), which governs market concentration and 
competition in the European Economic Community, or, if such 
proceedings are initiated, a finding that the concentration is 
compatible with the common market. (On November 26, 2001 theEuropean 
Commission authorized the Acquisition.);
    (2) An indication by the Director General of the Office of Gas 
and Electricity Markets in the U.K. that he will not seek 
modifications to any of the Powergen Group's licenses under the 
Electricity Act 1989 or the Gas Act 1986 as amended by the Gas Act 
1995 and subsequent legislation, including the Utilities Act 2000; 
that he will not seek undertakings or assurances from any member of 
the E.ON Group or the Powergen Group except, in each case, on terms 
acceptable to E.ON acting reasonably; and that in connection with 
the acquisition by E.ON of Powergen, he will give such consents and/
or directions (if any) and/or seek or agree to such modifications 
(if any) as are, in the reasonable opinion of E.ON, necessary in 
connection with such licenses;
    (3) The expiration of applicable waiting periods under the Hart-
Scott-Rodino Antitrust Improvements Act of 1976;
    (4) The termination of the review and investigation of the offer 
under the Exon-Florio Amendment to the Defense Production Act of 
1950; and
    (5) The approval of the Kentucky Commission, the Virginia 
Commission and the Tennessee Commission under applicable state 
utility law, the approval of the FERC under the Federal Power Act, 
and the approval of this Commission under the Act. (All three states 
and the FERC have approved the Acquisition.).
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    E.ON has, in its announcement of the Acquisition, reserved the 
right to elect, with the agreement of the Board of Powergen, to acquire 
the Powergen shares under an alternative U.K. legal procedure known as 
a ``Scheme of Arrangement.'' This procedure would involve the 
acquisition of all the outstanding Powergen shares by virtue of an 
order of the English court under the Companies Act 1985 of the United 
Kingdom (excluding Northern Ireland), given following approval at a 
Powergen shareholders' meeting by a majority in number, representing 
75% or more in value present and voting, either in person or by proxy, 
of the Powergen shares. The Scheme of Arrangement would be implemented 
on the same terms, as applicable, as those that apply to the offer.
    Although the timetable for a Scheme of Arrangement is somewhat 
different from that for a tender offer, Applicants state that similar 
issues arise in relation to the timing of the approval of the SEC: The 
court will not grant its order if there are significant conditions 
outstanding and it may not sanction the Scheme of Arrangement if there 
has been a substantial passage of time between the date of the 
shareholders' meeting and the date of the court hearing.
    E.ON expects, therefore, that some steps in the Acquisition process 
would not occur until after an order by the SEC authorizing the 
Application has been issued. There would be no guarantee, therefore, 
that the acquisition of Powergen would be consummated following the 
receipt of the requested order of the Commission, as the shareholders 
of Powergen may determine that they will not accept the

[[Page 67570]]

terms offered by E.ON.\20\ Applicants state, however, that it is 
extremely rare for shareholders of a U.K. public company not to accept 
an offer that has been recommended by their board.
---------------------------------------------------------------------------

    \20\ Applicants request the Commission to issue an order 
authorizing the Acquisition before Powergen's shareholders have 
indicated whether or not they will accept E.ON's tender offer. 
Applicants state that they will provide prominent disclosure in the 
relevant solicitation material distributed to Powergen shareholders 
that the Commission's authorization of the Acquisition is not an 
endorsement of the Acquisition or a recommendation by the Commission 
that Powergen shareholders accept the Tender offer or approve the 
Scheme of Arrangement.
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    The Boards of E.ON and Powergen have agreed to the terms of a 
recommended pre-conditional cash offer to be made by Goldman Sachs 
International on behalf of E.ON for the capital stock of Powergen.\21\ 
Applicants state that the Board of Powergen intends to recommend to 
Powergen's shareholders that they accept the offer. There are a number 
of conditions precedent to the offer.\22\
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    \21\ In connection with the offer, E.ON and Powergen have 
entered into a letter agreement dated April 8, 2001 (the 
``Agreement''), which, among other things, provides that Powergen 
will not solicit competing proposals and describes the steps that 
are to be taken to satisfy the preconditions to the offer. Under the 
Agreement, certain fees may be payable by either E.ON or Powergen to 
the other in certain circumstances. The Agreement will terminate 
(and the obligations of the parties, including E.ON's obligation to 
make the offer, will lapse) if the preconditions are not satisfied 
by July 9, 2002.
    \22\ Applicants state that the offer is subject to various 
conditions (all set forth in Exhibit B-1 to the Application) typical 
of acquisitions in Europe and the U.S. The conditions include the 
receipt of acceptances representing at least 90% (or such lesser 
percentage as E.ON may decide in excess of 50%) in nominal value of 
the Powergen shares or, in the event the offer is effected through a 
Scheme of Arrangement, rather than a tender offer, approval at a 
court-ordered meeting of the Powergen shareholders by a majority in 
number, representing 75% or more in value present and voting, either 
in person or by proxy, of the holders of the Powergen shares. In 
addition, the offer contains standard conditions restricting 
Powergen and its subsidiaries from issuing additional securities, 
paying dividends, bonuses or distributions, transferring assets not 
in the ordinary course of business, changing loan capital, making 
capital expenditures and other transactions of a long-term, onerous 
or unusual nature, changing director remuneration, repurchasing 
shares, changing constitutive documents, instituting bankruptcy and 
similar proceedings or entering into agreements to effect any of the 
above transactions, matters or events, subject to certain 
conditions.
    The conditions also contain standard provisions regarding 
developments material to the Powergen Group, taken as a whole, 
including adverse changes in the assets, business, financial or 
trading position or profits of the Powergen Group; legal proceedings 
having been threatened, announced or instituted by or against or 
remaining outstanding against any member of the Powergen Group; 
contingent or other liabilities having arisen; and steps having been 
taken which are likely to result in the withdrawal, cancellation, 
termination or modification of any license held by any member of the 
Powergen Group which is necessary for the proper carrying on of its 
business.
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    E.ON proposes to offer <brit-pound>7.65 for each Powergen share and 
<brit-pound>30.60 for each Powergen ADS (representing four Powergen 
shares).\23\ The offer values the whole of Powergen's capital stock at 
approximately <brit-pound>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, as at closing. On the basis of the Powergen debt outstanding as 
at December 31, 2000 of <brit-pound>4.5 billion ($6.4 billion) adjusted 
for divestitures and announced by Powergen prior to the date of the 
Agreement, the total value of the proposed acquisition would be 
<brit-pound>9.6 billion ($13.7 billion).\24\
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    \23\ Applicants state that for U.K. tax purposes, some 
shareholders of Powergen may prefer to receive a loan note rather 
than cash from E.ON in return for their Powergen shares. Under U.K. 
tax law, such shareholders can defer recognition of any capital 
gains from the sale of their Powergen shares until they redeem the 
loan notes. In the event the loan notes are used, accepting 
shareholders of Powergen shares would receive <brit-pound>1 nominal 
of loan notes for every <brit-pound>1 of cash consideration. The 
loan notes would be unsecured, and would not exceed in aggregate 
principal amount issued, $7.3 billion. They have not been, and will 
not be, registered under the Securities Act of 1933, and will not be 
offered to U.S. investors. If E.ON elects to make the offer through 
another member of the E.ON Group, E.ON would guarantee the loan 
notes. E.ON requests authorization to maintain the loan notes and 
any associated guarantee in connection with the Acquisition.
    \24\ Before taking into account future dividends payable to 
Powergen shareholders, the offer represents a premium of 8.4% over 
the price of Powergen shares as at the close of business on April 6, 
2001 (the last trading day prior to the announcement of the 
Acquisition); 25.8% over the closing price of Powergen shares on 
January 16, 2001, the last business day before the announcement of 
preliminary talks between E.ON and Powergen in relation to the 
offer) and 35.2% over the average price of Powergen shares over the 
6 months ended January 16, 2001.
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    The offer will extend to all existing issued Powergen shares and to 
any Powergen shares which are unconditionally allotted or issued prior 
to the date on which the offer closes (or such earlier date as E.ON 
may, subject to the City Code, decide), including Powergen shares 
issued in accordance with the exercise of options under Powergen's 
employee benefit plans or otherwise. In conjunction with the offer for 
the Powergen shares, an offer will be made to holders of Powergen ADSs 
to tender the Powergen shares underlying their ADSs into the offer.
    If more than 90% of Powergen shares and Powergen ADSs are tendered 
or otherwise acquired, E.ON would be able to rely on applicable U.K. 
law to acquire compulsorily any remaining shares, thus enabling E.ON to 
acquire 100% of Powergen. If more than 50% of Powergen shares and 
Powergen ADS, are tendered or otherwise acquired, it would be E.ON's 
option to declare the offer unconditional, even if E.ON had not 
acquired the 90% tender that is necessary to implement compulsory 
acquisition of the dissenting minority.
    When the offer becomes unconditional in all respects, Powergen will 
apply to the London and New York stock exchanges for the Powergen 
securities to be de-listed. It is anticipated that the cancellation of 
Powergen's listing on the London Stock Exchange will take effect no 
earlier than 20 business days after the offer becomes or is declared 
unconditional in all respects.
    To effect the Acquisition, E.ON has established a wholly owned 
subsidiary, E.ON UK Verwaltungs GmbH (``E.ON UK''), a corporation 
organized under German law. E.ON UK in turn owns all the outstanding 
shares of an acquisition vehicle, E.ON UK plc, a corporation organized 
under the laws of England and Wales, that will acquire all of the 
outstanding Powergen shares either by tender offer or Scheme of 
Arrangement, as discussed previously. E.ON UK plc would survive the 
Acquisition. E.ON would register as a holding company. Powergen would 
remain a registered holding company, and E.ON UK and E.ON UK plc would 
also register as holding companies.\25\ LG&E and KU would remain first-
tier subsidiaries of LG&E Energy and keep their names and headquarters 
locations. Applicants state that this corporate structure will take 
into account international tax regulations and clearly separate the 
domestic utility operations of LG&E and KU from the other businesses of 
E.ON and Powergen.
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    \25\ Applicants state that the German and European utility 
regulations that affect the E.ON Group apply only to its German and 
European operating companies and not to the parent holding company, 
which will register; therefore, there is no conflict between the 
regulatory scheme under the Act and German or European regulation. 
Similarly, U.K. utility regulation affecting Powergen (and E.ON 
following its acquisition of Powergen) would apply only to the U.K. 
operating companies and not directly to the parent registered 
holding company. Therefore, there also will be no conflict between 
the regulatory scheme under the Act and U.K. regulation. As noted 
previously, in addition to the U.S. Federal and state approvals, the 
transaction has been reviewed by the European Commission and will be 
reviewed by the U.K. Office of Gas and Electricity Markets.
---------------------------------------------------------------------------

    As a subsidiary of E.ON UK and E.ON UK plc, Powergen will remain 
the immediate parent company of Powergen Group Holdings Ltd., the 
current ``umbrella'' FUCO in the Powergen Group. Powergen will remain 
responsible for the development and operation of LG&E Energy, LG&E and 
KU and, in this manner, develop E.ON's Anglo-American energy and 
utility

[[Page 67571]]

business in the context of E.ON's overall group strategy. Although 
Powergen will cease to own any public-utility companies, Powergen will 
remain a registered holding company due to its continuing role 
regarding the LG&E Energy Group.
    Powergen will continue to hold an indirect voting equity interest 
in LG&E Energy through the Powergen Intermediate Holding Companies for 
a short period of time, not to exceed six months after the 
Acquisition.\26\ This will allow time for E.ON to accomplish a 
reorganization whereby the ownership of PUSIC, the immediate parent of 
LG&E Energy, will be transferred to E.ON US Verwaltungs GmbH (``E.ON 
US''), a wholly owned E.ON subsidiary company. Applicants request 
authorization to effect the reorganization.
---------------------------------------------------------------------------

    \26\ As a result of Powergen's acquisition of LG&E Energy, 
Powergen and the Powergen Intermediate Holding Companies registered 
as public-utility holding companies under Section 5 of the Act. The 
Powergen Intermediate Holding Companies are Powergen US Holdings 
Limited and Powergen US Investments, corporations organized under 
the laws of England and Wales, Powergen Luxembourg sarl and Powergen 
Luxembourg Holdings sarl, corporations organized under the laws of 
Luxembourg, and Powergen US Investments Corp., a Delaware 
corporation (``PUSIC''). PUSIC currently holds all of the 
outstanding voting securities of LG&E Energy, and will continue to 
do so after the Acquisition.
---------------------------------------------------------------------------

    After the Acquisition and the reorganization, E.ON will hold all 
the outstanding voting stock of LG&E Energy through PUSIC and E.ON U.S. 
(the ``Intermediate Companies'').\27\ PUSIC will remain a registered 
holding company under the Act and E.ON and E.ON US will register as 
such. The Powergen Intermediate Holding Companies will cease to own 
voting securities directly or indirectly in PUSIC or LG&E Energy, 
although certain arrangements made to finance Powergen's acquisition of 
LG&E Energy and the operations of LG&E Energy, will remain in place.
---------------------------------------------------------------------------

    \27\ Applicants state that this ownership structure is 
preferable from a tax law perspective because it avoids holding a 
U.S. asset through another foreign jurisdiction. They state that 
current German tax regulations with regard to controlled foreign 
corporations discourage German corporations from holding assets 
through multi-tier subsidiaries located in multiple jurisdictions.
---------------------------------------------------------------------------

    Because the Powergen Intermediate Holding Companies will cease to 
hold direct or indirect voting interests in LG&E Energy, they request 
that the Commission unconditionally approve their deregistration under 
section 5(d) of the Act. Applicants further request that the Commission 
reserve jurisdiction over the proposed deregistration until after the 
reorganization has been effected and the record is complete in this 
regard.
    Applicants state that maintaining an efficient post-Acquisition 
structure may require a rapid response to changes in matters such as 
tax and accounting rules, including by making appropriate revisions 
after consummation of the Acquisition to add or subtract an 
intermediate holding company between E.ON and LG&E Energy. They 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. Applicants request authorization to make such 
changes after consummation of the Acquisition, subject to the condition 
that no change (i) will result in the introduction of any third part 
interests in the upper structure, (ii) will introduce a non-European 
Union or non-U.S. entity into the upper structure, or (iii) will have 
any material impact on the financial condition or operations of E.ON or 
LG&E Energy and its subsidiaries.
    Applicants request that, for purposes of the analysis under section 
11(b)(2) of the Act, the Commission disregard the Intermediate 
Companies (PUSIC and E.ON US), neither of which will issue securities 
to third parties. Applicants assert that these companies are special 
purpose entities created for the sole purpose of capturing economic 
efficiencies that might otherwise be lost in a cross-border 
transaction.
    Applicants request that Powergen, E.ON UK and E.ON UK plc also be 
disregarded for the purposes of the analysis under section 11(b)(2) of 
the Act. As noted above, all three will be registered holding companies 
under the Act after the Acquisition. E.ON UK and Powergen will not 
issue securities to third parties, but will serve merely as financial 
conduits. E.ON UK plc, however, may issue and sell debt securities, in 
particular, bonds, to third parties to finance the authorized or 
permitted activities of the Powergen Group. Bonds issued by E.ON UK plc 
may be guaranteed by E.ON. Applicants state that financing the Powergen 
Group through bonds issued by E.ON UK plc is expected to be more cost 
effective due to tax considerations than financing capital needs 
through E.ON or another E.ON subsidiary and then lending the funds to 
E.ON UK plc.
    Applicants state that any third party debt issued by E.ON UK plc 
would be consolidated into E.ON's consolidated financial statements and 
would count against the financing limits for E.ON's external financing 
program set forth in the application that E.ON has filed with the 
Commission in File 70-9985 for approval of its proposed financings (the 
``Financing Application''). The debt issued by E.ON UK plc would be 
reflected in E.ON's consolidated financial statements, and in the 
Financing Application. E.ON will commit to a minimum 30% equity to 
total capitalization level. Applicants assert that in effect, 
especially in the case where such debt is backed by an E.ON guarantee, 
E.ON UK plc would function as a financing subsidiary for E.ON, and the 
debt of E.ON UK plc should be treated as E.ON debt for purposes of 
determining compliance with section 11(b)(2) of the Act. In other 
words, Applicants assert that E.ON UK plc, together with E.ON UK and 
Powergen, should be viewed as financing conduits that may be ``looked 
through'' for purposes of determining compliance with section 11(b)(2).
    As discussed in section II.A.3.c., supra, Applicants propose that, 
following the Acquisition, E.ON NA and Fidelia will be integrated under 
the E.ON U.S. corporate structure. In addition, Fidelia, which holds 
the cash proceeds of certain divestitures of E.ON's nonutility 
businesses in the U.S. will continue to hold such funds for use in 
future U.S. acquisitions, as permitted or authorized by the Commission. 
Further, Fidelia may lend funds to other companies in the E.ON Group, 
except as prohibited under the Act. \28\ This would avoid repatriating 
the funds to Germany and exposure to the risks of currency value 
fluctuations. To effect the restructuring, E.ON would transfer the E.ON 
NA shares to E.ON U.S., which, in turn, would transfer the shares to 
PUSIC. For tax reasons, debt of E.ON NA to E.ON may be cancelled, or 
E.ON may contribute assets to E.ON NA, in connection with the 
restructuring transactions.
---------------------------------------------------------------------------

    \28\ Applicants' filing in SEC File No. 70-9985 (the ``Financing 
Application'') describes the proposed financing plan for the E.ON 
Group, including Fidelia, in greater detail.
---------------------------------------------------------------------------

IV. Financing of the Acquisition

    E.ON proposes to finance the Acquisition with cash on hand, the 
proceeds of liquidating certain readily marketable assets, funds from 
E.ON's existing lines of credit or the issuance and sale of long-term 
or short-term debt securities or bank lines of credit. Powergen, LG&E 
Energy and its subsidiaries, including LG&E and KU, will not borrow or 
issue any security, incur any debt or pledge any assets to finance any 
portion of the purchase price paid by E.ON for Powergen shares.

[[Page 67572]]

V. EWG/FUCO Financings and Investments

    Applicants seek authorization (i) to retain existing investments in 
FUCOs \29\ and energy-related businesses; (ii) to invest the proceeds 
from divestitures (including any divestitures occurring since the June 
2000 merger of Veba and Viag, as well as future divestitures), which 
may total approximately $35 billion, in exempt wholesale generator 
(``EWG'') and FUCO activities without including those investments in 
E.ON's Aggregate EWG/FUCO Financing Limitation (as defined below);\30\ 
and (iii) to enter into transactions to finance additional investments 
in EWGs and FUCOs in an amount up to $25 billion.
---------------------------------------------------------------------------

    \29\ For purposes of this discussion, ``FUCOs'' is deemed to 
include all foreign businesses which qualify for FUCO status but for 
the fact that the appropriate notice has not yet been provided to 
the Commission. E.ON states that it intends to provide all such 
notices to the Commission at the time of the consummation of the 
Acquisition.
    \30\ Although the proceeds of divestitures could be invested in 
EWGs and FUCOs, they would not be limited to such uses and could be 
used to finance the activities of the E.ON Group generally, as 
authorized or permitted under the Act.
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    The authorization requested in (ii), above, would also include 
authorization for E.ON to issue and sell securities to finance EWG and 
FUCO investments pending the receipt of divestiture proceeds (``Bridge 
Loans''); provided that upon the receipt of such proceeds, the Bridge 
Loans or securities with an equivalent principal amount are retired, 
redeemed or otherwise paid down such that the aggregate EWG and FUCO 
investment under the authorization requested in (ii) does not exceed 
the cash proceeds from divestitures. The $35 billion Bridge Loan 
authorization, plus the $25 billion additional investment amount 
referred to in (iii) above, are referred to in the aggregate as the 
``Aggregate EWG/FUCO Financing Limitation.''
A. Reinvestment of Proceeds From Divestitures
    As discussed previously, E.ON intends to divest significant 
nonutility assets. E.ON requests authorization to reinvest the proceeds 
of those divestitures, estimated to be $35 billion in eligible EWG and 
FUCO assets. Applicants state that eligible FUCO assets will include 
non-U.S. electric and gas utilities as well as energy-related and other 
related activities and assets. Because the receipt of divestiture 
proceeds will not always coincide with the opportunity to invest in 
additional EWG or FUCO assets, Applicants also request authorization 
for E.ON to enter into bridge financing arrangements and to make Bridge 
Loans of up to $35 billion. In this way, attractive investment 
opportunities can be pursued pending the ultimate receipt of 
divestiture proceeds. Upon receipt of the divestiture proceeds, E.ON 
would retire, redeem or otherwise pay down the Bridge Loans or 
securities with an equivalent principal amount, so that E.ON's 
aggregate EWG and FUCO investment under the authorization to reinvest 
divestiture proceeds does not, in fact, exceed the proceeds from the 
divestitures.
B. Additional Investment in EWGs and FUCOs
    In addition to retention of E.ON's existing FUCO and energy-related 
investments and the reinvestment of the proceeds of divestitures, 
Applicants request authorization to finance additional EWG/FUCO 
investments in an aggregate amount of up to $25 billion. These 
financings may include the issue or sale of a security for purposes of 
financing the acquisition or operations of an EWG or FUCO, or the 
guarantee of a security of an EWG or FUCO.\31\ Applicants state that 
E.ON will not issue additional debt securities to finance EWG or FUCO 
acquisitions if upon original issuance E.ON's senior debt obligations 
are not rated investment grade by at least two of the major rating 
agencies (i.e., Standard & Poor's Corporation, Fitch Investor Service 
and Moody's Investor Service). E.ON, LG&E and KU will also each 
maintain a capital structure in which common equity comprises at least 
30% of consolidated capitalization.
---------------------------------------------------------------------------

    \31\ The specific types of financings are described in the 
Financing Application.
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    As of December 31, 2000, E.ON had an ``aggregate investment,'' as 
the term is defined in rule 53(a) under the Act, in EWGs and FUCOs of 
$6.009 billion.\32\ This investment represents 44% of E.ON's pro forma 
consolidated retained earnings of $13.805 billion as of December 31, 
2000, as adjusted for the Acquisition and determined in accordance with 
U.S. GAAP.\33\ In addition, the combined LG&E Energy Group and Powergen 
aggregate investment in EWGs and FUCOs as of December 31, 2000 is 
$1.048 billion. The combined E.ON, Powergen and LG&E Energy aggregate 
investment ($7.057 billion) represents approximately 51% of E.ON's pro 
forma consolidated retained earnings.
---------------------------------------------------------------------------

    \32\ Currently, E.ON has no EWG investments and its FUCO 
investment is in E.ON Energie only. E.ON's aggregate investment in 
E.ON Energie reflects the book value of E.ON's investment, including 
loans, in E.ON Energie as of December 31, 2000. As of September 30, 
2001, E.ON's aggregate investment in E.ON Energie was $6.147 
billion.
    \33\ E.ON's pro forma solidated retained earnings would be 
$13.805 billion as of December 31, 2000. As of September 30, 2001, 
E.ON's pro forma consolidated retained earnings would be $11.679 
billion.
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    On a pro forma basis to reflect the Acquisition and the 
reinvestment of the estimated proceeds of divestitures ($35 billion) in 
FUCO investments, E.ON's ``aggregate investment'' in EWGs and FUCOs as 
of December 30, 2000 would be approximately $42.057 billion, or 
approximately 305% of E.ON's pro forma consolidated retained earnings 
at December 31, 2000, calculated in accordance with U.S. GAAP. 
Additional investments in EWGs and FUCOs in an amount up to $25 
billion, would result in total aggregate investment of approximately 
$67.057 billion, or 486% of E.ON's pro forma consolidated retained 
earnings at December 31, 2000.

VI. Investments in Portfolio Securities

    E.ON Group companies, particularly E.ON Energie, hold significant 
investments as reserves against long-term liabilities, specifically, 
pension and, for E.ON Energie only, nuclear decommissioning 
obligations. These investments, which currently total approximately 
Euro 9 billion ($7.9 billion), include publicly traded common stocks of 
other companies. Large parts of the investments are held through 
investment funds. Applicants request that the Commission authorize E.ON 
and its FUCO and nonutility subsidiaries located in Germany to retain 
these investments under section 9(c)(3) of the Act as being ``in the 
ordinary course of business'' of a German company. The requested relief 
would not apply to the Powergen Group or the LG&E Energy Group.
    Applicants state that German law does not require, and German 
companies, including E.ON, do not, in practice, segregate the 
investments and funds they hold with respect to these kinds of 
liabilities. To ensure that the relief requested is appropriately 
matched to a continuing need in the ordinary course of business, E.ON 
proposes to make equity investments for the purposes of funding future 
employee benefit and nuclear decommissioning expenditures only if, at 
the time of investment, the actuarial value of the prospective 
obligations exceeds the aggregate amount of the investments that will 
be held by E.ON immediately after the investment has been made. 
Further, E.ON will not accumulate an affiliate interest in the equity 
of any company purchased to fund the reserves. During the year 2002, 
E.ON will divest shares held in companies in which E.ON holds an 
affiliate interest to reduce E.ON's

[[Page 67573]]

interest below 5%.\34\ Furthermore, on a going forward basis, E.ON's 
additional net investments in its reserves will be limited to 25% 
common stocks.\35\ E.ON's annual report on Form U5S will include a 
statement reconciling the reserve investments with the related long-
term liabilities. The statement will indicate the asset class breakdown 
of the reserves.
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    \34\ E.ON holds an interest above 5% in a company, which it 
plans to divest in 2002 by either selling the stock or issuing a 
bond that would be exchangeable for the stock of the company or 
cash. Applicants state that the terms of the exchange offer, 
including when the exchange would be triggered, have not yet been 
determined.
    \35\ This limit will be applied over the course of E.ON's fiscal 
year and will be based on the value of the investments at the time 
they were made.
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VII. Intrasystem Provision of Services

A. LG&E Services and the LG&E Energy Group
    In the Powergen Order, the Commission found that LG&E Services, 
Inc.(``LG&E Services'') met the requirements of section 13(b) of the 
Act. LG&E Services will remain a first-tier wholly owned subsidiary of 
LG&E Energy, will become the service company under section 13 of the 
Act for the E.ON Group upon completion of the Acquisition, and will 
continue to provide services to the members of the LG&E Energy Group. 
Except as otherwise authorized, the operation of LG&E Services will 
conform to the authorization granted in the Powergen Order.
B. Services Provided by Members of the Powergen Group and Members of 
the E.ON Group
    Applicants state that, after the Acquisition, Powergen and other 
members of the Powergen UK Group (Powergen Group Holdings and all of 
its direct and indirect subsidiaries) will continue to provide services 
to the LG&E Energy Group. For example, members of the Powergen UK Group 
will provide management services in the areas of internal audit, tax 
and treasury; and consultation regarding engineering, research and 
development projects and transmission best practices. Applicants also 
expect that E.ON and other members of the E.ON Group, especially E.ON 
Energie, will provide services to LG&E Services and other members of 
the LG&E Energy Group after the Acquisition.\36\ Those services would 
generally be limited to high-level management, administrative and 
technical services.
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    \36\ Applicants do not expect that significant services or goods 
would be provided by members of the E.ON Group other than E.ON and 
E.ON Energie to LG&E Services or other companies in the LG&E Energy 
Group.
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    Applicants state that E.ON does not intend to render services to 
its subsidiaries at a charge and 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.\37\ Applicants state that, to 
the extent that costs for services provided by members of the Powergen 
UK Group or the E.ON Group (other than E.ON and Powergen) can be 
attributed to a specific member of the LG&E Energy Group, that member 
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: (1) Total payroll and 
associated costs; (2) materials and consumable costs; (3) building and 
facilities costs; (4) information systems infrastructure costs; and (5) 
other departmental costs. Records related to services provided by any 
service provider to the LG&E Energy Group companies will be made 
available to the Commission staff for review.
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    \37\ Applicants state that, if in the future E.ON seeks to 
charge its costs for general administrative services relating to its 
corporate-wide objectives, policies and activities, including costs 
of senior management, shareholder services, investor relations, 
corporate affairs, strategic planning and business development, E.ON 
will file an application setting forth allocation methods and 
describing the proposed transactions in further detail.
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    Applicants state that, to the extent that any services cannot be 
directly attributed to a specific LG&E Energy Group company, members of 
the LG&E Energy Group will pay a share of the costs of services that 
benefit them. The portion of the costs attributable to the LG&E Energy 
Group companies will be determined using measures that reflect the 
relevant contribution and size of the individual businesses. With 
respect to costs incurred at the Powergen Group level, allocation of 
group costs will by done using four measures (revenues, operating 
profit, employee numbers and net assets) and group costs will be 
allocated equally across the four measures. Revenues are 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.
    Applicants state that LG&E Services will generally act as the 
gatekeeper or coordinator for services flowing to and from the LG&E 
Energy Group. Applicants expect that the majority of costs billed by 
members of the Powergen Group to the LG&E Energy Group will be paid 
initially by LG&E Services, which will then charge the appropriate 
service recipient. LG&E Services will allocate the costs of service 
among the LG&E Energy Group using one of several methods. The method of 
cost allocation varies based on the department rendering the service. 
The cost allocation methods used by LG&E Energy Services are described 
in Exhibit J-1 to the Application.
    Applicants state that, except as otherwise authorized by the 
Commission, all services provided by members of the E.ON Group and/or 
the Powergen Group to LG&E Services and the other members of the LG&E 
Energy Group will be billed at cost and in accordance with fair 
allocation methods, in accordance with section 13 of the Act and the 
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.
C. Exemptions for Transactions with Nonutility Companies
    Each member of the E.ON Group, the Powergen Group and the LG&E 
Energy Group (including LG&E Services) requests authorization under 
section 13(b) of the Act to provide services and sell goods to 
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, and requests an exemption under section 13(b) of the Act from the 
cost standards of rules 90 and 91 as applicable to these transactions, 
in any case in which the nonutility subsidiary purchasing these goods 
or services is:

[[Page 67574]]

    (1) A FUCO or foreign EWG which derives no part of its income, 
directly or indirectly, from the generation, transmission, or 
distribution of electric energy for sale within the United States;
    (2) An EWG which sells electricity at market-based rates which have 
been approved by the FERC, provided that the purchaser is not a public-
utility company in the LG&E Energy Group;
    (3) A ``qualifying facility'' (``QF'') within the meaning of the 
Public Utility Regulatory Policies Act of 1978, as amended (``PURPA''), 
that sells electricity exclusively (a) at rates negotiated at arms'' 
length to one or more industrial or commercial customers purchasing the 
electricity for their own use and not directly for resale, and/or (b) 
to an electric utility company other than a public utility in the LG&E 
Energy Group at the purchaser's ``avoided cost'' as determined in 
accordance with PURPA regulations;
    (4) A domestic EWG or QF that sells electricity at rates based upon 
its cost of service, as approved by FERC or any state public utility 
commission having jurisdiction, provided that the purchaser is not a 
public-utility company in the LG&E Energy Group; 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 non-utility subsidiaries described 
in clauses (1) through (4) immediately above, or (c) does not derive 
any part of its income from a public-utility company within the LG&E 
Energy Group.

VIII. Reporting

    Applicants state that under German law, E.ON must prepare and 
publish consolidated financial information at least semi-annually. 
Applicants propose to provide rule 24 certificates on a semiannual 
basis, consistent with the frequency of financial reporting required in 
Germany. The rule 24 certificates will be provided to the Commission 
within 180 days after the end of E.ON's fiscal year and within 60 days 
of the end of its second fiscal quarter and will contain paper copies 
of E.ON's filings of Form 20-F and reports to shareholders. The 
semiannual reports provided to the Commission in rule 24 filings under 
this Application will be organized so that all columns showing amounts 
in Euros in financial statements or tables are accompanied by parallel 
columns showing U.S. dollar amounts.
    Applicants state that they will file Form U5S annually within 180 
days of the close of E.ON's fiscal year. In addition, as required by 
the 1934 Act, and the Securities Act of 1933, as amended, respectively, 
E.ON will file Form 20-F and reports on Form 6-K containing material 
announcements as made. To maintain a consistent presentation of 
financial information, the Applicants propose that the Form U5S filing 
will contain: (1) U.S. GAAP financial statements for all the LG&E 
Energy Group companies; and (2) U.S. GAAP financial statements or 
financial statements in the format required by Form 20-F for (a) E.ON, 
on a consolidated basis, and (b) any intermediate holding companies. 
The reporting requirements imposed by the Commission will enable the 
Commission to oversee the operations of the E.ON companies, including 
intrasystem transactions. All amounts expressed in Euros shall be 
converted to U.S. dollars. Form U5S filings will state amounts in U.S. 
dollars.
    E.ON also will report annually, as a supplement to the Form U5S, 
service transactions among the E.ON system companies. That report will 
contain the following information:
    (1) A narrative description of the services rendered by members of 
the E.ON Group or the Powergen Group for the LG&E Energy Group, by the 
members of the LG&E Group for the E.ON Group or the Powergen Group, and 
by the members of the LG&E Energy Group for each other (other than as 
reported on Form U-13-60);
    (2) Disclosure of the dollar amount of services rendered according 
to category or department;
    (3) Identification of companies rendering services and recipient 
companies; and
    (4) Disclosure of the number of LG&E Energy Group employees engaged 
in rendering services to other E.ON system companies on an annual 
basis, stated as an absolute and as a percentage of total employees.
    Applicants also request an exemption from rule 26(a)(1) under the 
Act, regarding the maintenance of financial statements in conformance 
with Regulation S-X, for any subsidiary of E.ON organized outside the 
U.S. Applicants state that E.ON will comply with Rule 53(a)(2)(ii), 
which requires each majority-owned FUCO subsidiary of a registered 
holding company to maintain its books, records and financial statements 
in conformity with U.S. GAAP and requires the registered holding 
company to provide the Commission with access to such books and 
records. For each non-majority owned FUCO subsidiary, Applicants state 
that E.ON will endeavor to comply with Rule 53(a)(2)(iii), which 
requires either U.S. GAAP books, records and financial statements or, 
upon request, for E.ON to provide a description and quantification of 
material variations from U.S. GAAP if another comprehensive body of 
accounting principles is followed.
    Applicants also will report annually, as a supplement to the Form 
U-13-60 filed by LG&E Services, service transactions among E.ON system 
companies (excepting the LG&E Energy Group) and the LG&E Energy Group. 
The report will contain the following information:
    (1) A narrative description of the services rendered by individual 
E.ON system companies (excepting the LG&E Energy Group) to the LG&E 
Energy Group and by the LG&E Energy Group to other E.ON system 
companies
    (2) Disclosure of dollar amount of services rendered according to 
category or department;
    (3) Identification of companies rendering service and recipient 
companies, including disclosure of the allocation of services costs 
among the companies of the LG&E Energy Group; and
    (4) Disclosure of the number of LG&E Energy Group employees engaged 
in rendering services to other E.ON system companies on an annual 
basis, stated as an absolute and as a percentage of total employees.
    With regard to its investments in EWGs and FUCOs, E.ON proposes to 
report the following information in its semiannual rule 24 
certificates:
    (1) A calculation of the ratio of E.ON's aggregate investment in 
EWGs and FUCOs to E.ON's average consolidated retained earnings (both 
as determined in accordance with Rule 53(a));
    (2) A statement of aggregate investment as a percentage of the 
following: total capitalization, net utility plant, total consolidated 
assets and market value of common equity, all as of the end of that 
semiannual period;
    (3) A statement of E.ON's authorized EWG and FUCO investment limit 
and the amount of unused investment authority based on the aggregate 
investment as of the date of the report;
    (4) Consolidated capitalization ratios as of the end of that 
semiannual period;
    (5) The market-to-book ratio of E.ON's common stock at the end of 
that semiannual period;
    (6) An analysis of the growth in consolidated retained earnings, 
which segregates total earnings growth attributable to EWGs and FUCOs 
from

[[Page 67575]]

that attributable to other E.ON subsidiaries; and
    (7) A statement of revenues and net income of each of E.ON's EWGs 
and FUCOs for the twelve months ended as of the end of that semiannual 
period, with an indication of which EWGs and FUCOs were acquired during 
the reporting period.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-32074 Filed 12-28-01; 8:45 am]
BILLING CODE 8010-01-P