File No. 70-__________
United States Securities and Exchange Commission
Washington, D.C. 20549
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Form U-1
Application
Under
The Public Utility Holding Company Act of 1935
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E.ON AG
E.ON-Platz 1
40479 Dusseldorf
Germany
(Names of companies filing this statement
and addresses of principal executive offices)
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E.ON AG
(Name of top registered holding company)
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Dr. Guntram Wuerzberg
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 the Proposed Transaction
A. Introduction
In this application, E.ON AG ("E.ON" or "Applicant"), requests an
extension of the deadline set by prior Commission order to divest E.ON's
interest in an affiliated company, Hypo-Vereinsbank AG ("HVB"). HVB is a large
private bank in Germany with assets of approximately (euro)712 billion.
By applications filed on Form U-1 in SEC File Nos. 70-9961 and
70-9985, E.ON sought authorization to acquire Powergen plc ("Powergen"), a
registered holding company, and other authorizations under the Public Utility
Holding Company Act of 1935 (the "Act") related to E.ON's activities as a
registered holding company after the Powergen acquisition. The Commission
authorized the acquisition by order dated June 14, 2002, Holding Co. Act Release
No. 27539 (the "Acquisition Order"). E.ON completed the acquisition of Powergen
on July 1, 2002 and registered as a holding company on that day.
One of the conditions imposed by the Commission in the Acquisition
Order relates to the ability of E.ON and its subsidiaries to invest in the
equity securities of companies held for investment purposes ("Portfolio
Securities"), as opposed to investments for strategic or operating reasons
associated with E.ON's activities as an energy and utility company. As stated in
the Acquisition Order:
The E.ON Group companies, particularly E.ON Energie, a
proposed FUCO, hold significant investments as reserves
against two types of long-term liabilities: their pension
obligations, and, for E.ON Energie only, its nuclear
decommissioning obligations. These investments, which
currently total approximately (euro)9 billion ($7.9
billion), include publicly traded common stocks of other
companies./1
The Acquisition Order granted E.ON's request to continue to make these
investments under Section 9(c)(3) of the Act in the ordinary course of business
provided that it complied with certain conditions. The Commission required that
equity investments for the purposes of funding future employee benefit and
nuclear decommissioning obligations could be made 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 was restricted from creating an
affiliate relationship with any company within the terms of Section 2(a)(11) of
the Act by acquiring 5% or more of the voting securities of any issuer. The
Acquisition Order restates the commitment made by E.ON in its application that
during the year 2002, E.ON will reduce any stakes that it has that exceed 5% of
a single company to below 5%.
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1 Acquisition Order at 47 (footnotes omitted).
3
The Acquisition Order also required that on a going forward basis,
E.ON's additional net investment in its reserves should be limited to 25% common
stocks. These commitments would be monitored through reports to be included in
E.ON's Annual Report on Form U5S. E.ON was directed to include in its Annual
Report a statement reconciling the reserve investments with the related
long-term liabilities, and indicating the asset class breakdown of the
reserves./2
E.ON's Portfolio Securities include only one stake in the voting
securities of a company that exceeds 5%. This is E.ON's 6.72% voting equity
interest in HVB. The Acquisition Order made a reference to this affiliate
interest in the following footnote:
E.ON states that it holds an interest above 5% in a company
that it plans to divest in 2002, either by selling the stock
or by 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 the time when the
exchange would be triggered, have not yet been determined./3
Although E.ON continues to desire to reduce its voting equity interest
in HVB to the level where it would not constitute an affiliate interest, recent
declines in the market price of HVB shares have made share sales financially
prohibitive at this time. Consequently, E.ON seeks an extension of the
divestiture deadline until December 31, 2004.
B. Additional Time May Provide an Opportunity for the Market in HVB Shares
to Recover and Allow E.ON to Avoid a Fire Sale that Could Significantly Reduce
the Value of its Pension and Nuclear Decommissioning Reserves
E.ON's interest in HVB is held indirectly through E.ON Energie AG
("E.ON Energie") a foreign utility company under Section 33 of the Act ("FUCO"),
and its subsidiaries E.ON Sales and Trading GmbH, an energy marketing and
trading company, and E.ON Bayern AG, a regional utility in the German state of
Bavaria. The breakdown of shareholdings is shown in the table below.
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2 Id. at 48-49.
3 Id. at 49, n. 64.
4
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
E.ON Group Number of HVB Shares % of Outstanding HVB Book Value Market Value Market Value as of
Company Held as of June 30, Shares (521,735,101)/4 as of June 30, as of June September 24, 2002
2002 2002 (euro) 30, 2002 (euro) (euro)
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
E.ON Energie 5,516,342 1.06% 33.00 33.40 15.03
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
E.ON Sales and 27,988,649 5.36% 33.00 33.40 15.03
Trading
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
E.ON Bayern 1,550,475 0.30% 33.00 33.40 15.03
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
Total 35,055,466 6.72%
------------------ ---------------------- ------------------------ -------------- --------------- --------------------
It is evident from the table that the current market value of E.ON's interest in
HVB has declined substantially in relation to its book value. HVB shares have
had a 52 week high of (euro)42.55 on March 26, 2002 and a 52 week low of
(euro)15.03 on September 24, 2002. To comply with the requirement in the
Acquisition Order that E.ON reduce its stake in any portfolio company that
exceeds 5% to below 5%, E.ON must sell 1.73% of its HVB shareholdings. This
would bring E.ON's HVB interest down to 4.99%; the level where it would be
deemed a non-affiliate interest under Section 2(a)(11) of the Act. To effect
such a reduction would require the sale of at least 8,968,711 HVB shares and
result in a loss of (euro)164,755,221, based on the difference between the book
value of the shares as of June 30, 2002, and the market value as of September
24, 2002. If a sale at the September 24, 2002 market price is compared against
the 52 week high of (euro)42.55, the loss associated with divestiture would be
(euro)246,818,927. On July 1, 2000, just after the merger of VEBA AG and VIAG AG
that formed E.ON, the HVB interest was held on E.ON's books at a value of
(euro)68.10. Based on this original book value, E.ON's loss associated with a
divestiture at the September 24, 2002 market price would be (euro)475,969,493.
Given current weak market conditions, it is likely that a sale of 1.73% of HVB
would depress the share price even further, reducing both the proceeds received
by E.ON in the sale and the value of its retained HVB interest.
Although E.ON is not expecting the HVB shares to regain their former
market value in their entirety, its is thought that the current market value
does not reflect the long-term value of the shares and that the value of HVB
shares will return to the (euro)30 range over the medium term. Dr. Albrecht
Schmidt, spokesman for the Board of Managing Directors of the HVB Group,
acknowledged in a July 25, 2002 statement that a pronounced economic weakness
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4 HVB has an additional 14,553,600 non-voting shares outstanding that are
not included above. All HVB shares owned directly or indirectly by E.ON are
voting shares.
5
has caused dramatic plunges on the stock markets. HVB would in response seek to
reduce costs and streamline its operations. Dr. Schmidt forecasted "relatively
acceptable results for 2002" and that "real money will not be earned again until
2003."/5 Analyst reports generally support this view and project that HVB shares
may range from approximately (euro)30 to (euro)45 in the medium term.
E.ON requests an extension of the deadline for divesting its affiliate
interest in HVB so that it is not forced to sell at a temporarily depressed
share price to the detriment of its investors. A loss of (euro)164 million or
more also would adversely affect the value of E.ON Energie's reserves invested
for pension and nuclear decommissioning obligations. A longer divestiture period
would provide E.ON the opportunity to sell during stronger periods of the
economic and stock market cycle or, perhaps, to arrange for the private
placement of the shares in a block sale that would not have a market disrupting
effect.
C. The Commission has Never Forced a Fire Sale
The Commission has generally provided a three year period for
registered holding companies to divest nonutility interests./6 E.ON, for
example, committed to divest its interests in an oil company (VEBA Oel AG),
distribution and logistics companies (Stinnes AG and Klockner and Co. AG), an
aluminum company (VAW aluminium AG) and a silicon wafer manufacturer (MEMC
Electronic Materials Inc.) within three years of the date of its completion of
the Powergen acquisition. Many of these divestitures have been completed and
others are currently underway. In particular, the divestitures of VEBA Oel, VAW
aluminium, Klockner and Co. and MEMC have already occurred. The sale of E.ON's
65.4% interest in Stinnes to Deutsche Bahn AG as part of a public takeover bid
was announced on August 12, 2002. The sale of E.ON's 45.4% interest in
Schmalbach Lubeca AG to Ball Corp. was announced on August 30, 2002. These
divestitures demonstrate E.ON's strong motivation to complete its transformation
into a leading global integrated energy and utility company and to follow
through on the divestiture commitments that it has made.
In the case of the HVB divestiture, E.ON did not anticipate the rapid
share price decline that occurred and, consequently, neglected to seek a longer
period for the divestiture in its application for the Powergen acquisition. E.ON
will not increase its HVB interest if the proposed deadline extension is
granted. Its HVB holding will remain passive and E.ON will not exercise a
controlling influence over HVB's business or management./7 Given that E.ON's
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5 Press Conference on Second-Quarter Results, Speech of Dr. Albrecht
Schmidt, July 25, 2002, available at http://www.hvbgroup.com/wwweng/i_see_myself
_as/journalist/news_and_events/speeches.cfm?infoContainer=12&x=10&y=3,
accessed August 23, 2002.
6 See, e.g., E.ON AG, Holding Co. Act Release No. 27539 (June 14, 2002)
(requiring a three year divestiture period for various nonutility businesses and
a five year divestiture period for large chemicals and real estate businesses
based on special circumstances); FirstEnergy Corp., Holding Co. Act Release No.
27459 (October 29, 2001) (requiring the divestiture of a 50% interest in a
partnership formed to hold a shopping center within three years); KeySpan Corp.,
Holding Co. Act Release No. 27287 (December 1, 2000) (requiring the filing of a
post-effective amendment to address the issue of the retention of certain
nonutility subsidiaries and providing a three year divestiture period should
divestiture subsequently be required); Progress Energy, Inc., Holding Co. Act
Release No. 27422 (June 27, 2001) (requiring the divestiture of barge
transportation, railroad services and metal recycling businesses within
approximately two and one-half years).
7 Prof. Dr. Wilhelm Simson, Chairman and Co-CEO of E.ON's Board of
Management is a member of the HVB Supervisory Board. In addition, Kurt F.
Viermetz, is a member of both the E.ON and HVB Supervisory Boards. No E.ON
officer or member of E.ON's Management Board would serve on the HVB Board of
Management.
6
percentage holding in HVB is small, that the retention of this interest for the
extended divestiture period is not likely to have an adverse effect on E.ON, its
investors, consumers or the public interest, and also given the Commission
precedent authorizing similar three year divestiture periods, the proposed
extension of the divestiture deadline is reasonable, appropriate and consistent
with the protected interests under the Act and should be granted.
D. It is Appropriate for E.ON Energie to Hold the HVB Interest Because Such
Holdings are a Necessary and Appropriate Part of Funding Future Pension and
Nuclear Decommissioning Obligations, it follows therefore, that an Extension of
the Divestiture Deadline also would be Appropriate.
The E.ON group's entire holding in HVB is held directly or indirectly
by E.ON Energie, a FUCO. Under Section 33(a)(1) of the Act, except as otherwise
provided in that section, a FUCO is exempt from all of the provisions under the
Act. Section 33(c)(3) further provides that:
Any interest in the business of one or more foreign utility
companies, or one or more companies organized exclusively to
own, directly or indirectly, the securities or other
interest in a foreign utility company, shall for all
purposes of this Act, be considered to be -
(A) Consistent with the operation of a single integrated
public utility system, within the meaning of Section 11; and
(B) Reasonably incidental, or economically necessary or
appropriate, to the operations of an integrated public
utility system, within the meaning of Section 11.
The Commission also has recognized that the definition of a FUCO under Section
33, unlike the definition of exempt wholesale generator in Section 32 of the
Act, does not require this type of exempt entity to be "exclusively" engaged in
the electric or gas utility business./8 Nevertheless, the Commission believes
that there must be some limit to the types of businesses in which FUCOs may
engage because "permitting FUCOs owned by registered holding companies to engage
in any business would subvert limitations imposed on registered holding
companies by the Act in a way that Congress could not have intended when it
passed Section 33."/9 Accordingly, the Commission requires that the activities
of a FUCO have an "appropriate relationship" to the electric and gas utility
business.10
Investing in the equity securities of companies such as HVB is an
appropriate part
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8 Acquisition Order at 24-25.
9 Id. at 25.
10 Id. (noting that the "appropriate relationship" test is not as strict as
the test under Section 11 to determine whether registered holding companies may
engage in nonutility businesses).
7
of the business of a German utility company. E.ON Energie must maintain reserves
against long term obligations to pay for retiree pensions and the
decommissioning of its nuclear facilities. Accepted portfolio management
practice would require the portfolio manager to invest such reserves in a
diversified portfolio of investments including cash, readily marketable
securities, government and corporate debt securities, and equity securities.
Equity holdings also should be diversified among several high quality companies.
Stock of a bank such as HVB, with substantial assets and investment grade
credit, typically would be considered an appropriate portfolio investment. The
practice in the U.S. is not materially different in this regard. The U.S.
Nuclear Regulatory Commission ("NRC") does not prohibit external decommissioning
trusts from being invested in common stocks. Instead, NRC guidance indicates
that speculative issues (e.g., stocks of companies with limited operating
history or that have low "safety" rankings from ratings agencies) should be
avoided and that a licensee's own stock, as well as those of other power reactor
licensees, are inappropriate./11
As of December 31, 2001, the value of E.ON Energie's portfolio
investments was $8.1 billion, and its combined actuarially determined pension
and nuclear decommissioning obligations were $13.4 billion. E.ON Energie,
therefore, must continue to fund its reserves with additional investments and
carefully manage its existing portfolio. Preserving the value of E.ON Energie's
HVB interest by permitting E.ON Energie to trim its HVB investment over a longer
period is "appropriate" and consistent with the Commission's interpretation of
the Section 33 limits on nonutility investments by FUCOs.
Section 9(c)(3) of the Act permits a registered holding company and
its subsidiaries to acquire "commercial paper and other securities, within such
limitations, as the Commission may by rules and regulations or order prescribe
as appropriate in the ordinary course of business of a registered holding
company or subsidiary company thereof and as not detrimental to the public
interest or the interest of investors or consumers." As applied to the
management of portfolio investments by a FUCO, the broad scope of the exemption
provided to FUCOs under Section 33 of the Act should be interpreted by the
Commission in the light of Section 9(c)(3). Accordingly, because in the course
of ordinary business E.ON Energie must maintain reserves for pension and nuclear
decommissioning obligations, the maintenance of a portfolio of assets to fund
such obligations in a manner consistent with sound portfolio management
practices should be exempt under Section 33 of the Act. Since E.ON Energie may
acquire and maintain an investment in HVB relying on its exemption as a FUCO, it
follows that the Commission should not oppose E.ON's request to extend until
December 31, 2005, the deadline for E.ON to divest the HVB affiliate interest to
below 5%. A deadline extension is reasonable, appropriate and not detrimental to
the public interest or the interest of investors or consumers. For all these
reasons, therefore, E.ON respectfully requests that the Commission grant the
relief requested herein.
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses incurred or to be incurred in
connection with this Application are estimated at approximately $15,000.
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11 See the Nuclear Regulatory Commission's "Standard Review Plan on Power
Reactor Licensee Financial Qualifications and Decommissioning Funding Assurance"
(NUREG-SR1577r1) and Regulatory Guide 1.159
8
Item 3. Applicable Statutory Provisions
Sections 9(c)(3) and 33 of the Act apply to Applicant's request for an
extension of time to divest its interest in HVB.
Section 9(c)(3) excludes from the general prohibition against the
unauthorized acquisition of securities in Section 9(a), the acquisition of
securities in the ordinary course of business within limits prescribed by
Commission rule, regulation or order and consistent with the protected interests
under the Act.
As noted in Item 1 above, the maintenance of a portfolio of investment
securities, including the HVB interest, by E.ON Energie is in the ordinary
course of its business and appropriate for a FUCO under Section 33 of the Act.
The extension of the divestiture deadline also is not detrimental to the
interest of investors, consumers or the public interest. Indeed, by delaying the
sale until the HVB share price has recovered, investors may be benefited by
avoiding a loss. Consequently, the Commission should authorize the proposed
deadline extension.
Item 4. Regulatory Approvals
No state commission and no federal commission, other than this
Commission, has jurisdiction over the proposed transaction.
Item 5. Procedure
Applicants respectfully request that the Commission proceed forthwith
to issue a notice with regard to the transaction proposed herein and that it
issue an order granting the application as soon after the conclusion of the
notice period as is practicable.
Applicants waive a recommended decision by a hearing or other
responsible officer of the Commission for approval of the application and
consent to the Division of Investment Management's assistance in the preparation
of the Commission's decision. There should not be a 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
A. Exhibits
A Proposed Form of Notice.
B Opinion of Counsel (to be filed by amendment).
B. Financial Statements
Not Applicable.
9
Item 7. Information as to Environmental Effects
The proposed transaction neither involves a "major federal action" nor
"significantly affects the quality of the human environment" as those terms are
used in Section 102(2)(C) of the National Environmental Policy Act, 42 U.S.C.
Sec. 4321 et seq. No federal agency is preparing an environmental impact
statement with respect to this matter.
SIGNATURES
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the Applicant has duly caused this Application to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: September 25, 2002 E.ON AG
By: /s/ Hans Gisbert Ulmke
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Name: Hans Gisbert Ulmke
Title: Executive Vice President
By: /s/ Guntram Wuerzberg
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Name: Dr. Guntram Wuerzberg
Title: Vice President General Legal Affairs
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Exhibit Index
Exhibit
A Proposed Form of Notice.
11