Mail Stop 3561
July 29, 2005
B. Keith Trent, Esq.
Group Vice President, General Counsel, and Secretary
Duke Energy Corporation
526 South Church Street
Charlotte, NC 28203
Re: Duke Energy Holding Corp.
Registration Statement on Form S-4
Filed July 1, 2005
File No. 333-126318
Dear Mr. Trent:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or any other aspect
of
our review. Feel free to call us at the telephone numbers listed
at
the end of this letter.
General
1. We note that you have filed written communications under Rule
425
after you filed the registration statement. Subsequent to the
filing
of the registration statement, however, Rule 425 filings should be
made under the Securities Act file number of the Form S-4. See
Regulation M-A telephone interpretation B.12 available at
www.sec.gov
in the July 2000 Supplement to the Division of Corporation
Finance`s
Manual of Publicly Available Telephone Interpretations. Please
make
the correction in any future filings.
Cover Page
2. We remind you that the letter to the shareholders also serves
as
the cover page of the prospectus and therefore is subject to the
plain English rules. Accordingly, in order to increase the
readability and highlight the key terms of the offering, please
remove information that is not required to be included on the
cover
page. In particular, we suggest you delete the second full
paragraph. See Item 501 to Regulation S-K.
Summary, page 1
3. Please limit your summary disclosure to brief discussions of
only
the most material aspects of the proposed acquisition. Some of
your
disclosure appears to contain excessive detail, which is better
suited for the body of the prospectus. For example, you should
provide only a brief description of the mergers and the agreement.
See Item 3(c) to Form S-4. Please also consider whether other
subsections or elements of a discussion within a subsection are
necessary for the summary. Appropriate revisions should enable
you
to significantly reduce the length of the summary. Please revise
accordingly.
Risk Factors, page 24
4. Some of your risk factors appear overly lengthy and should be
revised to include only enough disclosure to clearly describe the
material risk and to put the risk into context. In this regard,
detailed information should be moved to the body of the
prospectus.
For example, we refer you to the first risk factor on page 32, the
risk factor on page 35, the second risk factor on page 36, the
risk
factor on page 38 and the last risk factor on page 39. Please
note
that these are only examples. Please revise accordingly
throughout
this section.
5. In general, descriptions of risks that describe circumstances
that
could apply equally to other businesses that are similarly
situated
are generic risks that should not be included in your risk factor
section. Please either eliminate these generic risks, or revise
them
to state specific material risks to you or to the investors in the
offering. For example, we note that the following risk factors
appear to contain generic disclosures:
* The long-term financial condition..., page 29;
* We rely on access to short-term money markets..., page 30;
* We may be required to record impairments..., page 31;
* We may make investments that do not achieve..., page 33;
* International concern with perceived global..., page 41 and
* Increased environmental regulation and liabilities..., page 41.
Please note these are only examples. Please review your entire
risk
factor section and revise as necessary.
The mergers are subject to approval..., page 25
6. This risk factor appears to discuss two separate risks, one
relating to the uncertainty of obtaining our approval of the
merger
under the Public Utility Holding Company Act and the other
relating
to the impact of Public Utility Holding Company Act on Duke Energy
Holdings. Please revise, here and throughout the risk factor
section, as each risk factor should discuss only one distinct and
material risk to you and investors.
We are subject to asbestos litigation, page 36
7. We note your disclosure in the second paragraph that you do not
anticipate that any changes to your current estimates will have
any
material adverse effect on your consolidated results of
operations,
cash flows or financial position. If you do not believe that a
risk
factor presents a material risk to you or to investors, you should
remove the risk factor. We also refer you to the last paragraph
of
the risk factor beginning at the bottom of page 36. In that
paragraph, you describe a risk, but conclude that you believe that
the Energy Markets Tariff "[w]ill not have a material impact on
our
results of operations or financial position." Please revise
accordingly throughout this section, as applicable.
The Duke Energy Special Meeting, page 44
Duke Energy Record Date; Shares Entitled to Vote, page 44
8. Please revise to clarify how Duke Energy treasury stock will be
treated for voting purposes at the special meeting.
The Mergers, Page 54
Background of the Mergers, page 54
9. Please note that if a report, opinion or appraisal materially
relating to the transaction has been received from an outside
party,
and that report, opinion or appraisal is referred to in the
prospectus, you must furnish the same information that would be
required by Item 9(b)(1) though (6) of Schedule 13E-3. See Item
4(b)
to Form S-4. In this regard, it appears that the analysis
provided
by the third-party synergy consultant engaged by both parties is
subject to disclosure per Item 4(b) to Form S-4. Please revise or
advise.
10. We note your disclosure in the fifth full paragraph on page 56
that your management presented a preliminary analysis of potential
business combinations with several potential partners to your
board
of directors. We further note your disclosure that your board of
directors reviewed and discussed a preliminary indication of
interest
regarding a potential business combination that you received from
a
third party and that the board determined not to pursue a
combination
with that third party. Please fully discuss each of the other
alternatives you considered, particularly the potential business
combination with the referenced third party, and explain why your
board of directors concluded not to pursue a business
combination(s)
with them. Further, please discuss why your board of directors
chose
to pursue a business combination with Cinergy over the other
alternatives.
Duke Energy`s Reasons for the Mergers..., page 64
11. We note your disclosure of the factors considered by Duke
Energy`s board of directors in recommending the mergers. Please
revise to expand the bulleted factors to discuss in more specific
detail how each factor impacted your decision to recommend the
transaction. As examples, please consider the following:
* Revise to more specifically discuss how you will achieve in
terms
of cost savings and synergies after the mergers. In this regard,
we
note the multiple analyst meeting presentation slideshow and
transcripts filed under cover of Form 425.
* Revise to more specifically address the possible impact upon the
Duke Energy North America operation. Again, we note more
extensive
discussion in your Form 425 filings.
* Revise here to more specifically address the motives and
advantages
highlighted in the Form 425 filing on July 1, 2005. In
particular,
we note the filing cites five "motives" for the merger, including
the
purchase of assets below their replacement costs, as a reason for
the
merger. The filing and other Form 425 filings also emphasis the
possible gas and electric operations standalone strength as a
reason
for the merger.
The above are only examples. Please revise accordingly. Further,
please also expand your disclosure under "Cinergy`s Reasons for
the
Mergers..." on page 86, as applicable.
Fairness Opinions Presented to the Duke Energy..., page 68
12. Provide us with any analyses, reports, presentations, or
similar
materials prepared for or by the financial advisors in connection
with rendering each fairness opinion.
13. Please revise to more clearly discuss why Duke Energy retained
two financial advisors.
14. As currently drafted, the discussion of each financial
advisor`s
opinion does not provide a meaningful summary of each of the
analyses
performed. Please revise each of the summaries so that they are
written in clear, understandable language. Avoid unnecessary
financial terms that make the disclosure very difficult to
understand. Rather, explain in clear, concise, and understandable
language what the financial advisor did and how the analysis and
conclusion are relevant to stockholders and specifically to the
consideration offered. As part of the revisions, please describe
the
purpose of each analysis and why particular measures were chosen
for
analysis.
Opinion of Cinergy`s Financial Adviser, page 91
15. According to the analyst meeting transcript filed under cover
of
Form 425 on May 9, 2005 and your disclosure beginning at the
bottom
of page 145, Merrill Lynch appears to be assisting Duke Energy in
its
share repurchasing program. Please tell us what consideration you
have given to providing Item 1015(b)(4) of Regulation M-A
disclosure
here with regard to that apparent material relationship between
Duke
Energy and Merrill Lynch.
The Merger Agreement, page 128
Timing of Closing, page 129
16. We note your disclosure stating that the transaction is
subject
to the satisfaction or waiver of the conditions. We also note
your
disclosure under "Amendment; Extension and Waiver" on page 138,
where
you disclosed that a party may "[w]aive compliance by the other
parties with any of the agreements or conditions contained in the
merger agreement." Please be aware that we generally believe that
re-solicitation is required when companies waive material
conditions
to a transaction.
Unaudited Pro Forma Condensed Combined Financial Information, page
148
17. You indicate the adjustments reflected in the pro forma
financial
statements are preliminary and subject to revision pending
additional
determinations. Please note that any material differences between
the adjustments reflected in your final pro forma financial
statements included in the final solicitation document and those
made
at closing of the acquisition should be identified and discussed
in
the historical financial statements in which the purchase is first
reflected. This may be accomplished in the note in which you
provide
the paragraph 51.e of SFAS 141 disclosure. Please ensure you
identify differences due to external factors such as interest
rates
or changes in the position of commodity forward curves versus
those
due to factors largely within your control, such as changes in
estimates, appraisals, discount rates or identification of
additional
contingencies or assets. Please confirm your concurrence with
this
approach and explain to us how you plan to communicate changes in
your allocation of purchase price at closing.
General
18. Please provide a listing and individual analysis of any
potentially material pre-acquisition contingencies, such as
lawsuits,
environmental reserves, cost of removal, or any uncertainties
about
the tax carryover basis of Cinergy`s assets and liabilities. Tell
us
whether and why Cinergy`s synthetic fuel credits do not constitute
potential pre-acquisition contingencies. In this regard, provide
us
details of any Internal Revenue Service action initiated to date
on
Section 29 credits. To the extent any potential pre-acquisition
contingencies exist, they should be identified and discussed in
the
pro forma financial statements using the guidance contained in SAB
Topic 2.A:7. Lastly, provide us an analysis of the potential
impact
of the proposed Interpretation of SFAS no. 109 with respect to
uncertain tax positions. Explain to us how you anticipate it will
affect your purchase price allocation and the extent to which tax
cushions currently exist and are adequate.
19. Tell us why you have not reflected the probable
deconsolidation
of Duke Energy Field Services in the pro forma income statement
given
its material impact on revenues and, we assume, expenses. We
further
assume such deconsolidation will materially change the composition
of
the balance sheet including the proceeds from disposal. Please
advise whether the disposition will necessitate the filing of a
Form
8-K and whether the equity investment will be significant
necessitating the filing of Rule 3-09 of Regulation S-X financial
statements.
20. You indicate that Duke Energy anticipates the merger
transaction
to generate approximately $400 million of cost savings by the
third
year of the transaction close. You also anticipate some form of
sharing with customers of the savings. Please explain what you
believe will be the approximate sharing percentage between
customers
and shareholders. Please explain the specific mechanism by which
savings would be shared. In this regard, please tell us whether
and
how the costs of effecting the merger, including any premium, will
be
matched against the anticipated savings for financial reporting
purposes. Tell us whether you anticipate a new rate case to
reflect the revised cost structure. Finally tell us whether there
is
any possibility that goodwill will be included in rates.
21. Please tell us what you mean by the statement "However, these
estimates of fair value could change following further analysis of
this matter." Please also tell us how the rate structure of
Cinergy`s utilities will affect the estimated fair value of the
assets and liabilities of these utility operations. Please be
detailed in your explanation and give hypothetical, reasonably
possible illustrations of what you are conveying in such
statements.
You may want to clarify or reference to where the rate
implications
are discussed.
22. Please advise whether the statements referred to in the prior
comment are intended to convey your intention that no allocation
will
be made to regulated tangible and intangible assets that do not
have
a pre-acquisition carrying value on the books of Cinergy, even if
newly identified. Specifically, for assets and liabilities
related
to regulated operations, will there be any process to identify and
allocate value to definite and indefinite-lived intangibles that
were
not being included in the rate setting process due to lack of cost
basis but are physically utilized in providing regulated service?
If
not, please explain in detail.
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet,
page 152
Note (b) Goodwill, page 155
23. Provide to us the calculation of the value of the Cinergy
stock
compensation assumed of $138 million. Show us the detailed
computation by equity instrument using any information on options
and
restricted stock contained in Cinergy`s December 31, 2004
financial
statements. Tell us the method you are using to value the stock
option awards and describe the model. Tell us how you treat
vested
versus unvested equity awards. Additionally, please advise if this
amount contains any performance awards, or other equity
compensation
arrangements which could be settled in cash.
24. Please describe in detail your process for identifying all
acquired intangible assets including those related to your
regulated
operations; see above comment. Other intangibles to be considered
include, for example, licensing agreements, procurement contracts,
and real estate easements. These examples are not exhaustive.
Given
the substantial amount of goodwill recorded on this transaction,
we
believe it is likely that there may be additional intangibles that
may have been omitted in allocating fair value. In this regard,
please tell us in detail the reasons you paid a substantial
premium
relative to the allocated net fair values to acquire assets with a
limited return. While we understand that synergies resulting from
the combination, as well as cost savings from certain
eliminations;
such as corporate overhead, may justify a premium, your existing
purchase price allocation of approximately 47% of goodwill appears
high given the target is a capital intensive business. Please
advise
in detail.
25. Please tell us how you intend to allocate the goodwill created
on
this acquisition to your reporting units. Please be detailed in
describing to us how you define your reporting units. If goodwill
is
anticipated to be allocated in a manner that does not follow the
related assets, please show us the method you anticipate using to
allocate goodwill between reporting units.
Note (c) Power Generating Assets, page 155
26. We note your preliminary valuation analysis of Cinergy`s non-
regulated generating facilities is between $1.7 billion and $2.5
billion, which is a wide range. Please note you should include a
sensitivity analysis that allows the user to determine the effect
on
net income of material changes in value allocated to generating
facilities. See Rule 11-02(b)(8) of Regulation S-X. Finally,
tell
us whether you plan on obtaining an appraisal for such facilities.
Please note that if an appraisal that employs comparable sales as
a
valuation basis is used, more weight should be given to the most
recent facilities sales. We may have further comment upon review
of
the final values used upon consummation.
Note (d) Emission Allowances, page 156
27. Explain to us why a disproportionate amount of emission
allowances were classified as non-current assets as opposed to
inventory. In this regard, explain to us your anticipated usage
with
respect to these allowances. We understand that emission
allowances
have finite lives, explain to us how you recognize expense related
to
such assets. Tell us why you classify the allowances as inventory
and advise as to the account name such non-current assets are
classified in. Tell us whether emission allowances are plant
specific or whether they can be used interchangeably among all
coal
plants. Also, please explain to us if any emission allowances are
identified as held for sale well in advance of expiration or
whether
such assets are held closer to potential expiration prior to being
held for sale. Given the intangible nature of such assets, we
believe the disclosure requirements set forth in paragraph 45.a of
SFAS 142 should be considered. Finally, explain to us how you
value
the emission credits. Please tell us whether such allowances are
SO2
or NOX or what combination and the principal reason(s) almost a
billion dollars in value was allocated to such assets.
Note (e) Investments, page 156
28. For the five largest equity investments, provide us a summary
of
the carrying value, the adjustment to reflect fair value and how
you
calculated such adjustment. Of the five, identify those in which
you
are awaiting appraisals. For the largest basis reducing fair
value
adjustment, if not included in the preceding five, show us how you
determined the step-down adjustment. If the adjustment is in
excess
of 10% of the predecessor carrying amount, tell us how Cinergy
evaluates other-than-temporary declines under paragraph 19.h of
APBO
no. 18. On this point, please advise whether any of the cash flow
analysis and appraisals will result in an other-than-temporary
write-
down of any of Cinergy`s equity investees. If so, please provide
the
name and details.
Note (i) Long term debt and notes payable, page 156
29. Please explain why you have not made any fair value
adjustments
related to Cinergy`s regulated debt. In this regard, we would
anticipate seeing an adjustment to the liability and balancing
adjustment to a regulatory asset or liability depending upon fair
value of the debt. Please advise.
Note (j) Pension and Postretirement Benefit Obligations, page 156
30. Please explain to us how you computed the adjustment to the
pension and postretirement obligations. To the extent you utilize
or
expect to utilize a current actuarial valuation, please tell us
the
date of such valuation, all the principle assumptions and whether
you
anticipate updating the valuation upon closing. Please explain to
us
what consideration you have given to anticipated settlements due
to
early retirement options in measuring the projected benefit
obligation. To the extent such settlements relate to your
severance
plans and are included in the purchase allocation, explain how
they
will meet the requirements of EITF 95-3. Also, please explain you
why believe $228 million of the adjustment is recoverable in
future
rates and show us how such amount will be recovered by using a
hypothetical illustration of the accounting adjustments that will
be
made as of the end of the first year in which the merger is
consummated.
Note (k) Power and Fuel Contracts, page 157
31. Please describe in detail your assumptions used in determining
the fair market value of Cinergy`s fuel and power sale contracts.
Specifically tell us the assumptions. Explain to us how you
obtain
forward market curves for energy prices including whether they are
internally generated or based on outside sources. If outside,
identify the source. Tell us whether the forward curves are used
for
other business purposes; such as entering into contracts for
purchase
and sale of the specified commodity in a given market. Tell us
whether the same forward curve is used for sales versus purchases
for
a given commodity at a given delivery point. If not, please
explain
why. Also, please explain why no adjustments have been made to
Cinergy`s regulated power supply and fuel contracts.
Comparison of Shareholder Rights, page 160
32. We note that in connection with the merger, the rights of
former
Duke Energy shareholder will be governed by a new certificate of
incorporation and by-laws. Among these, as set forth on pages
168-
169, we note that supermajority voting provisions relating to the
amendment of the articles of incorporation, removal of directors,
etc., will no longer be relevant for Duke Energy shareholders. It
does not appear that you intend to separately present these
changes
as proposals for shareholders to vote upon. Please tell us why
Rule
14a-4(a)(3) of the proxy rules does not require you to "unbundle"
these matters. In this regard, please see the Fifth Supplement to
the Division of Corporation Finance`s Manual of Publicly Available
Telephone Interpretations (September 2004).
Agreement and Plan of Merger, page A-1
33. Pursuant to Item 601(b)(2) of Regulation S-K, please file a
list
briefly identifying the contents of all omitted schedules or
similar
supplements. In addition, please file an agreement to furnish the
staff with a copy of any omitted schedule upon request. The
agreement to furnish the staff with copies of omitted schedules
may
be included in the exhibit index to the registration statement.
Signatures
34. Please have your principal executive officer, controller or
principal accounting officer and at least a majority of the board
of
directors sign the registration statement in these capacities.
Exhibits
35. Please file all required exhibits, such as the legality and
tax
opinions, in a timely manner so that we may have time to review
them
before you request effectiveness of your registration statement.
*****
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy
of the disclosure in the filing to be certain that the filing
includes all information required under the Securities Act of 1933
and that they have provided all information investors require for
an
informed investment decision. Since the company and its
management
are in possession of all facts relating to a company`s disclosure,
they are responsible for the accuracy and adequacy of the
disclosures
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
? should the Commission or the staff, acting pursuant to
delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
? the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
? the company may not assert staff comments and the declaration
of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Robert Babula, Staff Accountant, at (202) 551-3339
or
Jim Allegretto, Senior Assistant Chief Accountant, at (202) 551-
3849
if you have questions regarding comments on the financial
statements
and related matters. Please contact Kurt Murao, Attorney Adviser,
at
(202) 551-3338, David Mittelman, Branch Chief, at (202) 551-3214
or
me at (202) 551-3720 with any other questions.
Sincerely,
H. Christopher Owings
Assistant Director
cc: P. Gifford Carter, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Fax: (917) 777-3439
Jeremy D. London, Esq.
Skadden, Arps, Slate, Meagher & Flom LLP
Fax: (202) 661-8299
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B. Keith Trent, Esq.
Duke Energy Holding Corp.
July 29, 2005
Page 12