File No. 70-
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________________
APPLICATION OR DECLARATION
ON
FORM U-1
__________________________________
APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of company or companies filing this statement
and addresses of principal executive offices)
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of top registered holding company
parent of each applicant or declarant)
* * *
G. P. Maloney, Executive Vice President
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
John F. Di Lorenzo, Jr., Associate General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
Jeffrey D. Cross, General Counsel
AEP RESOURCES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTION
American Electric Power Company, Inc. ("American"), a holding
company registered under the Public Utility Holding Company Act of
1935 ("1935 Act"), and AEP Resources, Inc. ("Resources"), a wholly-
owned nonutility subsidiary of American, request that the
Commission exempt American from the requirements of Rule 53(a)(1)
such that American may use the net proceeds of currently and
subsequently authorized financings and issue Guarantees (as defined
herein) in an aggregate amount at any one time outstanding which,
when added to American's direct and indirect aggregate investment
in all Exempt Projects (as defined herein), would not at any time
exceed American's consolidated retained earnings. American and all
of its subsidiaries are collectively referred to herein as the
"American System" and American and Resources are sometimes
collectively referred to herein as the "Applicants".FN1
FN1 Appalachian Power Company ("APCo"), Columbus Southern
Power Company ("CSPCo"), Kentucky Power Company ("KPCo"),
Kingsport Power Company ("KgpCo"), Indiana Michigan Power
Company ("I&M"), Ohio Power Company ("OPCo") and Wheeling
Power Company ("WPCo"), electric utility subsidiaries of
American (sometimes collectively referred to herein as
"Operating Companies").
A. History and Nature of Request
Since 1989, American, directly or indirectly through
Resources, has engaged in preliminary development activities
related to qualifying cogeneration facilities and qualifying small
power production facilities (collectively, "QFs"), as defined under
the Public Utility Regulatory Policies Act of 1978, as amended, and
the rules thereunder. Since 1994, American, directly or indirectly
through Resources, has engaged in preliminary development
activities related to exempt wholesale generators ("EWGs"), as
defined in Section 32(a) of the 1935 Act ("EWGs"), foreign utility
companies ("FUCOs"), as defined in Section 33(a) of the 1935 Act,
and other independent power projects which constitute a part of
American's integrated electric utility system within the meaning of
Section 2(a)(29)(A) of the 1935 Act.FN2
FN2 EWGs and FUCOs are sometimes referred to herein
collectively as "Exempt Projects").
American is presently authorized under the terms of orders and
supplemental orders issued under File No. 70-7622 and File No. 70-
8429 (collectively, the "Financing Orders") to finance the above
operations of American and Resources and their respective
subsidiaries by issuing and selling debt and equity securities and
by issuing guarantees of the obligations of certain subsidiaries.
American's and Resources' authorizations under the Financing Orders
may be summarized as follows:
(1) File No. 70-7622
Pursuant to an order of the Commission dated June 6, 1989
(HCAR No. 24898) and supplemental orders dated October 8, 1993
(HCAR No. 25905) and February 4, 1994 (HCAR No. 25984) with respect
to File No. 70-7622, (i) American obtained authorization to invest
in Resources up to $7.5 million per year through December 31, 1996
for preliminary development activities related to QFs, EWGs, FUCOs
and other power projects and to issue guarantees and assume
liabilities of Resources in connection with such development
activities, and (ii) Resources obtained authorization to engage in
such preliminary development activities, including the
investigation of sites, preliminary engineering and licensing
activities, acquiring options and rights, contract drafting and
negotiation, preparation of proposals and other necessary
activities to identify and analyze feasible investment
opportunities and to initiate commercialization of a project and to
obtain debt financing from unaffiliated third parties. Pursuant to
these Orders, American also obtained authorization to make
investments in Resources by acquisition of Resources' common stock,
capital contributions, open account advances and/or subordinated
loans, and to guarantee any debt financing of Resources.
(2) File No. 70-8429
Pursuant to an order of the Commission dated December 22,
1994 (HCAR No. 26200), American and Resources obtained
authorization (i) to issue and sell from time to time up to $300
million in debt and/or equity securities through June 30, 1997 to
invest in Exempt Projects; (ii) to acquire the securities of one or
more companies ("Project Parents") that will directly or indirectly
own and hold the securities of one or more Exempt Projects; (iii)
for American to guarantee the debt securities and other commitments
of Resources; (iv) for American and Resources to guarantee the
securities of one or more Project Parents or Exempt Projects; and
(v) for Project Parents to guarantee the securities of their Exempt
Projects, in an aggregate amount which together with the securities
issued will not exceed $300 million.
Pursuant to an order of the Commission dated May 10, 1996
(HCAR No. 26516), American and Resources obtained authorization,
among other things, (i) to invest in Exempt Projects in an amount
up to 50% of American's consolidated retained earnings as
determined in accordance with Rule 53(a)(1)(ii) under the 1935 Act
for such investments for which there is recourse to American; (ii)
to extend through December 31, 2000 the authority granted in the
December 22, 1994 Order authorizing (a) the issue and sale of debt
and equity securities, (b) the acquisition by Resources and the
Project Parents of securities of new Project Parents, and (c)
American, Resources and the Project Parents to guarantee securities
("Guarantees"); and (iii) for American to issue and sell up to ten
million additional shares of its authorized but unissued common
stock or treasury shares.
B. Exempt Projects Presently Owned or Under Investigation by
American
American's consolidated retained earnings (as defined under
Rule 53(a) of the 1935 Act) as of December 31, 1996 were
approximately $1.508 billion and, accordingly, its Investment Limit
was about $754 million. Although American had aggregate investment
of approximately $1 million as of December 31, 1996, in February
1997, it committed approximately $360 million to its investment in
Yorkshire Electricity Group plc. In addition, it has $110 million
designated for another Exempt Project, of which approximately $11.5
million was invested as of March 13, 1997. American is considering
further investment opportunities, some of which would require an
"investment" in excess of the approximately $284 million of
undesignated Investment Limit.
(1) Yorkshire Electricity Group plc
On February 24, 1997 American and Public Service Company
of Colorado ("PSCo"), indirectly through Yorkshire Holdings plc
("Yorkshire Holdings"), announced their intention to commence an
offer in the United Kingdom to acquire all of the outstanding share
capital of Yorkshire Electricity Group plc ("Yorkshire
Electricity") for an aggregate purchase price of approximately $2.4
billion. Yorkshire Electricity, which is a FUCO, serves
approximately 2.1 million customers in England. Yorkshire
Electricity's distribution territory covers approximately 4,180
square miles of northeast England. It was one of the 12 regional
electricity companies created in 1990 by the British government as
part of the privatization of the electric utility industry in
England and Wales. Yorkshire Electricity is primarily a
distribution and supply company, purchasing most of its electricity
requirements from third-party generators. After giving effect to
the consummation of the purchase of all of the outstanding share
capital of Yorkshire Electricity, and the funding of the purchase
therefor, American estimates that its "aggregate investment" (as
defined under Rule 53 (a) of the Act) in Yorkshire Electricity will
be approximately $360 million. The purchase price for the
outstanding shares of Yorkshire Electricity will be financed by
capital contributions or loans to be made by Yorkshire Holdings'
sole shareholder, Yorkshire Power Group Limited, a company
organized under the laws of the United Kingdom, whose shareholders
are Resources and New Century International, Inc. Yorkshire Power
Group Limited arranged for a $1.7 billion credit facility to
finance amounts not provided by its shareholders. The credit
facility is neither guaranteed by, nor otherwise provides for
recourse to, American, Resources or any of American's operating
utility subsidiaries.
American anticipates that Yorkshire Electricity will make
an immediate contribution to American's earnings per share. In
addition to providing American with a relatively stable source of
income in the future, the acquisition of Yorkshire Electricity will
enable the grouping of all three companies to:
* add to the established achievements of Yorkshire
Electricity's management team. Yorkshire Holdings
believes that there are further opportunities in the
United Kingdom electricity market which it can assist
Yorkshire Electricity in pursuing;
* promote further competition in each of the companies'
markets to the benefit of customers;
* share effective best practice initiatives between the
three companies across the areas of customer service,
cost-to-customer, operational and financial disciplines;
* add proven expertise from American and PSCo in trading,
generation, transmission and gas marketing; and
* bring the financial resources and technical marketing
awareness of American and PSCo to bear on Yorkshire
Electricity's approach to the deregulation of the United
Kingdom supply market post-1998.
(2) Nanyang General Light Electric Co., Ltd.
On September 22, 1996, AEP Pushan Power LDC ("AEPP"), a
special purpose subsidiary of Resources (formed as a Project Parent
under the laws of the Cayman Islands), signed a joint venture
agreement together with two local Chinese partners in connection
with the formation of the Nanyang General Light Electric Co. Ltd.
("Nanyang"), a cooperative joint venture company formed under the
laws of the People's Republic of China.
Nanyang was established to own, construct, finance and
operate a coal-fired electric generating station in Nanyang, Henan
Province China, with two units of 125 megawatts each ("Nanyang
Project"). On November 4, 1996, Nanyang was granted its business
license and its initial Board of Directors meeting was held on
November 13-14, 1996. AEPP owns 70% of Nanyang, and special
purpose financing companies established by the Henan Electric Power
Company ("Henan Electric") and the City of Nanyang, respectively,
each own 15%. Under the joint venture agreement, AEPP's total
commitment in U.S. dollars will not exceed $110 million. It is
anticipated that this commitment will take the form of
approximately $40 million as a direct equity investment, and
approximately $70 million in the form of a shareholder loan
provided from Resources. Henan Electric will construct the Nanyang
Project under an engineering, construction and procurement
contract, will operate the Nanyang Project under an operating and
maintenance contract and will purchase the electric output from the
Nanyang Project under a 20 year power purchase contract. These
contracts were executed between Nanyang and Henan Electric on
November 14, 1996.
The remaining conditions to the execution of the
shareholder loan agreement contained in the joint venture contract
were satisfied on February 28, 1997 and a notice to proceed was
given to Henan Electric to commence construction on March 10, 1997.
Resources had invested approximately $11.5 million as of March 13,
1997. Unit 1 of the Nanyang Project is expected to be operational
by June 1999 with Unit 2 following 5 months later.
(3) Additional Investments in Exempt Projects
Although American is considering additional investments
in Exempt Projects, its ability to invest in additional projects is
restricted by the approximately $284 million that it has available.
Several of the opportunities would by themselves require an
investment in excess of the remaining Investment Limit.
For example, several United States utilities have
announced plans to sell significant amounts of generation. New
England Electric System has agreed to sell or spin off more than
4,000 megawatts of fossil fuel and hydroelectric generation valued
at about $1.2 billion. Southern California Edison also plans to
auction 10,000 megawatts of oil and gas fired generation beginning
in the summer of 1997.
C. Risk Profile of American's Investments in Exempt Projects
Investments in independent power production facilities and
foreign utility systems involve a variety of risks that are not
necessarily present in the traditional, regulated, electric utility
industry. The Applicants have established comprehensive procedures
to identify and address (i.e., limit and/or mitigate) these risks.
(1) The Project Review Process
Every potential project investment opportunity developed
by Resources is subjected to a series of formal reviews to ensure
the project's soundness. The process begins with a consideration
of Resources' strategic plans which survey independent power
opportunities domestically and throughout the world and provide a
variety of tools to assist in the evaluation of risks. These
plans, which are updated periodically, lead to the identification
of projects and countries where Resources intends to pursue project
development efforts. The plans also lead to the development of
budgeted levels of expenditure on foreign development activities.
This careful planning and budgeting process helps to mitigate an
important risk of the independent power business: the expenditure
of development funds without a realistic expectation of success in
terms of both making investments in projects and in obtaining
appropriate levels of non-recourse financing on commercially
reasonable terms.
Before American makes any investment in a foreign
country, an analysis of that opportunity, including the specific
country risk, is presented first to the executive management group
at Resources, then to the board of directors of Resources, the
Finance Committee of American's board of directors, and finally to
American's board of directors. The analysis includes a review of
the political and economic stability of the particular country, the
government's commitment to private power, the legal and regulatory
framework for private investment in electricity facilities, the
local business support for long-term investment of private capital,
the economic viability of the project, the technology and fuel
supply, the environmental impact, the currency conversion and
repatriation and the potential for future partial sales of the
investment interest to other investors. The board of directors of
both American and Resources must approve investments in any foreign
country.
Once development of a project is undertaken, milestones
are established to ensure that continuing expenditures on
development are producing acceptable results. In addition, project
teams are required to identify the major technical, financial,
commercial and legal risks associated with their particular project
and whether and how those risks have been mitigated. The members
of the project team are responsible for the due diligence
investigation of those risks that have been identified and must
present their findings to an officer of Resources with functional
oversight over the relevant risk factor subject matter.
Finally, every project is subjected to increasing levels
of management review. Depending on the amount of American's
projected financial exposure to a particular project, the proposed
investment must be approved successively by the entire executive
management group of Resources, the board of directors of Resources,
the Finance Committee of American's board of directors, and the
board of directors of American.
Significantly, the final project review process, in most
cases, is to a large extent replicated by the lenders who agree to
provide construction or permanent debt financing on a non-recourse
basis, since repayment of that debt will depend solely upon the
success of the project. Project debt maturities are frequently
long-term (e.g., 15 or more years), meaning that the lenders'
exposure to the risks of a project extends for many years after
closing or completion of construction. Project debt documents
customarily require the establishment of plant overhaul or utility
system maintenance, debt service and other funded reserves, all of
which are designed to preserve the asset and protect the financial
performance of the project against interruptions in revenues and
other contingencies.
(2) Risk Mitigation of Independent Power Projects and
Foreign Utility Investments
Resources carefully evaluates the potential risks of an
independent power project or foreign utility system before
American's funds are committed.
(a) Operating risks. Resources has focused its
project development efforts on projects using fuel technologies
with which the American System has existing competencies in
generation, transmission and distribution. Due diligence of
operating assumptions is carried out by Resources' engineers with
experience in the technology being evaluated and by outside
technical consultants. The risk of changes in the price of fuel is
typically passed through to the purchaser of electricity under the
negotiated terms of a long-term power sales agreement. Other
operating risks can be covered by equipment warranties and by
casualty, business interruption and other forms of insurance. If
Resources or one of its affiliates is responsible for the
operations of an Exempt Project, the operating risk will be further
reduced.
(b) Construction risks. Construction risks are
commonly addressed under fixed-price contracts with milestones and
performance guarantees (e.g., guaranteed heat rates, availability
factors), backed by appropriate levels of liquidated damages. The
credit-worthiness and "track record" of the construction contractor
is a very important consideration in this regard. In those cases
where Resources or its respective affiliate serves as its own
general construction contractor, it looks to pre-negotiated cost
and damage provisions from sub-contractors, including, without
limitation, equipment vendors, to protect against performance
shortfalls, cost overruns and schedule delays.
(c) Commercial risks. Many independent power
projects rely on the "off-take" commitment of a single power
purchaser, normally the local utility company, to eliminate all or
most of the risk of variation in revenues. In such cases,
Resources makes an assessment of the credit-worthiness of the power
purchaser over the life of the project and/or seeks to have a
contingency plan in the event of off-take defaults.
In competitive power markets outside the United
States, long-term off-take contracts are not always available and
electricity prices may be determined by supply and demand.
Resources conducts extensive investigations of the electricity
markets in these environments to ensure the viability of long-term
demand. Resources seeks projects that will be capable of producing
electricity at or below long-run marginal costs in the region, thus
providing that the project will be a competitive supplier.
(d) Financial risks. Resources addresses the
financial risks of its projects in a variety of ways. First and
foremost, Resources seeks to secure the maximum amount of permanent
debt financing for such projects that is available at reasonable
cost and that is, by its express terms, non-recourse to American or
any associate company (other than the Exempt Projects or Project
Parents). This means that the non-recourse debt of each project or
foreign utility system is secured solely by its assets and
revenues, and creditors have no ability to seek repayment upon
default from American. This method of financing ensures that
American's exposure to any independent power project is limited to
the amount of its equity commitment and that the Operating
Companies and their customers bear no risk of a project's failure
or financial distress. From time to time, American may agree to
provide Guarantees in connection with Exempt Project financings,
but these financial supports will be carefully monitored and
treated as a part of American's equity commitment for regulatory
reporting purposes. To date, American has not issued any such
Guarantee with respect to an investment in an Exempt Project.
In addition to the non-recourse nature of most
project debt financing, project debt is carefully structured to
meet, or match, the characteristics of the particular project. For
example, when the value of a project depends on a long-term, fixed-
price, off-take contract (i.e., a power purchase contract), the
project debt is often designed to be of a similar term, with
scheduled debt payments covered by fixed charges (usually the
capacity payment component in the contract). On the other hand,
where there is no long-term, fixed source of revenue, the
percentage of non-recourse debt financing should be smaller, so
that financial risk is not increased by excessive debt levels.
Thus, while Resources' projects with long-term off-take contracts
may have debt capitalization levels in the 70% to 80% range,
Resources' other projects are anticipated to be leveraged at levels
similar to those of United States regulated utilities, in the 50%
to 60% range.
Another financing risk is the potential variability
of interest rates. This risk is addressed, in part, by borrowing,
to the extent possible, on a long-term, fixed-rate basis. After
contractual terms for a project have been agreed to but before
financial closing, Resources is also exposed to interest rate
variability. This risk can be (and will be, upon approval of the
Treasurer of Resources, as described in the next sentence)
mitigated by purchasing financial instruments which provide hedges
against interest rate volatility. The Treasurer and the financial
staff of Resources are responsible for reviewing, analyzing and
comparing the costs of such financial instruments and the perceived
interest rate risk, for approving the purchase of such financial
instruments when the cost of the perceived risk exceeds the costs
associated with the financial instrument and for monitoring the use
of these instruments to ensure they are used properly.
(e) Foreign currency exchange risk. There are
several ways in which Resources may address the foreign currency
exchange risk element, depending on the status of the host country.
In countries which do not have a history of stability in the
management of their exchange policy, part or all of the revenue
from a project may be payable in or indexed to hard currency
(almost invariably U.S. dollars), as is presently the case with the
Nanyang Project. Back-up guarantees or other undertakings by the
central government may be available to ensure that the U.S. dollar
payments due under an off-take contract are actually made available
by the central bank or ministry of finance.
In other cases (Yorkshire Holdings for example), the
non-recourse project debt is borrowed in the same currency as the
project's revenues, thereby ensuring a match between debt service
obligations and operating income. In more developed countries,
long-term currency swaps are available to provide further hedging
for the equity component of the investment.
(f) Legal risks. Legal risks are addressed by
careful review of any investment by legal counsel, including local
and international counsel where foreign projects are concerned.
Such legal reviews address regulatory and permitting risks,
environmental risks, the adequacy and enforceability of guarantees
or other contractual undertakings of third parties, the status of
title to utility property and the obligations inherent in the
financing arrangements.
In addition to the specific risks mentioned above,
investment outside the United States can entail country-specific
risks related to political or economic performance. As indicated
above, Resources evaluates country risk at the outset of any
project development effort and attempts to mitigate this risk
through a number of measures. Most important, the country review
process described above ensures that the political and economic
stability of any country has been reviewed at several levels up to
and including American's board of directors before any investment
occurs. The country analysis also focuses specifically on the
country's electric sector and on the government's support for
private ownership in that sector.
At the outset of development work in a foreign
country, Resources seeks local partners who are experienced in
doing business in the host country. Local partners are a very
important element in reducing the risk of future expropriation or
unfair regulatory treatment. Another mitigating factor is the
participation of official or multilateral agencies in a project.
When funds for the project are supplied by government-sponsored
export credit agencies or other governments or institutions such as
the World Bank through its International Finance Corporation
affiliate, the host country has strong incentives not to take
actions which would harm a project's viability.
Most political risk can be addressed through
political risk insurance obtained from the Overseas Private
Investment Corporation, a United States agency, or the Multilateral
Investment Guaranty Agency, a World Bank affiliate, or in the
commercial insurance market. Political risk insurance is available
to insure the project debt or the return of an investor's equity.
One can also insure against outright expropriation, acts of civil
violence or even "creeping" nationalization brought about by
punitive regulation. American analyzes the perceived risk and its
costs and compares that with the cost of obtaining such insurance
and, when such costs associated with such risks exceed the costs of
insurance coverage therefor, American plans to procure such
insurance.
(g) Portfolio Diversification. Apart from the
detailed and comprehensive approach to the specific risks described
above, American's fundamental view is that the best long-term
approach to managing the risk of investing in the independent power
business and foreign utility systems is through diversifying both
the type and the location of projects. American recognizes that
the risk inherent in any investment cannot be eliminated entirely,
even by the most careful approach to project development.
Consequently, American is committed to diversifying its investments
across countries and regions of the world. American's strategy has
been focused on investment opportunities in North America (outside
the core regulated business of American), Europe, Latin America,
Australia and Asia. American plans to make investments in Exempt
Projects to diversify its portfolio of Exempt Projects by country,
project type and stage of development.
Regional diversification is important since
historically economic and political instability tends to involve
multiple countries in a region. Accordingly, American's board of
directors may set limits on investment in specific countries which
vary according to an assessment of the country's stability.
Another element of American's diversification policy
is to achieve a balance between so-called "greenfield" projects and
acquisitions of existing facilities and power systems. Greenfield
projects involve development and construction of completely new
electric facilities, principally generating stations, which present
a higher degree of risk due to the length of such development and
construction. Funds are expended during the early years of such
projects; return on investment is not earned until the project is
in operation. Nevertheless, while these projects have higher
levels of risk and deferred returns, they are important to American
because they generally produce higher rates of return on investment
than investments in existing assets and because they lay the
foundation for continued earnings growth for American in the
future.
To balance these greenfield project development
efforts, American's development efforts target assets to be
purchased that are already in operation, either from existing
private owners or through privatizations. These acquisitions
reduce the risk of American's overall business by producing near-
term earnings without significant development or construction risk.
The result of this balanced portfolio strategy is
that American will not be dependent on any single country,
regulatory environment or type of asset for its earnings from
independent power projects and foreign utility investments.
(3) Application of Review Process and Risk Factors to
Specific Investment Decisions
American's acquisition activity in China provides an
illustration of the review process and risk analysis outlined
above.
The Nanyang Project was developed and executed by a
Resources team with several years' experience in the China
electricity market. In September of 1994, Resources was invited to
visit Northeast China in connection with a potential development
opportunity of a large coal-fired power project. Although those
meetings have not yet led to a project there, it did enable
Resources' personnel to meet with numerous senior central and
provincial level government officials throughout China and to send
engineering teams to visit various Chinese design and manufacturing
facilities. The Nanyang Project arose as an opportunity from these
various contacts.
Once the preliminary terms of the Nanyang Project were
discussed with the Chinese parties, including affiliates of the
Henan Electric and the City of Nanyang in July 1995, senior
management of Resources discussed this matter with the Finance
Committee of American's board of directors. This Committee set
working parameters as to the conditions for making this investment
into China including the maximum dollar commitment for the Nanyang
Project. Resources then entered into a series of negotiations with
Henan Electric and the City of Nanyang over the next 14 months
leading to the signing of the Joint Venture Contract in September
1996.
In addition to providing equity capital, Resources,
through an affiliate, will also provide debt financing. It is the
intent of Resources to refinance the loan as soon as the commercial
bank lending market will provide such funding. To facilitate this,
the Nanyang Project documentation is in a form Resources believes
will be acceptable for an international project financing.
D. Potential Investments in Additional Exempt Projects
Resources is presently investigating, alone and in conjunction
with others, investment opportunities in domestic and foreign power
projects and existing foreign utility systems. Most of these
ventures should qualify as either EWGs or FUCOs. In particular,
several foreign countries are now privatizing state-owned utility
systems. Other countries are promoting private investment to
construct, own and operate generating plants. Several domestic
utilities have indicated that they intend to sell generation assets
in the near future.
American intends to make substantial investments in Exempt
Projects, primarily for the following reasons:
(1) Present projections indicate that the Operating
Companies other than APCo and KPCo will continue to fund their
operations and their construction expenditures from internal
sources of cash and from sales of senior securities and other
borrowings for the next five years. In 1996 American made equity
infusions in APCo and KPCo totaling $80 million and expects to make
additional equity contributions of up to $215 million by 2000.
After 1996, American forecasts that these capital investments will
be funded through American's retained earnings and other sources,
including short-term debt and new common equity of American. Thus,
acquisitions of Exempt Projects present American with the
opportunity to continue to grow through reinvestment of retained
earnings not used for capital infusions in an industry sector in
which American has decades of experience, while at the same time
diversifying overall asset risk. Because American's intended
portfolio will be diversified by region and operating assets, have
an increased potential for revenue growth and be less susceptible
to adverse effects from any one particular market, American
believes that its investments in Exempt Projects will give the
American System a larger and more diversified base for raising
equity capital in the event that one or more of the Operating
Companies requires additional equity capital. Investments in
Exempt Projects will help the American System remain competitive as
competition increases in the United States electric utility
industry and its investments in Exempt Projects will not have a
negative effect on its ability to make any additional equity
investments in the Operating Companies that may be required in the
future.
(2) American, directly or through Resources, is
purposely pursuing investments in utility systems in geographical
regions, such as Australia and Europe, which have moved much
further than the United States towards deregulation and full
competition in both wholesale and retail electricity markets.
American believes that the creation and maintenance of value for
its shareholders will depend on its ability to successfully operate
its core business in the United States as that business becomes
subject to increasing competition. American's experience in
markets that are already largely deregulated will be critical to
the long-term success of its core business. Moreover, the lessons
learned from these markets provide American with insights about the
market structures that produce efficient and equitable results for
consumers and shareholders. These insights will allow American to
play a role in shaping the evolution of the electric sector of the
United States.
E. Proposed Increase in Financing of Exempt Projects
For the reasons stated above, American and Resources hereby
requests that the Commission exempt American and Resources from the
requirements of Rule 53(a)(1) under the 1935 Act such that American
and Resources may use the net proceeds from the issuance of
recourse debt and equity securities and issue Guarantees, each in
accordance with and upon the terms of the Financing Orders, in an
aggregate amount at any time outstanding which, when added to
American's direct and indirect aggregate investment in all Exempt
Projects, would not at any time exceed American's consolidated
retained earnings. Based on the $360 million of investment in
Yorkshire Electricity and the $110 million designated for the
Nanyang Project and American's consolidated retained earnings as of
December 31, 1996 (approximately $1.508 billion), such limitation
would allow financing of investments in additional Exempt Projects
of approximately $1.038 billion. The authority requested herein
will be sufficient to enable American to make investments in all
Exempt Projects it is presently developing, as well as in Exempt
Projects that are under investigation at present or that arise in
the future.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
No fees, commissions or expenses, other than expenses
estimated not to exceed $20,000 to be billed at cost by American
Electric Power Service Corporation, are to be paid by the
Applicants or any associate company in connection with the proposed
transaction.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
The proposal herein is subject to Sections 6(a), 7, 12(b), 32
and 33 of the 1935 Act and Rules 45, 53 and 54 thereunder. Rule 53
provides that, if each of the conditions of paragraph (a) thereof
is met, and none of the conditions of paragraph (b) thereof is
applicable, then the Commission may not make certain adverse
findings under Sections 7 and 12 of the 1935 Act in determining
whether to approve a proposal by a registered holding company to
issue securities in order to finance an investment in any EWG or to
guarantee the securities of any EWG. Giving effect to the
proposals contained herein, American will satisfy all of the
conditions of Rule 53(a) except for clause (1) thereof, since
American is proposing herein that American's aggregate investment
may exceed 50% of American's consolidated retained earnings. None
of the conditions specified in Rule 53(b) is or will be applicable.
Rule 53(c) states that, in connection with a proposal to issue
and sell securities to finance an investment in any EWG, or to
guarantee the securities of any EWG, a registered holding company
that is unable to satisfy the requirements of paragraph (a) or (b)
of Rule 53 must "affirmatively demonstrate" that such proposal:
(a) will not have a substantial adverse impact
upon the financial integrity of the registered
holding company system; and
(b) will not have an adverse impact on any utility
subsidiary of the registered holding company,
or its customers, or on the ability of State
commissions to protect such subsidiary or
customers.
The Commission has performed an analysis of the requirements
of Rule 53(c) with respect to an application-declaration filed by
The Southern Company ("Southern") in File No. 70-8725 and by
Central and South West Corporation ("CSW") in File No. 70-8809. In
these application-declarations, Southern and CSW sought almost
identical authority to the authority sought by the Applicants
hereunder, namely relief from the safe-harbor requirements of Rule
53(a)(1) to allow investments in Exempt Projects in an amount not
to exceed its consolidated retained earnings. The Commission
granted such authority by issuing its orders making such
application-declarations effective on April 1, 1996 (HCAR No.
26501) (the "Southern Order") and January 24, 1997 (HCAR No. 26653)
(the "CSW Order"). In those orders, the Commission found that
Southern and CSW had demonstrated successfully, through the use of
certain financial indicators, that investing in Exempt Projects in
an amount not to exceed their consolidated retained earnings would
not have a substantial adverse impact on the financial integrity of
its system. A comparison with American of those financial
indicators used by Southern and CSW, considering the size and
market position of American relative to Southern and CSW,
demonstrates that the financial integrity of the American System is
substantially similar to the financial integrity of the Southern
and CSW systems. Thus, this Application-Declaration, which seeks
substantially the same authority (for American to invest in Exempt
Projects in an aggregate amount not to exceed its consolidated
retained earnings), is consistent with the rationale of, and the
conclusions reached by the Commission in, the Southern and CSW
Orders.
American addresses each of the requirements of Rule 53(c) as
follows:
(1) The use of proceeds from the issuance of debt and
equity securities of American to make investments in EWGs (as well
as in FUCOs), and the issuance of, or provision for, Guarantees in
connection therewith by American, in amounts of up to American's
consolidated retained earnings will not have a "substantial adverse
impact" on the financial integrity of the American System.
The lack of any "substantial adverse impact" on
American's financial integrity as a result of increased levels of
investments in Exempt Projects can be demonstrated in several ways,
including by analyses of historic trends in American's consolidated
capitalization ratios and retained earnings and the market view of
American's securities. Consideration of these and other relevant
factors supports the conclusion that the issuance of securities and
Guarantees by American to finance investments in Exempt Projects
exceeding the 50% consolidated retained earnings limitation in Rule
53(a)(1) will not have any "substantial adverse impact" on the
financial integrity of the American System.
American has a low-cost core electric utility business
and is developing an international presence and other diversified
businesses that will provide benefits to its core utility business,
as well as enhance the potential for substantial long-term earnings
growth. American's consolidated retained earnings have grown on
average approximately 5% per year over each of the previous two
years. American's consolidated capitalization and interest
coverage ratios are within industry ranges for A-/BBB+ rated
companies. After announcement of the offer to acquire Yorkshire
Electricity, the rating agencies reaffirmed these ratings.
Finally, the market's assessment of American's prospect for future
growth and earnings compares favorably to other electric utility
companies and its dividend payout ratio is improving.
(a) Aggregate investments in Exempt Projects in
amounts up to 100% of American's consolidated retained earnings,
which were $1.508 billion as of December 31, 1996, would still
represent a relatively small commitment of capital for a company
the size of American, based on various key financial ratios at
December 31, 1996. For example, investments of this amount would
be equal to only 15.2% of American's total capitalization ($9.9
billion), 13.2% of consolidated net utility plant ($11.4 billion),
9.5% of total consolidated assets ($15.9 billion), and 19.6% of the
market value of American's outstanding common stock ($7.7 billion).
Such percentages are lower than those of Southern as of December
31, 1995 (16.3%, 15.4%, 11.0% and 20.4%, respectively) and those of
CSW as of June 30, 1995 (23%, 23%, 14% and 31%, respectively)
described by the Commission in their Orders as "a relatively small
commitment of capital".
(b) American's consolidated retained earnings have
grown on average approximately 5% per year over each of the
previous two years. Consolidated retained earnings increased $56
million from 1993 to 1994, a 4.4% increase; by $84 million during
1995, a 6.3% increase; and by $138 million during 1996, a 9.8%
increase.
(c) The market's assessment of American's future
growth and earnings also compares favorably to other electric
utility issuers in the 1994 to present time frame. This can be
shown by comparison of price-earnings and market-to-book ratios,
both of which show a significant strengthening when compared with
the electric utility industry average in that period. These
measures indicate investor confidence in American's ability to
deliver shareholder value.
1992 1993 1994 1995 1996
P/E Ratio:
American 13.0 13.7 12.1 14.2 13.1
Electric IndustryFN3 14.8 15.1 11.8 12.0
FN3 Source: Historical - Compustat Electric Utilities
Database; Current - Utility Focus, Regulatory Research
Associates, Inc., August 1995.
Market-to-Book Ratio:
American 144% 168% 144% 174% 170%
Electric IndustryFN4 160% 161% 133% 137%
FN4 Source: Historical - Compustat Electric Utilities
Database; Current - Utility Focus, Regulatory Research
Associates, Inc., August 1995.
(d) In recent years, American's dividend payout
ratio (percentage of earnings paid out in dividends), has been
slightly above the electric utility industry average, but has been
improving.
1992 1993 1994 1995 1996
American Payout Ratio %: 94.6 88.8* 88.6 84.1 76.5
Electric Industry %FN5 84.3 78.6 81.4 76.0
* Restated to eliminate the write off of the Zimmer Generating
Station.
FN5 Source: Historical - Compustat Electric Utilities
Database; 1995 - Merrill Lynch & Co., Utility Data
Sheet, December 29, 1995 (for projected 12 months ended
December 31, 1995.)
(e) None of the conditions described in paragraph
(b) of Rule 53 is applicable. Specifically, (1) there has been no
bankruptcy of any American associate company; (2) American's
consolidated retained earnings, as previously indicated, have
increased in recent years; and (3) American has never reported an
"operating loss" attributable to its Exempt Projects. SFAS 121
requires a listing of all assets of a utility that a company plans
to write down and take as a loss. American presently has no assets
listed pursuant to SFAS 121. Based on American's current
knowledge, no assets with respect to any Exempt Project presently
owned (directly or indirectly) by American are expected to be
placed on such list pursuant to SFAS 121. Finally, no associate
Exempt Project has ever defaulted under the terms of any financing
document. None of the circumstances described in Rule 53(b) has
occurred. American undertakes to notify the Commission by filing
a post-effective amendment in this proceeding in the event that any
of the circumstances described in Rule 53(b) occurs during the
authorization period.
(f) Numerous financial indicators show the
financial strength of American. For example, American's earnings
per share and return on equity were $3.14 and 13.3%, respectively,
for the year ended 1996 and $2.85 and 12.4%, respectively, for the
year ended 1995.
(2) The proposed increased use of financing proceeds to
invest in Exempt Projects will not have an "adverse impact" on any
of American's Operating Companies, their respective customers, or
on the ability of the seven State commissions having jurisdiction
over one or more such Operating Companies to protect such Operating
Companies or such customers.
The conclusion that the Operating Companies and their
customers will not be adversely impacted by increased levels of
investment by American in Exempt Projects is well supported by (i)
analyses of the Operating Companies' financial integrity (including
ability of the Operating Companies to issue senior securities);
(ii) the modest need for equity capital from American foreseen for
the next five years (as discussed in Subsection (2)(c) of this Item
3); (iii) continuing compliance with other applicable requirements
of Rule 53(a); and (iv) the proven effectiveness of State
commission oversight together with the affirmation by the State
commissions of Indiana, Kentucky, Michigan, Ohio, Tennessee,
Virginia and West Virginia that they have authority and
jurisdiction, and will exercise such authority, to protect
ratepayers in their respective state from any adverse impact. The
State commissions can set the cost of capital for electric
utilities by comparison with selected groups of domestic utilities,
which may exclude any utilities with adverse impacts due to foreign
investments or EWGs. Therefore, the States have the authority and
the mechanism to prohibit any adverse effects on the cost of
capital due to investments in Exempt Projects from being passed on
to ratepayers. American has complied and will continue to comply
with the requirements of Rule 53(a)(4) regarding filing of copies
of applications and reports with other regulatory commissions.
(a) All of American's investments in Exempt
Projects are, and in the future should remain, segregated from the
Operating Companies. The Operating Companies are, and are
currently expected in the future to remain, insulated from the
direct effects of investments by American in Exempt Projects. No
Operating Company owes indebtedness or has extended credit or sold
or pledged its assets directly or indirectly to any Exempt Project
in which American owns any interest, no Operating Company intends
to do so in the future, and any losses that may be incurred by such
Exempt Projects would have no effect on domestic rates of any
Operating Company (because of the Applicants' undertaking not to
seek recovery in rates).FN6 American represents that it will not
seek recovery through higher rates to the Operating Companies'
utility customers in order to compensate American for any possible
losses that it may sustain on investments in Exempt Projects or for
any inadequate returns on such investments.
FN6 It should be noted that Section 33(f), with a minor
exception, prohibits State regulated public utilities
from financing investments in FUCOs, and Section 33(g)
prohibits outright any pledge or encumbrance of utility
assets by a State regulated public utility for the
benefit of any associate FUCO.
(b) Debt (including short-term debt) ratios of the
major Operating Companies are consistent with industry averages for
A/BBB+ rated electric utilities. The current industry average for
BBB+ electric utilities is approximately 50%.FN7
FN7 Source: Moody's Investors Services.
Debt as % of Capitalization 1992 1993 1994 1995 1996
APCo 52% 51% 53% 53% 53%
CSPCo 55% 58% 55% 57% 55%
I&M 52% 49% 48% 48% 47%
KPCo 58% 60% 60% 59% 59%
OPCo 48% 45% 44% 46% 42%
Due to a reduction in debt ratios attributable largely to projected
growth in retained earnings, debt ratios of the Operating Companies
should steadily decline, moving from an average of 51% in 1996 to
49% by the year 2000.
(c) Additional investments in Exempt Projects will
not have any negative impact on the Operating Companies' ability to
fund operations and growth. Present projections indicate that the
Operating Companies other than APCo and KPCo will continue to fund
substantially all of their construction expenditures from internal
sources of cash and from sales of senior securities and other
borrowings for the next five years. American anticipates making
equity infusions in APCo and KPCo of up to $215 million by 2000.
Based on these projections, the Operating Companies will be able to
fund their operations and growth and still improve their debt
ratios as indicated above.
Operating Companies - Construction Expenditures:
actual (1992-1996) and projected (1997) expenditures, including
Allowance for Funds Used During Construction ($million):
1992 1993 1994 1995 1996 1997
629 628 642 601 578 672
Percent internally generated:
1992 1993 1994 1995 1996
63% 139% 83% 101% 142%
American presently estimates that, for the five year period of
1997-2001, the estimated cash flow from operations will be
sufficient to fund aggregate projected construction expenditures.
(d) The major Operating Companies' ability to issue
debt and equity securities in the future depends upon earnings
coverages at the time such securities are issued; that is, they
must comply with certain coverage requirements designated in their
mortgage bond indentures. The Operating Companies should have more
than adequate earnings coverages for financing requirements in the
foreseeable future.FN8
FN8 1996 indenture earnings coverages for the Operating
Companies range from about 3.22 to 6.66, in each case
well above the required coverages of 2x.
(e) The major Operating Companies' coverages have
generally been within the A and BBB+ ranges set by the major rating
agencies in recent years. The Operating Companies continue to show
adequate financial statistics as measured by the rating agencies
(pre-tax interest coverage, debt ratio, funds from operations to
debt, funds from operations interest coverage, and net cash flow to
capital expenditures). Based on currently available public
information from the ratings agencies, American believes there has
been no adverse effect on the financial ratings of the Operating
Companies as a result of American's investments in Exempt Projects.
S&P Rating: 1992 1993 1994 1995 1996
APCo A- A- A- A- A-
CSPCo BBB BBB+ BBB+ A- A-
I&M BBB+ BBB+ BBB+ BBB+ BBB+
KPCo BBB+ BBB+ BBB+ BBB+ BBB+
OPCo A- A- A- A- A-
Moody's Rating: 1992 1993 1994 1995 1996
APCo A2 A2 A2 A2 A3
CSPCo Baa2 Baa2 Baa2 Baa1 A3
I&M Baa1 Baa1 Baa1 Baa1 Baa1
KPCo Baa1 Baa1 Baa1 Baa1 Baa1
OPCo A3 A3 A3 A3 A3
Duff & Phelps Rating: 1992 1993 1994 1995 1996
APCo A A A A A
CSPCo BBB BBB BBB+ BBB+ A-
I&M BBB BBB BBB+ BBB+ BBB+
KPCo BBB+ BBB+ BBB BBB BBB
OPCo A A A A A
After announcement of the offer to acquire Yorkshire Electricity,
management met with the rating agencies and they have reaffirmed
the above long-term debt ratings of the Operating Companies.
In addition, the rating agencies consider the
Operating Companies to have relatively favorable competitive
positions, with Standard & Poor's ranking them "somewhat above
average" business position. See Standard & Poor's Global Sector
Review, November 1996. Fitch Investors Service's Competitive
Indicator scores for the Companies are 2.30, 2.38, 2.65, 2.60 and
2.45 for APCo, CSPCo, I&M, KPCo and OPCo, respectively, relatively
favorable as compared to the average score of 2.73. See Fitch
Report on American Electric Power, October 14, 1996. (A lower
score indicating relatively less vulnerability to competition.)
(f) American has complied and will continue to
comply with the requirements of Rule 53(a)(2) regarding preparation
of and making available books and records and financial reports
regarding Exempt Projects.
(g) American has complied and will continue to
comply with the requirements of Rule 53(a)(3) regarding the
limitation on the use of Operating Company employees in connection
with providing services to Exempt Projects. Increased levels of
investment in Exempt Projects are not anticipated to have any
impact on utilization of Operating Company employees. The
Operating Companies have not and will not increase staffing levels
or acquire other resources to support the operations of Exempt
Projects. Project development, management and home office support
functions for the Exempt Projects are largely performed by American
Electric Power Service Corporation, and by outside consultants
(e.g., engineers, investment advisors, accountants and attorneys)
engaged by Resources. Accordingly, Resources' need for the support
of personnel provided by the Operating Companies has been and is
expected to remain relatively modest.
(h) In the opinion of American and Resources, the
seven State commissions of Indiana, Kentucky, Michigan, Ohio,
Tennessee, Virginia and West Virginia having jurisdiction over the
Operating Companies are able to protect utility customers within
their respective states. The State commissions have not raised
objections to American's current investments in Exempt Projects.FN9
To provide the Commission with added assurances, American met with
each of the State commissions having jurisdiction over the
Operating Companies and requested each to provide the Commission
with a letter certifying that such State Commission has
jurisdiction over certain Operating Companies and that such State
commission will protect ratepayers from any adverse effect or costs
that might result from American's investments in Exempt Projects.
FN9 Section 33(c) (2) provides that the State commissions may
make recommendations to the Commission regarding a
registered holding company's relationship to FUCOs, and
that the Commission shall "reasonably and fully consider"
such recommendations.
American and its affiliates have been subjected to
numerous audits by this Commission and the Federal Energy
Regulatory Commission, and it is assumed both staffs will
participate in future audits. Audits by the Commission have not
raised "significant" questions. Rule 54 provides that the
Commission, in determining whether to approve the issue or sale of
a security by a registered holding company for purposes other than
the acquisition of an Exempt Project, or other transactions by such
registered holding company or its subsidiary other than with
respect to Exempt Projects, shall not consider the effect of the
capitalization or earnings of any subsidiary which is an Exempt
Project upon the registered holding company system if the
provisions of Rule 53(a), (b) and (c) are satisfied. If the
transactions contemplated hereby are consummated and American's
aggregate investment in Exempt Projects exceeds 50% of its
consolidated retained earnings, the provisions of Rule 53(a) will
not be satisfied. The Applicants have included in this
Application-Declaration certain reporting requirements that are
intended to enable the Commission to monitor the impact of the
transactions for which authority is sought hereby. The Applicants
believe that such reporting requirements will assist the Commission
in its determinations concerning the effect of Exempt Projects on
other transactions for which American will require authorization.
ITEM 4. REGULATORY APPROVAL
The issuance and sale of securities by American and the use of
the proceeds thereof to acquire or guarantee the securities of any
Exempt Project are not subject to the jurisdiction of any State
commission or of any federal commission other than this Commission.
American has complied with the requirements of Rule 53(a)(4) by
submitting a copy of this Application-Declaration to the public
utility commissions in Indiana, Kentucky, Michigan, Ohio,
Tennessee, Virginia and West Virginia. American and the Operating
Companies have discussed the request for further investment
authority set forth in this Application-Declaration with each of
the seven State commissions having jurisdiction over one or more
such Operating Companies.
ITEM 5. PROCEDURE
It is requested, pursuant to Rule 23(c) of the Rules and
Regulations of the Commission, that the Commission's order
granting, and permitting to become effective this Application-
Declaration be issued on or before June 30, 1997. American waives
any recommended decision by a hearing officer of or by any other
responsible officer of the Commission and waives the 30-day waiting
period between the issuance of the Commission's order and the date
it is to become effective, since it is desired that the
Commission's order, when issued, becomes effective forthwith.
American consents to the Office of Public Utility Regulation
assisting in the preparation of the Commission's decision and/or
order in this matter, unless the Office opposes the matter covered
by this Application-Declaration.
American proposes to file, within 60 days after the end of the
applicable quarter, a quarterly report pursuant to Rule 24,
commencing with the report for the quarter ending March 31, 1997,
which contains the following information:
(i) a computation in accordance with Rule 53(a) (as
modified by the Commission's order in this proceeding) of
American's aggregate investment in all Exempt Projects;
(ii) American's cumulative aggregate investment in all
Exempt Projects expressed as a percentage of total
capitalization, net utility plant, total consolidated assets
and market value of common equity, all as of the end of such
quarter;
(iii) Consolidated capitalization ratios as of the end of
such quarter, with consolidated debt to be inclusive of all
short-term debt and non-recourse debt of Exempt Projects to
the extent normally consolidated under applicable financial
reporting rules;
(iv) The market-to-book ratio of American's common stock
at the end of such quarter;
(v) An analysis of the growth in consolidated retained
earnings which segregates earnings growth attributable to
Exempt Projects as a whole versus all other subsidiaries of
American; and
(vi) A breakdown in revenues and net income of each of
the Exempt Projects for the 12-months then ended.
American proposes to file a single report under Rule 24 which
combines the foregoing information with the information required
pursuant to Rule 24 in File No. 70-8429 (HCAR No. 26200, dated
December 22, 1994, and HCAR No. 26516, May 10, 1996).
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
Exhibit A - Correspondence from State Commissions (to
be filed by amendment)
Exhibit G - Proposed Notice
ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
It is believed that the proposed transactions will not have
any environmental effects which would require an environmental
impact statement under Section 102(c)(2) of the National
Environmental Policy Act. No other federal agency has prepared or
is preparing an environmental impact statement with respect to the
proposed transactions.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
statement to be signed on its behalf by the undersigned thereunto
duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
By_/s/ A. A. Pena___________________
Treasurer
Dated: March 14, 1997
Exhibit G
UNITED STATES OF AMERICA
before the
SECURITIES AND EXCHANGE COMMISSION
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
Release No. / , 1997
_________________________________________
:
In the Matter of :
:
AMERICAN ELECTRIC POWER COMPANY, INC. :
AEP RESOURCES, INC. :
1 Riverside Plaza :
Columbus, Ohio 43215 :
:
(70- ) :
__________________________________________:
NOTICE OF PROPOSED FINANCING OF POWER PROJECTS
American Electric Power Company, Inc. ("American"), a registered
holding company, and AEP Resources, Inc. ("Resources"), a
subsidiary of American, (American and Resources sometimes
hereinafter collectively referred to as the "Applicants") have
filed with the Commission an Application or Declaration pursuant to
the Public Utility Holding Company Act of 1935 (the "Act"),
designating Sections 6(a), 7, 9(a), 12(b), 32 and 33 and Rules 45,
53 and 54 promulgated thereunder as applicable the proposed
transactions.
American, through its direct and indirect subsidiaries, is engaged
in development activities (including preliminary studies, research,
investigation and consulting) pertaining to independent power
facilities, including, among other things, exempt wholesale
generators ("EWGs") as defined in Section 32 of the Act, and
foreign utility companies ("FUCOs"), as defined in Section 33 of
the Act.
American is currently authorized under the terms of the orders and
supplemental orders (collectively, the "Financing Orders") to
finance these activates by issuing and selling debt and equity
securities and by issuing guarantees of the obligations of certain
subsidiaries. (With respect to File No. 70-7622, see HCAR No.
24898, June 6, 1989; HCAR No. 25905, October 8, 1993; HCAR No.
25984, February 4, 1994. With respect to File No. 70-8429, see
HCAR No. 26200, December 22, 1994 and HCAR No. 26516, May 10,
1996.)
Under the terms of the Financing Orders, American, among other
things, may use the proceeds of common stock sales and borrowings
to finance the acquisition of the securities of, or other interests
in, one or more EWGs or FUCOs, as defined in Sections 32 and 33 of
the Act, and may issue guarantees of the obligations of such
entities, provided that the sum of the guarantees at any time
outstanding and the net proceeds of common stock sales and
borrowings by American that at any time may be used by American to
fund investments in EWGs or FUCOs shall not, when added to
American's "aggregate investment" (as defined in Rule 53(a) under
the Act) in all EWGs and FUCOs, exceed 50% of American's
"consolidated retained earnings" (as defined in Rule 53(a)). This
investment limitation is consistent with the investment limitation
contained in Rule 53(a)(1).
Applicants request that the Commission modify this limitation, and
exempt them from the requirements or Rule 53(a)(1), to permit
American to use the net proceeds of common stock sales and
borrowings to acquire, directly or indirectly, the securities of,
or other interests in, EWGs and FUCOs, and to issue guarantees of
the obligations of such entities (all as authorized by and in
accordance with the terms of the Financing Orders) in an aggregate
amount that, when added to American's direct and indirect
"aggregate investments", as defined, in all EWGs and FUCOs, would
not at any time exceed 100% of American's "consolidated retained
earnings", as defined. Although American had aggregate investments
in EWGs and FUCOs of approximately $1 million as of December 31,
1996, in February 1997, American committed approximately $360
million to its investment in Yorkshire Electricity Group plc. In
addition, American has designated $110 million for another FUCO, of
which approximately $11.5 million has been invested as of March 13,
1997. Based on the $360 million of investment in Yorkshire
Electricity, the $110 million of investment in another FUCO, and
American's consolidated retained earnings as of December 31, 1996
(approximately $1.508 billion), increasing this limitation as
Applicants propose would allow financing of additional investments
in EWGs and FUCOs of approximately $1.038 billion.
Applicants state that American is committed to making additional
investments in EWGs and FUCOs, primarily because (1) in the near
term there is projected to be little need for American to make new
equity investment in any of its Utility Subsidiaries; (2)
acquisitions of EWGs and FUCOs give American the opportunity to
continue to grow in an industry sector that American has decades of
experience in, while at the same time diversifying overall asset
risk; and (3) American has purposely invested in utility systems in
foreign countries where deregulation of and competition in retail
and wholesale electricity markets is more fully developed than in
the United States in order to gain valuable experience with
deregulated markets that will enhance American's ability to make
its core domestic utility operations more competitive and efficient
in the future as the United States moves toward deregulation and
increased competition. Applicants also describe comprehensive
procedures that American has established to identify and address
risks involved in EWG and FUCO investments.
American states that the use of financing proceeds and guarantees
to make investments in EWGs and FUCOs to the proposed increased
level will not have a substantial adverse impact on the financial
integrity of the American system or an adverse impact on any
Utility Subsidiary of American or its customers or on the ability
of the affected state commissions to protect such customers.
Applicants also state that American will not seek recovery through
higher rates to its Utility Subsidiaries' customers in order to
compensate American for any possible losses that it may sustain on
investments in EWGs and FUCOs or for any inadequate returns on such
investments.
The Application or Declaration and any amendments thereto are
available for public inspection through the Commission's Office of
Public Reference. Interested persons wishing to comment or request
a hearing should submit their views in writing by April , 1997 to
the Secretary, Securities and Exchange Commission, Washington, D.C.
20549, and serve a copy on the declarant at the address specified
above. Proof of service (by affidavit or, in case of any attorney
at law, by certificate) should be filed with the request. Any
request for a hearing shall identify specifically the issues of
fact 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 this matter. After said date, the
Application or Declaration, as filed or as it may be amended, may
be permitted to become effective.
For the Commission, by the Office of Public Utility Regulation,
pursuant to delegated authority.
Jonathan G. Katz
Secretary
