SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
APPLICATION OR DECLARATION on FORM U-1
under
The Public Utility Holding Company Act of 1935
THE SOUTHERN COMPANY
64 Perimeter Center East
Atlanta, Georgia 30346
(Name of company or companies filing this statement
and addresses of principal executive offices)
THE SOUTHERN COMPANY
(Name of top registered holding company parent of
each applicant or declarant)
Tommy Chisholm, Secretary Thomas G. Boren, President
The Southern Company Southern Electric International,
64 Perimeter Center East Inc.
Atlanta, Georgia 30346 900 Ashwood Parkway, Suite 500
Atlanta, Georgia 30338
(Names and addresses of agents for service)
The Commission is requested to mail signed copies of all orders,
notices and communications to:
W.L. Westbrook John F. Young
Financial Vice-President Vice President
The Southern Company Southern Company Services, Inc.
64 Perimeter Center East One Wall Street, 42nd Floor
Atlanta, Georgia 30346 New York, New York 10005
Thomas G. Boren John D. McLanahan, Esq.
President Troutman Sanders
Southern Electric 600 Peachtree Street, N.E.
International, Inc. Suite 5200
900 Ashwood Parkway Atlanta, Georgia 30308-2216
Suite 500
Atlanta, Georgia 30338
<PAGE>
Item 1. Description of Proposed Transactions.
1.1 Background. The Southern Company ("Southern") is a
registered holding company under the Public Utility Holding
Company Act of 1935 (the "Act"). Southern owns all of the common
stock of five operating electric utility subsidiaries (Alabama
Power Company ("Alabama Power"), Georgia Power Company, Gulf
Power Company, Mississippi Power Company, and Savannah Electric
and Power Company). Southern also owns all of the common stock
of Southern Electric International, Inc. ("SEI"), a non-utility
subsidiary that is authorized to engage in preliminary
development activities relating to certain categories of
independent power projects and in rendering operations,
construction, management and other similar services to such
projects. (See order dated October 20, 1987 (HCAR No. 24476);
and File No. 70-7932).
Southern, through a new wholly-owned subsidiary, Mobile
Energy Services Company, Inc. ("Mobile Energy"), an Alabama
corporation, proposes to enter into an Asset Purchase Agreement
("Asset Purchase Agreement") with Scott Paper Company ("Scott"),
a Pennsylvania corporation, pursuant to which Mobile Energy would
agree to purchase all right, title and interest of Scott in the
facilities that comprise the energy and recovery complex (the
"Energy Complex") at Scott's integrated pulp and paper mill (the
"Mill") located in Mobile, Alabama. The Energy Complex is used
to generate substantially all of the steam and electricity
requirements of the Mill. Alabama Power currently provides back-
2
<PAGE>
up and supplemental electric service to the Mill and Energy
Complex over existing interconnecting facilities inside the Mill.
Scott is one of the leading producers of pulp and finished
paper and tissue products in North America. In 1993, as a part
of an ongoing corporate-wide business improvement program, Scott
determined that the continued ownership and operation of the
Energy Complex did not represent the optimal use of the company's
capital and personnel, and therefore initiated efforts to sell
the Energy Complex to a third party. Scott's objective is to
redeploy the substantial capital invested in the Energy Complex
in its primary pulp and paper businesses.
In February 1994, SEI presented a preliminary proposal to
Scott for the purchase and subsequent operation of the Energy
Complex through a new special purpose company that would also
assume certain existing obligations of Scott. Following further
discussions, Scott and SEI executed a letter of intent pursuant
to which Scott agreed that it would negotiate with SEI on an
exclusive basis with respect to the sale and subsequent operation
of the Energy Complex. Scott's selection of SEI's preliminary
proposal was based upon a variety of factors, including SEI's
valuation of the Energy Complex, SEI's proposal of an ownership
and financing structure that would enable Scott to achieve
certain tax and accounting objectives, and SEI's willingness to
accept certain potential risks associated with a possible change
in ownership of some or all of the components of the Mill.
3
<PAGE>
An additional consideration to Scott in selecting the SEI
proposal was its desire to outsource the operations and
maintenance activities associated with the Energy Complex to
Southern, or a subsidiary of Southern, in order to ensure the
continuing reliability of the Energy Complex through quality
control/assurance programs customarily utilized in the electric
utility industry.
1.2 Description of the Mill and Energy Complex. The Mill
is one of Scott's largest integrated pulp and paper mills in
North America. It is comprised of three separate mills: the Pulp
Mill, which produces paper pulp; the Paper Mill, which produces
coated and uncoated printing papers; and the Tissue Mill, which
produces personal care and cleaning products. The Mill, which
Scott purchased in 1954, is fully integrated with Scott's
Southeast timberlands operations, which consist of more than one
half million acres of forested land in Alabama and Mississippi.
On October 10, 1994, Scott announced that it had entered into an
agreement to sell its wholly-owned subsidiary, S.D. Warren
Company, which owns the Paper Mill, to an investor group led by a
South African paper manufacturer. More recently, Scott has
announced that other components of the Mill are also being
offered for sale to unrelated third parties.1
The Energy Complex is comprised of two separate power
islands located inside the Mill, which are differentiated by age
1 See Wall Street Journal, October 25, 1994 edition,
page A-3.
4
<PAGE>
and technology. (See Exhibit E-1). The major components of the
north power island were constructed in 1984 and 1985, with an
addition completed in 1994. The south power island components
were constructed between 1960 and 1963. The combined facilities
are designed to produce an average of approximately 105 megawatts
of electricity and 2,000,000 lbs./hr. of steam, representing
approximately ninety-eight percent and one hundred percent of the
Mill's electric and thermal energy needs, respectively. The
principal components of the Energy Complex include three power
boilers, two recovery boilers, three turbine generators, two
evaporator sets, various related waste treatment and fuel and
"liquor" storage facilities, and station control facilities. The
Energy Complex is more fully described in Schedule 1.1(e) to the
Asset Purchase Agreement (Exhibit B-1(a) hereto).
More than eighty percent of the fuel requirements of the
Energy Complex are met by internally generated by-products of the
Mill's pulp manufacturing and woodlands operations. These by-
products include "black liquor," biomass (waste wood), and
sludge. Supplemental fuel needs are provided by coal and natural
gas. "Black liquor" is a by-product of the pulp-making process
that includes significant amounts of lignin, which is the natural
binder of the cellulose fiber in raw wood. After removal of a
portion of the moisture content in the "black liquor" in the
evaporator sets, it is combusted in the recovery boilers.
Biomass consists of tree bark and tops and limbs left from the
harvesting of trees by Scott. Sludge is solid waste from the
5
<PAGE>
Mill's waste water treatment plant. Its fuel value is derived
from its cellulose content.
Legal title to a substantial part of the equipment and
facilities comprising the Energy Complex is held by the
Industrial Development Board of the City of Mobile, Alabama (the
"Board") pursuant to various agreements that Scott and the Board
entered into between 1973 and 1994 in connection with financing
improvements to the Energy Complex through the issuance by the
Board of both tax exempt and taxable industrial development
revenue bonds. The payment of principal of and interest on the
outstanding bonds is secured by Scott's obligations under the
terms of facility leases and installment purchase agreements,
pursuant to which Scott is obligated to make payments in amounts
that are equal to the principal of and interest on the bonds.
The Energy Complex has been certified as a "qualifying
facility" under the Public Utility Regulatory Policies Act of
1978, as amended, pursuant to an order of the Federal Energy
Regulatory Commission dated July 18, 1985. However, since
Southern intends to acquire and hold 100% of the Energy Complex,
it will not preserve "qualifying facility" status for the Energy
Complex.
1.3 Interconnection with Alabama Power Facilities.
Alabama Power provides and will continue to provide back-up
and supplemental electric service to the Mill and Energy Complex
over three existing 30,000 kVA feeds. The facilities of Alabama
Power and those of the Energy Complex are interconnected at a
6
<PAGE>
single 13.8 kV bus, from which power is distributed to multiple
load centers inside the Mill. (See Exhibit E-2). Internal
controls are designed to assure that the facilities of Alabama
Power and those of the Energy Complex at all times operate
synchronously. Dispatch of the Energy Complex facilities is
coordinated with the Southern System dispatcher.
Generally, the Energy Complex generators are controlled to
match, or balance, electrical generation with electrical energy
consumption inside the Mill and Energy Complex, although there
are actual operating conditions that limit the control system's
ability to maintain a perfect balance between generation and
load. During such conditions, energy produced in the Energy
Complex can and does flow out to the Alabama Power grid. Such
inadvertent flows could occur, for example, following a sudden
loss of electric load inside the Mill, and would continue until
the internal controls correct the imbalance by ramping down power
generation to match the new load condition. Likewise, sudden
variations in the process steam demand requirements of the Mill
can lead to an imbalance between on-site electrical generation
and demand.2 No charge to Alabama Power will be made by Mobile
2 Two of the three turbine generators in the Energy Complex
are "back pressure" units in which the steam flow through the
turbine, and hence the amount of electricity generated, is
dictated by the demand for process steam inside the Mill. If the
demand for process steam experiences a sudden drop, electrical
generation from these two units and the demand for electricity
inside the Mill would also experience a transitory imbalance,
with the result that energy flows to the Alabama Power grid could
occur.
7
<PAGE>
Energy with respect to any power flows into the Alabama Power
grid.
1.4 Summary of Terms of Principal Acquisition Documents.
Under the terms of the Asset Purchase Agreement, Mobile
Energy will agree to pay $350 million for Scott's interest in the
Energy Complex, subject to usual and customary adjustments for
prorated items such as taxes and payments with respect to
obligations to be assumed by Mobile Energy at closing
("Closing"), among other items. In addition, the purchase price
will be reduced by the amount, if any, of past service
liabilities related to pension and other post-retirement benefits
plans maintained by Scott on behalf of certain employees assigned
to the Energy Complex. At Closing, SEI expects to hire the
majority of these employees and assume responsibility for some or
all of the related past service liabilities. (Asset Purchase
Agreement, sec. 2.4).
The obligations of the parties under the Asset Purchase
Agreement are subject to satisfaction of customary and usual
conditions precedent for a transaction of this type, including
expiration of the applicable waiting period under the Hart-Scott-
Rodino Antitrust Improvements Act of 1976, the receipt of all
necessary regulatory approvals and consents for the transfer of
all other permits necessary for ownership and operation of the
Energy Complex, and execution and delivery of all other operative
documents. (Asset Purchase Agreement, Articles 7 and 8). It is
8
<PAGE>
anticipated that Closing will occur no later than November 30,
1994. (Asset Purchase Agreement, Sec. 3.1).
At Closing, Scott and Mobile Energy will execute and deliver
various instruments ("Transfer Instruments") pursuant to which
Scott will convey, assign, and sublease to Mobile Energy its
interests in the facilities, equipment and structures comprising
the Energy Complex and in the site on which the Energy Complex is
located, and grant to Mobile Energy easements necessary for the
operations of the Energy Complex. Although the terms of the
Transfer Instruments are subject to change prior to Closing, it
is currently contemplated that Mobile Energy will assume Scott's
obligations under a lease and certain other agreements (the "Tax
Exempt Bond Lease") relating to $85 million principal amount of
outstanding tax exempt industrial development bonds (the "Tax
Exempt Bonds") issued by the Board to finance certain solid waste
disposal facilities constructed in 1984 and 1985. The Tax Exempt
Bond Lease and related agreements are more fully described in
Item 1.5(b), below. The cash portion of the purchase price will
be guaranteed by Southern.
As previously indicated, the Board also holds legal title to
other facilities and equipment in the Energy Complex under the
terms of agreements between the Board and Scott pursuant to which
the Board has issued or made commitments to issue both taxable
and tax exempt industrial development revenue bonds to finance
improvements to the Energy Complex and Mill. Substantially all
of these bonds were issued to and are held directly or indirectly
9
<PAGE>
by Scott.3 Mobile Energy will not assume any direct or indirect
liability with respect to any of these other bonds. For tax and
other reasons, however, the parties have concluded that it may be
desirable to leave these financing arrangements in place such
that the Board would continue to hold legal title to some or all
of the financed facilities, and to structure the conveyance of
Scott's interest in the financed facilities as a sublease. In
such case, the Transfer Instruments may provide that a part of
the cash portion of the purchase price ($265 million) would be
paid to Scott as a one-time prepayment of rent. In order to
insulate the Energy Complex facilities from any potential claims
of creditors of Scott, however, it may be necessary and desirable
that some or all of these bonds be transferred at Closing to
Mobile Energy.
At Closing, Scott and Mobile Energy will also enter into an
agreement or agreements regarding the use and maintenance of
common facilities between the Mill and the Energy Complex and
pursuant to which Mobile Energy would be granted easements
necessary for the operation on the Energy Complex.
Under the terms of separate Environmental Indemnity
Agreements (Exhibit B-1(c) hereto) to be entered into at Closing
with respect to the Energy Complex and each of the three mills,
Mobile Energy and Scott (and its successors) will agree to defend
3 Since Scott holds most of these bonds, directly or
indirectly, the payments Scott is obligated to make to the Board
under the related facility leases and installment purchase
agreements are offset by the payments of principal and interest
Scott receives on the bonds.
10
<PAGE>
and indemnify each other against claims attributable to certain
environmental conditions or claims arising from environmental
noncompliance to the extent arising out of facts or circumstances
that occur or come into existence after the date of Closing.
Southern, on behalf of Mobile Energy, proposes to enter into a
Guaranty Agreement (Exhibit B-1(d) hereto) pursuant to which
Southern would guaranty payment of uninsured liabilities of
Mobile Energy under the Environmental Indemnity Agreements in an
aggregate amount not to exceed $20 million, as escalated for
inflation.
Finally, Mobile Energy and Scott, in its capacity as the
owner of each of the Pulp Mill, the Paper Mill and the Tissue
Mill, will enter into three separate Energy Services Agreements
(Exhibits B-6(a), (b) and (c) hereto) at Closing pursuant to
which Mobile Energy will provide to each of the three mills
power, steam and "black liquor" processing services; and a Master
Operating Agreement (Exhibit B-6(d) hereto), which will govern
the use of certain common facilities, and set forth the
understanding of the parties with respect to allocations of
processing services to the three mills, among other matters. The
Energy Services Agreements and Master Operating Agreement are
more fully described in Item 1.6, below.
1.5 Proposed Financing Plan. Southern states that the
aggregate transaction costs for the purchase, related capital
improvements, and financing of the Energy Complex will not exceed
$420 million. The financed costs will include the agreed upon
11
<PAGE>
purchase price ($350 million), costs of capital improvements to
the Energy Complex estimated at $11 million,4 bank structuring,
underwriting and servicing fees estimated at $10 million and
other estimated closing costs of $4 million to be paid at
Closing, and necessary working capital and cash reserves to meet
the requirements of financing parties. Mobile Energy proposes to
finance the aggregate transaction costs from the proceeds of up
to $105 million of equity investments by Southern, through the
assumption of Scott's obligations with respect to the $85 million
principal amount of Tax Exempt Bonds, and from the proceeds of up
to $230 million of fixed-rate notes (the "Notes") to be issued
and sold to one or more financial institutions or underwriters.
Financial closing on the sale of the Notes will not occur
concurrently with Closing under the Asset Purchase Agreement.
Mobile Energy anticipates that such sale will take place in the
first or second quarter of 1995. Accordingly, in order to
provide bridge financing until the Notes are issued, Southern
proposes to make an interim loan to Mobile Energy in an amount
not to exceed $190 million, which would be repaid from the
proceeds of the sale of the Notes. The interim loan would be
evidenced by Mobile Energy's non-interest bearing promissory note
(the "Interim Note") delivered to Southern in the form of Exhibit
B-2 hereto.
4Planned capital improvements include the addition of a
warehouse, administrative building, repair shop, and various
metering equipment.
12
<PAGE>
(a) Equity Investments By Southern. Southern requests
authority to invest up to $105 million in Mobile Energy in the
form of purchases of Mobile Energy's common stock and cash
capital contributions. Southern's equity investment in Mobile
Energy will provide approximately 25% of Mobile Energy's total
capitalization. Mobile Energy is authorized under the terms of
its Articles of Incorporation (Exhibit A-1 hereto) to issue up to
1000 shares of common stock, par value $1.00 per share, all of
which will be issued to Southern on or before Closing. Mobile
Energy has no other authorized class of capital stock.
Southern proposes to finance its investment in Mobile Energy
(including any interim loan to Mobile Energy) with the proceeds
of the sale of Southern's common stock, as authorized in Holding
Company Act Release Nos. 25979 and 26098, dated January 25 and
August 5, 1994, respectively, from borrowings and/or commercial
paper sales as authorized in Holding Company Act Release No.
26004, dated March 15, 1994, and from internally generated funds,
chiefly dividends from subsidiaries.
(b) Tax Exempt Bonds. As indicated, at Closing, Mobile
Energy will assume Scott's obligations under the Tax Exempt Bond
Lease (Exhibit B-3(a) hereto) between Scott and the Board,
pursuant to which Scott leases certain solid waste disposal
facilities constructed in 1984 and 1985 in conjunction with
Scott's addition of a new power boiler. These facilities were
financed by the Board through the issuance of $85 million
principal amount of Variable Rate Demand Solid Waste Revenue
13
<PAGE>
Refunding Bonds, Series 1984 A, B, C, D and E (the "Tax Exempt
Bonds"), which remain outstanding.
The Tax Exempt Bonds mature on December 1, 2019 and do not
have any mandatory amortization prior to maturity. The Tax
Exempt Bonds were issued pursuant to a Trust Indenture dated as
of December 1, 1984 (the "Trust Indenture") (Exhibit B-3(b)
hereto) between the Board and Chemical Bank, as Trustee (the
"Trustee"). The Tax Exempt Bond Lease obligates Scott to make
payments to the Board in amounts equal to the payments of
principal of and interest on the Tax Exempt Bonds. The Board's
rights under the Tax Exempt Bond Lease are assigned to the
Trustee as security for the Tax Exempt Bonds. Under the terms of
the Tax Exempt Bond Lease, Scott has the ability to accelerate
payment and direct the redemption of the Tax Exempt Bonds at any
time. The Tax Exempt Bond Lease provides that Scott may purchase
the tax exempt facilities for $10 when the Tax Exempt Bonds have
been paid in full.
Under the terms of the Trust Indenture, Scott may cause the
interest rate on the Tax Exempt Bonds to be fixed for various
periods of time ranging from one day up to the entire term of the
bonds. (Trust Indenture, Article IV). Currently, the Tax Exempt
Bonds bear interest at a rate which is reset weekly by the
Remarketing Agent (Goldman Sachs & Company). The interest rate
so established is a rate that, considering relevant market
conditions, is calculated to cause the Tax Exempt Bonds to sell
at par. Each bondholder has the right to tender its Tax Exempt
14
<PAGE>
Bonds for purchase upon seven days' notice. If Tax Exempt Bonds
are tendered, the Remarketing Agent attempts to remarket such
bonds to another purchaser.
To secure the obligation to make payments under the Tax
Exempt Bond Lease with respect to the principal of or interest on
the Tax Exempt Bonds, and to assure the liquidity needed in the
event that the Tax Exempt Bonds cannot be remarketed following
their tender, Scott delivered and is obligated to maintain one or
more irrevocable, direct-pay, bank letters of credit in an amount
equal to the unpaid principal amount of the bonds plus a portion
of the interest thereon, payable on demand by the Trustee. The
existing letters of credit (the "Existing LOCs") are issued by
Morgan Guaranty Trust Company of New York, as to the Series A, B
and C Tax Exempt Bonds, and Swiss Bank Corporation, as to Series
D and E Tax Exempt Bonds. (Exhibit B-3(c) hereto). The face
amounts of the Existing LOCs are approximately as follows:
Series A Series B Series C Series D Series E
$10,715,753 $13,777,397 $14,797,945 $21,941,825 $25,513,750
Scott's obligation to reimburse the issuing banks under the
Existing LOCs is set forth in two separate Reimbursement
Agreements, each dated as of December 1, 1984, as they have each
been amended from time to time (the "Existing Reimbursement
Agreements"). (Exhibit B-3(d) hereto). A fee, in the form of a
commission currently equal to .625% per annum of the face amount
of each of the Existing LOCs, is payable to each of the issuing
banks. (Existing Reimbursement Agreements, Sec. 2.4). Any
15
<PAGE>
unreimbursed amount drawn under the Existing LOCs is treated as a
"domestic" loan to Scott which bears interest at the "Borrowing
Rate," which is currently the greater of (i) the issuing bank's
prime rate, and (ii) the Federal Funds Rate plus 1/2 of 1%.
(Existing Reimbursement Agreements, Sec. 2.1(f)). Subject to
certain conditions, under the Swiss Bank Reimbursement Agreement,
Scott may convert any "domestic" loan to a one, two, three or six
month Eurodollar loan that bears interest at 1/2 of 1% over the
applicable London Interbank Offered Rate (LIBOR). Any loan made
to Scott with respect to an unreimbursed advance is evidenced by
Scott's promissory note (Annex 3 to each of the Existing
Reimbursement Agreements).
Mobile Energy proposes either to convert the Series A
through E Tax Exempt Bonds to fixed interest rate bonds in
accordance with the terms of the Trust Indenture, or,
alternatively, to enter into agreements with the Board pursuant
to which new fixed-rate Tax Exempt Bonds in an aggregate
principal amount of up to $85 million would be sold and the
proceeds thereof applied to redeem the existing Tax Exempt Bonds.
In either case, the converted Tax Exempt Bonds or new Tax Exempt
Bonds would have final maturities in years 2015 through 2019. It
is proposed that Mobile Energy may convert the existing Tax
Exempt Bonds or cause new Tax Exempt Bonds to be issued at any
time prior to December 31, 1996, or such later date as the
Commission by subsequent order in this proceeding may authorize,
16
<PAGE>
and that the fixed rate on the converted or new Tax Exempt Bonds
in no event exceed 8 1/2%.
As indicated, at Closing, Scott will assign its entire
interest in the Tax Exempt Bond Lease to Mobile Energy, and
Mobile Energy will assume Scott's obligations thereunder. In
addition, as between Scott and Mobile Energy, Mobile Energy will
agree to be responsible for any obligations of Scott under the
Existing Reimbursement Agreements. Notwithstanding the
foregoing, Scott will remain primarily liable to the Board under
the Tax Exempt Bond Lease and directly liable to the issuing
banks under the Existing Reimbursement Agreements for a period of
not more than nine months after Closing. (Asset Purchase
Agreement, Sec. 2.7(a)). Not sooner than six nor later than nine
months after Closing, Mobile Energy is obligated to cause Scott
to be relieved of all of its obligations under the Tax Exempt
Bond Lease and the Existing Reimbursement Agreements, either
through amendments to the Tax Exempt Bond documents that would
have the effect of making Mobile Energy the sole party thereto,
or through the redemption of the Tax Exempt Bonds. (Asset
Purchase Agreement, Sec. 2.7(c)).
The Asset Purchase Agreement provides that, for so long as
Scott shall remain liable to the Board under the Tax Exempt Bond
Lease and to the issuing banks under the Existing Reimbursement
Agreements, Southern must absolutely and unconditionally guaranty
payment by Mobile Energy of all amounts required to be paid by
Scott under the Existing Reimbursement Agreements. (Asset
17
<PAGE>
Purchase Agreement, Sec. 2.7(b)). Should Mobile Energy fail to
cause Scott to be relieved of all of its obligations under the
Tax Exempt Bond Lease and the Existing Reimbursement Agreements
within nine months after Closing, Scott may draw upon the
Southern guaranty and apply the proceeds thereof to redeem all of
the outstanding Tax Exempt Bonds. (Asset Purchase Agreement,
Sec. 2.7(c)). The Southern guaranty would expire once Scott is
relieved of its obligations to the Board and to the issuing banks
under the Existing Reimbursement Agreements, and the Tax Exempt
Bonds would thereupon be obligations solely of Mobile Energy.
(c) Notes. Mobile Energy proposes to issue and sell up to
$230 million of its Notes to one or more financial institutions
in a private placement, or to one or more underwriters for resale
to qualified institutional buyers pursuant to Rule 144A under the
Securities Act of 1933. Mobile Energy proposes to issue the
Notes at any time through June 30, 1995, or such later date as
the Commission may hereafter authorize. The Notes will be
secured by a first priority lien on Mobile Energy's interest in
the Energy Complex and in the site and the easements, and by an
assignment of Mobile Energy's rights under the Energy Services
Agreements, the Master Operating Agreement, and, to the extent
assignable, in all permits and licenses necessary for the
ownership and operation of the Energy Complex. As additional
security for payment of the Notes, Southern may also be obligated
to execute and deliver a stock pledge agreement pledging all of
the common stock of Mobile Energy. The form of the loan and
18
<PAGE>
security documents (the "Note Instruments") are included herewith
as Exhibit B-4.
The Notes will be issued in series having maturities of from
16 to 22 years from financial closing, will have a weighted
average life of 13 to 15 years from the date of issuance, and
bear interest at a rate to be fixed on or before financial
closing that will not exceed the sum of the yield to maturity for
an actively-traded U.S. Treasury bond with a maturity date equal
to such average life, plus 3-3/4%. Based on an assumed rate for
a 14-year Treasury bond having a yield to maturity of 7.90% as of
October 24, 1994, and a spread of 3-3/4%, the fixed rate on the
Notes would be no greater than 11.65%.
Under the terms of the Note Instruments, the Notes may be
subject in certain instances to mandatory prepayment in the case
of casualty events, and optional prepayment with payment of a
premium. Principal and interest on the Notes will be payable
quarterly.
As additional security for the payment of the Notes, Mobile
Energy may be obligated to fund various cash reserve accounts,
including but not limited to reserves for debt service and
working capital. All or a portion of the funds needed for such
cash reserves, estimated at not more than $40 million, would be
provided from the proceeds of the Notes. Southern requests
authority to provide a guaranty in an amount of up to $40 million
in lieu of some or all of these cash funded reserve amounts.
Southern states that it is desirable to have the flexibility to
19
<PAGE>
provide a guaranty in lieu of cash funded reserve balances since
it would enable Mobile Energy to reduce the principal amount of
Notes to be sold, thereby reducing interest expense and improving
the project's economics.
It is currently contemplated that the Notes and Tax Exempt
Bonds would be secured pari passu under the terms of an
Intercreditor Agreement (Exhibit B-5 hereto) between the Board
and the holders of the Notes (or trustee on behalf of such
holders).
(d) Interest Rate Swap Agreements. Southern requests
authority to enter into separate interest rate swap agreements in
order to hedge against adverse movements in long-term interest
rates between Closing and the date on which the Notes are sold,
and between Closing and the date (not earlier than six months
after Closing) on which the Tax Exempt Bonds are either converted
to a fixed rate or redeemed with the proceeds of new Tax Exempt
Bonds issued by the Board. In each case, the counterparty to the
swap instrument would be a highly rated financial institution.
The interest rate swap with respect to the Notes will be a
"forward" swap under which Southern would in effect lock in the
fixed rate at the time of Closing, although the exchange in
interest rates would not be scheduled to occur until the
anticipated financial closing date, which would be not later than
June 30, 1995. Since Southern anticipates that it would reverse
this interest rate swap when the Notes are sold, however, it is
unlikely that there would ever be an actual exchange of coupons.
20
<PAGE>
The notional principal amount of the swap would be not more than
$230 million.
The interest rate swap with respect to the $85 million
principal amount of Tax Exempt Bonds would hedge the conversion
or redemption of the bonds from the current weekly variable rate
to long-term fixed rates. The exchange of coupons would be
scheduled to commence six months after Closing. However, since
Southern contemplates that it will reverse the swap at the time
of converting or redeeming the existing Tax Exempt Bonds, it is
unlikely that there would ever be an actual exchange of coupons.
1.6 Terms of Energy Complex Agreements. Mobile Energy and
Scott further propose to enter into three separate Energy
Services Agreements (Exhibits B-6(a), (b) and (c) hereto), in
each instance with Scott in its capacity as owner of the Pulp
Mill, the Paper Mill and the Tissue Mill.5 The term of each of
the Energy Services Agreements shall commence at Closing and
terminate twenty-five (25) years thereafter, subject to the
exercise of Mobile Energy's unqualified option to extend the term
thereof by a period of five (5) years upon not less than five (5)
years advance notice. (Energy Services Agreement, Article 2).
Under the Energy Services Agreements, Mobile Energy will
provide power and steam processing services to the Tissue Mill,
5 As indicated, Scott has announced its agreement to sell
the Paper Mill as a part of its sale of S.D. Warren Company, and
will have the right to seek a purchaser for the Tissue Mill and
Pulp Mill, as well, should it choose to do so. Accordingly, the
purpose for having three separate Energy Services Agreements is
to anticipate the possibility that unrelated companies may at
some future point own the separate mills.
21
<PAGE>
the Paper Mill and the Pulp Mill. In addition, Mobile Energy
will provide black liquor processing services to the Pulp Mill.
(Energy Services Agreement, Article 4).6 During the term of the
Energy Services Agreement, the Mill owners will commit to
purchase the foregoing processing services from Mobile Energy on
an exclusive basis (to the extent Mobile Energy can meet the Mill
owners' as-needed requirements) in the amounts necessary to
operate the Mill from time to time, but not to exceed the Energy
Complex's current full operating capacity or the Mill's current
capacity requirements. (Energy Services Agreement, Secs. 4.4 and
4.5). Mobile Energy will also produce and the Mill owners will
accept certain other by-products and waste streams resulting from
the foregoing products and services, including soap, process
condensates, and miscellaneous effluent streams in volumes,
quantities and qualities to be negotiated and meeting
environmental pre-treatment conditions to be negotiated.
(Energy Services Agreement, Secs. 5.3 and 5.4).
Mobile Energy and Scott (or, as applicable, S. D. Warren
Company) in its capacity as owner of each of the Paper Mill, the
Tissue Mill and the Pulp Mill will also enter into a Master
Operating Agreement (Exhibit B-6(d) hereto), which, among other
things, provides for the creation of a site operating committee
6 As described in Item 1.2, above, after removing a portion
of the moisture content and certain other waste streams, the
black liquor produced in Seller's pulping process is combusted in
the recovery boilers. This removes most of the lignin content in
the black liquor, producing what is referred to as "green
liquor," which is returned to Seller for reuse in the pulping
process.
22
<PAGE>
comprised of the owners of the three mills and Mobile Energy for
the purpose of ensuring through cooperative efforts continued
integrated operation of the Mill and Energy Complex. In
addition, the Master Operating Agreement will govern nominations
of processing services and allocation of demand charges to the
three mills and provides for the installation, testing and
reading of metering devices.
Revenues under the Energy Services Agreements will be based
on separate demand and usage charges for power, steam, and black
liquor processing services. (Energy Services Agreement, Article
6; Master Operating Agreement, Exhibit C). The level of the
demand charges, which are designed to cover debt service, return
of capital and fixed operating costs (such as taxes, insurance,
and on-site labor) of the Energy Complex, are based on peak
levels of demand determined for each of the Pulp Mill, the Paper
Mill, and the Tissue Mill. The demand charges for steam and
electricity apply to each of the three mills. The liquor
processing demand charge applies only to the Pulp Mill. The
steam and electric demand charge levels are first determined on
an aggregate basis, then allocated between the three mills based
on the relative demand peaks of each of the mills. (Master
Operating Agreement, Sec. 3.6).
A more detailed explanation of the demand and usage charge
structure is contained in Exhibit B-6(e) hereto.
Based on projections of the revenues and expenses of the
Energy Complex, Southern estimates that, over the life of the
23
<PAGE>
project, Mobile Energy's net operating cash flow will at all
times be greater than 1.3x fixed debt service, and on average
will be 1.5x fixed debt service.
1.7 Operations and Maintenance Services. In accordance
with its existing authorization, SEI will provide operating and
maintenance services to Mobile Energy at cost, as determined in
accordance with Rules 90 and 91. At Closing, SEI will hire a
majority of the approximately 130 employees of Scott who are
currently assigned to the operations of the Energy Complex.
(Asset Purchase Agreement, Exhibit N). These employees will
remain dedicated to the Energy Complex. Any additional personnel
or other resources that may be required in connection with
operating and maintaining the Energy Complex will be provided by
SEI using its own work force, independent third party suppliers,
or, subject to availability, personnel and other resources that
may be provided by Southern Company Services, Inc. or the
Operating Companies pursuant to the existing service agreements
between SEI and such associate companies.
1.8 Other Matters. The consolidated federal income tax
liability of the Southern System is allocated among the members
of the consolidated group in accordance with the provisions of
subparagraph (a)(1) of Section 1552 of the Internal Revenue Code
of 1986, as amended, and the applicable requirements of Rule
45(c), as modified by certain orders of the Commission. Mobile
Energy will be allocated a portion of the consolidated federal
income tax liability based upon those provisions.
24
<PAGE>
In accordance with its existing authorization, Southern
Company Services, Inc., a subsidiary service company of Southern,
will provide tax, auditing, engineering support and other
services to Mobile Energy pursuant to a service agreement that
will be substantially identical to the standard form of Southern
System service agreement now in use. The agreement will be filed
as an exhibit to Southern's Annual Report on Form U-5S.
Item 2. Fees, Commissions and Expenses.
An estimate of the fees, commissions and expenses expected
to be incurred by the applicants in connection with the
transactions proposed herein will be filed by amendment hereto.
Item 3. Applicable Statutory Provisions.
The issuance of common shares and of the Interim Note by
Mobile Energy to Southern are subject to Sections 6(a) and 7 of
the Act, and the acquisition thereof by Southern is subject to
Sections 9(a), 10, 12(b) and 12(f) and Rules 43 and 45
thereunder. The repayment of the Interim Note with the proceeds
of the Notes is subject to Rule 42. The issuance and sale of
Notes by Mobile Energy, and the entering into of an interest rate
swap agreement with respect thereto by Southern, are also subject
to Sections 6(a) and 7 of the Act. The making of cash capital
contributions and/or open account advances by Southern to Mobile
Energy is subject to Section 12(b) of the Act and Rule 45
thereunder.
25
<PAGE>
The assumption by Mobile Energy of Scott's obligations under
the Tax Exempt Bond documents, Mobile Energy's exercise of rights
under the Indenture to convert the Tax Exempt Bonds to a fixed
rate or to redeem the existing Tax Exempt Bonds with the proceeds
of new Tax Exempt Bonds to be issued by the Board, and the
entering into by Southern of an interest rate swap agreement with
respect to the conversion of the Tax Exempt Bonds to a fixed
rate, are also subject to Sections 6(a) and 7 of the Act and Rule
42 thereunder.
Upon its acquisition of the Energy Complex, Mobile Energy
will be an "electric utility company" within the meaning of
Section 2(a)(3) of the Act. Mobile Energy's acquisition of the
Energy Complex is subject to Sections 9(a) and 10. The
acquisition of certain components of the Energy Complex
associated with the processing of black liquor and steam may be
regarded as an acquisition of an interest in an "other business"
for purposes of Section 9(a)(1).
The proposed guaranties by Southern of (i) the cash portion
of the purchase price, (ii) Mobile Energy's obligations under the
Environmental Indemnity Agreements, (iii) Mobile Energy's
obligations to the Board and to Scott under the Tax Exempt Bond
documents for so long as Scott shall remain directly and
primarily liable thereunder, and (iv) debt service, working
capital, and other reserve requirements under the terms of the
Note Instruments, are subject, in each case, to Sections 6(a), 7,
and 12(b) and Rule 45.
26
<PAGE>
The proposed transactions will be carried out in accordance
with the procedures specified in Rule 24 of the Act and pursuant
to an order of the Commission with respect thereto, except that
Southern and Mobile Energy request authorization (i) to issue and
sell the Notes (and repay the Interim Note with the proceeds
thereof) at any time prior to June 30, 1995, and (ii) to convert
the Tax Exempt Bonds to a fixed rate or redeem the existing Tax
Exempt Bonds with the proceeds of new Tax Exempt Bonds to be
issued by the Board at any time prior to December 31, 1996.
SEI and Southern Company Services will provide services to
Mobile Energy at cost in accordance with Section 13 and Rules 87,
90 and 91 thereunder and with the terms of authorizations
heretofore granted.
Item 4. Regulatory Approval.
The proposed transactions are not subject to the
jurisdiction of any state commission or of any federal commission
other than the Commission. Mobile Energy will not be a "public
utility" under the Federal Power Act or the Alabama public
utilities code. The transactions are subject to review by the
Justice Department and Federal Trade Commission pursuant to the
Hart-Scott-Rodino Antitrust Improvements Act of 1976.
27
<PAGE>
Item 5. Procedure.
Southern requests that the Commission's order be issued as
soon as the rules allow, and that there be no thirty-day waiting
period between the issuance of the Commission's order and the
date on which it is to become effective. Southern hereby waives
a recommended decision by a hearing officer or other responsible
officer of the Commission and hereby consent that the Division of
Investment Management may assist in the preparation of the
Commission's decision and/or order in the matter unless such
Division opposes the matters covered hereby.
28
<PAGE>
Item 6. Exhibits and Financial Statements.
(a) Exhibits.
A-1 - Articles of Incorporation of Mobile
Energy. (To be filed by amendment).
A-2 - Form of share of Common Stock of Mobile
Energy. (To be filed by amendment).
A-3 - Bylaws of Mobile Energy. (To be filed
by amendment).
B-1 - Acquisition Documents
(a) Asset Purchase Agreement between Mobile
Energy and Scott. (To be filed by
amendment).
(b) Transfer Instruments. (To be filed by
amendment).
(c) Environmental Indemnity Agreements
between Mobile Energy and Scott, in its
capacity as owner of each of the Pulp
Mill, the Tissue Mill and the Paper
Mill. (To be filed by amendment).
(d) Guaranty Agreement between Southern,
Mobile Energy and Scott, in its capacity
as owner of each of the Pulp Mill, the
Tissue Mill, and the Paper Mill. (To be
filed by amendment).
B-2 - Form of Interim Note evidencing interim
loan by Southern to Mobile Energy. (To
be filed by amendment).
B-3 - Tax Exempt Bond Documents
(a) Lease and Agreement between the
Industrial Development Board of the City
of Mobile, Alabama and Scott,
dated as of December 1, 1984.
(To be filed by amendment).
("P")
(b) Trust Indenture between the Industrial
Development Board and Chemical Bank, as
Trustee, dated as of December 1, 1984,
and First Supplement thereto, dated as
29
<PAGE>
of January 1, 1985. (To be filed by
amendment). ("P")
(c) Letters of Credit issued by Morgan
Guaranty Trust Company of New York and
Swiss Bank Corporation in favor of the
Industrial Development Board, including
amendments thereto. (To be filed by
amendment). ("P")
(d) Reimbursement Agreements between Scott
Paper Company and each of Morgan
Guaranty Trust Company of New York and
Swiss Bank Corporation, as issuing banks
under the Letters of Credit, including
amendments thereto. (To be filed by
amendment). ("P")
(e) Form of Southern Company Guaranty of
Scott's Tax Exempt Bond Lease
obligations. (To be filed by
amendment).
B-4 - Note Instruments
(a) Note Purchase/Underwriting Agreement.
(To be filed by Amendment).
(b) Form of Note. (To be filed by
amendment).
(c) Instruments securing holders of the
Notes. (To be filed by amendment).
(d) Stock Pledge Agreement between The
Southern Company, as pledgor, and
[_____________], as pledgee. (To be
filed by amendment).
B-5 - Intercreditor Agreement. (To be filed
by amendment).
B-6 - Operating Contracts.
(a) Pulp Mill Energy Services Agreement
between Mobile Energy and Scott. (To
be filed separately, by amendment,
pursuant to Rule 104).
(b) Paper Mill Energy Services Agreement
between Mobile Energy and Scott. (To be
30
<PAGE>
filed separately, by amendment, pursuant
to Rule 104).
(c) Tissue Mill Energy Services Agreement
between Mobile Energy and Scott. (To be
filed separately, by amendment, pursuant
to Rule 104).
(d) Master Operating Agreement between
Mobile Energy and Scott in its capacity
as the Pulp Mill owner, the Paper Mill
owner, and the Tissue Mill owner. (To
be filed separately, by amendment,
pursuant to Rule 104).
(e) Explanation of demand and usage charge
structure under Energy Services
Agreements. (Filed separately pursuant
to Rule 104).
C - None.
D - None.
E-1 - Map of Mill and Energy Complex. (To be
filed by amendment). ("P")
E-2 - Schematic diagram depicting bus bar
interconnections between Alabama Power
and Energy Complex and Mill facilities.
(To be filed by amendment). ("P")
F - Opinion of Troutman Sanders. (To be
filed by amendment).
G - Form of Federal Register Notice.
(b) Financial Statements. (To be filed by amendment).
Item 7. Information as to Environmental Effects.
In view of the nature of the proposed transactions as
described in Item 1 hereof, the Commission's action in this
matter will not constitute any major federal action significantly
affecting the quality of the human environment.
31
<PAGE>
No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed
transactions.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this statement to be signed on their behalf by the undersigned
thereunto duly authorized.
Dated: October 26, 1994 THE SOUTHERN COMPANY
By: /s/Tommy Chisholm
Tommy Chisholm
Secretary
32
<PAGE>
Exhibit G - Form of
Federal Register Notice
The Southern Company ("Southern"), a registered holding
company under the Public Utility Holding Company Act of 1935, as
amended (the "Act"), has filed an application-declaration
pursuant to Sections 6, 7, 9, 10, 12 and 13 of the Act and Rules
42, 43, 45, 54, 87, 90 and 91 thereunder, regarding the proposed
purchase by a new wholly-owned subsidiary of Southern of a
cogeneration and resource recovery facility located at Scott
Paper Company's Mobile, Alabama, pulp and paper mill, and certain
other transactions ancillary thereto.
Southern proposes to organize and acquire all of the common
stock of a new subsidiary to be named Mobile Energy Services
Company, Inc. ("Mobile Energy"). Through Mobile Energy, Southern
proposes to purchase the energy and recovery complex (the "Energy
Complex") at Scott Paper Company's Mobile, Alabama, pulp and
paper mill (the "Mill"). Upon the acquisition of the Energy
Complex, Mobile Energy will become an "electric utility company"
within the meaning of Section 2(a)(3) of the Act.
The Energy Complex consists of three turbine generators with
an aggregate rated capacity of approximately 105 MW, three power
boilers, two recovery boilers, and various ancillary facilities.
The Energy Complex provides approximately 100% and 98%,
respectively, of the steam and electric requirements of the Mill.
More than 80% of the fuel requirements of the Energy Complex are
met by waste streams ("black liquor," biomass and sludge) of
Scott's Mill operations. Supplemental fuel needs are met with
coal and natural gas. Through existing electrical
<PAGE>
interconnections with the Mill and Energy Complex, Alabama Power
provides back-up and supplemental electric service.
Mobile Energy proposes to purchase the Energy Complex for
$350 million. A portion of the consideration paid would be in
the form of the assumption by Mobile Energy of Scott's
obligations under various agreements relating to certain
outstanding tax exempt industrial development bonds, due 2019
(the "Tax Exempt Bonds") issued by the Industrial Development
Board of Mobile, Alabama, in 1985, in connection with the
financing of certain solid waste disposal facilities. The total
financed costs of the proposed acquisition will not exceed $420
million, which includes the purchase price, the cost of certain
improvements that Mobile Energy will make to the Energy Complex,
closing costs and amounts needed for working capital and as cash
reserves to satisfy the requirements of lenders.
The financed costs will be provided as follows: (i) by
equity investments by Southern in Mobile Energy in an aggregate
amount not to exceed $105 million, in the form of purchases of
all of Mobile Energy's authorized shares of common stock and cash
capital contributions; (ii) by Mobile Energy's assumption of
Scott's obligations with respect to $85 million aggregate
principal amount of Tax Exempt Bonds; and (iii) by the issuance
of up to $230 million aggregate principal amount of notes (the
"Notes") to one or more financial institutions in a private
placement or to one or more underwriters for resale to qualified
institutional buyers pursuant to Rule 144A. Closing on the sale
of the Notes is anticipated to occur in the first or second
quarter of 1995. Southern proposes to advance up to $190 million
2
<PAGE>
to Mobile Energy in the form of a non-interest bearing interim
loan, which would be repaid from the proceeds of the Notes.
The Tax Exempt Bonds do not have any scheduled payments of
principal prior to maturity in 2019. The bonds currently bear
interest at a rate which is reset weekly. The bond holders have
the right to tender their bonds for repurchase upon seven days
notice. If bonds are so tendered, the remarketing agent offers
them for resale. To secure and assure liquidity for these
arrangements, Scott has delivered direct-pay letters of credit,
backed by reimbursement agreements between Scott and the issuing
banks, in the full amount of the outstanding bonds, plus a
portion of the interest thereon.
At closing, Mobile Energy will assume Scott's obligations
under the Tax Exempt Bond lease and agree to pay all of Scott's
obligations under the existing reimbursement agreements.
Southern proposes to guaranty Mobile Energy's obligations.
Notwithstanding the foregoing, Scott will remain directly and
primarily liable under the Tax Exempt Bond lease and the
reimbursement agreements. Mobile Energy is obligated to cause
Scott to be discharged from all liability under the Tax Exempt
Bond lease and reimbursement agreements not later than 9 months
after closing. If Mobile Energy should fail to take action that
would discharge Scott under these agreements, Scott would have
the right to draw down on the Southern guaranty and redeem the
Tax Exempt Bonds in full.
Mobile Energy requests authority to exercise an option in
the bond documents to convert the Tax Exempt Bonds to a fixed
rate through maturity, or, alternatively, to enter into
arrangements with the Industrial Development Board of Mobile,
3
<PAGE>
Alabama, pursuant to which the board would issue new fixed-rate
bonds in an aggregate principal amount not to exceed $85 million
and use the proceeds thereof to redeem the existing Tax Exempt
Bonds. In either case, it is proposed that the fixed rate on the
converted bonds or new bonds would be no greater than 8 1/2%. Upon
conversion of the Tax Exempt Bonds or issuance of new bonds, the
existing letters of credit and reimbursement obligations would be
released.
It is proposed that the Notes would have maturities of from
16 to 22 years from the date of issuance and would bear interest
at a fixed rate not to exceed the sum of the yield to maturity of
an actively traded U.S. Treasury bond with a maturity equal to
the average life of the Notes (proposed to be from 13 to 15
years) plus 3-3/4%. Southern has requested authority to provide
a guaranty to the holders of the Notes in any amount of up to $40
million in lieu of part or all of any cash funded debt service
and/or working capital reserve account balances that may be
required under the terms of the Note documents. Southern states
that having the flexibility to provide a guaranty would enable
Mobile Energy to reduce the amount of Notes sold, thereby
reducing interest expense.
The obligations of Mobile Energy under the Tax Exempt Bond
documents and the Notes would be secured by the assets and
properties of Mobile Energy, including the collateral assignment
of Mobile Energy's rights under three separate 25-year energy
services agreements with Scott pursuant to which Mobile Energy
will sell electricity, steam, and black liquor processing
services to Scott. The three agreements are each with Scott in
its capacity as owner of the pulp mill, the tissue mill, and the
4
<PAGE>
paper mill, which are the three components of the Mill. Separate
agreements will be executed because Scott has already announced
its agreement to sell its paper mill to an unaffiliated third
party, and may in the future offer for sale either or both of the
tissue mill and pulp mill.
Southern proposes to enter in to two separate interest rate
swap agreements at closing for the purpose of hedging against
adverse movements in long-term interest rates between closing and
the date (not earlier than six months after closing) on which the
Tax Exempt Bonds are converted to fix rate bonds or redeemed from
the proceeds of new Tax Exempt Bonds and the date (not later than
June 30, 1995) on which the Notes are sold.
Under the terms of the acquisition documents, Mobile Energy
and Scott will agree to indemnify each other with respect to
environmental claims relating to the Energy Complex and each of
the three mills to the extent such claims arise after closing.
Southern proposes to guaranty uninsured claims against Mobile
Energy under the terms of the environmental indemnities in an
aggregate amount not to exceed $20 million, as escalated for
inflation.
SEI will enter into an agreement with Mobile Energy pursuant
to which SEI will operate and maintain the Energy Complex at
cost, as determined in accordance with Rules 90 and 91. At
closing on the purchase of the Energy Complex, SEI will hire a
majority of the approximately 130 current employees of Scott who
are dedicated to the Energy Complex operations. These employees
will remain dedicated to the Energy Complex.
5
<PAGE>
