File No. 70-7932
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 3 to
APPLICATION OR DECLARATION on FORM U-1
under
The Public Utility Holding Company Act of 1935
THE SOUTHERN COMPANY SOUTHERN ELECTRIC
64 Perimeter Center East INTERNATIONAL, INC.
Atlanta, Georgia 30346 900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
ALABAMA POWER COMPANY MISSISSIPPI POWER COMPANY
600 Piedmont Avenue, N.E. 2992 West Beach
Atlanta, Georgia 30308 Gulfport, Mississippi 39501
GEORGIA POWER COMPANY GULF POWER COMPANY
333 Piedmont Avenue, N.E. 500 Bayfront Parkway
Atlanta, Georgia 30308 Pensacola, Florida 32501
SAVANNAH ELECTRIC AND POWER SOUTHERN COMPANY SERVICES,
COMPANY INC.
600 Bay Street East 64 Perimeter Center East
Savannah, Georgia 31401 Atlanta, Georgia 30346
SOUTHERN NUCLEAR OPERATING COMPANY
42 Inverness Center Parkway
Birmingham, Alabama 36242
(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
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The Application - Declaration (the "Application"), as
previously amended by Amendment No. 2, is further amended and
restated in its entirety to read as follows:
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, Georgia Power Company, Gulf Power Company,
Mississippi Power Company, and Savannah Electric and Power
Company) and Southern Nuclear Operating Company, a special
purpose nuclear power plant operating subsidiary (collectively,
the "Operating Companies") and Southern Company Services, Inc.
("SCS"), a subsidiary service company. Southern also owns all of
the common stock of Southern Electric International, Inc.
("SEI"), a non-utility subsidiary.
In accordance with the Commission's order dated October 20,
1987 (HCAR No. 24476) (the "1987 Order"), SEI is engaged in the
design, development, construction, ownership and operation of
cogeneration and independent power facilities within and outside
the United States. SEI also provides technical services to
industrial and commercial concerns, unaffiliated utilities and
foreign governments in both domestic and international markets,
and markets "intellectual property" acquired or created by
Southern System companies ("Intellectual Property") to
unaffiliated third parties in accordance with its original
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authorizations dated July 17, 1981 and December 18, 1981 (HCAR
Nos. 22132 and 22315A) (the "Original Orders").
As a part of a plan to reorganize various non-utility
businesses of Southern and its subsidiaries along functional
lines, Southern and SEI propose in this Application to amend and
restate SEI's existing financing and operational authority. SEI,
SCS and the Operating Companies are also requesting herein
approval for intrasystem service agreements pursuant to which
such companies may render services and sell goods directly (in
the case of SEI) or indirectly (in the case of the Operating
Companies and SCS) to "exempt wholesale generators," or "EWGs,"
as defined in Section 32, and "foreign utility companies," or
"FUCOs," as defined in Section 33, as well as to associate
companies that own "qualifying facilities," or "QFs," as defined
under the Public Utility Regulatory Policies Act of 1978, as
amended ("PURPA"), or other facilities that SEI may hereafter be
authorized to acquire.
In a related proceeding (see File No. 70-8173), Southern is
proposing to restate the operational and financing authority of
The Southern Development and Investment Group, Inc.
("Development"), also a wholly-owned non-utility subsidiary of
Southern. It is proposed in that proceeding that Development
will succeed to certain of SEI's consulting activities
(generally, consulting activities that are not related to
domestic power generation or foreign generation, transmission, or
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distribution), and to SEI's licensing of Intellectual Property,
among other business activities.
Since the enactment of Sections 32 and 33 of the Act,
Southern has acquired directly and indirectly the securities of
several EWGs and FUCOs. Certain of Southern's EWG subsidiaries
were previously subsidiaries of SEI that SEI acquired in
accordance with its authority under the 1987 Order. Exhibit H
hereto identifies, as of February 28, 1994, all associate
companies of Southern that are EWGs, FUCOs, and QFs.
1.2 Plan of Reorganization and Effect on Existing
Authority. Southern and SEI have adopted a plan of
reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended, pursuant to which SEI
proposes to organize and acquire all of the stock of a newly
organized Delaware corporation ("Newco") in exchange for certain
assets of SEI having an aggregate book value at January 1, 1994,
of approximately $6.8 million, consisting primarily of rights
under certain existing consulting agreements with third parties
and accounts receivable associated therewith, which will be
assigned to Newco; computers; office equipment and furniture; and
interests in certain software programs and other proprietary
technology. Newco will also assume certain liabilities of SEI
totaling approximately $7.4 million at January 1, 1994, including
accounts payable, accrued pension and retirement costs associated
with employees to be transferred to Newco, and certain loss
reserves under existing contracts. Immediately thereafter, the
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shares of Newco will be distributed to Southern as a dividend
distribution, and Newco and Development will be merged pursuant
to a plan adopted under applicable state law.
Exhibit I hereto lists and describes the investments and
currently effective contracts to be retained by SEI, and those to
be transferred to Development.
The plan of reorganization described above will involve the
transfer to Newco of three of SEI's operating departments and
approximately 30 of SEI's current employees. Generally, these
departments are responsible for non-power generation services,
marketing of Intellectual Property, and related activities, which
are the core of SEI's business activities authorized in the
Original Orders.
SEI and Southern will relinquish the authority heretofore
granted by the Commission in the Original Orders and the 1987
Order upon the effective date of the Commission's order relating
to this Application and to the Application of Southern and
Development in File No. 70-8173, except with respect to any
contracts and investments that are entered into or made by SEI
prior to the effective dates of such orders in reliance upon and
in accordance with the Original Orders or the 1987 Order, as the
case may be.
1.3 Development of Independent Power and Foreign Utility
Projects. Since 1987, SEI has engaged in the development of QFs
and other power production, energy management and resource
recovery facilities. In 1988, SEI acquired a 33-1/3% percent
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interest as a limited partner in a QF in Hawaii, and is currently
developing a QF in Virginia, scheduled to be placed in commercial
operation in 1996.1 Since the passage of the Energy Policy Act
in late 1992, SEI has also successfully developed bid proposals
pursuant to which Southern has acquired interests in FUCOs in the
Bahamas, Argentina and Chile.2 SEI now has under active
consideration several additional domestic and foreign power
production proposals and foreign utility system privatization
proposals.
It is proposed that SEI will continue to engage in
preliminary project development activities ("Development
Activities") relating to the potential acquisition and ownership
of independent power facilities, including QFs and facilities to
be owned or operated by EWGs and FUCOs, and other power
production facilities located within the service territories of
the Operating Companies or the service territories of other
members of the Southeastern Electric Reliability Council,
together with facilities and equipment that are ancillary to the
foregoing, such as may be used for fuel production, conversion,
handling and/or storage; electrical transmission; and energy
management, recovery and efficiency (hereinafter referred to
collectively as "Projects"). With the exception noted in Item
1 Each of these facilities was subsequently determined by
the Federal Energy Regulatory Commission to be an "eligible
facility" under Section 32 of the Act.
2 At December 31, 1993, Southern's "aggregate investment,"
as defined in Rule 53(a), in all such EWGs and FUCOs, was
approximately $333.98 million.
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1.7, below, in any case in which SEI's Development Activities
culminate in a proposal to acquire the securities of or other
interest in any EWG or FUCO, it is intended that Southern, rather
than SEI, would consummate the acquisition in an exempt
transaction pursuant to Section 32 or 33 of the Act, as
applicable, subject to complying with all rules and regulations
promulgated thereunder. Any acquisition by Southern or SEI of an
interest in any other type of Project, and any related financing,
would be the subject of separate filings with this Commission.
Development Activities will be limited to project due
diligence and design review; market studies; site inspection;
preparation of bid proposals; application for required permits
and/or regulatory approvals; acquisition of site options and
options on other necessary rights; negotiation and execution of
contractual commitments with owners of existing facilities,
equipment vendors, construction firms, power purchasers, thermal
"host" users, fuel suppliers and other project contractors;
negotiation of financing commitments with lenders and equity co-
investors; and such other preliminary development activities as
may be required in order to consummate the acquisition of or
financial closing on a Project.
SEI intends to pursue Development Activities alone, or in
combination with unaffiliated third parties (such as engineering
companies, fuel suppliers, or equipment suppliers) pursuant to
"teaming" or joint development arrangements, not involving the
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formation of any business entity, under which the parties may
agree to share costs and/or contribute services or expertise.
1.4 Performance of Project Related and Other Services. SEI
also proposes to render project development, engineering, design,
construction and construction management, operating, fuel
management, maintenance and power plant overhaul, and other
similar kinds of managerial and technical services to both
affiliated Project entities and to non-affiliated developers,
operators and owners of independent power projects and foreign
and domestic utility systems, utilizing the technical
capabilities and expertise developed by SEI and other Southern
System companies in the following areas: management expertise,
such as strategic planning, financial analysis and modeling,
feasibility studies, policy planning and implementation programs,
and project management services; environmental expertise; central
station and distributed power plant, transmission and
distribution operations and maintenance services and expertise;
technical services and expertise, such as design, engineering,
procurement, construction supervision, engineering and
construction planning and procedures; system planning and
operational planning; training services and expertise,
particularly training in the area of operation and maintenance of
power plants and related facilities; and technical and procedural
resources and systems, such as are embedded in computer,
information, and communications systems, programs or manuals.
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SEI will render such services utilizing its own work force,
which now consists of approximately 200 employees (exclusive of
employees who will be transferred to Development upon receipt of
the Commission's order in File No. 70-8173), independent
contractors, and personnel and other resources of SCS and the
Operating Companies obtained pursuant to service agreements (the
"Service Agreements") which are currently in effect, as described
in Item 1.6 below. The use by SEI of the available technical
expertise and personnel of SCS and the Operating Companies will
result in the efficient and cost-effective utilization of already
existing capabilities. It will also give SEI's associate
companies the benefit of knowledge and experience gained by SEI
from its outside project related activities.
All services rendered by SEI to non-affiliates will be based
upon the fair market value thereof and will be subject to such
other terms, conditions and standards of performance as are
negotiated on a case-by-case basis, taking into account the kind
and scope of services involved, the duration of the contract, the
levels of warranties and indemnities that may be negotiated, and
other factors that are unique to each transaction.
Similarly, SEI proposes to provide such services and sell
goods to any Project entity that is an associate company
(including but not limited to any EWG, FUCO, or QF) at fair
market prices, and requests an exemption pursuant to Section
13(b) and Rule 100(a) from the requirements of Rules 90 and 91 as
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applicable to such transactions in any case in which any one or
more of the following circumstances shall obtain:
1. Such Project entity derives no part of its income,
directly or indirectly, from the generation, transmission, or
distribution of electric energy for sale within the United
States;
2. Such Project entity is an EWG which sells electricity at
market-based rates which have been approved by FERC or the
appropriate state public utility commission, or a QF which sells
electricity at the purchaser's "avoided cost" determined in
accordance with the regulations under PURPA, or sells electricity
at rates negotiated at arms'-length with large industrial or
commercial customers purchasing such electricity for their own
use and not for resale;
3. If such Project entity sells electricity at rates based
upon its cost of service, as approved by FERC or any state public
utility commission having jurisdiction, the terms and conditions
(including price) of any contract pursuant to which such services
or goods are provided have been expressly approved by the holders
of a majority of the equity interests of such Project entity
other than Southern or any associate company of Southern.
The final sentence of Section 13(b) permits the Commission
to exempt certain categories of transactions otherwise falling
within the scope of Section 13(b) from the cost requirement if
any such transactions are with any associate company which does
not derive, directly or indirectly, any material part of its
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income from sources within the United States, or involve "special
or unusual circumstances." A FUCO or foreign EWG clearly falls
within the first category. As to the latter category, SEI
submits that there is an adequate basis for the Commission to
find that "special or unusual circumstances" exist in any case in
which SEI renders services or sells goods to an associate Project
company if such associate company is engaged in selling
electricity at negotiated prices or rates that are determined
wholly without reference to the associate company's cost of
service, at prices determined on the basis of arms'-length
negotiations with unaffiliated co-investors, and/or under
circumstances where it is otherwise impracticable to determine
cost.3 In this regard, the Commission has, in the past,
recognized that these factors may provide an appropriate basis
for exempting transactions from the "cost" rules under Section
13(b). (See New England Electric System, et al., HCAR No. 22309,
December 9, 1981).
In most cases, SEI believes that it will be impracticable to
determine "cost" in connection with providing operating,
construction and other similar Project services. In order to be
competitive with other providers of such services in the
marketplace, as well as responsive to the requirements of project
lenders and power purchasers, among others, the terms and
3 See HCAR No. 125, dated March 30, 1936, in which the
Commission adopted the predecessors of Rules 80 through 92,
including exceptions from the cost rule intended for cases in
which it is "impracticable to determine cost."
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conditions of many of the services that SEI anticipates it will
provide, such as power plant operations and maintenance and
construction services, will typically include warranties on
equipment and workmanship, minimum performance guarantees, or
guaranteed completion dates, backed by contract price retention
provisions, liquidated damages and/or the potential obligation to
pay rebates, as well as broad indemnification terms. Terms such
as these are rarely if ever provided by "cost"- based subsidiary
service companies or operating utility subsidiaries in a holding
company system in connection with routine intrasystem service or
sales transactions. Such performance-based terms expose the
service provider to substantial, potential, economic risks, for
which it is reasonable to expect compensation in the form of
performance bonuses, success fees or the like. Moreover, it
would be difficult if not impossible to assign a "cost" to such
terms for purposes of Rules 90 and 91.
For the foregoing reasons, SEI submits that it is not
necessary or appropriate in the public interest or for the
protection of investors or consumers that the charge for services
or goods provided by SEI to associate Project entities be limited
to "cost" in any of the circumstances listed above.
1.5 Standby Generator Network Programs. In 1991, as a part
of its purchase of certain non-utility assets of Intellicon,
Inc., SEI acquired the exclusive rights to a proprietary
computer-based controls system which SEI has since modified and
incorporated into a proprietary computer-based remote generator
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dispatch and control program, known as "Standby Capacity
Network," or "SCN" for short. The SCN program enables a utility
company to access the capacity associated with standby or
emergency generators, typically owned by large customers such as
hospitals, factories, and office buildings. With the
installation of the SCN equipment and software programs and
interconnection facilities at a customer's location, a utility,
or contract operator acting under the direction of such utility,
is able to remotely dispatch a standby generator and operate it
in parallel with the utility grid.
SCN is a novel supply-side program designed to give a
utility access to the capacity associated with its customers'
standby generators during peak demand periods. Thus, SCN can
provide access to an important, under-utilized, source of
existing generation. In addition to its potential attractiveness
to utilities, SEI believes that SCN programs would also be
attractive to many industrial, commercial and institutional
owners of standby generators, because SCN would enable them to
shift the responsibility for the maintenance, fuel supply, and
operation of their standby generators to the utility that serves
them. Among other benefits, the owner of the standby generator
would be assured of regular testing of its equipment and periodic
maintenance in accordance with generally accepted operating,
maintenance and testing procedures. In addition, the owner of a
standby generator would in some cases be compensated in some way
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for the use of its generating facilities or the capacity
associated therewith.
SEI is currently negotiating with several different
utilities with a view to implementing SCN programs. (In at least
one case, SEI has also bid an SCN program in response to a
non-affiliated utility's solicitation for new capacity). SEI has
not yet concluded any contractual arrangements and is therefore
unable to state precisely what form these contractual
arrangements may take. Nevertheless, SEI believes that, in many
cases, an SCN program would be implemented pursuant to a contract
between a utility and SEI under which SEI would agree to install
certain equipment at the standby generator location and act at
the utility's direction in operating and maintaining the standby
generator. SEI may also agree to manage appropriate fuel
inventories and periodically test and, if necessary, overhaul,
the customer's standby generator, among other possible related
services that could be provided.
The equipment that would be installed at the SCN customer's
premises would consist of off-the-shelf electrical components
purchased from third party vendors and suppliers which have been
assembled to SEI's proprietary design configuration. Typical
components of this equipment would include an industrial
programmable computer, battery backup, modem for communications,
electronic engine governor, power factor controller,
multiplexers, control wire, electrical cables and a
breaker/contactor. A central dispatch station, located at a site
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designated by the interconnecting utility, would manage the
operation of the SCN system, collect data to measure performance,
monitor events at the site, and dispatch the standby generator.
The dispatch station would utilize a high-speed microcomputer and
telecommunications devices. The estimated installed cost of SCN
equipment per site would range, in most cases, from $30,000 to
$60,000.
Under a typical SCN arrangement, SEI would be compensated by
the utility, both for providing the proprietary technology and
related equipment necessary to control and dispatch the standby
generator, and for providing the related services and supplies.
SEI would not seek to acquire any interest in the customer's
generating equipment, and would not take title to the electricity
generated. SEI would retain all right, title and interest to the
proprietary software used in SCN. In most cases, SEI would also
retain ownership of the SCN equipment and control systems in
which its proprietary technology is incorporated, and to any
other equipment supplied by SEI as a part of any related
services. Alternatively, the utility contracting with SEI to
implement an SCN network may take title to the equipment and
control systems.
SEI requests authority to market the SCN program to both
affiliated and unaffiliated utilities and/or their respective
customers. The program and related services would be sold to
unaffiliated parties at prices to be negotiated based upon the
fair market value thereof. As currently required under the
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terms of the Original Orders, SEI has and will continue to make
the proprietary technology incorporated into the SCN program
available to the Operating Companies without charge (except for
the actual expenses incurred by SEI in making such program
available). If an Operating Company requests SEI to provide any
related service, e.g., software support, training of Operating
Company personnel, maintenance of the customer's equipment, or
the like, SEI would bill the associate company for the costs of
such services, determined in accordance with Rules 90 and 91.
SEI regards SCN activities as a part of its proposed Project
related services activities, rather than a separate and distinct
business. The kinds of services offered to non-affiliates
(including those offered in connection with any SCN program) will
be similar to those offered to associate Project entities using
SEI's existing personnel and other resources. Such activities
will also provide SEI with an important means of access to
potential investment opportunities involving projects owned or
under development by third parties, and will help SEI to
establish a market presence in domestic or foreign markets in
which it is actively seeking to develop Project investment
opportunities. Although there are novel aspects to an SCN
program, SCN activities are ultimately concerned with the
production and dispatch of electricity, which has been and will
continue to be SEI's primary business. As more fully explained
below, in Item 1.7, only 10% of the additional investment in SEI
by Southern will be utilized to support all non-affiliate
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services activities, including services provided as a part of any
SCN program and any associated investment in SCN equipment.
These activities will therefore be clearly subordinate to SEI's
primary business functions of developing investment opportunities
in Projects and services to associate Project entities.
1.6 Amendment of Existing Service Contracts Between SEI and
SCS and the Operating Companies. Under the authorization
contained in the Original Orders, SEI has entered into Service
Agreements with SCS and each of the Operating Companies (other
than Savannah Electric and Power Company, which was not then a
subsidiary of Southern) pursuant to which personnel and other
resources of SCS and the Operating Companies may be made
available to SEI, upon request, to support SEI in connection with
its authorized activities. Under these agreements, SEI is
obligated to reimburse SCS or an Operating Company, as the case
may be, for the cost of such services, determined in accordance
with Rules 90 and 91. The cost of services provided by an
Operating Company to SEI includes all direct charges, including
direct labor costs, including direct labor benefits; costs of
material, vehicle and equipment usage; and meals, lodging and
miscellaneous expenses. Direct labor costs are based upon the
wage rates of assigned employees. In addition, SEI is obligated
to pay certain indirect costs, such as pension costs, insurance,
payroll taxes, and payments to employee benefits plans, and a
portion of the administrative and general expenses of the
Operating Company. Where SEI requests and obtains services from
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SCS, SEI is obligated to pay all direct charges incurred by SCS
to render such services and SEI's pro rata share of SCS's
indirect costs allocated in accordance with SCS's approved
methods of allocation.
Under the existing Service Agreements, all services rendered
by SCS or an Operating Company to SEI are performed in accordance
with a work order which defines the services requested. In no
case is SCS or an Operating Company obligated to render services
to SEI upon SEI's request, if, in the sole judgment of SCS or the
Operating Company, the personnel and resources needed to fill the
work order are not available. The Service Agreements provide
that SCS and the Operating Companies shall have no liability or
make any other warranty to SEI with respect to the performance of
the services requested, other than the obligation to reperform
the requested work at cost in accordance with the work order.
Furthermore, SCS and the Operating Companies are fully
indemnified by SEI against liabilities to or claims of third
parties arising out of the performance of services to SEI.
The existing Service Agreements also obligate SEI to make
any "Intellectual Property" developed in the course of SEI's
business available for utilization by other Southern System
companies without charge, except for the actual expenses incurred
in making the same available, to the extent that SEI has or
retains proprietary rights therein. "Intellectual Property" is
defined as "any process, program or technique which is protected
by the copyright, patent or trademark laws, or as a trade secret,
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and which has been specifically and knowingly incorporated into,
exhibited in, or reduced to a tangible writing, drawing, manual,
computer program, product or similar manifestation or thing."
Under the Service Agreements, SEI has a reciprocal right to
receive such Intellectual Property from SCS and the Operating
Companies without charge, except for the actual expenses incurred
in making the same available.
This system of compensation and reciprocal availability of
Intellectual Property has existed for almost thirteen years. It
has benefitted SCS and the Operating Companies and their
customers, as well as SEI, and has not resulted in any
subsidization of SEI at the expense of SCS or the Operating
Companies. As an example, SCS has developed a software program
for use within the Southern System which has applications
relating to the operation of nuclear power plants ("NORMS"). In
order to make NORMS commercially available to non-affiliated
nuclear utilities, SEI expended more than $10,000,000 on
modifications and enhancements to NORMS. These modifications, in
turn, have now been made available to the Operating Companies
without charge or assessment for SEI's development costs. Thus,
the Operating Companies have not contributed any amount towards
the further development of this software.
Further, SCS and the Operating Companies derive other
indirect, but tangible, benefits under the existing Service
Agreements, such as the training and experience gained by
Operating Company and SCS employees in the course of working on
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SEI's activities. In the power generation area, for example,
SEI's Development Activities often involve exposure to emerging
technologies in the industry that Operating Company personnel
would not otherwise have. Likewise, SCS and Operating Company
personnel frequently benefit from in-house training programs and
seminars paid for by SEI.
Finally, as indicated above, under the terms of the existing
Service Agreements, the Operating Companies and SCS are not
exposed to the usual and customary business risks and potential
liabilities assumed by SEI in connection with its performance of
contracts with associate Project entities or unaffiliated third
parties. For example, a power plant operations and maintenance
agreement or turnkey construction contract between SEI and a
power project owner typically includes market-based completion or
minimum performance guarantees and warranties, backed by
liquidated damage and/or contract price retention provisions.
Thus, like its competitors, SEI is not assured a profit under
such contracts, and may even sustain a loss. Under the Service
Agreements, however, the Operating Companies and SCS are not
exposed to these risks. Likewise, in connection with its
Development Activities, SEI may incur substantial costs to SCS
and the Operating Companies, which SEI must reimburse currently,
even though SEI may not recover those costs unless and until a
particular development effort is successful.
SCS and the Operating Companies propose to continue to
render services and provide other resources to SEI in connection
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with SEI's authorized activities in accordance with the existing
Service Agreements. However, the applicants propose to amend
the Service Agreements in certain respects in order to reflect
the changes to SEI's authorized business activities and to comply
with the requirements of Rules 53(a)(3) and 87,4 as those rules
relate to the rendering of services or sale of goods directly by
SEI or indirectly by the Operating Companies and SCS to EWGs and
FUCOs in which Southern holds an interest. A draft of the
proposed amendment (the "Amendment") is attached hereto as
Exhibit B.
The Amendment would also delete a provision contained in
each of the existing Service Agreements requiring SEI to pay a
commission to SCS or an Operating Company in any case in which
SEI licenses or sells Intellectual Property developed by SCS or
an Operating Company to a third party if, as a result thereof,
the continued use of such Intellectual Property by SCS or the
Operating Company is lost. Upon approval of this Application,
SEI will relinquish its authority to engage in the business of
selling or licensing Intellectual Property owned or developed by
its associate companies to third parties. Hence, this provision
of the current Service Agreements will no longer be applicable.
Finally, in order to comply with Rules 53(a)(3) and 87, the
Amendment contains a provision that will enable SEI to identify
on a work order basis services and other resources provided by
4 For purposes of the authorization requested herein, it is
assumed that Rule 87 will be amended as proposed in Holding
Company Act Release No. 25887.
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SCS and the Operating Companies to SEI to support the latter in
connection with services and goods provided by SEI to EWGs and
FUCOs in which Southern directly or indirectly holds an interest.
Among other things, this will enable Southern to monitor the
overall usage of employees of the Operating Companies and SCS in
connection with such services.
SCS and the Operating Companies will not, without requesting
the further approval of the Commission, render any services or
sell any goods directly or indirectly to any EWG or FUCO in which
Southern holds an interest, except pursuant to the Service
Agreements, as herein proposed to be amended.
1.7 Additional Investments in SEI. Southern hereby
requests authority to invest in SEI up to an aggregate of
$250,000,000 from time to time through December 31, 1998, in
addition to any investments in SEI that Southern shall have made
pursuant to previous authorizations, including but not limited to
the 1987 Order, prior to the effective date of the order in this
proceeding. It is proposed that such additional investments may
take the form of any combination of cash capital contributions to
SEI, loans to SEI by Southern, and loans to SEI by one or more
lenders other than Southern that are guaranteed by Southern.
Each loan by Southern to SEI would be evidenced by SEI's
promissory note in the form attached hereto as Exhibit A-2.
The proceeds of such additional investments in SEI would be
used by SEI to finance Development Activities and costs
(including equipment costs) associated with SCN activities, for
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working capital purposes in connection with rendering technical
consulting services, and to pay ongoing general and
administration expenses of SEI. Without the further order of the
Commission, SEI will not utilize any part of the additional
investment by Southern to invest in power production or other
facilities, but may invest in the securities of one or more EWGs
or FUCOs organized solely for the purpose of operating facilities
of any EWG or FUCO in transactions which are not jurisdictional
pursuant to Section 32 or 33, as applicable, and the rules
promulgated thereunder. Any such entity would have nominal
capitalization.
In connection with Development Activities, SEI anticipates
the need to incur significant marketing costs and costs
associated with due diligence, permit and site acquisition
activities, and the preparation of bids on Projects (including
cash deposits that are frequently required as a part of a bid),
among other typical costs. It has been SEI's experience that
such costs are typically recovered, if at all, from the proceeds
of project financing in the form of a development fee paid at the
time of financial closing on a Project; and even in the case of a
successful Project development effort, there may be a period of
several months to several years before financial closing occurs.
SEI estimates that approximately $225 million of the additional
investments by Southern will be used to fund Development
Activities.
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SEI estimates that up to $20 million of the proposed
additional investment by Southern will be utilized for working
capital and for the costs of equipment in connection with SCN
activities, and an estimated $5 million for working capital and
other needs in connection with rendering technical consulting
services to non-affiliates. Working capital in connection with
these activities is needed to fund certain ongoing general and
administrative costs, including personnel, accounting, general
marketing, engineering, legal, financial, and training costs, and
costs associated with other necessary support functions required
in connection with developing and administering its business
lines. The availability of working capital will enable SEI to
promptly pay its associate companies for services they agree to
provide to SEI under the Service Agreements, as they are proposed
to be amended.
As a part of the proposed $250 million of additional
investments by Southern, SEI requests authority to issue
promissory notes (the "Notes") from time to time through December
31, 1998 to Southern or to lenders other than Southern which have
been guaranteed by Southern, provided that the sum of the
aggregate principal amount of Notes at any time outstanding and
Southern's additional investments in SEI shall not exceed $250
million. The Notes would have maturities no later than
December 31, 2003, and would bear interest at a rate of not more
than 3% over the prime rate at the bank to be designated by
Southern in the case of Notes issued to lenders other than
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Southern, and a rate of not more than the prime rate in the case
of Notes issued to Southern.
No finder's fee or other fee, commission or remuneration
will be paid in connection with the sale of any Note to a lender
other than Southern, and the purchasers of such Notes would be
limited to commercial banks, insurance companies or similar
institutions which acquire notes for investment and not for
resale to the public. In connection with any such sale, a
commitment fee may be paid in an amount not greater than 1/2 of
1% of the principal amount of the Note. The name or names of the
lender or lenders other than Southern, principal amounts and
terms of other Notes will be filed by amendment to this
Application. It is anticipated that any Notes sold to lenders
other than Southern may be guaranteed by Southern as to
principal, premium, if any, and interest.
Based upon the current prime rate of 6 1/4%, Notes issued to
lenders other than Southern would bear interest at a rate not
exceeding 9 1/4% and Notes issued to Southern would bear interest
at a rate not exceeding 6 1/4%.
It is further proposed that the Notes issued to Southern
hereunder may, at the option of Southern, be converted to capital
contributions to SEI through Southern's forgiveness of the debt
(including any accrued interest) represented thereby.
1.8 Indemnifications and Performance Guarantees. Southern
also proposes, from time to time, to guarantee or act as
indemnitor of commercial sureties required to support bid bonds
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and performance and other obligations (other than securities or
other financial instruments) issued or undertaken by SEI in
connection with its authorized activities. SEI anticipates that,
in the ordinary course of its business, it will be required to
furnish various types of bonds, including bid bonds, performance
bonds, and material and payment bonds, and that it will be
required to provide commercial sureties for its obligations under
certain of such bonds. The proposed guarantees or
indemnification of commercial sureties will facilitate SEI in
obtaining the necessary bonds when needed and at more favorable
rates than if such obligations were not guaranteed or supported
by a commercial surety.
In the past, Southern has often been called upon to provide
performance guarantees and to undertake other contractual
obligations with respect to SEI's activities in connection with
proposals and contracts for consulting services. The inability
of SEI to provide parent guarantees of such performance and other
obligations would have hindered, or made more costly, its
participation in Projects and consulting contracts. Based on
this experience, Southern believes that its ability to guarantee
the performance obligations of or indemnify sureties on behalf of
SEI will facilitate SEI's ability to win bid proposals or obtain
contracts by enhancing its competitiveness in the marketplace.
In addition, in order to maintain this competitiveness in
the marketplace, SEI must have the ability to bid on or otherwise
pursue multiple Projects and services contracts on a simultaneous
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basis and to provide evidence of its authority to provide the
proposed guarantees or indemnifications of sureties by Southern
on such Projects and contracts at the time of bid or inception of
development. Southern's theoretical exposure on such guarantees
and indemnifications of sureties will be limited by the fact that
many of these guarantees provided at the time of bid will not be
activated unless and until SEI actually receives a contract or
bid award and by the relatively low likelihood that SEI will win
bids and proposals on all such contracts and Projects.
Southern's exposure will also be limited to the extent that SEI
participates in Projects through joint venture arrangements in
which unaffiliated joint venture partners share the
responsibility of such guarantees and indemnifications of
sureties.
These forms of credit enhancement or assurance are typical
in the marketplace. As an example, preliminary bids or proposals
often must be accompanied by bid bonds so as to evidence the
seriousness and financial responsibility of the bidder. Such
bids may be conditioned upon governmental approvals, as well as
other business and legal conditions. A bid bond merely assures
that the bidder, if successful, will act in accordance with the
terms of the bid or forfeit the bond. In one transaction, as an
example, a $7,500,000 letter of credit was posted in connection
with SEI's proposal to a utility to develop a $150,000,000
cogeneration project. Certain kinds of contract services, such
as generation plant design, engineering and/or construction
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management, and operations and maintenance services, also
typically require credit support to cover performance and
warranty obligations such as those relating to competence,
misfeasance or malfeasance. However, the warranties and degree
of credit support are the result of arms'-length bargaining and
are usually subject to limitations as to duration and amount and
normally exclude consequential damages. It is often the case
that the amount of liability is related to all or a portion of
the contract price or stipulated liquidated damages, rather than
the aggregate payments thereunder.
Despite the fact that Southern has had outstanding
guarantees and suretyships issued for several years pursuant to
the 1987 Order, there has not been a single claim against any
bonds, guarantees or suretyships which have been issued. They
exist, nevertheless, as a necessary commercial practice,
particularly with reference to engineering, design, construction
and operational assurances which are required in the commercial
marketplace.
It is therefore proposed under this Item 1.8 that Southern
continue to have the authority to (i) provide such guarantees of,
and similar provisions and arrangements concerning, the
performance and undertaking of other obligations by SEI (or any
subsidiary of SEI), or of any Project entity (including but not
limited to EWGs and FUCOs) in which Southern holds a direct or
indirect interest, and of other obligations relating to SEI's
authorized activities, and (ii) to provide such indemnifications
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of and with respect to persons acting as surety on bonds or other
obligations on behalf of such companies, all as described above,
in an aggregate amount outstanding at any one time of
$800,000,000 through December 31, 2003; provided, that any
guarantees or indemnifications outstanding at December 31, 2003
shall continue until expiration or termination in accordance with
their terms; and provided further that the aggregate amount of
such authorized guarantees or indemnifications of sureties shall
be reduced dollar for dollar by any similar guarantees or
indemnifications of sureties made or incurred by Southern
pursuant to authority requested in File No. 70-8173 in connection
with the business activities of Development. For purposes of
computing the above limitation, neither Southern's agreements to
provide guarantees or indemnifications of sureties of SEI or its
subsidiaries, or of any Project entity, which guarantees or
indemnifications have not actually been issued, nor the
respective shares of any such obligations of a joint venture
partner (whether several or joint and several), shall be counted.
It is further proposed that, because the need for such
guarantees and indemnifications covers a range of contracts too
broad to describe in all of their detail at this time, Southern
requests the flexibility to negotiate specific guarantees and
similar provisions and arrangements with third parties, and
indemnifications of sureties, as the need to do so arises,
without further Commission authorization. For purposes of this
filing, the Commission should assume that Southern's obligation
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under any particular guarantee or indemnification arrangement
would be direct, absolute, unconditional and not subject to
defenses.
1.9 Accounting for Transactions with Associate Companies.
All SEI costs will be identified and expensed promptly. SEI will
continue to use portions of systems also employed by SCS to
account for those costs and segregate them by Project, service
contract or SCN activity and Southern System company performing
the services. SEI will modify the standard work order currently
in use in order to enable SEI to identify the use of personnel of
the Operating Companies and Services to perform services
indirectly through SEI for associate companies that are EWGs or
FUCOs.
For its part, each Southern System company providing
services for or material to SEI will utilize cost accounting
procedures designed to identify promptly all direct and indirect
costs, including overheads, which are applicable to the work
being performed by or with such Southern System company
personnel, material or other assets. SCS will account for,
allocate and charge its costs to SEI, using the procedures in
accordance with Rules 90 and 91 and Section 13 of the Act.
Southern System companies supporting SEI's activities will be
reimbursed promptly for their costs incurred in connection
therewith.
The consolidated federal income tax liability of the
Southern System is allocated among the members of the
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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. SEI will
continue to be allocated a portion of the consolidated federal
income tax liability based upon those provisions.
1.10 Reporting Obligations. Southern and SEI agree that
the Commission's order to be issued in connection with this
filing shall be subject to the terms and conditions prescribed in
Rule 24 promulgated under the Act, except that it is proposed
that certificates regarding the activities of SEI required to be
filed thereunder may continue to be filed on a quarterly basis,
not later than 60 days after the end of each quarterly period.
Such certificates shall include the following:
(1) A copy of SEI's balance sheet and income
statement;
(2) A narrative description of SEI's activities during
the quarter just ended organized by business
category (project development, project related
services, SCN activities and other), and within
each category, a description of new developments
by project type (e.g., EWGs, FUCOs, "qualifying
facilities," etc.), international and domestic
consulting and specific types of consulting within
the international and domestic spheres, and SCN
project updates.
(3) Amounts and forms of: (i) guarantees of, and
similar provisions and arrangements
concerning, performance and undertaking of
other obligations by SEI, any subsidiary of
SEI, or any Project entity; and (ii)
indemnifications of and with respect to
persons acting as sureties on bonds or other
obligations on behalf of SEI, any subsidiary
of SEI, or any Project entity which Southern
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has agreed to grant in the event a bid by any
of the foregoing is accepted;
(4) Amounts and forms of: (i) guarantees of, and
similar provisions and arrangements
concerning, performance and undertaking of
other obligations by SEI, any subsidiary of
SEI, or any Project entity which Southern has
granted and are currently effective; and (ii)
indemnifications of and with respect to
persons acting as sureties on bonds or other
obligations on behalf of SEI, any subsidiary
of SEI, or any Project entity which Southern
has granted and are currently effective.
(5) A description of services obtained from associate
companies, specifying the type of service, the
number of personnel from each associate company in
providing services during the quarter and the
total dollar value of such services.
(6) A description of services provided to associate
companies which identifies the recipient company,
the service, the charge to the associate and
whether the charge was computed at cost, market or
pursuant to another method, which method shall be
specified.
In addition, Southern will continue to file on behalf of SEI
Form U-13-60 (as modified) as an exhibit to Southern's annual
report on Form U5S, provided that information with respect to
Southern's direct or indirect interests in any EWGs or FUCOs will
be included in Items 9 and 10 of the Form U5S.
1.11 Other Matters. SEI anticipates that it may be
necessary or desirable in certain foreign countries to organize
one or more special purpose foreign subsidiaries through which
SEI would conduct its project Development Activities. For
example, SEI has learned that, in connection with its opening of
a representative office in Vienna, Austria, it would be desirable
and advantageous to organize an Austrian subsidiary in order to
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lease office space and enter into other routine and ordinary
business transactions, such as maintaining a bank account,
leasing a company automobile, obtaining a telephone directory
listing, and hiring office employees, as well as to obtain
favorable tax treatment under local law. SEI anticipates that
requirements of local foreign law in other countries may in the
future necessitate the creation of subsidiaries under the laws of
such countries.
Accordingly, SEI requests authority to acquire the stock of
and provide needed working capital to one or more foreign
subsidiaries through which SEI would conduct its project
Development Activities. SEI represents that in no case will any
such subsidiary, directly or indirectly, acquire, own or operate
any significant assets or facilities, other than a bank account,
leased office space and related office equipment, issue or
acquire any securities, other than common shares issued to SEI,
or provide services or sell goods to any associate company. The
sole function of any such subsidiary would be to engage in
Development Activities on behalf of SEI in a foreign country or
countries whose laws would subject SEI to significant
restrictions or penalties if SEI were itself to maintain a legal
presence in any such country. The capitalization of any such
subsidiaries is expected to be less than $50,000. (In Austria,
for example, the minimum capitalization would be approximately
$25,000).
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Item 2. Fees, Commissions and Expenses.
Fees, commissions and expenses expected to be incurred by
SEI in connection with the Application are as follows:
Holding Company Act filing fee ..........$ 2,000
Counsel fees:
Troutman Sanders ...................$20,000*
Miscellaneous and incidental expenses... $ 1,000*
*Estimated amount
Total $23,000
Item 3. Applicable Statutory Provisions.
The issuance of common shares by Newco is subject to
Sections 6 and 7 of the Act, and the acquisition thereof by
Southern is subject to Sections 9 and 10. The distribution of
Newco's shares to Southern is subject to Section 12(c) of the Act
and Rule 46 thereunder. The merger of Newco and Development is
deemed to be subject to Sections 6(a)(2) and 7.
The issuance and sale of Notes by SEI and the acquisition
thereof by Southern are subject to Sections 6(a), 7, 9(a), and 10
of the Act and Rule 50 promulgated thereunder. The issuance by
SEI of the Notes will be excepted from Rule 50 pursuant to
paragraph (a)(2) or (a)(3), as applicable. The guaranty by
Southern of any such Notes is subject to Section 12(b) of the Act
and Rule 45 thereunder. The making of cash capital contributions
by Southern to SEI (including the conversion of borrowings by SEI
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from Southern to capital contributions) is also subject to
Section 12(b) of the Act and Rule 45 thereunder.
The organization and acquisition of shares of any foreign
subsidiary of SEI, and the issuance of such shares to SEI, is
also subject to Sections 6, 7, 9 and 10.
The acquisition by Southern of any securities of any EWG or
FUCO will be exempt from the Act pursuant to Section 32(g) or
33(c), as applicable, subject to compliance with rules
promulgated pursuant to Sections 32 and 33.
The sale of goods or services to SEI at cost by other
Southern System companies or by SEI to such other Southern System
companies is subject to Section 13(b) and Rules 87, 90 and 91
thereunder. In addition, the sale of services directly by SEI
and indirectly by SCS or the Operating Companies to any company
that is an EWG or FUCO is subject to Section 32 and Rule 53(a)(3)
thereunder or Rule 87, as it is proposed to be amended, as
applicable. The final sentence of Section 13(b) and Rule 100(a)
are applicable to SEI's request for an exemption from Section
13(b) and Rules 90 and 91 as applicable to the proposed sale of
goods and services by SEI to associate Project entities at prices
other than cost.
The proposed guarantee and/or indemnification by Southern of
performance and other obligations of SEI, its subsidiaries, or
any Project affiliates, are subject to Section 12(b) and Rule 45
thereunder.
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The sale of services, including SCN related services,
project related services, and other technical services, by SEI to
non-associate companies is subject to Sections 9 and 10 of the
Act. Such activities are functionally related to SEI's principal
business activities of developing, owning and operating Projects,
in that such services will be similar in nature to comparable
services that SEI will provide to associate companies, and may be
offered or provided to non-associate companies with little or no
incremental investment by SEI in human or other resources.
Further, in many instances, SEI anticipates that it will offer
consulting or other services to non-associate companies and
foreign and domestic governments and agencies thereof primarily
as a marketing tool for subsequent Project development efforts
and/or as means for forming strategic alliances for later Project
development and investment activities.
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.
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.
Item 5. Procedure.
The applicants request that the Commission's order be issued
as soon as the rules allow, and that there be no thirty-day
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waiting period between the issuance of the Commission's order and
the date on which it is to become effective. The applicants
hereby waive 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.
Item 6. Exhibits and Financial Statements.
(a) Exhibits.
A-1 - Articles of Incorporation of Newco. (To
be filed by amendment).
A-2 - Form of Note evidencing borrowings by
SEI from Southern. (To be filed by
amendment).
B-1 - Draft of Amendment to Service Agreement
between SCS and SEI. (To be filed by
amendment).
B-2 - Draft of Amendment to Service Agreement
between a System Operating Company and
SEI. (To be filed by amendment).
C - None.
D - None.
E - None.
F - Opinion of Troutman Sanders. (To be
filed by amendment).
G - Form of Notice. (Previously filed).
H - Chart showing, as of February 28, 1994,
all associate companies of Southern that
are EWGs, FUCOs, and QFs. (To be filed
by amendment.)
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I - List and description of investments and
currently effective contracts to be
retained by SEI, and those to be
transferred to Development. (To be
filed by amendment.)
(b) Financial Statements. (To be filed by amendment).
(i) Corporate balance sheet of SEI and
statements of earnings retained in
the business and of amount paid in
for common stock in excess of par
value at December 31, 1993.
(ii) Corporate statement of income of
SEI for the twelve months ended
December 31, 1993.
(iii) Net cash flow statement of SEI for
the twelve months ended December
31, 1993.
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.
No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed
transactions.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this amendment to be signed on their behalf by the undersigned
thereunto duly authorized.
Dated: April 14, 1994 THE SOUTHERN COMPANY
By: /s/ Tommy Chisholm
Tommy Chisholm
Secretary
SOUTHERN ELECTRIC INTERNATIONAL,
INC.
By: /s/ Tommy Chisholm
Tommy Chisholm
Vice President and Secretary
ALABAMA POWER COMPANY
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
GEORGIA POWER COMPANY
By: /s/Wayne Boston
Wayne Boston
Assistant Secretary
(Signatures continued on next page).
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GULF POWER COMPANY
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
MISSISSIPPI POWER COMPANY
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
SAVANNAH ELECTRIC AND POWER COMPANY
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
SOUTHERN COMPANY SERVICES, INC.
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
SOUTHERN NUCLEAR OPERATING COMPANY
By: /s/ Wayne Boston
Wayne Boston
Assistant Secretary
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