SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM U-1
APPLICATION OR DECLARATION
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
The Southern Company
64 Perimeter Center East
Atlanta, Georgia 30346
(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 Thomas G. Boren, President
Financial Vice President Southern Electric International, Inc.
The Southern Company 900 Ashwood Parkway
64 Perimeter Center East Suite 500
Atlanta, Georgia 30346 Atlanta, Georgia 30338
John D. McLanahan, Esq.
Troutman Sanders LLP
600 Peachtree Street, N.E.
Suite 5200
Atlanta, Georgia 30308-2216
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INFORMATION REQUIRED
Item 1. Description of Proposed Transaction.
1.1 Background. The Southern Company ("Southern") is a
registered holding company under the Public Utility Holding
Company Act of 1935, as amended (the "Act"). Since 1987,
Southern's wholly-owned subsidiary, Southern Electric
International, Inc. ("Southern Electric"), has engaged in
preliminary development activities related to potential
investments by Southern in "qualifying facilities" ("QFs"), as
defined under the Public Utility Regulatory Policies Act of 1978,
as amended, "exempt wholesale generators" ("EWGs") and "foreign
utility companies" ("FUCOs"), as defined in Sections 32 and 33 of
the Act, respectively, and other non-exempt power projects which
constitute a part of Southern's integrated electric utility
system; and in providing project management, operations and
maintenance, construction, fuel management and other similar
kinds of services to associate project companies and to non-
associates.1
Southern is currently authorized under the terms of three
separate orders (the "Financing Orders") to finance the
operations of its subsidiaries by issuing and selling additional
authorized shares of its common stock, par value $5 per share, by
issuing guaranties of the securities of certain subsidiaries, and
by issuing notes evidencing short-term and term loan borrowings
1 See Holding Co. Act Rel. No. 26212, dated December 30,
1994.
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and/or commercial paper. Southern's authorization under the
Financing Orders may be summarized as follows:
- File No. 70-8277 (Holding Co. Act Rel. No. 26349, dated
August 3, 1995). Southern may issue and sell in one or more
transactions from time to time through December 31, 1999, up to
25 million additional shares of its authorized common stock (as
such number may be adjusted for any subsequent share split). As
of September 30, 1995, none of these authorized shares of common
stock had been sold by Southern. Southern may also guaranty from
time to time through December 31, 1999, the securities of one or
more EWGs or FUCOs (collectively, "Exempt Projects") in an
aggregate amount at any one time outstanding not to exceed $1.2
billion (hereafter referred to as the "Guaranties").
- File No. 70-8435 (Holding Co. Act Rel. No. 26347, dated
August 2, 1995). Southern may issue and sell in one or more
transactions from time to time through December 31, 1999,
additional shares of its authorized common stock pursuant to
Southern's dividend reinvestment, employee savings and stock
ownership plans (collectively, the "Plans"). The authorization
under this order covers the remainder of 37 million shares of
common stock (as such number may be adjusted for any subsequent
share split) that Southern was previously authorized to sell
pursuant to the Plans. At September 30, 1995, there were about
25 million shares of common stock remaining unsold under the
Plans.
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- File No. 70-8309 (Holding Co. Act Rel. No. 26346, dated
August 1, 1995). Southern may issue and sell in one or more
transactions from time to time through March 31, 2000, notes
evidencing short-term and term loan borrowings and/or commercial
paper in an aggregate principal amount at any one time
outstanding not to exceed $1 billion.
Under the terms of each of the Financing Orders, Southern
may use the proceeds of common stock sales and borrowings to,
among other things, finance the acquisition of the securities of
or other interest in one or more Exempt Projects, and may issue
Guaranties in respect of the securities of such Exempt Projects,
provided that the sum of the Guaranties at any time outstanding
and the net proceeds of common stock sales and borrowings by
Southern that may at any time be used by Southern to fund
investments in Exempt Projects (or in certain intermediate
subsidiaries organized by Southern to facilitate investments in
Exempt Projects)2 shall not, when added to Southern's "aggregate
investment," as defined in Rule 53(a), in all such entities,
exceed 50% of Southern's "consolidated retained earnings." The
term "consolidated retained earnings," also defined in Rule
53(a), is the average of consolidated retained earnings for the
previous four quarters, as reported on Form 10-K and Form 10-Q.
For Southern, "consolidated retained earnings" at June 30, 1995,
was approximately $3.213 billion.
2 See File No. 70-8421 (Holding Co. Act Rel. No. 26338,
dated July 25, 1995).
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1.2 Description of Exempt Projects Currently Owned by
Southern.
Since passage of the Energy Policy Act of 1992, which added
Sections 32 and 33 to the Act, Southern has invested or committed
to invest directly and indirectly an aggregate of approximately
$1.244 billion in Exempt Projects, or about 38.7% of Southern's
"consolidated retained earnings" for the four quarters ended
June 30, 1995. Additional funds required to purchase the
securities of and/or finance construction costs of the facilities
owned by these entities have been obtained from lenders on a non-
recourse basis; that is, from loans that are secured solely by
the assets and revenues of a particular Exempt Project and which
are not recourse directly or indirectly to Southern or any
associate company (other than another Exempt Project), except to
the extent of any currently effective Guaranties, which are
included in Southern's "aggregate investment" for purposes of
Rule 53(a). Southern's current holdings of Exempt Projects are
as follows:
- South Western Electricity plc ("SWEB") - Southern
completed its purchase of substantially all of the ordinary share
capital of SWEB on October 9, 1995, and will purchase the
remaining shares before year end. SWEB, which is a FUCO, serves
approximately 1.3 million customers in the southwestern part of
England. It was one of the 12 regional electricity companies
created in 1990 by the British government as a part of the
privatization of the electric utility industry in England and
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Wales. SWEB is primarily a distribution company, purchasing
most of its electricity requirements from third-party generators.
Power is delivered to SWEB by The National Grid Company plc,
which operates the electric transmission system in England and
Wales. SWEB indirectly owns 6.3% of the shares of The National
Grid Company. Southern's pro forma "aggregate investment" in
SWEB is approximately $794 million. The balance of the purchase
price for the outstanding shares of SWEB, approximately $1.016
billion, was financed by the sale of non-recourse notes by
Southern Investments UK plc, a wholly-owned indirect subsidiary
of Southern.3
Southern anticipates that SWEB will make an immediate
contribution to Southern's earnings per share. In addition to
providing Southern with a relatively stable source of income in
the future, the SWEB acquisition is particularly attractive to
Southern for other reasons. First, Southern believes that it can
add value to its investment in SWEB's shares, primarily through
implementation of cost savings measures. Under the British
regulatory system, the benefits of these cost savings will accrue
primarily to Southern, as SWEB's shareholder. Second, SWEB
competes as a power marketer in a market in which retail
customers with a maximum annual peak demand of 100 kW or more can
choose their electricity supplier. The experience that Southern
3 Reference is made to the Current Report on Form 8-K of
The Southern Company, dated October 3, 1995 (File No. 1-3526),
for additional information on SWEB and the status of Southern's
offer to acquire SWEB's shares.
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will gain in operating a utility in such a competitive
environment is expected to be highly valuable to Southern in
connection with its power marketing efforts in the U.S. And
third, Southern's purchase of SWEB is the first in a series of
anticipated events that will lead to a rationalization, possibly
through further consolidations, of the electricity sector in the
U.K., a process that in itself will likely produce attractive
returns for investors. By acquiring SWEB, Southern has achieved
early entry into that market and therefore is positioned to earn
an attractive return on its investment.
- Hidroelectrica Alicura, S.A. ("Alicura") - Southern
indirectly owns a 55% interest in Alicura, a FUCO which, in 1993,
acquired from the Argentine government a 30-year concession to a
four-unit 1000 MW hydroelectric generating facility located on
the Limay River. Southern Electric manages the concession
company and oversees the operations and maintenance of the
facilities. Alicura sells its power into a highly competitive
market either on the basis of negotiated contracts or hourly
prices of the national power pool. The experience of operating
Alicura has been extremely valuable to Southern in terms of
gaining knowledge on the dynamics of a competitive electricity
market.
Southern acquired its interest in Alicura for
approximately $188 million. In 1994, Southern Electric arranged
a $170 million Eurobond offering by Alicura pursuant to Rule
144A. The net proceeds of that offering were used to pay
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maturing short-term debt and other existing obligations of
Alicura. Southern's current "aggregate investment" in Alicura is
$205.5 million.
- Empresa Electrica del Norte Grande S.A. ("EDELNOR")
Southern indirectly owns a 65% interest in EDELNOR, a FUCO which
serves most of Northern Chile. EDELNOR owns and operates 96 MW
of generating capacity and is completing the first of two new
generating facilities, the 150 MW coal-fired Mejillones I plant.
Electricity demand in EDELNOR's service territory has been so
buoyant that EDELNOR in July 1995 commenced construction of a
sister coal-fired plant, also 150 MW, at the Mejillones site
(Mejillones II). The construction of the Mejillones II plant is
expected to be financed entirely by EDELNOR'S internal cash
generation and by non-recourse debt.
EDELNOR also operates the transmission grid for northern
Chile, serving a rapidly expanding copper mining industry. Half
of EDELNOR's electricity is sold to mining companies under
contract, and half is sold to electric distribution companies.
Southern originally invested $153 million to acquire its
65% stake in EDELNOR. Subsequently, $40.8 million of the
original investment was refinanced with non-recourse debt.
Southern acquired the EDELNOR shares at an average per share
price of $1.0267. The shares not owned by Southern are publicly-
held and traded on the Santiago stock exchange. Those shares
have traded at an average weekly share price of $2.10 over the
past six months.
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- Freeport Power Company ("Freeport Power") - In early
1993, Southern indirectly purchased 50% of the common stock of
Freeport Power, a privately-held company which provides electric
service to about 16,000 customers on the Island of Grand Bahama
in the Bahamas. Freeport Power's facilities include five oil and
distillate-fired generating plants with a combined installed
capacity of about 113 MW, as well as a transmission and
distribution network that serves the entire island of Grand
Bahama. Southern originally invested $35.5 million to purchase
its interest in Freeport Power. Subsequent to the purchase,
Southern refinanced $17.8 million of the purchase price on a non-
recourse basis, thereby reducing Southern's exposure to the
project.
- Power Generation Company of Trinidad and Tobago Ltd.
("PowerGen") - Southern indirectly owns a 39% interest in
PowerGen, a joint-venture company formed in 1994 to purchase and
operate the existing electrical generation facilities on the
island of Trinidad and Tobago. These facilities consist of three
gas-fired generating stations having a combined generating
capacity of 1,178 MW. The electrical output of these facilities
is purchased by the Trinidad and Tobago Electricity Commission
("T&TEC"), the state-owned electric utility which owns and
operates the island's transmission and distribution system.
T&TEC serves approximately 300,000 customers on the island.
Southern Electric's relationship with T&TEC began in the early
1980's, when Southern Electric was engaged to assist T&TEC in
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improving the efficiency of certain of T&TEC's electric utility
operations. Southern acquired its interest in PowerGen in
December 1994 for $85.6 million. Subsequently, in August 1995,
Southern Electric successfully arranged for the sale of $71
million principal amount of non-recourse bonds. A portion of the
proceeds of that offering was applied to reduce Southern's
"aggregate investment" in the company to $30 million.
- Birchwood Power Partners, L.P. ("Birchwood") - Southern
indirectly owns 50% of the general and limited partnership
interests in Birchwood, an EWG that is constructing a 220 MW
coal-fired cogeneration facility in King George County, Virginia.
The Birchwood facility, which is also a QF, is scheduled to be
placed into commercial operation on-time and on-budget in
November 1996. Southern Electric developed this project,
arranged for construction financing, and is constructing the
facility under a fixed-price turn-key contract. Southern
Electric will also operate the plant under a cost
reimbursement/incentive-based operations and maintenance
agreement. When complete, all of the electrical output of the
Birchwood facility will be sold to Virginia Electric and Power
Company under a long-term power purchase agreement, and steam
will be sold to a local agricultural user. Funding for
construction of the Birchwood facility is being provided on a
non-recourse basis by a group of banks and insurance companies.
Southern has not actually made any cash investment in Birchwood
at this time; its "aggregate investment" in the partnership
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consists of its guaranty of 50% of the forward equity commitment
(about $43.7 million), which will be invested when the plant is
completed. Southern sold a 50% general and limited partnership
interest in the partnership to a non-associate company in
December, 1994, in order to satisfy the limitations under the
PURPA regulations on utility ownership of a QF, and realized a
profit of approximately $28 million on the sale.
- Kalaeloa Power Partners, L.P. ("Kalaeloa") - Southern
indirectly through its ownership of an EWG holds a 33-1/3%
limited partnership interest in Kalaeloa, which owns and operates
a 180 MW oil-fired combined-cycle cogeneration plant on the
island of Oahu, Hawaii. The plant produces power for sale to
Hawaiian Electric Co. under a long-term contract and steam for
sale to an adjacent refinery. The facility, which was placed in
service in 1990 and 1991, is also certified as a QF. Southern
has recovered its original investment in Kalaeloa through
partnership distributions, but continues to be obligated under
the terms of its guaranty of a $2.5 million contingent equity
funding commitment, which is included in "aggregate investment."
- Investments in Other Exempt Projects - As of September
30, 1995, Southern had invested an aggregate of $2.6 million in
several other Exempt Projects which are developing or which
operate (but do not own) other facilities or foreign utility
systems; and in Southern Energy Marketing, Inc., a power marketer
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which has been designated an EWG by the Federal Energy Regulatory
Commission ("FERC").4
1.3 Risk Profile of Southern's Investments in Exempt
Projects. Investments in independent power production facilities
and foreign utility systems involve a variety of risks that are
not necessarily present in the traditional, regulated, electric
utility industry. Southern Electric has established
comprehensive procedures to identify and address (i.e., limit
and/or mitigate) these risks.
The Project Review Process. Every potential project
investment opportunity developed by Southern Electric is
subjected to a series of formal reviews to ensure the project's
soundness. The process begins with an annual strategic plan
which surveys independent power opportunities throughout the
4 Southern Electric also structured and arranged for the
financing of Southern's purchase through a wholly-owned
subsidiary, Mobile Energy Services Company, L.L.C. ("Mobile
Energy"), of the integrated energy and recovery complex inside a
large pulp, paper and tissue mill in Mobile, Alabama. (See File
No. 70-8505, Holding Co. Act Rel. Nos. 26185 and 26339, dated
December 13, 1994 and July 13, 1995, respectively). The
facility, which includes generating capacity of approximately 110
MW, was acquired by Southern in December 1994 for a purchase
price of $350 million, which included assumption of certain
existing tax-exempt debt. Southern Electric operates and manages
the Mobile Energy facility. In August 1995, Mobile Energy sold
approximately $267 million of first mortgage bonds in a
registered public offering and refinanced $85 million principal
amount of tax-exempt bonds, in each case on a fully non-recourse
basis. A portion of the proceeds of the first mortgage bonds
($190 million) was used to repay a bridge loan provided by
Southern at the time of the purchase. Reference is made to the
Registration Statement on Form S-1 of Mobile Energy (File No. 33-
92776) for a fuller description of the project and of the non-
recourse financing. Mobile Energy is not an Exempt Project.
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world. This survey leads to the identification of projects and
countries where Southern Electric intends to pursue project
development efforts and results in budgeted levels of expenditure
on those projects. Before Southern makes any investment in a
foreign country, an analysis of that country is presented to the
board of directors of Southern Electric and subsequently to the
Finance Committee of Southern's board of directors. The analysis
focuses on political and economic stability of a particular
country, the government's commitment to private power, the legal
and regulatory framework for private investment in electricity
facilities, and whether local business practices will support
long-term investment of private capital. Both boards must
approve foreign countries as acceptable for investment. This
careful planning and budgeting process helps to mitigate an
important risk of the independent power business: the expenditure
of development funds without a realistic expectation of success
in terms of both making investments in projects and in obtaining
appropriate levels of non-recourse financing on commercially
reasonable terms.
Once development of a project is undertaken, milestones are
established to ensure that continuing expenditures on development
are producing acceptable results. In addition, project teams are
required to identify the major technical, financial, commercial
and legal risks associated with their particular project and
whether and how those risks have been mitigated. In addition,
the members of the project team are responsible for the due
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diligence investigation of risks that have been identified and
must secure the concurrence of an officer of Southern Electric
with functional oversight over the relevant subject matter for
their conclusion.
Finally, every project is subjected to increasing levels of
management review. Depending on the amount of Southern's
anticipated financial exposure to a particular project, the
proposed investment must be approved successively by the board of
directors of Southern Electric, the Finance Committee of
Southern's board of directors (which is comprised entirely of
outside directors), and finally, by the full board of directors
of Southern.
Significantly, the final project review process is to a
large extent replicated by the lenders who agree to provide
construction or permanent debt financing on a non-recourse basis,
since repayment of that debt will depend solely upon the success
of the project. Project debt maturities are often long-term
(e.g., 15 or more years), meaning that the lenders' exposure to
the risks of a project extends for many years after closing or
completion of construction. Typically, project debt documents
require the establishment of plant overhaul, debt service and
other funded reserves, all of which are designed to preserve the
asset and protect the financial performance of the project
against interruptions in revenues and other contingencies.
Southern Electric's success in arranging appropriate levels of
non-recourse financing for its exempt and non-exempt projects in
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effect serves as a validation of the project review process
described above.
Risk Mitigation of Independent Power Projects. Southern
Electric carefully evaluates the potential risks of an
independent power project or foreign utility system before
Southern's funds are committed.
- Operating risks are typically addressed in a number of
ways. Southern Electric has generally limited its project
development efforts to technologies with which it has existing
competencies in coal, gas, oil, or hydroelectric generation. Due
diligence of operating assumptions is carried out by Southern
Electric's engineers with experience in the technology being
evaluated and by outside technical consultants. The risk of
changes in fuel price is often passed through to the purchaser of
electricity under the negotiated terms of a long-term power sales
agreement. Other operating risks can be covered by equipment
warranties and by casualty, business interruption and other forms
of insurance. Further, when Southern Electric or an affiliate is
responsible for managing the day-to-day operations of the
facilities owned by Exempt Projects, its ability to address and
correct operating problems is far greater than would be the case
if operating control were in the hands of a third party.
- Construction risks are typically addressed under
fixed-price contracts with milestones and performance guarantees
(e.g., guaranteed heat rates, availability factors), backed by
appropriate levels of liquidated damages. The credit-worthiness
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and "track record" of the construction contractor is a very
important consideration in this regard. In those cases where
Southern Electric serves as its own general construction
contractor, as is the case in the Birchwood project, it looks to
pre-negotiated damage provisions from sub-contractors to protect
against cost over-runs and schedule delays.
- Commercial risks. Many independent power projects
rely on the "off-take" commitment of a single power purchaser,
usually but not always the local utility company, to eliminate
all or most of the risk of variation in revenues. In such cases,
Southern Electric makes an assessment of the credit-worthiness of
the power purchaser over the life of the project and/or seeks to
have a fall-back plan in place in case the off-taker defaults.
With other projects, particularly in competitive power
markets outside the U.S., long-term off-take contracts are
generally not available and electricity prices are determined by
supply and demand. Southern Electric conducts extensive
investigations of the electricity markets in these environments.
Further, Southern Electric seeks to ensure that a project will be
capable of producing electricity at or below long-run marginal
costs in the region, thus providing that the project will be a
competitive supplier. Examples are the Alicura hydroelectric
project in Argentina and the new coal-fired Mejillones plants
currently under construction for the market in northern Chile.
- Financial risks. Southern Electric addresses the
financial risks of its projects in a variety of ways. First and
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foremost, the permanent debt financing for Southern Electric's
projects is, by its express terms, non-recourse to Southern or
any associate company (other than other Exempt Projects). This
means that the debt of each project or foreign utility system is
secured solely by its assets and revenues, and creditors have no
ability to seek repayment upon default from Southern. This
method of financing ensures that Southern's exposure to any
independent power project is limited to the amount of its equity
commitment and that Southern's domestic public utility
subsidiaries (the "Operating Companies") and their customers bear
no risk of a project's failure or financial distress. From time-
to-time, Southern may agree to provide limited guarantees or
other forms of credit support in connection with non-recourse
financings, but these financial supports are carefully monitored
and treated as a part of Southern's equity commitment for
regulatory reporting and internal control purposes.5 To date,
Southern has never been called upon to fund its obligation under
any such guaranty.
In addition to the essentially non-recourse nature of
project debt financing, project debt is carefully structured to
meet, or match, the characteristics of the particular project.
For example, when the value of a project depends on a long-term,
5 The purposes of such limited guarantees and the inclusion
thereof as a part of Southern's committed equity has previously
been considered by the Commission. See The Southern Company, et
al., Holding Co. Act Rel. No. 26339, dated July 13, 1995
(approving financing and related limited guarantees in connection
with Southern Electric's Mobile Energy project, which is not an
Exempt Project).
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fixed price, off-take contract (i.e., a power purchase contract),
the project debt is typically designed to be of a similar term,
with scheduled debt payments usually covered by fixed charges
(usually the capacity payment component in the contract). On the
other hand, where there is no long-term, fixed source of revenue,
the percentage of non-recourse debt financing is typically
smaller, so that financial risk is not induced by excessive debt
levels. Thus, while projects with long-term off-take contracts,
such as the Birchwood project, have debt capitalization levels in
the 70% to 80% range, Southern Electric's other projects are
leveraged at (or often below) the level of U.S. regulated
utilities.
Another financing risk is the potential variability of
interest rates. This risk is addressed, in part, by borrowing,
to the extent possible, on a long-term, fixed-rate basis. After
contractual terms for a project have been agreed but before
financial closing, Southern Electric is also exposed to interest
rate variability. This risk can be mitigated by purchasing
financial instruments which provide hedges against interest rate
volatility. The use of these instruments is monitored on a daily
basis by the senior financial officers of Southern Electric to
ensure they are used properly.
- Foreign currency exchange risk. There are several
ways in which Southern Electric has addressed this risk element,
depending on the status of the host country. In countries which
do not have a history of stability in the management of their
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exchange policy, part or all of the revenue from a project is
payable in or indexed to hard currency (almost invariably U.S.
dollars). In addition, Southern Electric has negotiated back-up
guarantees or other undertakings by the central government to
ensure that the U.S. dollar payments due under an off-take
contract are actually made available by the central bank or
ministry of finance.
In some countries, the source of revenues is tied in other
ways to the U.S. dollar. For example, the capacity charge
element of revenues derived by the Alicura and EDELNOR projects
is tied to the cost of new capacity measured in U.S. dollars. In
addition, in Chile, part of EDELNOR's revenues is expressed in a
unit of account (i.e., a notional monetary unit) which adjusts
for any inflation of the Chilean peso, thereby protecting EDELNOR
against depreciation of the currency.
In other cases (SWEB, for example), the non-recourse
project debt is borrowed in the same currency as the project's
revenues, thereby ensuring a match between debt service
obligations and operating income. In addition, in more developed
countries, long-term currency swaps are available to provide
further hedging for the equity component of the investment.
- Legal risks. Legal risks are addressed by careful
review of any investment by legal counsel, including local and
international counsel where foreign projects are concerned. Such
legal reviews address regulatory and permitting risks,
environmental risks, the adequacy and enforceability of
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guarantees or other contractual undertakings of third parties,
the status of title to utility property, and the obligations
inherent in the financing arrangements.
In addition to the specific risks mentioned above,
investing outside the U.S. can entail country-specific risks
related to political or economic performance. As indicated
above, Southern Electric evaluates country risk at the outset of
any project development effort and attempts to mitigate this risk
through a number of measures. Most important, the country review
process described above ensures that the political and economic
stability of any country has been reviewed at several decisional
levels up to and including Southern s board of directors before
any investment occurs. In addition to a general review, the
country analysis focuses specifically on the country's electric
sector and on the government's support for private ownership in
that sector.
Also at the outset of development work in a foreign
country, Southern Electric seeks local partners who are
experienced in doing business in the host country. Local
partners are a very important element in mitigating the risk of
future expropriation or unfair regulatory treatment. An
additional mitigating factor is the participation of official or
multilateral agencies in a project. When funds for the project
are supplied by government-sponsored export credit agencies or
other governments or institutions, such as the World Bank through
its International Finance Corporation affiliate, the host country
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has strong incentives not to take actions which would harm a
project's viability. In addition, political risk can often be
addressed through political risk insurance obtained from the
Overseas Private Investment Corporation ("OPIC"), a U.S. agency,
or the Multilateral Investment Guaranty Agency ("MIGA"), a World
Bank affiliate, or in the commercial insurance market.6
Portfolio Diversification. Apart from the detailed and
comprehensive approach to the specific risks described above,
Southern Electric's fundamental view is that the best long-term
approach to managing the risk of investing in the independent
power business is through diversifying both the type and the
location of projects. In this regard, Southern Electric
recognizes that the risk inherent in any investment cannot be
eliminated entirely, even by the most careful approach to project
development. Consequently, Southern Electric is committed to
diversifying its investments across countries and regions of the
world. Southern Electric's strategy has been to invest in North
America (outside the core regulated business of Southern), Latin
America (including the Caribbean), Europe and Asia. Substantial
investments have been made in the first three regions, and
extensive development efforts are underway in Asia.
Regional diversification is important since economic and
political instability, when they have occurred historically, have
6 Political risk insurance is available to insure the
project debt or the return of an investor's equity. One can also
insure against outright expropriation, acts of civil violence, or
even "creeping" nationalization brought about by punitive
regulation.
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tended to involve multiple countries in a region. Accordingly,
Southern's board of directors may set limits on investment in
specific countries which vary according to an assessment of the
country's stability.
Another element of Southern Electric's diversification
policy is to achieve a balance between so-called "greenfield"
projects and acquisitions of existing facilities and power
systems. Greenfield projects are those that involve completely
new development and construction of electric facilities,
principally generating stations. Greenfield projects involve a
higher degree of risk since they entail a lengthy process of
development and construction. Funds are expended during the
early years of such projects; return on investment is not earned
until the project is in operation. Nevertheless, while these
projects have higher levels of risk and deferred returns, they
are important to Southern Electric because they generally produce
higher rates of return on investment than investments in existing
assets and they lay the foundation for continued earnings growth
for Southern after the turn of the century.
To balance these greenfield project development efforts,
Southern has also purchased assets that are already in operation,
either from existing private owners (e.g., SWEB; Freeport Power)
or through privatizations (e.g., Alicura, Edelnor, Trinidad).
These acquisitions reduce the risk of Southern's overall business
by producing near-term earnings without significant development
or construction risk.
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The result of this balanced portfolio strategy is that
Southern is not dependent on any single country, regulatory
environment, or type of asset for its earnings from independent
power projects and foreign utility investments. In addition,
while Southern Electric has successfully developed significant
investments in projects which are expected to produce long-term
results, it has also ensured that Southern's portfolio of
projects will add cash flow and earnings for Southern
shareholders in the immediate future, thereby supporting share
value and dividend growth.
1.4 Potential Investments in Additional Exempt Projects.
Southern Electric is currently investigating, alone and in
conjunction with others, investment opportunities in several
additional domestic and foreign power projects and existing
foreign utility systems. Most of these ventures are expected to
qualify as either EWGs or FUCOs. In particular, several foreign
countries, such as Hungary and Jamaica, are now privatizing
state-owned utility systems. Other countries, such as Korea,
Taiwan and Indonesia, are promoting private investment to
construct, own and operate generating plants.
Southern is committed to making additional,
substantial, investments in Exempt Projects, primarily for the
following reasons:
There has been since 1988, and is projected for at
least the next ten years to be, little or no need for Southern to
make any significant new equity investment in any of the
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Operating Companies. Thus, acquisitions of Exempt Projects
present Southern with the opportunity to continue to grow through
reinvestment of retained earnings in an industry sector that
Southern has decades of experience in, while at the same time
diversifying overall asset risk.
Second, Southern Electric has purposely pursued investments
in utility systems in countries, such as England, Argentina and
Chile, which have moved much further than the United States
towards deregulation and full competition in both wholesale and
retail electricity markets. Southern believes that the creation
and maintenance of value for its shareholders will depend
critically on its ability to operate its core business in the
southeastern U.S. successfully as that business becomes subject
to increasing competition. Southern Electric's experience in
markets that are already largely deregulated and its investment
in power marketing in the U.S. will be critical to the long-term
success in the core business. Moreover, the lessons learned from
these markets provide Southern with insights about the features
of market structures that produce efficient and equitable results
for consumers and shareholders. These insights will allow
Southern to play a role in shaping the evolution of the electric
sector in the U.S.
1.5 Proposed Increase in Financing of Exempt Projects.
For the reasons stated above, Southern hereby requests that the
Commission exempt Southern from the requirements of Rule 53(a)(1)
such that Southern may use the net proceeds of currently and
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subsequently authorized financing and issue Guaranties in an
aggregate amount at any time outstanding which, when added to
Southern's direct and indirect "aggregate investment" in all
Exempt Projects, would not at any time exceed Southern's
"consolidated retained earnings." Based on Southern's current
"aggregate investment" in all Exempt Projects (approximately
$1.244 billion) and "consolidated retained earnings" at June 30,
1995 (approximately $3.213 billion), such limitation would allow
financing of additional investments in Exempt Projects of
approximately $1.97 billion.
Southern is not herein requesting any authority to issue
and sell any additional common stock, notes evidencing
borrowings, or Guaranties, or any other modification to any other
terms or conditions of the Financing Orders.
Item 2. Fees, Commissions and Expenses.
The fees, commissions, and expenses paid or to be paid or
incurred in connection with the filing of this Application or
Declaration are estimated not to exceed $10,000, including the
Commission's $2,000 filing fee.
Item 3. Applicable Statutory Provisions.
3.1 General Provisions. The proposal herein is subject
to Sections 6(a), 7, 12(b), 32 and 33 of the Act and Rules 45,
53, 54 and 100(a) thereunder. Rule 53 provides that, if each of
the conditions of paragraph (a) thereof is met, and none of the
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conditions of paragraph (b) thereof is applicable, then the
Commission may not make certain adverse findings under Sections 7
and 12 of the Act in determining whether to approve a proposal by
a registered holding company to issue securities in order to
finance an investment in any EWG or to guaranty the securities of
any EWG. Giving effect to the proposals contained herein,
Southern will satisfy all of the conditions of Rule 53(a) except
for clause (1) thereof, since Southern is proposing herein that
Southern's "aggregate investment" may exceed 50% of Southern's
"consolidated retained earnings." None of the conditions
specified in Rule 53(b) is or will be applicable.
3.2 Analysis of Rule 53(c) Issues. Rule 53(c) states
that, in connection with a proposal to issue and sell securities
to finance an investment in any EWG, or to guarantee the
securities of any EWG, a registered holding company that is
unable to satisfy the requirements of paragraph (a) or (b) of
Rule 53 must "affirmatively demonstrate" that such proposal:
(i) will not have a substantial adverse impact upon the
financial integrity of the registered holding company
system; and
(ii) will not have an adverse impact on any utility
subsidiary of the registered holding company, or its
customers, or on the ability of State commissions to
protect such subsidiary or customers.
Southern addresses each of these requirements as follows:
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1. The use of common stock proceeds, borrowings and
Guaranties to make investments in EWGs (as well as in FUCOs) in
amounts of up to Southern's "consolidated retained earnings" will
not have a "substantial adverse impact" on the financial
integrity of the Southern System.
The lack of any "substantial adverse impact" on Southern's
financial integrity as a result of increased levels of
investments in Exempt Projects can be demonstrated in several
ways, including by analyses of historic trends in Southern's
consolidated capitalization ratios and retained earnings, the
market view of Southern's securities, and Southern's proven
success in obtaining appropriate levels of non-recourse debt
financing and third-party equity for its associate Exempt
Projects. Consideration of these and other relevant factors
supports the conclusion that the issuance of securities by
Southern to finance investments in Exempt Projects exceeding the
50% consolidated retained earnings limitation in Rule 53(a)(1)
will not have any "substantial adverse impact" on the financial
integrity of the Southern System.
- Aggregate investments in Exempt Projects in amounts up
to 100% of Southern's "consolidated retained earnings" would
still represent a relatively small commitment of capital for a
company the size of Southern, based on various key financial
ratios at June 30, 1995. For example, investments in this amount
<PAGE>
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would be equal to only 18% of Southern's total capitalization
($17 billion), 14.7% of consolidated net utility plant ($21.0
billion), 11.6% of total consolidated assets ($27 billion), and
21% of the market value of Southern's outstanding common stock
($14.9 billion).
- Southern's consolidated retained earnings has grown on
average approximately 6.2% per year over each of the previous 5
years. Consolidated retained earnings increased $223 million
from 1993 to 1994, an 8% increase; and by $237 million in the
twelve-month period ended June 30, 1995, also an 8% increase.
- Currently, Southern's projected consolidated
capitalization ratios for 1995 (52% equity, 48% debt) are well
within industry norms and within the limits set by the
independent rating agencies for "A" rated companies.
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Projected 1995 Capitalization Ratios:
(Excluding Non-Recourse Project Debt)
Equity 52% (common - 44%; preferred - 8%)
Debt 48%
'A' Industry Benchmark
Average* 'A'*
Equity 51% 48%
Debt 49% 52%
*(Source: 'A' Industry average - Merrill Lynch & Co., Utility
Data Sheet - Electric and Combination Utility Companies, April
1995 (includes A-, A, A+); Benchmark 'A' - Standard & Poor's,
Creditweek, October 27, 1993)
- There is no indication that Southern's ability to raise
common equity has been adversely affected by investments in
Exempt Projects. In fact, just the opposite appears to be true,
relative to the rest of the industry. Southern has completed two
recent public offerings of common stock, in January 1994 and
January 1995, both by competitive bids. In each case, the net
price per share paid to Southern was greater than the last sales
price before the underwriting agreement was executed. Net
proceeds of the January 1995 sale ($20.56 per share) compares
favorably to the then per share net book value for Southern's
common stock ($12.47), resulting in a market-to-book ratio of
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165%. The market's assessment of Southern's future growth and
earnings also compared favorably to other electric utility
issuers in the 1994 - 1995 time frame. This can be shown by
comparison of price/earnings and market-to-book ratios, both of
which were above the electric utility industry average in that
period. These measures indicate investor confidence in
Southern's ability to deliver shareholder value.
1992 1993 1994 Current
P/E Ratio
Southern 12.7 14 13.2 13.8 (as of 7/31/95)
Electric Industry* 14.8 15.1 11.8 12 (as of 7/31/95)
Market-to-Book
Ratio:
Southern 168% 184% 160% 174% (as of 7/31/95)
Electric Industry* 160% 161% 133% 137% (as of 7/31/95)
*(Source: Historical - Compustat Electric Utilities Database;
Current - Utility Focus, Regulatory Research Associates, Inc.,
August 1995)
- In recent years, Southern has been more conservative
than the industry as a whole in its dividend payout policy. This
can be shown by Southern's dividend payout ratio (percentage of
earnings paid out in dividends), which has been significantly
below the electric utility industry average. The implication of
a conservative payout policy is that Southern's earnings are more
than adequate to cover current dividend levels and to support the
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growth in dividend levels needed to attract common stock
investors, while continuing to strengthen the equity base through
retained earnings growth.
1992 1993 1994 1995
Payout Ratio (%):
Southern 72.9 72.4 77.5 74.1
Electric Industry* 84.3 78.6 81.4 81
*(Source: Historical - Compustat Electric Utilities Database; 1995 -
Merrill Lynch & Co., Utility Data Sheet, June 19, 1995 (for 12
months ended May 31, 1995))
- The market's assessment of the overall quality of
Southern Electric's portfolio of projects (Exempt Projects and
Mobile Energy) is demonstrated by the success that Southern
Electric has had in obtaining appropriate levels of non-recourse
debt to finance and refinance the operations of these entities,
and in selling down portions of its equity investments in such
projects. For example, Southern Electric recently arranged a $71
million non-recourse refinancing of a portion of Southern's
investment in the Power Generation Company of Trinidad and
Tobago, a $35.3 million non-recourse refinancing of a portion of
Southern's investment in the EDELNOR project, and a sale to a
third party of a 50% interest in the Birchwood project at a $28
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million profit.7 Non-recourse debt for all Exempt Projects
equals approximately 40.2% of capitalization of those entities.8
- As previously described, Southern's portfolio of
Exempt Projects is well diversified, by country, project type,
and stage of development (i.e., most are in operation or nearing
completion).
- None of the conditions described in paragraph (b) of
Rule 53 is applicable. Specifically, (a) there has been no
bankruptcy of a Southern associate company, (b) Southern's
consolidated retained earnings, as previously indicated, has
increased in recent years, and (c) Southern has never reported an
"operating loss" attributable to its Exempt Projects. Further,
with the completion of the purchase of the capital shares of
SWEB, and with the Birchwood project scheduled to go into
commercial operation in November 1996 and EDELNOR's Mejillones I
Plant in December 1995, it is reasonable to expect a positive
impact on the "operating income" of Southern's Exempt Projects as
a group. Finally, no associate Exempt Project has ever defaulted
under the terms of any financing document.
7 As indicated above, fn. 4, Southern Electric also
recently arranged a public offering by Mobile Energy of
approximately $267 million of first mortgage bonds and
refinancing of $85 million of tax-exempt bonds.
8 Debt capitalization of Southern Electric's project
portfolio as a whole (i.e., including the Mobile Energy project,
which is not an Exempt Project) is about 51.1%.
<PAGE>
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2. The proposed increased use of financing proceeds to
invest in Exempt Projects will not have an "adverse impact" on
any utility subsidiary of Southern, or its customers, or on the
ability of the four State commissions to protect such customers.
The conclusion that the Operating Companies and their
customers will not be adversely impacted by increased levels of
investment by Southern in Exempt Projects is well supported by
analyses of the Operating Companies' financial integrity
(including ability of the Operating Companies to issue senior
securities), lack of current and anticipated need for any
significant amount of equity capital from Southern, continuing
compliance with other applicable requirements of Rule 53(a), and
the proven effectiveness of State commission oversight.
- All of Southern's investments in EWGs (as well as in
FUCOs) are segregated from the Operating Companies. No Operating
Company has extended credit or sold or pledged its assets
directly or indirectly to any Exempt Project,9 and the
indebtedness of the Exempt Projects is not otherwise recourse to
any Operating Company. Losses incurred in connection with any
Exempt Project are not anticipated, and in any event would not
have any effect on rates charged by the Operating Companies to
domestic utility customers.
9 It should be noted that Section 33(f), with a minor
exception, prohibits State regulated public utilities from
financing investments in FUCOs, and Section 33(g) prohibits
outright any pledge or encumbrance of utility assets by a State
regulated public utility for the benefit of any associate FUCO.
<PAGE>
- 33 -
- Debt (including short-term debt) ratios of the
Operating Companies are generally below (i.e., better than)
industry averages for 'A'-rated electric utilities. The current
industry average for 'A'-rated electric utilities is 49%.*
Debt as % of 1991 1992 1993 1994 1995(YTD-June)
Capitalization
Alabama 47% 46% 45% 46% 48%
Georgia 52% 51% 49% 47% 46%
Gulf 52% 48% 45% 45% 45%
Mississippi 51% 44% 44% 44% 46%
Savannah 40% 40% 46% 45% 46%
*(Source: 'A' industry average-Calculated using Merrill Lynch & Co.,
Utility Data Sheet - Electric and Combination Utility Companies,
April 1995)
Debt levels of the Operating Companies are projected to steadily
decline, moving to the 40-45% range by the year 2000. The
reduction in debt levels is attributable largely to projected
growth in retained earnings.
- Additional investments in Exempt Projects will not have
any negative impact on the Operating Companies' ability to fund
operations and growth since the Operating Companies are not
"competing" for Southern's capital. Over the past 5 years, the
Operating Companies have funded substantially all of their
construction expenditures from internal sources of cash and from
sales of senior securities and other borrowings. The last
significant equity infusion by Southern in the Operating
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Companies was made in 1988 (approximately $280 million).10
Current projections indicate that Southern will not have to make
any significant equity investment in any Operating Company for at
least the next 10 years.
Operating Companies - Construction Expenditures:
Actual and projected expenditures, net of AFUDC ($million)*:
1991 1992 1993 1994 1995 1996 1997
1110 1096 1432 1524 1317 1244 1335
*(Source: Southern Company Financial & Statistical Review 1984-1994)
Percent internally generated:
1991 1992 1993 1994 1995
137% 117% 88% 83% 110%
Southern currently estimates that for 1996 and 1997 the percentage
of construction funded from internal sources will range from 100%
to 120%.
- The Operating Companies' ability to issue first mortgage
bonds and preferred stock in the future depends upon earnings
coverages at the time such securities are issued; that is, the
Operating Companies must comply with certain coverage requirements
designated in their respective mortgage bond indentures and
corporate charters. Currently, the Operating Companies anticipate
10 Southern contributed $25 million to Mississippi Power
Company in 1994 and $30 million in 1993. There have been no
other capital contributions to any Operating Company since 1988.
<PAGE>
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having more than adequate earnings coverages for financing
requirements in the foreseeable future.11
- The senior securities of each of the Operating Companies
are currently rated 'A+' by Standard & Poor's and have all
experienced upgrades in the last 5 years. The Operating Companies'
coverages have generally been within the 'A' and 'AA' ranges set by
the major rating agencies in recent years. The Operating Companies
continue to show strong financial statistics as measured by the
rating agencies (pre-tax interest coverage, debt ratio, funds from
operations to debt, funds from operations interest coverage, and
net cash flow to capital expenditures).
Bond Rating: 1991 1992 1993 1994 1995(Current)
Alabama A A A A+ A+
Georgia A- A- A- A A+
Gulf A A A A A+
Mississippi A+ A+ A+ A+* A+
Savannah A A A A+ A+
* (Mississippi Power was upgraded by Moody's to Aa3
from A1 in 1994).
- Southern has complied and will continue to comply with the
requirements of Rule 53(a)(2) regarding preparation and making
available of books and records and financial reports regarding
Exempt Projects.
11 Projected (1995) indenture earnings coverages for the
Operating Companies range from about 4.92x to 6.69x, and
projected charter earnings coverages range from about 2.5x to
3.17x, in each case well above the required coverages of 2x and
1.5x, respectively.
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- 36 -
- Southern has complied and will continue to comply with the
requirements of Rule 53(a)(3) regarding limitation on use of
Operating Company employees in connection with providing services
to Exempt Projects. Increased levels of investment in Exempt
Projects are not expected to have any impact on utilization of
Operating Company employees.12 The Operating Companies have not
and will not increase staffing levels or acquire other resources to
support the operations of Exempt Projects. In this regard, the
vast majority of the operational employees of the Exempt Projects
are hired or contracted locally. This is true even where Southern
Electric is the operator. Project development, management, and
home office support functions for the Exempt Projects are largely
performed by Southern Electric, which has approximately 411 full
time employees, and by outside consultants (e.g., engineers,
investment advisors, accountants and attorneys) engaged by Southern
Electric. Accordingly, Southern Electric's need for the support of
personnel provided by the Operating Companies has been and is
projected to remain relatively modest.
- There is no evidence that the four State commissions have
been or will be unable to protect utility customers. The State
commissions have not raised objections to Southern's investments in
12 On average, since January, 1993, no more than 1/2 of 1% of
the employees of the Operating Companies and Southern Company
Services have been used at any one time to render services
directly or indirectly to Exempt Projects.
<PAGE>
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Exempt Projects.13 Southern, through Operating Company contacts,
has consulted frequently with State commission staffs in regard to
its financing and acquisition proposals. Certain State commission
staffs (and FERC staff) have participated with the SEC audit teams
in connection with audits of Southern Electric and Freeport Power,
and it is assumed that some or all will so participate in future
audits. Audits by the SEC have not raised "significant" questions.
Item 4. Regulatory Approval.
The issuance and sale of securities by Southern and the use of
the proceeds thereof to acquire or guaranty the securities of any
Exempt Project are not subject to the jurisdiction of any State
commission or of any federal commission other than this Commission.
Southern has complied with the requirements of Rule 53(a)(4) by
submitting a copy of this Application or Declaration to the public
utility commissions in Georgia, Alabama, Mississippi and Florida.
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
13 Section 33(c)(2) provides that the State commissions may
make recommendations to the SEC regarding a registered holding
company's relationship to FUCOs, and that the SEC shall
"reasonably and fully consider" such recommendations.
<PAGE>
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officer of the Commission and hereby consents that the Division of
Investment Management may assist in the preparation of the
Commission's decision and/or order in this matter unless such
Division opposes the matters covered hereby.
Southern also requests that the Commission's order herein
specifically provide that, if the Commission shall hereafter
promulgate a rule under Section 33(c) of the Act respecting
investments in FUCOs, and the effect of any such rule is to
incorporate by reference the "safe harbor" standards of Rule 53,
then the Commission's order herein shall, for the purposes of any
such rule, also constitute a grant of an exemption under Rule
100(a) from the requirements of such rule.
Item 6. Exhibits and Financial Statements.
(a) Exhibits.
F - Opinion of Counsel. (To be filed by
amendment).
G - Form of Federal Register Notice.
(b) Financial Statements.
None.
Item 7. Information as to Environmental Effects.
(a) In light 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.
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(b) 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 company has duly caused this
statement to be signed on its behalf by the undersigned thereunto
duly authorized.
Dated: October 23, 1995 THE SOUTHERN COMPANY
By: /s/Tommy Chisholm
Tommy Chisholm, Secretary
<PAGE>
Exhibit G
FORM OF FEDERAL REGISTER NOTICE
The Southern Company, a registered holding company whose
address is 64 Perimeter Center East, Atlanta, Georgia 30346, has
filed an application or declaration pursuant to Sections 6(a), 7,
12(b), 32 and 33 of the Act and Rules 45, 53, 54 and 100(a)
thereunder.
Southern is currently authorized under the terms of separate
orders dated August 2 and 3, 1995 (HCAR Nos. 26347 and 26349,
respectively) to issue and sell in one or more transactions from
time to time through December 31, 1999, additional shares of its
common stock, $5 par value, and to utilize the net proceeds
thereof to make investments, directly or indirectly, in one or
more "exempt wholesale generators" ("EWGs") or "foreign utility
companies" ("FUCOs"), as defined in Sections 32 and 33,
respectively; and to guaranty, from time to time through December
31, 1999, the securities of one or more EWGs or FUCOs in an
aggregate amount not to exceed $1.2 billion at any time
outstanding. By order dated August 1, 1995 (HCAR No. 26346),
Southern is also authorized to issue and sell short-term and term
loan notes and/or commercial paper from time to time prior to
prior to April 1, 2000, in an aggregate principal amount at any
time outstanding not to exceed $1 billion, and to use the
proceeds thereof to acquire the securities of one or more EWGs or
FUCOs.
Each of the three financing orders referred to above
<PAGE>
specifies that the sum of the principal amount of securities of
EWGs and FUCOs that Southern may guaranty and the proceeds of
common stock sales and borrowings used by Southern to invest in
the securities of EWGs and FUCOs shall not, when added to
Southern's "aggregate investment," as defined in Rule 53(a), in
all such entities, exceed 50% of Southern's "consolidated
retained earnings," as determined in accordance with Rule 53(a).
This is the requirement of Rule 53(a)(1), which is one of the
conditions of the financing "safe-harbor" under Rule 53(a).
At September 30, 1995, Southern's "aggregate investment" in
all EWGs and FUCOs was approximately $1.244 billion, or
approximately 38.7% of Southern's "consolidated retained
earnings" for the four consecutive quarters ended June 30, 1995
($3.213 billion).
Southern is now requesting an order that would exempt
Southern from the requirement of Rule 53(a)(1) so as to allow
Southern to guaranty securities of EWGs and FUCOs and to use the
proceeds of authorized common stock sales and borrowings to
invest in the securities of EWGs and FUCOs in amounts which, when
added to Southern's "aggregate investment" at any time in such
entities, would not exceed Southern's "consolidated retained
earnings." Southern is not seeking approval for any increase in
the number of shares of common stock or notes and/or commercial
paper that it is currently authorized to issue and sell, or in
the amount of securities of EWGs or FUCOs that it is currently
authorized to guaranty.
The application or declaration describes Southern's current
<PAGE>
ownership of EWGs and FUCOs and the process of project risk
review and mitigation that Southern states is undertaken by its
subsidiary, Southern Electric International, Inc. ("Southern
Electric"), prior to any commitment of funds by Southern in any
EWG or FUCO. Southern states that, through Southern Electric, it
is actively considering making investments in additional foreign
and domestic independent power projects and foreign electric and
gas utility systems which would qualify for exemption under
Section 32 or 33. If such additional investments were
consummated, it would result in Southern's "aggregate investment"
in all such entities exceeding the limitation on financing of
such investments contained in Rule 53(a)(1).
Rule 53(c) provides that, if any of the conditions of the
financing "safe-harbor" in Rule 53(a) is not satisfied, then an
applicant must "affirmatively demonstrate" that the proposal (i)
will not have a "material adverse impact upon the financial
integrity" of the holding company system, and (ii) will not have
an "adverse impact" on any utility subsidiary of the holding
company, or its customers, or on the ability of the relevant
State commissions to protect such subsidiary or customers.
In its application or declaration, Southern has provided
financial and other information which, Southern asserts,
demonstrates that the financing of investments by Southern in
EWGs and FUCOs in amounts which, when added to Southern's
"aggregate investment" at any point in time in such entities, may
be equal to as much as Southern's "consolidated retained
earnings," would not have either of the adverse impacts referred
<PAGE>
to in Rule 53(c). Southern represents that it has provided a
copy of the application or declaration to the public service
commissions in Georgia, Alabama, Florida, and Mississippi, and
has made itself available for consultation with each of those
bodies.
<PAGE>
