File No. 70-9701
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 4
to
FORM U-1
APPLICATION OR DECLARATION
under
The Public Utility Holding Company Act of 1935
THE SOUTHERN COMPANY
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
ALABAMA POWER COMPANY MISSISSIPPI POWER COMPANY
600 North 18th Street 2992 West Beach
Birmingham, Alabama 35291 Gulfport, Mississippi 39501
GEORGIA POWER COMPANY SAVANNAH ELECTRIC AND POWER
241 Ralph McGill Boulevard, N.E. COMPANY
Atlanta, Georgia 30308 600 East Bay Street
Savannah, Georgia 31401
GULF POWER COMPANY SOUTHERN ELECTRIC GENERATING
One Energy Place COMPANY
Pensacola, Florida 32520 600 North 18th Street
Birmingham, Alabama 35291
(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 and Assistant Treasurer
The Southern Company
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
William E. Zales, Jr. Michael W. Southern, Vice President,
Vice President and Secretary Secretary and Treasurer
Alabama Power Company Mississippi Power Company
600 North 18th Street 2992 West Beach
Birmingham, Alabama 35291 Gulfport, Mississippi 39501
Judy M. Anderson, Vice President Kirby R. Willis, Vice President,
and Corporate Secretary Treasurer and Chief Financial Officer
Georgia Power Company Savannah Electric and Power Company
241 Ralph McGill Boulevard, N.E. 600 East Bay Street
Atlanta, Georgia 30308 Savannah, Georgia 31401
Warren E. Tate William E. Zales, Jr.
Secretary and Treasurer Secretary and Assistant Treasurer
Gulf Power Company Southern Electric Generating Company
One Energy Place 600 North 18th Street
Pensacola, Florida 32520 Birmingham, Alabama 35291
(Names and address of agents for service)
This Commission is requested to mail signed copies of all orders,
notices and communications to:
W.L. Westbrook John D. McLanahan, Esq.
Financial Vice President Troutman Sanders LLP
The Southern Company 600 Peachtree Street, N.E.
270 Peachtree Street, N.W. Suite 5200
Atlanta, Georgia 30303 Atlanta, Georgia 30308-2216
Walter M. Beale, Jr., Esq.
Balch & Bingham LLP
1901 Sixth Avenue North
Suite 2600
Birmingham, Alabama 35203
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INFORMATION REQUIRED
The statement on Form U-1 as initially filed in this proceeding is
hereby amended and restated in its entirety as follows:
Item 1. Description of Proposed Transactions.
The Southern Company ("Southern") is a registered holding company under
the Public Utility Holding Company Act of 1935, as amended (the "Act"). Southern
proposes to organize a new subsidiary company ("NewCo"). Upon obtaining
requisite regulatory authorizations, NewCo will undertake the construction and
ownership of certain electric power generation interconnected to the
transmission systems of Alabama Power Company ("Alabama"), Georgia Power Company
("Georgia"), Gulf Power Company ("Gulf"), Mississippi Power Company
("Mississippi"), Savannah Electric and Power Company ("Savannah")1 and Southern
Electric Generating Company ("SEGCO") 2 (collectively, the "Operating
Companies"), or to transmission systems interconnected to those of the Operating
Companies designed for serving the power requirements of the Operating Companies
and of other power purchasers in the region. 3 In addition, NewCo proposes to
invest in exempt wholesale generators ("EWGs"), the generation of which may not
be interconnected to transmission systems of the Operating Companies. NewCo will
not invest in foreign utility companies ("FUCOs") or foreign EWGs. Certain power
generation owned by NewCo may be integrated into the power generation owned by
the Operating Companies and operated on a central dispatch basis by Southern
Company Services, Inc. ("Services").
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1 Alabama, Georgia, Gulf, Mississippi and Savannah are public utility company
subsidiaries of Southern.
2 Alabama and Georgia each own 50% of the common stock of SEGCO and are each
entitled to 50% of the output of SEGCO.
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A. Purpose of NewCo.
It is proposed that NewCo will own substantial portions of the
generation for wholesale sales to third parties and to some or all of the
Operating Companies. NewCo will not engage in retail sales of electricity. The
wholesale sales of electricity are subject to approval by the Federal Energy
Regulatory Commission (the "FERC") under procedures promulgated under the
Federal Power Act, as amended (the "Federal Power Act"), designed to preserve
the integrity of state regulatory authority over retail electricity sales.
Over the last few years, electric supply in the United States has been
dramatically transformed from a heavily regulated industry to one that is now
extremely fast paced and marked by unprecedented levels of customer choice and
competition. Southern is adapting to this new environment by forming NewCo. The
formation of NewCo reflects an organizational change which will focus on
wholesale generating assets in the Southeast. NewCo will facilitate Southern's
adaptation to that new business environment by consolidating the sort of
wholesale activities that are currently being conducted on a piecemeal basis by
the existing Operating Companies. The organizational change is expected to
produce efficiencies in at least three respects:
(1) It will provide a structure to clearly separate assets that are
involved in wholesale transactions from retail ratemaking. Under the current
structure, an Operating Company is free to engage in wholesale transactions, and
the Operating Companies have done so for many years. Nevertheless, a significant
amount of time and effort is required by the state commissions (and their
staffs) and company management to ensure that the retail/wholesale operations
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3 The Commission recently granted similar authority to another holding company
system. See Allegheny Energy, Inc. et al., Holding Company Act Release No.
27101, dated November 12, 1999.
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are properly segregated from both an accounting and a ratemaking standpoint.
Establishing a separate company to handle those transactions in the future will
conclusively resolve any such concerns and will reduce (if not eliminate) the
need for jurisdictional separation studies or other such time consuming and
costly safeguards that are otherwise used for this purpose.
(2) It will simplify the resource planning process for the existing
Operating Companies, which must now reconcile two different concepts of business
development. Under current retail regulation, each Operating Company has a
statutory duty to serve retail customers located in its service territory. To
meet that need, it procures resources to serve that projected load (including
reserves). In contrast, the customer choice available in the wholesale market
requires an entirely different planning process -- one that involves the
analysis of prospective arrangements, the rapid formulation of definitive bids
and the development of plants that are intended either to meet a delivery
deadline under a winning bid or to serve as a source of supply for future bids.
In short, the retail and wholesale markets require different approaches to
planning and decision making, and thus efficiencies would result from their
segregation.
(3) It will expedite decision making. The above-described wholesale
power market now moves very quickly. Some of the current decision making
regarding wholesale power requires coordination among the dispersed management
structures of the individual Operating Companies. As a separate corporate
entity, NewCo will be in a position to make decisions in a time frame that is
more compatible with the requirements and expectations of the market.
While the formation of NewCo offers the improvements and efficiencies
described above, it will in no way diminish the reliability of electric supply
in the Southeast. Regional reliability will be just as strong as it would have
been in the absence of this organizational change. Southern will continue to
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develop and/or purchase supply resources to provide reliable service to its
wholesale and retail customers through the Operating Companies and also NewCo.
B. Formation and Capitalization of NewCo.
Southern and the Operating Companies request the authority to complete
all steps necessary for the organization of NewCo, a limited liability company
or corporation, as a new subsidiary of Southern4 (see Exhibit A-1). Southern and
the Operating Companies further seek authority for the issuance by NewCo and the
acquisition by Southern of limited liability company interests or other equity
interests in NewCo.
As described more fully in Item 1, Section E. Financing Authority,
Subsection 1 Equity Funding, Guarantee and Parent Support Authority herein, the
initial capitalization of NewCo may take the form of any combination of: (1)
purchases of or contributions in respect of limited liability company interests
or other forms of equity interests; (2) open account advances without interest;
(3) loans; and (4) Guarantees (as defined below) issued in support of securities
and other obligations of NewCo. Southern and NewCo will maintain the equity
component of NewCo's consolidated capitalization at or above 30%. Applicants
propose that NewCo be permitted to maintain a common equity component less than
30% and request that the Commission reserve jurisdiction over transactions that
would cause the common equity component of NewCo's consolidated capitalization
to fall below 30%.
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4 An Operating Company may form a wholly-owned subsidiary which will acquire
certain assets described herein from such Operating Company and which will
subsequently be spun off to Southern and be merged into a limited liability
company or corporation to form NewCo.
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C. Transfer of Assets by the Operating Companies and Acquisition of
Assets by NewCo.
Southern and the Operating Companies propose to transfer the following
asset and types of assets (collectively, the "Plant Sites and Generating
Equipment") to NewCo: Plant Dahlberg in Jackson County, Georgia; plants under
construction and/or undeveloped plant sites prior to their becoming utility
assets; and existing contracts for wholesale sales of electricity.
Georgia Power Company, a public utility subsidiary of Southern Company,
is currently developing the Plant Dahlberg facility, an 800 MW simple-cycle
natural gas peaking facility located north of Athens, Georgia. The facility will
initially consist of 10 combustion turbine generating units. Units 1-8 entered
commercial operation during May through June 2000. Units 9 and 10 are scheduled
for commercial operation in the spring of 2001. Primary fuel for the units will
be natural gas, with No. 2 fuel oil backup. The facility is interconnected to
the Georgia Integrated Transmission System and the Southern Company electrical
control area via a 230 kV transmission line and is centrally dispatched as part
of the Southern control area. Plant Dahlberg will be transferred at the book
cost of Georgia Power Company, which was approximately $204 million at September
30, 2000, and is estimated to appreciate to $275 million, upon completion of
Units 9 and 10 in the spring of 2001.
The Plant Sites and Generating Equipment will be transferred or sold to
NewCo in an amount equal to the net book value thereof. NewCo will pay cash
and/or issue promissory notes, secured by purchase money mortgages on the Plant
Sites and Generating Equipment, for the Plant Sites and Generating Equipment to
the respective Operating Company in complete consideration therefor. Promissory
notes would only be issued to the Operating Companies for a term not to exceed
five years and at interest rates equivalent to similar securities of a like
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maturity, provided that such rate of interest fully compensates the Operating
Company for its cost of funds. After the transfer of the Plant Sites and
Generating Equipment, NewCo will assume responsibility for the construction and
ownership of the Plant Sites and Generating Equipment.
NewCo will become an "electric utility company" as defined in Section
2(a)(3) of the Act.
D. Intercompany Interchange Contract.
By order issued June 15, 2000 under the Federal Power Act, the FERC
approved the participation of NewCo in the Intercompany Interchange Contract
dated as of February 17, 2000 among Alabama, Georgia, Gulf, Mississippi,
Savannah, NewCo and Services (the "Intercompany Interchange Contract"). The
Intercompany Interchange Contract is a wholesale power sale rate schedule and
coordination agreement subject to the jurisdiction of the FERC pursuant to
Section 205 of the Federal Power Act. The principal purpose of the Intercompany
Interchange Contract is to provide for the accounting for energy transfers among
the participants that result from the operation of their power generation on a
centrally dispatched basis (the "Pool").5 Under the Intercompany Interchange
Contract, each participant is deemed to retain its lowest cost energy resources
to serve its own load and its remaining resources are made available to the Pool
at a rate that recovers variable cost. Centralized dispatch results in a lower
energy cost than would be achieved through independent operation because the
participants can purchase from the Pool when doing so is less expensive than
using their own resources. Pooled power operations also reduce the reserve
requirements needed for reliable energy supply from those that would be required
on a single company stand alone basis.
__________________________
5 The Intercompany Interchange Contract also provides for the sharing of
reserves among the participants.
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E. Financing Authority.
The applicants request authority to engage in the transactions
described below from time to time, as applicable, through June 30, 2005.
1. Equity Funding, Guarantee and Parent Support Authority.
Southern seeks finance authority to fund the development and growth of
NewCo. Funding from Southern in an aggregate amount not to exceed $1.7 billion
may take the form of any combination of: (1) purchases of or contributions in
respect of limited liability company interests or other forms of equity
interests; (2) open account advances without interest; (3) loans; and (4)
Guarantees issued in support of securities and other obligations of NewCo. The
proceeds of such financings will be used to finance the operations of NewCo
authorized herein including the acquisition, construction and operation of power
generation facilities, fuel and power generation equipment procurement and
storage, and energy-related activities, including those authorized pursuant to
17 C.F.R. ss. 250.58, pertaining thereto.
Guarantees may be utilized as credit support for NewCo. The increase in
guarantee authority is necessary if NewCo is expected to achieve its goal of
increasing operating income from non-rate-regulated businesses in the next few
years. Southern proposes to issue additional guarantees or provide other forms
of credit support or enhancements (collectively, "Guarantees") to, or for the
benefit of, NewCo. Guarantees may take the form of Southern agreeing to
guarantee, to undertake reimbursement obligations, to assume liabilities or to
assume other obligations with respect to, or to act as surety on, bonds, letters
of credit, evidences of indebtedness, equity commitments, performance and other
obligations undertaken by NewCo.
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The terms and conditions of the Guarantees will be established through
arms-length negotiations based upon current market conditions. Any Guarantee
issued will be without recourse to any of the Operating Companies.
Southern also seeks authority to issue loans with a term not to exceed
two years to NewCo in order to provide liquidity to NewCo to facilitate cash
management. NewCo needs the flexibility to be able to obtain parent company
loans if the need arises in its business operations. Such loans will be at
interest rates and maturities designed to provide a return to Southern at its
effective cost of capital.
2. NewCo Independent Financing.
In connection with its daily operations, financing the acquisition,
construction and operation of assets owned by it and its subsidiaries, and to
achieve its business goals, it will also be necessary for NewCo to obtain
independent financing. This financing is currently expected to take, without
limitation, the form of bank loans and/or bank credit support, project
financing, lease or sale/leaseback transactions,6 commercial paper programs,
preferred equity, preferred securities,7 debt secured by NewCo's assets or
unsecured debt, notes, debentures and other issuances of equity. In connection
with project financing of generating assets, NewCo may acquire securities or
other interests in project subsidiaries. In addition, NewCo proposes to incur
obligations in connection with the issuance and sale by public instrumentalities
of one or more series of revenue bonds. NewCo requests that the Commission
_______________________________
6 In connection with any lease or sale/leaseback transaction, NewCo may transfer
or sell its utility assets to a third party. NewCo will lease such assets from
the third party with an option to buy back the assets. Applicants request that
the Commission reserve jurisdiction over such transactions.
7 In connection with the issuance of preferred securities, NewCo will organize a
special purpose subsidiary (each, a "SPS") and may organize another special
purpose subsidiary for the purpose of complying with applicable state law. A SPS
will issue preferred securities to third parties and NewCo will acquire all of
the common equity or general partnership interests of the SPS. NewCo will
simultaneously issue debt securities to the SPS and may guarantee certain
payments with respect to the preferred securities.
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authorize it to obtain financing in an aggregate amount not to exceed $2.5
billion, which is in addition to parent support, guarantees and other
commitments described in under Item 1, Section E. Financing Authority,
Subsection 1. Equity Funding, Guarantee and Parent Support Authority herein.
The interest rate or other distribution rate for independent financings
will reflect rates obtained by companies with comparable credit quality. It is
expected that the rate will not exceed the highest of the following rates: (i)
400 basis points over U.S. Treasury securities, (ii) a gross spread over U.S.
Treasury securities that is consistent with similar securities having comparable
maturities, (iii) 200 basis points over the prime rate or (iv) 350 basis points
over LIBOR.
3. Dividend Authority.
In order to manage its financial assets most efficiently, pursuant to
Rule 46, NewCo requests that the Commission reserve jurisdiction with respect to
authority for it and its subsidiaries to pay dividends to Southern out of
capital or unearned surplus to the extent permitted by the applicable law and
without impairing the rights of the holder of outstanding securities. This will
permit NewCo and its subsidiaries to avoid having excess unrestricted cash
trapped in subsidiaries.
F. Proposed Service Agreements with Services and Operating Companies.
Initially, Southern anticipates that NewCo will not have a significant
number of its own employees. It is likely that (1) personnel employed by
Services, a service company approved by the Commission under Section 13 of the
Act and Rule 88 thereunder (see The Southern Company et al., Holding Company Act
Release No. 14776, dated December 21, 1962), will provide a wide range of
services on an as-needed basis pursuant to a Service Agreement ("Service
Agreement") to be entered into between NewCo and Services and (2) personnel
employed by the Operating Companies will also provide services to NewCo pursuant
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to Operating Agreements (the "Operating Agreements") between NewCo and each
Operating Company or other arrangements.
The Service Agreement will take effect upon Commission approval thereof
and will be similar in all material respects to those service agreements which
Services has signed with each of the Operating Companies. Under the proposed
Service Agreement, Services will render to NewCo, at cost computed in accordance
with Rules 90 and 91 under the Act and other applicable rules and regulations,
various services including general executive and advisory services, power pool
operations, general engineering, design engineering, purchasing, accounting,
finance and treasury, taxes, insurance and pensions, corporate, rates,
budgeting, public relations, employee relations, systems and procedures and
other services with respect to business and operations. Services will account
for, allocate and charge its costs of the services provided on a full cost
reimbursement basis under a work order system consistent with the Uniform System
of Accounts for Mutual and Subsidiary Service Companies. The time that Services
employees spend working for NewCo will be billed to and paid by NewCo on a
monthly basis, based upon time records. Each company will maintain separate
financial records and detailed supporting records. The proposed form of Service
Agreement to be entered into is filed as Exhibit B-1.
The Operating Agreements will provide that each Operating Company will
provide certain services relating to accounting matters and to the construction,
operation, maintenance and rehabilitation of assets owned by NewCo at cost to
NewCo. The proposed form of Operating Agreement is attached hereto as Exhibit
B-2.
NewCo may also determine from time to time that it is efficient and
advantageous to have certain development activities performed by its own
employees and/or by unaffiliated third parties. Such arrangements with
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unaffiliated third parties will be on a fee-for-service negotiated basis at
market rates.
G. Formation of EWG Subsidiaries of NewCo.
NewCo proposes to acquire securities or interests in the business of
one or more EWGs, as such term is defined in the Act (the "Exempt
Subsidiaries"), either directly or indirectly through project companies
("Intermediate Companies").
1. Use of Intermediate Companies.
Intermediate Companies would be special purpose subsidiaries formed to
exclusively engage in activities to facilitate the consummation of investments
in EWGs. They may also engage in development activities.8 Intermediate Companies
may acquire interests in, finance the acquisition of and hold the securities of
EWGs. Intermediate Companies would enhance the ability of NewCo to respond
quickly to investment opportunities. An Intermediate Company may be organized at
the time of the making of bids or proposals to acquire an interest in any EWG or
at any time thereafter in order to facilitate the bidding and subsequent
consummation of an acquisition of an interest in an EWG.
Southern also proposes that an Intermediate Company may issue equity
securities and debt securities to persons other than NewCo or Southern (and with
respect to which there will be no recourse to Southern), including banks,
insurance companies and other financial institutions, exclusively for the
purpose of financing (including any refinancing) investments in EWGs.
_____________________________
8 Development activities will include project due diligence and design review;
market studies; site inspection; preparation of bid proposals, including, in
connection therewith, posting of bid bonds, cash deposits or the like;
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 preparation for the acquisition or financing of a project.
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2. Investment in Intermediate Companies and Exempt
Subsidiaries.
The Intermediate Companies may issue securities to Southern and/or
NewCo, and Southern and/or NewCo may acquire the securities. The investment by
Southern or NewCo in the Exempt Subsidiaries may take the form of capital stock
or shares, debt securities, trust certificates, capital contributions, open
account advances without interest and partnership interests or other equity or
participation interests, bid bonds or other credit support to secure obligations
incurred by NewCo and/or Intermediate Companies in connection with Exempt
Subsidiary investments or of NewCo's undertaking to contribute equity to an
Intermediate Company. Southern and NewCo propose, from time to time through June
30, 2005, to (1) guarantee the indebtedness or other obligations of one or more
Exempt Subsidiaries; (2) assume the liabilities of one or more Exempt
Subsidiaries; and/or (3) enter into guarantees and letters of credit
reimbursement agreements in support of equity contribution obligations or
otherwise in connection with project development activities for one or more
Exempt Subsidiaries. Guarantees and credit support are also described under Item
1, Section E. Financing Authority, Subsection 1. Equity Funding, Guarantee and
Parent Support Authority herein.
Investments may be made from Southern to NewCo and/or Intermediate
Companies directly or indirectly. Any open account advance made by Southern will
have a maturity of not more than one year.
Southern requests approval to enter into reimbursement agreements with
banks to support letters of credit delivered as security for Southern's or
NewCo's equity contribution obligation to an Intermediate Company or otherwise
in connection with an Intermediate Company's or Exempt Subsidiary's project
development activities.
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The investment in Intermediate Companies and Exempt Subsidiaries is
included in the $4.2 billion authority requested in Item 1, Section E. Financing
Authority herein.
3. Rule 53 and Rule 58 Compliance.
Southern will report all "aggregate investment" as defined under Rule
53 of the Act on a consolidated basis. In addition, to the extent that Southern
provides funds to NewCo that are used to invest in an energy-related company
(within the meaning of Rule 58 under the Act), the amount of the investment will
be included in the calculation of "aggregate investment" required under Rule 58.
H. NewCo to Sign Income Tax Allocation Agreement.
In accordance with Rule 45 of the Act, NewCo will participate in the
Income Tax Allocation Agreements, as amended, by signing an amendment to such
agreements.
I. Reporting Requirements.
Southern proposes that a single consolidated quarterly report be filed
by Southern pursuant to Rule 24, with respect to all activities of Southern and
its subsidiaries authorized in this file. The format of the report shall
continue to include the following:
Item (1) A copy of the balance sheet and income statements as
of and for the period ending on the last day of such quarter
for direct subsidiaries of Southern that hold the securities
of EWGs, including, without limitation, NewCo.
Item (2) A narrative description of NewCo's activities during
the quarter just ended organized by business category (project
development, project related services and other) and, within
each category, a description of new developments by project
type (e.g., EWGs, energy related activities, etc.).
Item (3) Amounts and forms of: (i) guarantees of, and similar
provisions and arrangements concerning, performance and
undertaking of other obligations by NewCo or any subsidiary of
NewCo; and (ii) indemnifications of and with respect to
persons acting as sureties on bonds or other obligations on
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behalf of NewCo or any subsidiary of NewCo which Southern has
agreed to grant in the event a bid by any of the foregoing is
accepted.
Item (4) Amounts and forms of: (i) guarantees of, and similar
provisions and arrangements concerning, performance and
undertaking of other obligations by NewCo or any subsidiary of
NewCo which Southern has granted and are currently effective;
and (ii) indemnification's of and with respect to persons
acting as sureties on bonds or other obligations on behalf of
NewCo or any subsidiary of NewCo which Southern has granted
and are currently effective.
Item (5) A description of services and goods obtained from
associate companies, including services to NewCo, specifying
the type of service, the number of personnel from each
associate company providing services during the quarter and
the total dollar value of such services.
Item (6) A description of services and goods provided to
associate companies and NewCo which identifies the recipient
company, the charge to the associate and whether the charge
was computed at cost, market or pursuant to another method,
which method shall be specified.
Item (7) A chart showing, as of the end of such quarterly
period, all associate companies of Southern that are EWGs,
Intermediate Subsidiaries, Special Purpose Subsidiaries and
Energy-Related Companies; Southern's direct or indirect
investment in each such entity; the aggregate direct and
indirect investment by Southern in all such entities; and
Southern's percentage equity ownership in each such entity,
together with a statement indicating by category the type of
entity or person (i.e., domestic corporation, foreign
corporation, foreign government or natural persons) owning the
equity interests in each such entity that are not held
directly or indirectly by Southern.
Item 2. Fees, Commissions and Expenses.
The fees, commissions and expenses paid or incurred or to be paid or
incurred in connection with the proposed transactions are estimated not to
exceed $100,000.
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Item 3. Applicable Statutory Provisions.
The applicants consider that Sections 6, 7, 9, 10, 11, 12 and 13 of the
Act and Rules 43, 44, 45, 46, 53, 54, 58, 88, 90 and 91 under the Act are
applicable to the proposed transactions.
To the extent that other sections of the Act or the Commission rules
thereunder are deemed to be applicable to the transactions described herein,
such sections and rules should be considered to be set forth in this Item 3.
Section 9(a)(1) provides that unless the acquisition has been approved
by the Commission under Section 10, it shall be unlawful for any registered
holding company or any subsidiary company thereof "to acquire, directly or
indirectly, any securities or utility assets or any other interest in any
business."
Applicants believe that the proposed transactions described herein
which are subject to Section 9(a) of the Act satisfy the standards of Section 10
of the Act.
Applicants also believe that the consideration to be paid in connection
with the transactions described herein is fair and reasonable.
Applicants believe that the transactions described in Item 1 do not
unduly complicate the capital structure of the Southern system and are in the
public interest and in the interest of investors and consumers. Applicants also
believe that the transactions described in Item 1 will tend toward the proper
functioning of the Southern system in a deregulated wholesale market and, as a
consequence, toward the economical and efficient development of an integrated
public utility system. The request that NewCo and its subsidiaries be permitted
to pay dividends from unearned surplus is consistent with Commission precedent.
See Conectiv, Inc., Holding Company Act Release No. 27079 (September 27, 1999.)
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The transactions described in Item 1 are, in the context of
deregulation in the wholesale electrical generation market, "reasonably
incidental, or economically necessary and appropriate to" the operations of a
registered electric utility holding company system such as Southern. See The
Southern Company, Holding Company Act Release No. 26211, dated December 30,
1994. These transactions will enable the Southern system to offer competitive
generation in the wholesale market, thus they tend toward the economical and
efficient development of an integrated public utility system.
The various transfers of assets and equity securities and the formation
of NewCo described in Item 1 would not result in the existence of any company in
the holding company system that would unduly or unnecessarily complicate the
structure, or unfairly or inequitably distribute voting power among security
holders, of the Southern system. The creation of the new subsidiary is necessary
to adapt to competition in the wholesale generation industry and will contribute
to the efficient operation of Southern's integrated power supply system. Plant
Dahlberg operates as part of that system. As noted in Item 1, the transfers and
the formation of new subsidiary will allow the Operating Companies to continue
to serve the needs of their requirements customers while gearing Southern for
competition in a deregulated wholesale generation market, will allow NewCo to
manage and operate its generating assets with due regard to market
considerations and will increase the flexibility for financing activities on
cost-effective terms that reflect the costs of capital for each area of business
activity. After all transfers and actions described in Item 1 are completed,
redundant organizational structures will not remain. As described in Item 1
hereof, Southern will achieve a number of operating, financial and managerial
benefits from forming NewCo that are consistent with and will contribute to the
efficient operation of an integrated utility system. See WPL Holdings Inc.,
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Holding Company Act Release No. 25377, dated September 18, 1991. Accordingly,
approval is warranted under Section 10 of the Act.
Rule 54 Analysis: The proposed transactions are also subject to Rule
54, which provides that, in determining whether to approve an application which
does not relate to any EWG or FUCO, the Commission shall not consider the effect
of the capitalization or earnings of any such EWG or FUCO which is a subsidiary
of a registered holding company if the requirements of Rule 53(a), (b) and (c)
are satisfied.
Southern currently meets all of the conditions of Rule 53(a), except
for clause (1). At September 30, 2000, Southern's "aggregate investment," as
defined in Rule 53(a)(1), in EWGs and FUCOs was approximately $2.565 billion, or
about 58.14% of Southern's "consolidated retained earnings," also as defined in
Rule 53(a)(1), for the four quarters ended September 30, 2000 ($4.412 billion).
With respect to Rule 53(a)(1), however, the Commission has determined that
Southern's financing of investments in EWGs and FUCOs in an amount greater than
the amount that would otherwise be allowed by Rule 53(a)(1) would not have
either of the adverse effects set forth in Rule 53(c). See The Southern Company,
Holding Company Act Release No. 26501, dated April 1, 1996 (the "Rule 53(c)
Order"); and Holding Company Act Release No. 26646, dated January 15, 1997
(order denying request for reconsideration and motion to stay).
In addition, Southern has complied and will continue to comply with the
record-keeping requirements of Rule 53(a)(2), the limitation under Rule 53(a)(3)
on the use of Operating Company personnel to render services to EWGs and FUCOs,
and the requirements of Rule 53(a)(4) concerning the submission of copies of
certain filings under the Act to retail rate regulatory commissions. Further,
none of the circumstances described in Rule 53(b) has occurred.
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Moreover, even if the effect of the capitalization and earnings of EWGs
and FUCOs in which Southern has an ownership interest upon the Southern holding
company system were considered, there would be no basis for the Commission to
withhold or deny approval for the proposal made in this Application-Declaration.
The action requested in the instant filing would not, by itself, or even
considered in conjunction with the effect of the capitalization and earnings of
Southern's EWGs and FUCOs, have a material adverse effect on the financial
integrity of the Southern system, or an adverse impact on Southern's
public-utility subsidiaries, their customers, or the ability of State
commissions to protect such public-utility customers.
The Rule 53(c) Order was predicated, in part, upon an assessment of
Southern's overall financial condition which took into account, among other
factors, Southern's consolidated capitalization ratio and the recent growth
trend in Southern's retained earnings. As of December 31, 1995, the most recent
fiscal year preceding the Rule 53(c) Order, Southern's consolidated
capitalization consisted of 49.3% equity (including mandatorily redeemable
preferred securities) and 50.7% debt (including $1.68 billion of long-term,
non-recourse debt and short-term debt related to EWGs and FUCOs). Southern's
consolidated capitalization as of September 30, 2000 was 40.4% equity,9 59.6%
debt including all non-recourse debt, and 55.7% equity and 44.3% debt excluding
all non-recourse debt. On a pro forma basis, taking into consideration the
transactions contemplated hereby, such ratios are 40.4% and 59.6%, respectively,
for equity and debt. The common equity component of Southern's pro forma
consolidated capitalization includes $11.080 billion of common stock equity,
representing 32.5% of capitalization and $2.688 billion principal amount of
______________________________
9 Excluding preferred stock and preferred securities from the equity component
of Southern's consolidated capitalization, the equity component was 31.4% of
total capitalization.
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preferred stock and preferred securities representing 7.9% of capitalization.
Since the date of the Rule 53(c) Order, there has been a reduction in
Southern's consolidated equity capitalization ratio; however, it remains within
acceptable ranges and limits of rating agencies for strong investment grade
corporate credit ratings. In addition, the affiliated operating companies, which
have a significant influence on the Southern corporate rating, continue to show
strong financial statistics as measured by the rating agencies. The following
table presents the senior secured ratings history for each as rated by S&P,
Moody's and Fitch:
------------- ---------- --------- --------- --------- --------- ---------
Company Agency 1995 1996 1997 1998 199910
------------- ---------- --------- --------- --------- --------- ---------
------------- ---------- --------- --------- --------- --------- ---------
Alabama S&P A+ A+ A+ A+ A+
Moody's A1 A1 A1 A1 A1
Fitch A+ AA- AA- AA- AA-
------------- ---------- --------- --------- --------- --------- ---------
------------- ---------- --------- --------- --------- --------- ---------
Georgia S&P A+ A+ A+ A+ A+
Moody's A1 A1 A1 A1 A1
Fitch AA- AA- AA- AA- AA-
------------- ---------- --------- --------- --------- --------- ---------
------------- ---------- --------- --------- --------- --------- ---------
Gulf S&P A+ A+ AA- AA- AA-
Moody's A1 A1 A1 A1 A1
Fitch A+ AA- AA- AA- AA-
------------- ---------- --------- --------- --------- --------- ---------
------------- ---------- --------- --------- --------- --------- ---------
Mississippi S&P A+ A+ AA- AA- AA-
Moody's Aa3 Aa3 Aa3 Aa3 Aa3
Fitch AA- AA- AA- AA- AA-
------------- ---------- --------- --------- --------- --------- ---------
------------- ---------- --------- --------- --------- --------- ---------
Savannah S&P A+ A+ AA- AA- AA-
Moody's A1 A1 A1 A1 A1
Fitch Not rated Not rated Not rated Not rated Not rated
------------- ---------- --------- --------- --------- --------- ---------
Southern's consolidated retained earnings grew on average approximately
5.9% per year over the last five years. Excluding the $111 million one-time
windfall profits tax imposed on SWEB in 1997, the $221 million write down of
_______________________________________
10 In April 2000, Moody's and Duff & Phelps (now known as Fitch) reaffirmed
their ratings; however, S&P placed the ratings of Southern and its affiliates on
credit watch with negative implications.
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assets in 1998, the $69 million write down of the Mobile Energy investment in
1999 and the $78 million gain on the sale of the SWEB supply business in 1999,
the average growth would be 7.4%. In 1999, consolidated retained earnings
increased $354 million, or 9.1%. Southern's interests in EWGs and FUCOs have
made a positive contribution to earnings over the four calendar years ending
after the Rule 53(c) Order.
Accordingly, since the date of the Rule 53(c) Order, the capitalization
and earnings attributable to Southern's investments in EWGs and FUCOs has not
had an adverse impact on Southern's financial integrity.
Item 4. Regulatory Approval.
No state commission has jurisdiction with respect to the subject
transactions and, assuming that the Commission authorizes and approves all
aspects of the subject transactions (including the accounting therefor), no
other Federal commission has jurisdiction with respect thereto except that
NewCo's participation in the Intercompany Interchange Contract and any wholesale
sales of electric power will be subject to FERC jurisdiction under the Federal
Power Act.
Item 5. Procedure.
The applicants hereby request that the Commission's order be issued as
soon as the rules allow. The applicants hereby waive a recommended decision by a
hearing officer or other responsible officer of the Commission, consent 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 transactions proposed herein, and request that there be no 30-day waiting
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period between the issuance of the Commission's order and the date on which it
is to become effective.
Item 6. Exhibits and Financial Statements.
The following exhibits and financial statements are filed as a part of
this Application/Declaration:
(a) Exhibits
A-1- Proposed Certificate of Incorporation of NewCo.
A-2- Proposed By-Laws of NewCo.
B-1- Form of Service Agreement.
B-2- Form of Operating Agreement.
C - Not applicable.
D-1- Approval of the FERC regarding NewCo's participation in
the Intercompany Interchange Agreement.
E - Not applicable.
F-1- Opinion of Troutman Sanders LLP, counsel to Southern.
F-2- Opinion of Balch & Bingham LLP, counsel to Alabama.
F-3- Opinion of Troutman Sanders LLP, counsel to Georgia.
F-4- Opinion of Beggs & Lane, counsel to Gulf.
F-5- Opinion of Eaton and Cottrell, P.A., counsel to
Mississippi.
F-6- Opinion of Troutman Sanders LLP, counsel to Savannah.
G - Form of Notice. (Previously filed).
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(b) Financial Statements
Consolidated balance sheet of The Southern Company and its subsidiaries
at September 30, 2000. (Designated in the Southern Company's Form 10-Q for the
quarter ended September 30, 2000, File No. 1-3536.)
Consolidated statements of income and cash flows for The Southern
Company and its subsidiaries for the six months ended September 30, 2000.
(Designated in The Southern Company's Form 10-Q for the quarter ended September
30, 2000, File No. 1-3536.)
Item 7. Information as to Environmental Effects.
(a) The issuance of an order by the Commission with respect to the
proposed transactions will not constitute a major federal action significantly
affecting the quality of the human environment.
(b) No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
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SIGNATURES
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.
Date: December 21, 2000 THE SOUTHERN COMPANY
By: /s/Tommy Chisholm
Tommy Chisholm
Corporate Secretary and Assistant
Treasurer
ALABAMA POWER COMPANY
By: /s/Wayne Boston
Wayne Boston
Assistant Secretary
GEORGIA POWER COMPANY
By: /s/Wayne Boston
Wayne Boston
Assistant Secretary
GULF POWER COMPANY
By: /s/Wayne Boston
Wayne Boston
Assistant Secretary
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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 ELECTRIC GENERATING COMPANY
By: /s/Wayne Boston
Wayne Boston
Assistant Secretary
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