SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
APPLICATION OR DECLARATION
on
FORM U-1
under
The Public Utility Holding Company Act of 1935
THE SOUTHERN COMPANY SOUTHERN ENERGY, INC.
270 Peachtree Street, N.W. 900 Ashwood Parkway
Atlanta, Georgia 30303 Suite 500
Atlanta, Georgia 30338
SOUTHERN ENERGY RESOURCES, INC.
900 Ashwood Parkway
Suite 500
Atlanta, Georgia 30338
(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 Marce Fuller, President
The Southern Company Southern Energy, Inc.
270 Peachtree Street, N.W. 900 Ashwood Parkway
Atlanta, Georgia 30303 Suite 500
Atlanta, Georgia 30338
(Names and addresses of agents for service)
The Commission is requested to mail signed copies of all orders,
notices and communications to:
W.L. Westbrook Marce Fuller, President
Financial Vice-President Southern Energy, Inc.
The Southern Company 900 Ashwood Parkway
270 Peachtree Street, N.W. Suite 500
Atlanta, Georgia 30303 Atlanta, Georgia 30338
John D. McLanahan
Robert P. Edwards, Jr.
Troutman Sanders LLP
600 Peachtree Street, N.E.
Suite 5200
Atlanta, Georgia 30308-2216
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Item 1. Description of the Transaction
The Southern Company ("Southern"), 270 Peachtree Street, N.W., Atlanta,
Georgia 30303, a holding company registered pursuant to the Public Utility
Holding Company Act of 1935, as amended (the "Act"), and its subsidiaries
Southern Energy, Inc. ("Southern Energy," formerly SEI Holdings, Inc.) and
Southern Energy Resources, Inc. ("SERI," formerly Southern Electric
International, Inc.), both of 900 Ashwood Parkway, Suite 500, Atlanta, Georgia
30338 ("Applicants"), file this application and declaration in order (a) to
extend the authorization conferred by the Commission in The Southern Company,
HCAR No. 26468 (February 2, 1996) (the "1996 Order")1 beyond its expiration date
of December 31, 2000, (b) to obtain any required authorizations pertaining to
the implementation of the plan for the distribution during calendar year 2001 of
the voting securities of Southern Energy by Southern to the common stock
shareholders of Southern (the "Distribution") and (c) to obtain any required
authority for Southern to be permitted to make and retain investments in EWGs,
FUCOs and Energy-Related Companies as defined by 17 C.F.R. ss. 250.58
(hereinafter collectively "Exempt Projects") through intermediate subsidiaries
_____________________
1 By order dated February 2, 1996 (HCAR No. 26468), the Commission authorized
the Applicants to carry out the restructuring and consolidation of Southern's
interests in exempt wholesale generators ("EWGs"), foreign utility companies
("FUCOs") and certain other non-utility activities under Southern Energy.
Southern Energy was authorized to acquire Southern Energy North America, Inc.
and SEI Europe, Inc., the umbrella companies for Southern Energy's domestic and
certain foreign operations, respectively. Southern Energy also was authorized to
acquire additional direct or indirect subsidiaries ("Intermediate Subsidiaries")
to acquire and hold EWGs, FUCOs and companies that derive or will derive
substantially all of their revenues from energy related businesses
("Energy-Related Companies"). In addition, Southern Energy was authorized to
acquire the shares of SERI and the securities of one or more direct or indirect
subsidiaries ("Special Purpose Subsidiaries") organized to engage in the project
development and service activities in which SERI previously had been authorized
to engage in HCAR No. 26212 (December 30, 1994), discussed in fn. 2, infra.
Applicants request that Southern's authority to retain subsidiaries with this
business structure be extended through June 30, 2005.
<PAGE>
subject to the terms, conditions and requirements imposed by the 1996 Order,
including the terms and conditions of HCAR No. 26212 (December 30, 1994),2
through June 30, 2005.
Southern and Southern Energy's activities under the 1996 Order have
resulted in Southern Energy growing into a major energy business that is
structurally separate from the public utility company operations of Southern. As
of March 31, 2000: (a) the total assets associated with Southern's integrated
public utility system operations in the states of Alabama, Florida, Georgia and
Mississippi had a book value of $25 billion; (b) the book value of Southern
Energy's total assets was $13.9 billion; (c) calculated in accordance with Rule
53, Southern's "aggregate investment" in the EWG and FUCO operations of Southern
Energy was $2.75 billion; (d) as of December 31, 1999, the budgeted construction
expenditures for calendar year 2000 were approximately $0.58 billion for
Southern Energy and $2.44 billion for the Southern system, excluding Southern
Energy; and (e) Southern Energy's budgeted construction expenditures were
approximately $1.0 billion in 2001 and $1.2 billion in 2002.
Southern Energy's business, which has grown significantly in size in
recent years, is a high growth business with enormous capital requirements. In
order to compete effectively, Southern Energy must raise capital by relying upon
a relatively high degree of debt leverage. Southern's traditional public utility
business, however, also faces increased capital requirements which must be
satisfied at the lowest reasonable cost consistent with applicable regulatory
requirements.
The purpose of the transactions described herein is to permit Southern
Energy to raise the capital needed to conduct its existing authorized business
____________________________
2 By order dated December 30, 1994 (HCAR No. 26212), Southern Electric
International, Inc. (now SERI) was authorized to engage in preliminary project
development activities and the sale of operating construction, project
management, administrative and other services to associates and nonassociates.
<PAGE>
activities consistent with the ability of Southern to raise the capital required
for its integrated public utility company system. Southern has determined that
its existing and potential shareholders would prefer the opportunity to select
between a predominantly traditional public utility holding company system and an
Exempt Project oriented business such as Southern Energy. Southern has
determined that the Distribution will result in benefits accruing both to the
shareholders of Southern and to the public through an enhancement of Southern's
ability to perform its role as a registered public utility holding company.
Applicants expect that the benefits to accrue to Southern and its public utility
subsidiaries and to Southern Energy through separation will be equivalent to
those typical of distributions of business units.3
1.1 Matters Preceding the Distribution.
Southern's existing authority under the 1996 Order includes
authorization for Southern Energy to form Intermediate Subsidiaries to own the
securities of Energy-Related Companies, FUCOs, EWGs and Special Purpose
Subsidiaries authorized to engage in Exempt Project development and service
functions.4
Southern and Southern Energy intend to continue to conduct their
currently authorized lines of business pending the Distribution. Southern
___________________________
3 Some of these benefits were recently summarized by business management experts
retained by the United States Department of Justice in the Microsoft litigation.
Affidavit of R. F. Greenhill and J. P. Williams, United States District Court,
District of Columbia, Civil Action No. 98-1232
(http://www.usdoj.gov/atr/cases/f4600/4645.htm).
4 The declaration that is effective under the 1996 Order also contemplates
Southern Energy issuing equity securities to non-affiliates. In pertinent part,
the Declaration rendered effective by the 1996 Order provides as follows: "[t]he
primary objective for the reorganization of Southern's ownership interests in
Projects is to facilitate Holdings' [Southern Energy's] access to external
sources of debt and equity capital.... Specifically Southern envisions that
Holdings or subsidiaries of Holdings may from time to time issue equity and/or
debt securities to third persons, i.e., investors and lenders other than
Southern. This would enable Holdings to finance at least a portion of its
investments in Projects with equity and debt furnished by others, thereby
reducing the financing pressures on Southern itself." File No 70-8733, Amendment
No. 2, at 3-4. See also Allegheny Power Systems, HCAR No. 26401 (October 22,
1995), at fn. 13, noting that the sale of equity securities by a subsidiary of a
registered holding company equivalent to Southern Energy is exempt from Section
6(a) of the Act by virtue of 17 C.F.R. ss.ss.250.52(b).
<PAGE>
Energy's routine business activities have substantial capital requirements which
it will satisfy in part through securities issuances. In addition, pending the
Distribution, Southern and Southern Energy intend to reorganize Southern and
Southern Energy's Exempt Project activities so that, after the Distribution,
Southern will retain certain components of the Exempt Project lines of business
it now owns through Southern Energy. These Exempt Project components consist of
Energy-Related activities authorized by 17 C.F.R. ss. 250.58 ("Rule 58") and
FUCO activities deemed to be particularly beneficial to Southern. Southern
further intends to achieve that reorganization at a minimal transaction cost
through a distribution by Southern Energy to Southern that qualifies as tax-free
under Section 355 of the Internal Revenue Code of 1986, as amended ( the
"Internal Revenue Code"), of the Exempt Project components to be retained by
Southern. Applicants also intend to implement the final Distribution on a
tax-free basis in accordance with the requirements of the Internal Revenue Code.
Accordingly, Southern Energy and Southern Company Energy Solutions
("Solutions"), a direct subsidiary of Southern conducting Energy-Related
operations pursuant to Rule 58, will contribute their energy-management business
lines to a subsidiary of a newly formed subsidiary of Southern Energy ("NEWCO").
NEWCO will hold no public utility company subsidiaries or assets. In exchange
for its contribution to NEWCO, Solutions will receive up to 20% of the voting
stock of NEWCO and, in exchange for contributing SE Finance and Capital Funding
(a Southern Energy subsidiary described below) to NEWCO, Southern Energy will
receive no less than 80% of the voting securities of NEWCO, the final
percentages of ownership to be determined based upon the relative value of the
respective contributions to NEWCO. Southern Energy's ownership of NEWCO will be
conveyed to Southern in redemption of a special class of preferred stock to be
issued by Southern Energy to Southern.
<PAGE>
Each of these steps is described more fully below.
The effect of these intercorporate transactions, all of which solely
involve Exempt Projects, is to enable Southern to retain currently authorized
interests in Energy-Related subsidiaries and FUCOs through an intermediate
subsidiary following the Distribution and to permit both the preliminary Exempt
Project reorganization and the Distribution to comply with Section 355 of the
Internal Revenue Code.
To effectuate the foregoing, Southern and Southern Energy intend to
take the following steps5 to prepare for the Distribution.
(a) In order to raise funds to support its authorized and
existing business activities, Southern Energy will execute a 272,000 to one
stock split and register with the Commission 66,700,000 new shares of Southern
Energy common stock with an anticipated offering price in the $ 15.00 to $17.00
range. 6 The offering will raise funds for Southern Energy's existing business
operations and will reduce Southern's ownership to approximately (but not less
than) 80% of the voting stock of Southern Energy.7 Southern Energy will also
distribute a single share of a special class of preferred stock to Southern (the
"SEI Preferred Stock"). The SEI Preferred Stock will have only the right to be
_________________________
5 Applicants believe that most, if not all, of the steps taken herein fall
within the authority conferred pursuant to the 1996 Order; Part 250 of 17 C.F.R.
ss.ss. 45, 52, 57, 58, 87; and Sections 32(g) and 33(c) of the Act. Applicants
note that affiliate transactions are subject to the general supervision of the
Commission under Section 12(f) of the Act. To the extent activities described
herein require approval pursuant to any Sections of the Act, Applicants request
such approval and demonstrate herein compliance with the established standards
of the Act. As shown herein, this Application merely seeks to facilitate the
orderly divestiture of a non-public-utility line of business at minimal
transaction costs and is therefore wholly consistent with the requirements and
standards of the Act.
6 Southern Energy currently has 1,000 shares of common stock with a par value of
$1 authorized, issued and outstanding, held with the power to vote by Southern.
7 Each holder of Southern Energy common stock will be entitled to one vote per
share. Shareholders will not have the right to accumulate their votes in
elections of directors. Holders of common stock will be entitled to dividends on
a pro rata basis upon declaration of dividends by the Southern Energy Board of
Directors. Dividends will be payable only out of unreserved and unrestricted
surplus that is legally available for the payment of dividends. Upon a
liquidation of Southern Energy, holders of common stock will be entitled to a
pro rata distribution of the assets of Southern Energy, after payment of all
amounts owed to Southern Energy's creditors, and subject to any preferential
amount payable to holders of preferred stock of Southern Energy, if any.
<PAGE>
redeemed for the stock of NEWCO (described in paragraph (b) below). The SEI
Preferred Stock will be redeemed prior to the Distribution.
(b) In order to facilitate the retention by Southern of
currently authorized and existing FUCO and Energy-Related business operations
now owned through Southern Energy, Southern Energy will form NEWCO (an
Intermediate Subsidiary as defined by and authorized by the 1996 Order).
In exchange for at least 80% of the voting stock of NEWCO, Southern
Energy will contribute the securities of two of its current Intermediate
Subsidiaries, SE Finance Capital Corporation ("SE Finance") and Southern Company
Capital Funding, Inc. 8 ("Capital Funding"), to NEWCO. Each of these
subsidiaries is an Intermediate Subsidiary of Southern Energy authorized under
the 1996 Order. The NEWCO group operations do not include high growth businesses
and are dominated by traditional public utility assets, including several
natural gas distribution systems in the Netherlands that qualify as FUCOs. As of
March 31, 2000, Southern Energy's investment in SE Finance totaled $199 million
(including retained earnings of $12 million). SE Finance includes an Energy
Related Company component and a FUCO subsidiary component. The Energy-Related
Company component now includes three Energy-Related subsidiaries, including
Southern Energy Carbontronics, L.L.C. and two held by Southern Energy Clairton,
L.L.C. Each of these Energy-Related Companies participates in alternative fuel
commercialization projects. The book value of the equity investments by SE
_____________________
8 As of March 31, 2000, Southern Energy's investment in Capital Funding was
$52.7 million (including retained earnings of $2.3 million). Capital Funding has
no subsidiaries.
<PAGE>
Finance in these projects as of March 31, 2000 totaled $75 million, of which $13
million was retained earnings.9
SE Finance, also owns the securities of four FUCOs: EPZ Lease, Inc.,
Dutch Gas Lease, Inc., SEI Gamog Lease, Inc. and Nuon Lease, Inc. SE Finance's
equity investment in these subsidiaries totaled $486 million (including $34
million of retained earnings) as of March 31, 2000. Southern has no investment
or "aggregate investment" within the meaning of Rule 53 in these FUCOs.
Southern Energy has filed notifications of FUCO status with respect to
each of these FUCO investments on Form U-57. In December 1996, SE Finance,
through its wholly-owned subsidiary EPZ Lease, Inc. and its affiliates, became
the sole investor in a lease and leaseback of a 339 MW cogeneration plant
located in Moerdijk, Netherlands.10 In December 1998, SE Finance, through its
wholly-owned subsidiary Dutch Gas Lease, Inc. and its affiliates, became the
sole investor in a sale and leaseback of a natural gas network leased by N.V.
Energie Distributiemaatschappig voor Oost en Noord Nederland ("EDON"), a natural
gas distribution utility which supplies natural gas to four provinces of the
Netherlands. SE Finance has entered into similar natural gas distribution
transactions with GAMOG Gelre Flevo Holding, N.V. and GAMOG Gelre Flevo Infra
B.V. (collectively "GAMOG") and with NV NUON Energie-Onderneming Voor
Gelderland, Heerenveen en Flevoland ("NUON"), which distribute natural gas in
several regions of the Netherlands. As noted above, Southern has made no
_______________________
9 These subsidiaries are included in Southern's Quarterly Reports Pursuant to
Rule 58, filed on Form U-9C-3. Southern is authorized by Rule 58 to invest up to
15% of its total capitalization in Energy-Related Companies such as Southern
Energy Clairton, L.L.C. and Southern Energy Carbontronics, L.L.C. Southern has
in excess of $4 billion of authority available under Rule 58.
10 N.V. Elekriciteits Produktiemaatshappij Zuid-Nederland Corporation ("EPZ"),
an energy supply company in the Netherlands, is the lessee of the facility,
off-taking all of the electricity and a portion of the steam.
<PAGE>
investment in the EPZ Lease, EDON, GAMOG or NUON FUCOs and has no "aggregate
investment" within the meaning of Rule 53 associated with these FUCOs.
Southern Energy recently closed debt financings totaling $477 million
with respect to the Exempt Project operations of SE Finance. Section 5.11 of the
Master Agreement (as herein defined and attached hereto as Exhibit B.1)
anticipates Southern making capital contributions authorized by 17 C.F.R. ss.
250.45(b)(4) to SE Finance (or its subsidiary SE Finance Capital Corporation) in
the event of a shortfall in the scheduled debt service in each loan repayment
period up to the amount of the payments due from Southern under the Southern
Company Income Tax Allocation Agreement ("Allocation Agreement") if any such
payment shortfall results from a change in law or regulation, a reduction in the
U.S. Federal tax rate, a later Internal Revenue Service disallowance or
inability of Southern to use the expected tax benefits, a phase out of the
Section 29 tax credits prior to the scheduled expiration date or an amendment of
the Allocation Agreement. These assurances of tax benefit sharing are in the
form of limited keep-well commitments, the forms of which are included as
Exhibits B.8 and B.9 hereto. Applicants propose to include these in a filing
pursuant to 17 C.F.R. ss. 250.45(c). Southern proposes to include the maximum
potential capital contributions required under these commitments as "aggregate
investment" in EWGs and FUCOs for the purposes of Rule 53. As of December 31,
2000, the unamortized balances of these loans will equal $414 million.
In exchange for not more than 20% of the voting stock of NEWCO,
Solutions will contribute to a NEWCO subsidiary energy management lines of
business with a valuation at least equal to 5% but not more than 20% of the
total valuation of NEWCO. The business lines contributed to NEWCO by Solutions
<PAGE>
all will qualify for ownership by Southern Energy and its Intermediate
Subsidiaries within the terms of the 1996 Order and 17 C.F.R. ss. 250.58.11
Southern Energy will distribute its securities of NEWCO to Southern in
redemption of the SEI Preferred Stock described in paragraph (a) above. The
NEWCO group to be retained by Southern includes Energy-Related activities that
the Commission has previously determined to be reasonably incidental and
economically necessary to the operation of an integrated electric utility system
and FUCO operations predominantly consisting of traditional public utility
assets.12
(c) Southern Energy and Southern will enter into a Master
Separation and Distribution Agreement ("Master Agreement")13 and the associated
ancillary agreements (the "Ancillary Agreements"), subject to existing authority
and rules and regulations of the Commission. The parties may enter into the
Master Agreement prior to the distribution of the shares of NEWCO to Southern.
______________________
11 The transaction will enable NEWCO to finance and continue its existing
business as an Intermediate Subsidiary under the 1996 Order authorized to own
interests in Exempt Projects, including EWG, FUCO and Energy-Related Company
subsidiaries. See e.g. 17 C.F.R. ss.ss. 250.52(b) and ss. 250.52(d).
12 Applicants could achieve the same structure without the need for further
authority under the 1996 Order through Southern Energy selling its interests in
Exempt Projects, retaining only those interests to be retained by the NEWCO
group and combining Solutions with the NEWCO group, as authorized under the 1996
Order and Rule 58. In the exercise of its business judgment, Southern has
determined that greater value can be achieved through a tax-free distribution of
Southern Energy, which consists entirely of Exempt Projects, to its shareholders
than through a sale of portions or all of its business.
13 The Master Agreement is appended hereto as Exhibit B.1. It provides for
separation of the Southern and Southern Energy businesses prior to the scheduled
sale of common stock (the "Separation Date"). Section 5.8 of the Master
Agreement obligates the parties to implement the Master Agreement and the
Ancillary Agreements (as herein defined) to the fullest extent permitted by
their existing authority and to cooperate to the end of achieving any further
necessary authority. Section 5.11 of the Master Agreement provides for the
distribution of NEWCO (termed "Holdco" in the Master Agreement). Notwithstanding
references to the sale of Plant Dahlberg in the Master Separation Agreement, no
sale of that plant, or of any public utility assets, to Southern Energy is
contemplated at this time. Section 5.13 of the Master Agreement provides that
Southern will not cancel any outstanding guarantees, all of which are authorized
pursuant to Southern's existing authority, and that Southern will extend credit
support to Southern Company Energy Marketing through the Distribution, provided
that the aggregate amount of such credit support arrangements shall not exceed
$425 million and may be canceled within six months following the Distribution.
The credit support provided for is within the existing performance guarantee
authority of Southern pertaining to Southern Energy and its subsidiaries. The
1996 Order authorizes Southern to issue performance guarantees up to $800
million through December 31, 2003.
<PAGE>
The Ancillary Agreements appended to the Master Agreement include an
Employee Matters Agreement,14 a Tax Indemnification Agreement,15 a Transitional
Services Agreement,16 a Confidential Disclosure Agreement,17 a Technology and
Intellectual Property Ownership and License Agreement18 and an Indemnification
and Insurance Matters Agreement.19 The Employee Matters Agreement assures that
affected employees will be covered by benefit plans, but avoids redundant
benefit programs. The Tax Indemnification Agreement will be separately filed
pursuant to Rule 45(c) of the Act. The Transitional Services Agreement provides
for the continuation on an incidental basis of certain services currently
provided to Southern Energy, including financial, human resources administration
and payroll, accounting and treasury, engineering and technical consulting,
information technology, procurement, government relations and legal services,
for a term not to exceed two years from the date of the first issuance of
Southern Energy common stock to the public. As a result of the incidental nature
of the services, neither Southern nor its subsidiaries will incur unreimbursed
costs. The Confidential Disclosure Agreement protects certain proprietary
information. The Technology and Intellectual Property Ownership and License
Agreement documents the intellectual property that Southern and Southern Energy
are each authorized to use and does not require any future transfers of
intellectual property following the Separation Date. The Indemnification and
Insurance Matters Agreement provides for a separation of insurance coverage and
for mutual indemnification for claims based upon fault.20
__________________________-
14 Appended hereto as Exhibit B.3.
15 Appended hereto as Exhibit B.4.
16 Appended hereto as Exhibit B.5.
17 Appended hereto as Exhibit B.6.
18 Appended hereto as Exhibit B.2.
19 Appended hereto as Exhibit B.7.
20 Applicants suggest that a claims indemnification agreement of this nature
incidental to a genuine transaction does not involve an upstream loan or any
extension of credit and is not an "indemnity" within the meaning of Section 12
of the Act. See Mississippi Valley Generating Company, HCAR No. 70-3319
(February 9, 1955) and The Southern Company, HCAR No. 27134 (February 9, 2000)
(both construing and applying Section 12(a) of the Act in accordance with
Section 1(c) of the Act and the legislative history showing an intent to protect
public utility subsidiaries).
<PAGE>
After the Separation Date, the subsidiaries of Southern intend to
restrict the services rendered to the Southern Energy group to the services
enumerated in the Transitional Services Agreement, which are a subset of the
currently authorized services.21 The terms and conditions of the Master
Agreement and the Ancillary Agreements, while specific to the circumstances of
Southern and Southern Energy, are typical of the terms and conditions associated
with corporate distributions of business units to shareholders.22
Until the Distribution, Southern will own at least 80 percent of the
common stock of Southern Energy. Southern Energy will issue up to 20 percent of
its common stock to the public in an initial public offering (the "Offering").
Southern Energy intends to issue approximately 58 million shares to the public
in the Offering.
(d) Southern intends to distribute all (or substantially all)
of its voting securities of Southern Energy to Southern's shareholders within
twelve months of the initial offering of Southern Energy stock.
_____________________
21 Southern's subsidiaries are authorized under Rule 87 of the Act to provide
goods and services at cost to Southern Energy and its subsidiaries in accordance
with the limitations imposed by Rule 87. Southern Company Services, Inc.
("Southern Services") is further authorized pursuant to the 1996 Order and HCAR
No. 26212 (December 30, 1994) to provide services at cost to SERI. Southern
Energy represents less than 3% of the total service billings of Southern
Services. Southern anticipates a substantial reduction in the services rendered
to Southern Energy following the Separation Date and a further reduction
following the Distribution.
22 The recent separations undertaken by Delphi Automotive Systems Corp./General
Motors; Williams Communication Group/The Williams Company; Palm Computing,
Inc./3 Com; Conoco, Inc./Dupont; and Agilent Technologies/Hewlett-Packard are
subject to terms and conditions similar to the Southern/Southern Energy
separation.
<PAGE>
1.2 Authority Sought With Respect to the Distribution
Applicants request that the Commission extend the expiration date of
the 1996 Order in order to enable Southern Energy to conduct its operations
until June 30, 2003 or the date of the Distribution, whichever is earlier. The
Distribution is anticipated to occur during calendar 2001. Applicants will file
the reports required concerning investments in Exempt Projects and demonstrate
compliance with 17 C.F.R. ss. 250.53 ("Rule 53") and the other outstanding
orders of the Commission as required by the 1996 Order on a consolidated basis.
Southern further requests that the Commission take such action, if any,
deemed appropriate and consistent with the Act pursuant to Section 12(f) of the
Act23 with respect to the Master Agreement and the Ancillary Agreements, taking
into account that Southern Energy will in all probability cease to be an
associate company of Southern in 2001.
1.3 Post Distribution Authority For Southern.
Southern requests authority through June 30, 2005 to form Intermediate
Subsidiaries to invest in Exempt Projects and Special Purchase Subsidiaries.
Special Purpose Subsidiaries would perform preliminary project design and
development, including acquiring permits and licenses, site options,
right-of-way options, preparing and making bids, ordering equipment and posting
bid bonds with respect to Exempt Projects and power generation that would be
part of Southern's "integrated public-utility system" within the meaning of
Section 2(a)(29)(A) of the Act, together with ancillary facilities, such as
facilities for fuel production, conversion, handling, storage and energy
_____________________
23 Section 12(f) of the Act confers plenary jurisdiction upon the Commission
over affiliate transactions.
<PAGE>
management, control and storage.24 Southern proposes to retain NEWCO in order to
continue NEWCO's Exempt Project business operations and for Solutions to retain
its interest in NEWCO.
As noted above, the Exempt Project operations associated with NEWCO do
not impose the types of capital requirements as the growth segments retained by
Southern Energy. Southern anticipates that power generation requirements in the
Southeast may result in the use by Southern of the EWG form of generation
ownership, in lieu of ownership by public utilities that engage in the
transmission, distribution and retail sale of electric energy, in order to
facilitate joint ownership and to improve the liquidity of generation assets,
even though the generation owned by such an EWG would serve as part of
Southern's traditional public utility operations and would function as part of
Southern's integrated power supply. Southern anticipates that its wholesale
power requirements will be satisfied in the future by a sixth operating company
authorized by the Federal Energy Regulatory Commission. An application to form
this company is pending before this Commission. Accordingly, Southern requests
authority to contribute the voting securities of NEWCO to any such sixth
operating company. Southern's investment in one or more Exempt Projects through
subsidiary companies will be subject to the conditions imposed by Rules 5325 and
58 of the Act and subject to compliance with the reporting requirements
established by the 1996 Order on a Southern consolidated basis. Southern's
business purposes in seeking to retain this flexibility is its need to be able
to respond quickly to changing energy needs and market developments. The
________________________
24 Such authority has previously been conferred in HCAR No. 26212 (December 30,
1994) and HCAR No. 26468 (February 2, 1996).
25 HCAR No. 26501 (April 1, 1996) authorized Southern to invest the proceeds of
its securities issuances up to a total of 100% of its consolidated retained
earnings. Southern proposes to retain the authority extended in that file as it
may be modified or extended.
<PAGE>
flexibility of organizing and financing Exempt Projects afforded by the 1996
Order will be just as beneficial in the context of the development of projects
that effectively serve public utility functions and that hew closely to
traditional integrated public utility operations as such flexibility had been in
the pursuit of a high growth energy business such as had been undertaken by
Southern Energy.
Item 2. Fees, Commissions and Expenses
Applicants anticipate that the total fees, commissions and expenses in
connection with the Application are $45,000.
Item 3. Applicable Statutory Provisions
Applicants submit that the transactions described in this Application
are governed by Sections 12 and 13 of the Act. The Act regulates the acquisition
and retention of businesses other than integrated public utility system
operations, encourages the divestiture of "other" lines of business and imposes
no special conditions or requirements pertaining to the divestiture of Exempt
Projects or other diversified activities. Southern Energy is neither a "holding
company" nor a "public-utility company" within the meaning of the Act.
Sections 12 and 13 of the Act are aimed at regulating and prohibiting
transactions that are "detrimental" to subsidiaries and "unduly" advantageous to
holding companies. House Rep. No. 1318, 74th Cong., 1st Sess. (June 24, 1935).
Southern seeks to facilitate the speedy and efficient effectuation of the
Distribution and to avoid any adverse impact on the system retained by Southern.
The authority sought herein has no effect upon public utility company
subsidiaries of Southern and only authorizes an efficient means of Southern
divesting Exempt Project lines of business that do not involve public utility
<PAGE>
company operations. Accordingly, the Application does not impinge upon the
substantive interests that underpin Sections 12 and 13 of the Act.
To the extent these transactions are subject to Sections 6 and 9 of the
Act, Applicants request such approval and demonstrate compliance with the
applicable standards of the Act, including Sections 7, 10 and 11 of the Act.26
With respect to the retained businesses, Applicants are seeking authorizations
as have customarily been extended to registered holding companies, which are
consistent with the 1996 Order. See e.g., Entergy Corporation, HCAR No. 27039
(June 22, 1999); Cinergy Corp., HCAR No. 26662 (February 7, 1997).
Applicants represent that the transactions proposed herein will have no
effect upon the capitalization of the existing public utility company
subsidiaries of Southern, all of which maintain a common equity component of
their capitalization in excess of thirty percent. Southern further represents
that the Distribution will not cause the common equity component of its
consolidated capitalization to fall below thirty percent.27 Satisfaction of
Standards Enumerated by Sections 10 and 11 of the Act
To the extent this Application is subject to Sections 10 and 11 of the
Act, the Application readily satisfies those standards because (a) the
Application is consistent with the integration provisions of the Act in that it
proposes a divestiture of non-utility business operations, (b) the Application
does not propose "interlocking relations or the concentration of control of
______________________
26 In adopting and amending Rule 52 of the Act, the Commission preserved its
authority to prevent unauthorized diversification through securities issuances,
but recognized that it is no longer appropriate for the Commission to regulate
the terms, conditions or "quality" of securities issuances by non-public utility
subsidiaries and affirmatively relied on the disclosure of securities markets to
protect the interests of investors and consumers. HCAR No. 26311 (June 20,
1995), 60 F.R.33634, 33636 (prior Commission approval "no longer necessary"),
cited with approval, HCAR No. 26826 (February 26, 1998) at fn. 22.
27 A principal business purpose of the Distribution is to de-couple the high
growth business of Southern Energy from Southern's traditional business in order
to permit Southern to maintain a traditional capital structure to the extent
permitted by the service requirements of its integrated public utility system.
<PAGE>
public utility companies;" (c) the Application does not propose any acquisition
of public utility assets directly or indirectly through the acquisition of
securities or any acquisition of a business not previously retained by Southern;
and (d) the Application does not involve minority interests in public-utility
companies or other attributes that would "unduly complicate" the capital
structure of Southern.28
As noted above, this Application results from a divestiture of a
business line that Southern could sell or otherwise divest in part or in its
entirety without the need for authorization under the Act and the proposed
continued retention of Exempt Projects previously authorized by the Commission.
The divestiture of the majority of Southern Energy's Exempt Project operations
in order to enhance Southern's focus on the operations of its integrated utility
system business is wholly consistent with the economical operation of an
integrated electric utility system.
Indemnification for Claims Subject to Section 12(f).
Applicants contend that none of the indemnification provisions of the
Ancillary Agreements is an "extension of credit or indemnity" within the meaning
of the Act and are consistent with the standards of the Act, including Section
12(f) of the Act.29 Section 12 of the Act undertakes to regulate extensions of
credit among subsidiaries and their registered holding company systems. An
indemnification agreement incidental to a lawful transaction between affiliates
would be subject to such conditions as the Commission might prescribe in the
__________________________
28 The retained businesses are all Exempt Projects previously authorized, and
the Commission approved an equivalent business structure in the 1996 Order.
29 The term "indemnity" has two general meanings. "Indemnity," 31 Corpus Juris
417, P. 1 ( 1923). One is giving security. The other is satisfying a claim. 31
Corpus Juris 417, P. 1. See also "Indemnify," 31 C. J. 416 ("The word appears to
be used in two general senses: First in the sense of giving security; and,
second, in the sense of compensating for actual damage.") The single sentence
prohibition of section 12(a) prohibits an "indemnity" in the sense of security
for a borrowing or an "extension of credit," and does not address payment of a
bona fide damage claim.
<PAGE>
public interest pursuant to Section 12(f) of the Act. When a party contractually
agrees to bear responsibility for a portion of a transaction, the resulting
indemnification for claims does not constitute an extension of credit and is not
therefore an "indemnity" agreement within the meaning of Section 12(a) of the
Act. Section 12(a) absolutely prohibits a registered holding company from
borrowing money or receiving an extension of credit or indemnity from a public
utility in the same system or from a subsidiary of the holding company. Section
12(a) seeks to protect money raised on the credit of an operating company in
order to prevent the "milking" of the operating company. Southern submits that
Section 12(a) does not apply to the proposed indemnities because, in substance,
the indemnities do not constitute the type of indemnity prohibited by Section
12(a). Furthermore, none of the purposes identified by the legislative history
of the Act generally, or in Section 12 of the Act in particular, would be served
by prohibiting Southern and Southern Energy from establishing clear contractual
responsibilities for their undertakings and for claims arising from those
undertakings. Southern Energy is not a public utility operating company or
public utility holding company. Therefore, its indemnification of Southern is
not an example of the evil against which the prohibition was directed.
With respect to the construction of Section 12(a), the Commission has
recognized that the creation of bona fide reciprocal obligations does not give
rise to the extensions of credit that the Act was intended to prohibit.
Mississippi Valley Generating Co. v. United States, 175 F. Supp. 505, 520-21
(Ct. Claims 1959), affirming Mississippi Valley Generating Company, HCAR No.
12794 (1955).
Applicant's construction of Section 12 is consistent with Section 1(c)
of the Act and the legislative history of the Act. The legislative history of
the Act indicates a concern with public utility subsidiaries and subsidiary
<PAGE>
public utility holding companies ("sub-holding companies") lending their credit
to a holding company. Although Section 12(a) literally covers all subsidiaries,
the legislative history of Section 12(a) indicates that "subsidiaries" were
included within the prohibition of upstream loans to holding companies in order
to capture both public utility operating companies and sub-holding companies
that were their parents, and not non-public utility company operations. Report
of National Power Policy Committee on Public Utility Holding Companies, 74th
Cong. 1st Sess., H. Rep. No. 137 (March 12, 1935) ("Holding companies should
immediately be prevented from borrowing from sub-holding companies or from
operating companies in the same holding company system."). See also 74th Cong.
1st Sess. Cong. Record, June 27, 1935, at 10323 ("Loans by operating companies
are sometimes called upstream loans."); House. Rep. No. 1318, 74th Cong. 1st
Session, June 24, 1935 (characterizing the "flat prohibition" of Section 12(a)
as applying to public-utility company "upstream loans" and stating that
"[r]egulation of intercompany transactions is provided to prevent the milking of
operating companies for undue advantage to the controlling holding companies...
Section 12 covers other intercompany transactions detrimental to operating
companies"); 74th Cong. Com. Interstate Commerce, Hearings on S. 1725 (April
26-29, 1935), at 59 ("flat prohibition" of "upstream loans" applies to
"public-utility companies"). Section 1(b) of the Act reflects this legislative
history through its findings in subsections 1(b)(2) and 1(b)(3) of abusive
transactions harmful to "subsidiary public-utility companies." Section 1(c) of
the Act, in turn, directs the Commission to interpret the Act "to meet the
problems and eliminate the evils as enumerated in this section." Southern Energy
is neither a public utility operating company nor a sub-holding company.
<PAGE>
Southern Energy derives no credit from the public utility subsidiaries of
Southern.
None of the purposes of the Act would be served by construing the
prohibition of extensions of credit by subsidiaries of a registered holding
company in favor of the holding company to prohibit Southern Energy from
indemnifying Southern for claims arising from activities for which Southern
Energy has accepted responsibility. Section 12(a) was implemented to prohibit
"upstream loans" -- loans from an operating utility to its registered holding
company. It was enacted to stop "the further milking of operating companies in
the interest of controlling holding-company groups." 74th Congressional
Committee Interstate Commerce, Hearings on S. 1725, at 59 (April 26-29, 1935).
The indemnity by Southern Energy is not an "upstream loan" as conceived by the
legislative history, therefore this is not the type of transaction that Section
12(a) was designed to prevent. The present Application is not a case of the
holding company obtaining any type of financing from a public utility operating
company or sub-holding company. It simply involves the reimbursement of Southern
by Southern Energy for any claims caused by Southern Energy.
In similar situations, the Commission has considered the substance of a
transaction over its form.30 In Mississippi Valley Generating Company, supra,
the Commission recognized that, even though the registered holding companies
were the lead parties in the proposed transactions and the public utilities were
providing financial support, effectively in a form of an indemnity, for the
undertaking, in reality the public utilities were obligating themselves to
__________________________
30 In The Southern Company, HCAR No. 27134 (February 9, 2000), the Commission
recently applied this principle in order to approve a financing subsidiary
structured to permit Southern to engage in trust preferred and debt financing.
<PAGE>
external parties, and the substance of the transaction therefore did not violate
Section 12(a):
It is proper under the Act for construction projects and
operations to be planned and carried forward on a basis
meeting the purposes of the system as a whole, and for the
holding company to make contracts in furtherance of such
coordinated operations with the intent that the operating
aspects of such contracts shall be carried out by the system
operating companies. The creation of the attendant reciprocal
benefits and undertakings involved in such arrangements does
not in our view automatically result in an indemnity of the
holding company within the meaning of Section 12(a).
Mississippi Valley Generating Company, HCAR 12794 (1954) (text at footnotes
65-69, footnotes omitted) (emphasis supplied).
Southern is not receiving an "extension of credit" or borrowing money
raised on the credit of an operating subsidiary. Southern will merely receive
reimbursement of any money paid by it to a third party from claims caused by
Southern Energy. The indemnity provisions are typical of business unit
distribution transactions.31
Rule 44
Section 12 of the Act also prohibits the direct or indirect disposition
of public utility assets or securities of public utilities without Commission
approval. Southern Energy does not own or operate any public utility assets.
Southern Energy owns a 1% equity interest in Mobile Energy Service Company, a
public utility company that is pending reorganization. The shares have a book
value of zero and a fair market value of zero. The indirect disposition is
authorized under 17 C.F.R. ss. 250.44.
__________________________
31 See, e.g., the examples cited in fn. 22, supra.
<PAGE>
Ancillary Services
Southern proposes that the authority to provide the ancillary services
provided herein shall expire in accordance with the terms of the Master
Agreement and shall not extend beyond June 30, 2003, unless cause is shown
through a supplemental application.32 Southern proposes to provide ancillary
services on a wholly incidental basis and only as required to permit an orderly
separation of the businesses without extraordinary losses or transition costs.
To the extent Section 11 of the Act applies to this transaction, the wholly
incidental nature of these services and the limitation of the authority to
effectuating an economical divestiture of a non-public-utility business assures
consistency with the applicable standards pertaining to the retention of
interests in businesses other than integrated public utility operations only to
the extent reasonably incidental or economically necessary to integrated public
utility system operations.
Rule 54 Discussion
The Distribution will result in Southern substantially decreasing its
"aggregate investment" in EWGs and FUCOs and in Southern satisfying the
conditions established by 17 C.F.R.ss.ss. 53(a) and (b). Southern currently has
no "aggregate investment" in the FUCOs to be retained through NEWCO and
currently owns no interests in EWGs or FUCOs other than through Southern Energy.
To the extent the Southern consolidated tax sharing keep-well commitments
referenced herein constitute "aggregate investment," Southern will incur an
_________________________
32 Southern is not seeking authorization to acquire any material interest in
another business or to maintain any material operations other than
energy-related services as currently authorized. Following the Distribution,
Southern will principally provide engineering and technical services to Southern
Energy through Solutions or any other Rule 58 subsidiary authorized to provide
energy-related engineering and technical services to third parties. The costs
associated with Southern Services providing support services (other than
energy-related engineering and technical services) is estimated to be less than
1% of the annual billings of Southern Services. To the extent the Commission
deems the transaction to be subject to Section 11 of the Act, Southern shows
herein that it is consistent with the standards of the Act because it minimizes
the costs incidental to divestiture of a non-public utility company business and
therefore is both necessary and merely incidental to the operation of the
integrated public utility system.
<PAGE>
"aggregate investment" of $ 414 million in FUCOs as a result of the
Distribution, substantially less than 50% of its consolidated retained earnings
calculated in accordance with Rule 53. Other than these effects of the
Distribution, the authority sought herein has no effect upon Southern's
investment, direct or indirect, in EWGs or FUCOs. Southern anticipates a
significant decrease in the services rendered to Southern Energy following the
Offering and a further decrease following the Distribution. Southern will
maintain compliance with all conditions of Rule 53 except to the extent Southern
otherwise receives authority to invest the proceeds of its securities issuances
in EWGs or FUCOs.33
Reporting
As stated above, Southern proposes to continue to comply with the
reporting requirements established by the 1996 Order on a Southern consolidated
basis. Southern will include all services provided to Southern Energy prior to
the Distribution within the calculation required by Rule 53(a)(3). After the
Distribution, except for services rendered at market-based terms and conditions
by NEWCO, Solutions or an equivalent Energy-Related subsidiary, Southern will
include all services provided by it to Southern Energy within the calculation
required by Rule 53(a).
Item 4. Regulatory Approval
The Federal Energy Regulatory Commission may exercise
jurisdiction to approve the Distribution as an indirect disposition of
jurisdictional assets. A copy of an application to FERC will be filed by
_______________________
33 Southern is currently authorized to invest the proceeds of financings in EWGs
and FUCOs up to an "aggregate investment" equal to 100% of consolidated retained
earnings calculated in accordance with Rule 53.
<PAGE>
amendment. No state commission and no other federal agency other than this
Commission has jurisdiction over the transactions proposed herein.
Item 5. Procedure
Applicants hereby request that the Commission's order be
issued as soon as the rules allow. Applicants hereby waive a recommended
decision by a hearing officer or other responsible officer of the Commission,
consent that the Division of the 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 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
(a) Exhibits
A Not Applicable
B Master Separation and Distribution Agreement and
Ancillary Agreements
B.1 Master Separation and Distribution Agreement
(Designated in Registration No. 333-35390 as
Exhibit 10.1)
B.2 Technology and Intellectual Property
Ownership and License Agreement (Designated
in Registration No. 333-35390 as Exhibit
10.4)
B.3 Employee Matters Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.6)
B.4 Tax Indemnification Agreement (Designated in
Registration No. 333-35390 as Exhibit 10.7)
B.5 Transitional Services Agreement (Designated
in Registration No. 333-35390 as Exhibit
10.2)
B.6 Confidential Disclosure Agreement
(Designated in Registration No. 333-35390 as
Exhibit 10.5)
<PAGE>
B.7 Indemnification and Insurance Matters
Agreement (Designated in Registration No.
333-35390 as Exhibit 10.3)
B.8 Form of Tax Benefits Allocation Keep Well
Agreement
B.9 Form of Tax Benefits Allocation Keep Well
Agreement
C. Registration No. 333-35390
C.1 Registration No. 333-35390 (Filed
Electronically April 21, 2000)
C.2 Amendment No. 1 to Registration No.
333-35390 (Filed Electronically July 18,
2000)
D. (To Be Filed By Amendment)
E. Not Applicable
F. Opinion of Counsel (To be filed by amendment)
(b) Financial Statements (Not applicable)
Item 7. Information as to Environmental Effects
No other federal agency is preparing an environmental impact statement
with respect to the proposed transactions. In light of the nature of the
proposed transaction, the Commission's action in this matter will not constitute
any major federal action significantly affecting the quality of the human
environment.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be signed
on their behalf by the undersigned thereunto duly authorized.
Dated: July 27, 2000
THE SOUTHERN COMPANY
By: /s/Tommy Chisholm
Tommy Chisholm
Secretary
SOUTHERN ENERGY, INC.
By: /s/Elizabeth B. Chandler
Elizabeth B. Chandler
Secretary
SOUTHERN ENERGY RESOURCES, INC.
By: /s/Elizabeth B. Chandler
Elizabeth B. Chandler
Secretary
