Holding Company Act Release 27584
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27584; 70-10073)
Order Authorizing the Acquisition of Special Purpose Entities, Issuance and Sale of Preferred Securities, and Provision of Guaranties; Reservation of Jurisdiction
The Southern Company, et al.
October 23, 2002
The Southern Company ("Southern"), a registered holding company, and Georgia Power Company ("Georgia Power"), a wholly owned public-utility company subsidiary of Southern (collectively, "Applicants"), both Atlanta, Georgia, have filed an application-declaration ("Application") under sections 6(a), 7, 9(a), 10 and 12(b) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 45 and 54 under the Act. On August 2, 2002, the Commission issued a notice of the Application (Holding Co. Act Release No. 27558).
Southern and Georgia Power propose to organize and acquire, indirectly and directly, respectively, all the common stock of one or more special purpose subsidiaries ("SPEs"), which will be used to issue and sell preferred securities ("Preferred Securities"), described further below. Applicants state that SPEs will be used to issue the Preferred Securities because these indirectly issued securities are assigned more equity content by certain rating agencies. Additionally, they state that the use of SPEs will afford Georgia Power greater access to new sources of capital1 and may offer increased state/federal tax efficiency.2
The SPEs may be organized in the following corporate forms: limited liability companies in any state jurisdiction considered advantageous by Georgia Power; limited partnerships in any state jurisdiction considered advantageous by Georgia Power; business trusts in any state jurisdiction considered advantageous by Georgia Power; and any other entities or structures, foreign or domestic, that are considered advantageous by Georgia Power. Applicants request that the Commission reserve jurisdiction over the use of a foreign entity as a SPE. In the event that any SPE is organized as a limited liability company, Applicants may organize a second special purpose wholly owned subsidiary ("Investment Subsidiary") for the sole purpose of acquiring and holding SPE membership interests to comply with any requirements that a limited liability company have at least two members. In the event that any SPE is organized as a limited partnership, Georgia Power may organize an Investment Subsidiary to act as the general partner of the SPE. Further, Georgia Power may acquire, directly or indirectly through an Investment Subsidiary, a limited partnership interest in a SPE to comply with any requirements that a SPE would have a limited partner.
Georgia Power and/or an Investment Subsidiary would acquire all the common stock or all of the general partnership or other common equity interests of any SPE for an amount not less than the minimum required by law and not exceeding twenty-one percent of the total equity capitalization of any SPE ("Equity Contribution").3 Georgia Power may issue and sell to any SPE, at any time, or from time to time, in one or more series, subordinated debentures, promissory notes or other debt instruments ("Notes") under an indenture or other document.4 The SPE would apply both the Equity Contribution and the proceeds from the sale of Preferred Securities to purchase Notes. Alternatively, Georgia Power may enter a loan agreement with any SPE, under which the SPE would loan to Georgia Power both the Equity Contribution and the proceeds from the sale of the Preferred Securities and Georgia Power would issue Notes to the SPE evidencing the borrowings.
Applicants request authority for Georgia Power to issue and sell, through the SPEs, up to an aggregate amount of $650 million in ("Preferred Securities") through October 31, 2005. Each of the Preferred Securities would have a specified par amount, stated value amount, liquidation amount, or preference. No SPE will publicly issue Preferred Securities unless it has maintained at least an investment grade corporate or senior unsecured debt rating by at least one nationally recognized rating agency.
Applicants request authority for Georgia Power to guarantee: (1) payments of dividends or distributions on the Preferred Securities of any SPE if, and to the extent, that the SPE has legally available funds; (2) payments to the Preferred Securities holders of amounts due upon liquidation of a SPE or redemption of the Preferred Securities; and (3) certain additional amounts that may be payable regarding the Preferred Securities (collectively, "Guaranties").
Notes would have terms of up to fifty years. Prior to maturity, Georgia Power would pay interest on the Notes at a rate equal to the dividend or distribution rate on the related series of Preferred Securities. The dividend or distribution rate may be either a fixed rate or an adjustable rate to be determined on a periodic basis by auction or remarketing procedures according to a formula based on certain reference rates, or by other predetermined method. Interest payments would constitute each SPE's only income and would be used to pay dividends or distributions on the Preferred Securities and dividends or distributions on the common stock or the general partnership or other common equity interests of the SPE.
Dividend payments or distributions on the Preferred Securities would be made on a monthly or other periodic basis and must be made to the extent that the SPE has legally available funds and cash. However, Georgia Power may have the right to defer payment of interest on Notes for up to five or more years. Each SPE would have the parallel right to defer dividend payments or distributions on the related series of Preferred Securities for up to five or more years, provided that if dividends or distributions on any series of Preferred Securities are not paid for up to eighteen or more consecutive months, then the Preferred Securities holders may have the right to appoint a trustee, special general partner or other special representative to enforce the SPE's rights under the Note or Guarantee. The dividend or distribution rates, payment dates, redemption and other similar provisions of each series of Preferred Securities would be substantially identical to the interest rates, payment dates, redemption and other provisions of the related Notes issued by Georgia Power.
The Notes and related Guaranties would be subordinate to all other existing and future unsubordinated indebtedness for borrowed money of Georgia Power and will have no cross-default provisions with respect to other indebtedness of Georgia Power. However, Georgia Power may be prohibited from declaring and paying dividends on its outstanding capital stock and making payments related to pari passu debt unless all payments then due under the Notes and Guaranties, without giving effect to the deferral rights, have been made.
It is expected that Georgia Power's interest payments on the Notes would be deductible for federal income tax purposes and that each SPE would be treated as either a partnership or a passive grantor trust for federal income tax purposes. Consequently, holders of the Preferred Securities, Georgia Power and any Investment Subsidiary would be deemed to have received distributions from their ownership interests in any SPE and would not be entitled to any "dividends received deduction" under the Internal Revenue Code.
Any series of Preferred Securities may be redeemable at the option of the issuing SPE, with the consent or at the direction of Georgia Power, at a price equal to the Preferred Securities' par amount, stated value amount, liquidation amount, or preference, plus any accrued and unpaid dividends or distributions. The Preferred Securities may be redeemable at any time after a specified date not later than approximately ten years from their date of issuance or upon the occurrence of certain events.5 Any series of Preferred Securities may also be subject to mandatory redemption upon the occurrence of certain events. Georgia Power also may have the right in certain cases or in its discretion to exchange the Preferred Securities of any SPE for the Notes or other junior subordinated debt issued to the SPE.
In the event that any SPE is required to withhold or deduct certain amounts in connection with dividend, distribution or other payments, it may also be obligated to "gross up" such payments so that the Preferred Securities holders would receive the same payment after such withholding or deduction as they would have received if no withholding or deduction were required. In such event, Georgia Power's obligations under its related Note and Guaranty may also extend to the "gross up" obligation. In addition, if any SPE is required to pay taxes on income derived from interest payments on Notes issued to it, Georgia Power may be required to pay additional interest on the related Notes in an amount equal to the tax obligation.
In the event of any voluntary or involuntary liquidation, dissolution or winding up of any SPE, the holders of the Preferred Securities would be entitled to receive, out of the assets of the SPE available for distribution to its shareholders, partners or other owners, an amount equal to the par, stated value or liquidation amount or preference of the Preferred Securities, plus any accrued and unpaid dividends or distributions.
Applicants state that each SPE's activities would be limited to issuing and selling Preferred Securities and lending to Georgia Power or an Investment Subsidiary the proceeds from those sales and the Equity Contributions and any related activities. Applicants further state that each SPE's common stock, general partnership or other common equity interests are not transferable, except to certain permitted successors, that its business and affairs would be managed and controlled by Georgia Power and/or its Investment Subsidiary or successor, and that Georgia Power or its successor would pay all expenses of the SPE.
The distribution rate to be borne by the Preferred Securities and the interest rate on the Notes would not exceed the greater of 300 basis points over U.S. Treasury securities having comparable maturities or a gross spread over U.S. Treasury securities that is consistent with similar securities having comparable maturities and credit quality issued by other companies. Georgia Power would use the proceeds from the sale of the proposed securities to fund its ongoing construction program, pay scheduled maturities and/or refundings of its securities, repay short-term indebtedness to the extent outstanding, and for other general corporate purposes.
Applicants state that, for purposes of rule 54, the conditions specified in rule 53(a) are satisfied6 and that none of the adverse conditions specified in rule 53(b) exist. As a result, the Commission will not consider the effect on the Southern system of the capitalization or earnings of any Southern subsidiary that is an exempt wholesale generator or foreign utility company, as each is defined in sections 32 and 33 of the Act, respectively, in determining whether to approve the proposed transactions.
Applicants estimate that the fees and expenses to be incurred in connection with the proposed transactions will not exceed $2,425,000, exclusive of underwriting discounts and commissions. Applicants state that no State or federal commission, other than the Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the Application has been given in the manner prescribed by rule 23 under the Act, and no hearing has been requested of or ordered by the Commission. Based on the facts in the record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Application, as amended, is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act; provided that Georgia Power will file a rule 24 certificate, on a quarterly basis, containing the following: (1) a representation that the financial statements of Georgia Power account for all SPEs in accordance with generally accepted accounting principles; (2) a description of each SPE, including the following information: (a) its name; (b) the value of Georgia Power's investment in it; (c) the balance sheet account where the investment and the cost of the investment are booked; (d) the amount invested in the subsidiary by Georgia Power; (e) the type of corporate entity; (e) the percentage owned by Georgia Power; (f) the identities of all other owners, if the SPE is not 100% owned by Georgia Power; (g) the purpose of the investment in the subsidiaries; (h) the amounts and types of securities to be issued by the subsidiaries; and (3) to the extent any securities are issued by any entity as authorized by this order, which securities are not set forth on the balance sheet of Georgia Power, then the terms and conditions of such securities will be included.
IT IS FURTHER ORDERED, that jurisdiction is reserved over Applicants' proposed acquisition of foreign SPEs, pending completion of the record.
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland
1 By organizing SPEs in jurisdictions and/or in forms that have favorable terms, Applicants state that Georgia Power can indirectly offer securities with features and terms attractive to a wider investor base.
2 According to Applicants, increased tax efficiency can result if a SPE is located in a state or country that has tax laws that make the proposed financing transaction more tax efficient relative to the sponsor's existing taxing jurisdiction.
3 The remaining equity would be obtained through the purchase of the Preferred Securities.
4 Applicants state that the issuance and sale of the Notes will be exempt under rule 52(a) because: (1) the Georgia Public Service Commission has authorized or will authorize Georgia Power to issue the Notes; and (2) Georgia Power will use the proceeds to pay scheduled maturities and/or refundings of its securities, to repay short-term debt, and for other general corporate purposes.
5 These events may be that: (1) the SPE is required to withhold or deduct certain amounts in connection with dividend, distribution or other payments or is subject to federal income tax on interest received on the Notes issued to the SPE; (2) it is determined that the interest payment by Georgia Power on the related Notes are not deductible for income tax purposes; or (3) the SPE becomes subject to regulation as an "investment company" under the Investment Company Act of 1940, as amended.
6 As of June 30, 2002, Southern's "aggregate investment," as defined in rule 53(a)(1) under the Act, in exempt wholesale generators and foreign utility companies was approximately $119 million, which was 2.60% of Southern's $4,564 million "consolidated retained earnings," as defined in rule 53(a)(1) under the Act.