Holding Company Act Release 27597
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27597;70-9635)
Xcel Energy, Inc.
Supplemental Order Modifying Previous Orders Authorizing Financing Transactions and Reserving Jurisdiction
November 7, 2002
Xcel Energy, Inc. ("Xcel"), Minneapolis, Minnesota, a registered public-utility holding company, and its wholly owned subsidiaries (collectively, "Applicants"), have filed a post-effective amendment under sections 6(a), 7, 12(b), 32 and 33 of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rules 53 and 54 to a previously filed application-declaration ("Application"). Applicants seek an amendment to a condition in orders issued on August 22, 2000 (Holding Co. Act Release No. 27218) (the "August 2000 Order") and March 7, 2002 (Holding Co. Act Release No. 27494) (the "100% Order") (together with the August 2000 Order, the "Financing Orders"). The condition requires Xcel to maintain a common equity component of capitalization of at least 30%. The Commission issued notice of the proposed amendment on August 2, 2002 (Holding Co. Act Release No. 27558).
I. Executive Summary
Xcel, which owns six utility subsidiaries that operate in twelve states, also engages in a variety of nonutility activities permitted under the Act. The most significant of its non-utility subsidiaries is NRG Energy, Inc. ("NRG"), which, through its subsidiaries, owns foreign utilities and independent power producers and engages in the merchant generation and energy trading businesses.
As a result of continued deterioration in the merchant generation and energy trading sectors, NRG is currently experiencing severe financial problems. NRG's dwindling revenues from its generation and trading activities have forced the company to default on a significant portion of its heavy debt load, leading credit rating agencies to downgrade NRG to below investment grade status. As a result, NRG's access to the capital markets is limited.
Xcel is in negotiations with NRG's creditors to develop a prepackaged bankruptcy plan for NRG. Although final details of the plan have not been concluded, and the deal could fall through, Xcel anticipates that if agreement is reached, it will cede much if not all of its equity interest in NRG to its creditors. If Xcel is unable to reach agreement with NRG's creditors, it will continue attempting to restore NRG's financial health by selling the company's assets to repay debt.
Xcel's attempts to resolve NRG's financial problems have caused Xcel's equity capitalization to fall to a level below 30% of its total capitalization. Specifically, during this restructuring process, NRG and Xcel have identified assets to sell and projects to cancel. Accordingly, the companies have had either to write-down the value of those assets to their fair market value or to write-off their investment in the cancelled projects. These impairments have caused the portion of Xcel's total capitalization that consists of equity to fall below 30%. Consequently, Xcel does not satisfy the conditions in the Financing Orders and is therefore unable to rely on those orders.
At present, Xcel and its subsidiaries are thus effectively prevented from issuing any new securities, either debt or equity, with the exception of issuances permitted by rule 52 under the Act. By post-effective amendment to the Application, Xcel seeks modification of the 30% requirement through March 31, 2003 with respect to certain specific transactions. Xcel expects that, by March 31, 2003, when this modification will have terminated, it will have progressed sufficiently with the restructuring of NRG that the portion of its capitalization consisting of equity will again meet or exceed 30%. As discussed below, we find that, with respect to the specific transactions for which authorization is sought, no adverse findings are required. We therefore grant Xcel's Application, but reserve jurisdiction pending completion of the record over any other transactions otherwise authorized by the Financing Orders during the period during which Xcel's equity capitalization is less than 30% of its total capitalization.
Xcel was formed on August 18, 2000 through the merger of New Century Energies, Inc. and Northern States Power Company.1 Xcel directly owns six utility subsidiaries that serve electric and/or natural gas customers in twelve states. These utilities are Northern States Power Company, a Minnesota corporation, Northern States Power Company, a Wisconsin corporation, Public Service Company of Colorado, Southwestern Public Service Company, Black Mountain Gas Company2 and Cheyenne Light, Fuel and Power Company (collectively, the "Utility Subsidiaries."). The service territories of the utilities include portions of Arizona, Colorado, Kansas, Michigan, Minnesota, New Mexico, North Dakota, Oklahoma, South Dakota, Texas, Wisconsin and Wyoming.
Xcel also owns, or has in interest in, a number of nonutility businesses, the largest of which is NRG. 3 NRG is primarily engaged in the acquisition, development, ownership and operation of power generation facilities and the sale of energy, capacity and related products. As of September 30, 2002, NRG had interests in power generation facilities (including those under construction) having a total generating capacity of 36,685 megawatts ("MW"), of which NRG has, or will have, net ownership of 25,715 MW. Approximately 21,167 MW, or 82%, of NRG's net MW generation in operation and under construction is located in the United States. NRG has international power generation projects in three distinct markets: Australia/Asia Pacific, Europe and Latin/South America. At September 30, 2002, NRG had net ownership interests of 2,106 MW in the Australia Pacific region, 1,852 MW in Europe and 590 MW in the Latin/South America region.4
B. Xcel's Existing Financing Authority
The August 2000 Order granted various authorizations through September 30, 2003 (the "Authorization Period"). Among other things, the August 2000 Order authorized: (1) Xcel to engage in external financings;5 (2) Xcel and certain subsidiaries to engage in intrasystem financings, including guarantees; (3) Xcel's nonutility subsidiaries to pay dividends out of capital and unearned surplus; and (4) Xcel to use the proceeds of financings to invest in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs") so long as aggregate investment does not exceed $1.2 billion. The August 2000 Order reserved jurisdiction over investments exceeding that amount up to the limit of 100% of consolidated retained earnings (the "100% Limit"). As of December 31, 2001, 100% of consolidated retained earnings would have represented $2.47 billion. Subsequently, on March 7, 2002, the 100% Order released jurisdiction and authorized Xcel to use the proceeds of its securities issuances to invest up to 100% of its consolidated retained earnings in EWGs and FUCOs.
The Financing Orders are subject to various conditions, including a requirement that Xcel's common equity remain at least 30% of consolidated capitalization (the "30% Test"). As described in more detail below, various measures that Xcel is now implementing to stabilize NRG's financial condition have caused Xcel's common equity to drop below the required 30% level. As a result, Xcel is currently unable to rely on the Financing Orders. Therefore, Applicants seek temporary relief from the 30% Test.
C. Financial Condition of NRG
Xcel's request to modify the conditions in the Financing Orders is directly related to the effect that NRG's financial problems have had on it. In order to place our analysis of Xcel's request in context, we review below the problems currently facing NRG.
Prior to the second quarter of 2000, Xcel owned 100% of NRG. Through public offerings, NRG became a partially owned subsidiary. As of March 8, 2002, Xcel owned 74.3% of NRG.
NRG, like many companies in the energy trading and merchant generation businesses, has been severely impacted by the disruptions currently existing in the energy trading markets. As NRG's financial condition worsened earlier this year, Xcel announced a number of steps intended to restore NRG's financial stability. In particular, on February 17, 2002, Xcel announced a financial improvement plan for NRG. As part of that plan, Xcel announced its intent to acquire the outstanding shares of NRG. The Commission approved that acquisition on May 30, 20026 and Xcel completed the acquisition on June 3, 2002.
At the same time, Xcel provided additional detail on the steps it intended to take once NRG was a wholly-owned subsidiary to return NRG to financial stability. At the time, none of these steps required specific Commission approval under the Act. These plans included:
Infusing $600 million of equity into NRG, consisting of an initial loan of $300 million recently made,7 plus an additional $300 million to be provided in 2002 under the Support Agreement;
Slowing NRG's growth in megawatt capacity and possibly selling $1.9 billion of existing generating assets;
Cancelling approximately $700 million of planned projects of NRG and deferring about $900 million of planned projects; and
Beginning the process of selling unassigned turbines and deferring installment of additional unassigned turbines.
Xcel expected that these actions, if successful, would reduce the 2002 cash requirements of NRG by about $3 billion. Xcel further stated that it expected to realize substantial efficiencies and cost savings.8
Consistent with these plans, Xcel made additional investments in NRG in the aggregate amount of $503 million during the second quarter of this year. Xcel also committed under a Support and Capital Contribution Agreement dated May 29, 2002 (the "Support Agreement") to invest up to an additional aggregate amount of $300 million in the event that NRG should require funds to pay any of its indebtedness when due or any guarantee of any indebtedness of a subsidiary. Xcel's obligations under the Support Agreement are discussed further below. Finally, Xcel continued to guarantee various obligations of NRG and NRG's subsidiaries. As of August 31, 2002, Xcel's total exposure under these guarantees was approximately $110 million.
In their current Application, Applicants state that, at the time NRG again became a wholly owned subsidiary, Xcel was optimistic that the subsidiary's earnings would remain positive and at a higher level than NRG could have achieved on a stand-alone basis. It now appears, however, that NRG will operate at a loss for 2002, without regard to non-recurring losses. In particular, because NRG's results are highly dependent upon the demand for, and price of, wholesale power and both demand and price have been depressed during this year in the various markets that NRG serves, NRG has not performed in a manner consistent with Xcel's prior expectations.
In addition to the problems currently being experienced in the energy trading markets, a number of other factors have had a negative impact on NRG's financial condition. First, NRG incurred significant amounts of debt to finance its acquisitions in the past several years. Substantially all of NRG's operations are conducted by project subsidiaries and project affiliates. NRG's cash flow and ability to service corporate-level indebtedness when due depends upon receipt of cash dividends and distributions or other transfers from these companies. The subsidiaries' debt agreements generally restrict their ability to pay dividends, make distributions or otherwise transfer funds to NRG. As of June 30, 2002, six of NRG's subsidiaries and project affiliates are restricted from making cash payments to NRG.
Second, NRG is also facing liquidity issues in view of the difficulty of raising cash through the capital markets. Applicants state that, since December 2001, NRG's access to short-term capital has deteriorated significantly, due to tightening credit standards for the independent power sector as a whole. During 2002, NRG has been experiencing some volatility in its funding sources, due largely to credit issues.
Third, despite Xcel's efforts to improve NRG's financial condition, all major credit rating agencies lowered the ratings for NRG's debt to below investment grade in late July and early August. The downgrade, in turn, triggered an obligation under various loan agreements for NRG to post collateral ranging from $1.1 billion to $1.3 billion. NRG successfully obtained waivers from its various lenders to post the required collateral. These waivers expired on September 13, 2002. NRG's lenders entered into a Second Collateral Call Extension Letter (the "Extension Letter") to extend the waivers until November 15, 2002, subject to earlier termination upon the occurrence of certain events (the "Extension Period").9 The Waiver Extension was terminated on November 6, 2002. Xcel does not believe that this action will impact the ongoing efforts to restructure NRG.
D. Write-Downs at NRG and Drop in Xcel's Equity Capitalization
Since June, Xcel has been developing a plan to save its investment in NRG that would have involved selling many of NRG's generating assets in order to reduce NRG's debt. As outlined below, one of the results of this process has been to reduce Xcel's equity capitalization to a level below 30%.
As Xcel's management and Board of Directors identify assets to be sold, the accounting treatment for these assets changes. In particular, as described below, approval by the Board of a plan to sell NRG assets would result in the immediate recognition of losses before the sales are completed, which would cause the 30% Test not to be met.
More specifically, as long as Xcel intends indefinitely to own an asset, it accounts for it as "held for use." Once Xcel's Board decides to sell a particular asset, however, it is reclassified as "held for sale."10 Xcel is required to value assets "held for sale" by comparing the carrying value of the asset to its fair value. Thus, if an asset being reclassified as "held for sale" has a fair value less than its book value, Xcel records an impairment charge against income to reduce the carrying value of the asset to its fair value at the time it is classified as "held for sale." Although the actual sale may not occur until later periods, this write-down must be made at the time that the asset is determined to be "held for sale," rather than at the time of sale. These write-downs have a direct negative impact on the portion of Xcel's total capitalization that is represented by equity.
In addition, as noted above, Xcel and NRG's managements are also evaluating NRG's ability to meet its cash flow commitments with respect to a number of projects, including those in operation now and those under construction. Limited financial resources have led NRG to cancel or defer the funding of certain projects under construction and/or not to contribute additional funds to certain projects that are already operating.
If such cancelled or deferred capital spending affects the future ability of a project to continue to operate successfully, future cash flows from the projects may be insufficient to recover investments made to date. In this event, FASB 144 would require an impairment charge to the extent that current investments are not recoverable by future cash flows. The impairment charges would have to be recorded in the period in which future cash flow projections were reduced below project investment levels. NRG expects to take such an impairment charge in excess of $2 billion with respect to the quarter that ended September 30, 2002, causing Xcel's common equity to fall below 30% of Xcel's consolidated capitalization. These charges were in addition to those related to the sale of assets.
E. Xcel's Current Plans for NRG
Xcel currently believes that the best way to solve NRG's problems would be to reach agreement with NRG's creditors with respect to a restructuring of NRG. Xcel believes that whether this agreement is implemented through a consensual bankruptcy filing or otherwise, the reorganization will result in it owning less than 50% of NRG's equity, and will perhaps result in Xcel having no equity stake in NRG. Xcel is thus currently negotiating a restructuring of NRG with NRG's creditors.11 As explained by Xcel, one effect of an agreement would be to change the way in which NRG's debt is treated in calculating Xcel's capital structure. In particular, because NRG is currently a wholly-owned subsidiary of Xcel, all of its debt is included in Xcel's capital structure. A reorganization that reduced Xcel's stake in NRG to below 50% or eliminated it entirely would reduce the amount of NRG debt included in the calculation of Xcel's capitalization ratios. In addition, by converting debt to equity, NRG's total debt would also be reduced. Because Xcel's traditional regulated utility business is healthy and financially stable, this would result in Xcel's equity capitalization returning to a level above 30%.
Alternatively, if Xcel fails to reach agreement with NRG's creditors, it plans to continue selling NRG assets and using the proceeds to repay NRG's debt. Again, as explained by Xcel, although the resulting impairment charges harm Xcel's capital structure in the short term, the use of sale proceeds to reduce debt ultimately improves Xcel's equity capitalization, and permits its equity capitalization to return to a level above 30%.
III. Applicant's Request for Relief
A. Need for Relief from the 30% Test
As noted previously, Applicants state that, in spite of their current failure to meet the 30% Test, Xcel's registered system, apart from NRG, is financially strong. Applicants further state that it is essential to maintaining the financial stability of the system that they be authorized to engage in certain routine financing transactions. In identifying these transactions, Xcel points primarily to its ability to make intercompany loans, its ability to issue guarantees to support various system activities,12 and the ability of its nonutility subsidiaries to pay dividends out of capital and unearned surplus during the period when the 30% Test is not met. Xcel also seeks authority to issue new equity securities during the period when the 30% Test is not met. In support of this request, Xcel states that the issuance of new equity would improve its capital structure and improve the health of the registered system overall.13
B. Request for Relief
Applicants therefore seek authorization to engage in certain transactions that would otherwise be permissible pursuant to the Financing Orders at any time when the common equity component of Xcel's capitalization is less than 30%. In particular, Xcel seeks authority to engage in the following transactions:
A. Issuance of up to $400 million of debt (including convertible debt) in connection with the repayment, refinancing, replacement and/or substitution of the $400 million credit facility maturing on November 8, 2002;
B. Issuance of guarantees, to support the trading obligations of NRG Power Marketing, Inc., in renewal of existing guaranties expiring on or before January 1, 2003, provided that the notional amount of such guarantees shall not be increased and the aggregate notional amount of such guarantees shall not exceed $118 million;
C. Intercompany loans to Cheyenne Light, Fuel and Power Company and Black Mountain Gas Company such that the aggregate principal amount of such intercompany loans at any time outstanding shall not exceed $80 million in the aggregate,14 as authorized in the Financing Orders;
D. Payment of dividends by the nonutility subsidiaries of Xcel out of capital or unearned surplus; and
E. Issuance of common stock subject to the limits set forth in the Financing Orders, including without limitation common stock issued in connection with dividend reinvestment plans and employee benefit plans.
The authority would be subject to the following conditions:
1) The common equity of Xcel15 shall be at least 24% of Xcel's capitalization; and
2) Applicants will not engage in any of the financings authorized in the Financing Orders or in a separate proceeding at any time after March 31, 2003 unless the 30% Test is met.
Applicants request the Commission to reserve jurisdiction with respect to any other financing transactions authorized by the Financing Orders during the period when the 30% Test is not met as well as with respect to any financing authorized by the Financing Orders between April 1, 2003 and June 30, 2003 if the 30% Test is not met during that period; provided that the common equity of Xcel, as previously defined, is at or above 24% of its capitalization. All other terms and conditions of the Financings Orders would remain in effect.
The requested relief would be subject to various additional conditions. During the period that Xcel does not meet the 30% Test, Xcel will not permit NRG to invest, or commit to invest, in any new projects that qualify as EWGs or FUCOs. However, NRG may increase its investment in EWGs and FUCOs as a result of the qualification of existing projects as EWGs or FUCOs, and may make additional investments in an existing EWG or FUCO to the extent necessary to complete any project or to preserve or enhance the value of NRG's investment in the entity. Xcel also requests that the Commission reserve jurisdiction over any additional investment by Xcel and its subsidiaries in EWGs and FUCOs during the period that the 30% Test is not met.
Xcel commits that at any time when the 30% Test is not met, neither Xcel nor any subsidiary (other than NRG and its subsidiaries) will invest, or commit to invest, any funds in NRG and/or any EWG or FUCO, except for any amount required to honor the obligations of Xcel under the Support Agreement and/or under any guarantee of the obligations of Xcel or any EWG or FUCO, which was a valid and binding obligation of Xcel prior to the time that Xcel ceased to comply with the 30% Test, and was entered into by Xcel in conformity with the terms and conditions of the Financing Orders.
Further, Xcel commits that, prior to making any payment to NRG under or pursuant to the Support Agreement, Xcel shall (i) engage, for a fixed and not a contingent fee, an independent financial advisor, which has expertise in complex corporate transactions and which is not unacceptable to the staff of the Commission, to review the proposed transaction and (ii) deliver to the staff of the Commission a letter of such financial advisor stating in substance that the payment, in the context in which it is being made, does not impose an unreasonable financial burden on Xcel and is a reasonable business decision of Xcel, after consideration in each case of, among other things, the interests of investors in Xcel or any Utility Subsidiary and the protection of the consumers of electricity or natural gas of the Utility Subsidiaries in light of the interests sought to be protected under the Act. In delivering such letter to the staff of the Commission, and, if legal matters affect conclusions contained in such letter, the financial advisor shall be entitled to rely on the on the advice of independent legal counsel.
Any future guarantees by Xcel for NRG Marketing while the 30% Test is not met will not be in connection with speculative trading activity. NRG Marketing will engage solely in transactions for the purchase and sale of electricity on behalf of the generating projects of NRG and the procurement of fuel for the projects.
Finally, during the period that Xcel does not meet the 30% Test, e prime inc., a nonutility subsidiary, will not enter into any new trades that expose the Xcel system to speculative risk, but will instead enter into transactions only if its aggregate portfolio risk after entering into a transaction does not exceed $500,000.
Applicants state that the financing transactions engaged in by Applicants under the requested authorization will otherwise remain subject to the terms set forth in the Financing Orders or in a separate proceeding.
Xcel expects that any reduction of its common equity ratio below 30% would be temporary. As discussed above, upon consummation of the sale of generating assets of NRG and other nonutility businesses, the outstanding indebtedness of Xcel and its subsidiaries will be reduced - either by the application of net proceeds of the sale to repay outstanding indebtedness of NRG or as a result of the purchaser of a project assuming the project-related indebtedness.
C. Applicants' Rationale for the Requested Relief
Xcel believes that granting the requested relief from the 30% Test is necessary and would not be detrimental to the public interest or the interests of investors and consumers. Xcel's management does not think that it would be appropriate for it to manage in the short term to maintain a common equity ratio of at least 30% while at the same time taking the actions necessary to restructure NRG. In particular, the reduction in the common equity ratio of Xcel is driven by measures to improve the financial health of NRG, especially, as explained above, the sale of NRG assets and the suspension, termination or abandonment of NRG projects. Although these actions have negative accounting implications for Xcel, Xcel's management has determined that the actions are integral to preserving the value of NRG's business, and thus, from a business perspective, are in the best interest of Xcel's investors and NRG's investors and creditors.
Applicants state that the requested relief would not adversely affect customers of the Xcel system public-utility companies. The ratio of common equity to total capitalization of each utility will continue to be maintained at not less than 30%. As of August 31, 2002, the common equity ratios of the primary utilities, Northern States Power Company (Minnesota), its subsidiary, Northern States Power Company (Wisconsin) and Public Service Company of Colorado, actually exceed 45%. Furthermore, the utilities are subject to regulation by state commissions that are able to protect utility customers within their respective states.
In the past, Xcel has made various commitments regarding the segregation and insulation of the Utility Subsidiaries from the businesses of NRG. Xcel reaffirms the commitments and representations made in the application for the NRG Order. Specifically, none of the utilities will provide financing for, extend credit to, or sell or pledge its assets directly or indirectly to, NRG or any EWG or FUCO in which Xcel owns an interest. Losses that may be incurred by such EWGs and FUCOs would have no effect on domestic rates of any utility because the utilities have undertaken not to seek recovery of such losses in rates. Moreover, to the extent that there may be any indirect impact on the utilities from Xcel's investment in EWGs and FUCOs, through effects on Xcel's capital costs, the state commissions have the authority and the mechanisms to prevent any such adverse effects from being passed on to ratepayers. Xcel further commits to take all appropriate steps to ensure that the day-to-day operations of its Utility Subsidiaries will not be affected by the financial condition of NRG.
Sections 6(a), 7, 12(b), 32 and 33 of the Act and rules 45, 53 and 54 are applicable to the transactions authorized in the Financing Orders and the proposed modification of the Financing Orders discussed above. As noted above, the 30% Test is a condition of the Financing Orders.
Section 7(d) is the primary section in the Act governing the issuance of securities by registered system companies. Notably, section 7(d) requires the Commission to approve a proposed financing unless it finds, among other things, (1) that the security is not "reasonably adapted to the security structure of the declarant and other companies in the same holding-company system" or (2) that the "issue and sale of the particular security is [not] . . . necessary or appropriate to the economical and efficient operation of [the applicant's] business."16 To the extent that the proceeds of any of the financings for which authority is requested in this matter will be used to renew existing arrangements with EWGs or FUCOs or to make additional investments in EWGs or FUCOs, the request is also subject to sections 32, 32(h)(3) and 33(c)(2) of the Act and rule 53 under the Act. Pursuant to these provisions, the issuance of a security for these purposes will be permitted unless doing so will have a significant adverse impact on the registered system or its utility subsidiaries.
The Commission has historically used the 30% capitalization test as one potential indicator of whether an adverse finding is warranted under section 7(d). The Act itself neither specifically addresses nor mandates particular capitalization structures. For example, in 1956, in announcing a study of a proposed statement of policy on capitalization ratios for registered holding company systems, the Commission explained that in administering section 7(d), its goals included ensuring that holding company systems had a "balanced capital structure [that] provides a considerable measure of insurance against bankruptcy, enables the utility to raise new money economically, and avoids the possibility of deterioration in service to consumers if there is a decline in earnings."17 The Commission also noted its concern in maintaining an adequate amount of equity in the capital structure since "[a]n adequate equity cushion to absorb the vagaries of business conditions is an important attribute of a good security."18
In recent years, the Commission has looked for an equity capitalization rate of 30% at both the holding company level and at each of the holding company's utility subsidiaries, as a key proxy for the soundness of the holding company's capital structure.19 However, our administration of the Act demonstrates that the 30% common equity standard is a benchmark rather than an absolute requirement for the capital structures of holding-company systems. Historically, we have permitted capital structures with less than 30% common equity when mitigating circumstances are present, particularly when market conditions are concerned. For example, as was stated in 1999 in permitting one holding company system to issue securities when its equity capitalization was as low as 20%:
The Commission has in the past, however, granted exceptions to the 30% requirement where there was some special circumstance leading to the inability to maintain this standard, including difficulties expected in connection with industry restructuring, and it was likely that the standard could be met in the near future.20
We have recognized this principle in a variety of circumstances, generally stating that the question of what is an appropriate capitalization ratio is not merely the result of a simple application of arithmetical formulas, but rather is dependent upon the circumstances in which the particular company finds itself. For example, in Georgia Power Company,21 the Commission considered the decline in relative weight of the common equity element in the capital structure of Georgia Power Company as a result of the heavy demands of a construction program. In that context, the Commission stated that:
While the appropriateness of capital ratios in any given situation is a more complex matter than the simple application of arithmetical formulas, we are not persuaded that Georgia's present common equity ratio requires immediate and drastic action -- particularly under present unfavorable conditions in the market for utility equity securities. It would be imprudent to require Georgia to raise large amounts of equity capital immediately, with no assurance that this could be done on reasonable terms.
Similarly, in Alabama Power Company,22 the Commission stated that ". . .the proposed financing is directed to curing critical financial problems of Alabama. The suggestion that the financing program be deferred makes no financial or statutory sense."
More recently, in Eastern Utilities Associates,23 the Commission issued a supplemental order releasing jurisdiction over various financing transactions proposed by Eastern Utilities Associates ("EUA") and its electric utility subsidiary EUA Power Corporation ("EUA Power") in connection with EUA Power's investment in a nuclear-fueled generating plant in Seabrook, New Hampshire. In that case, EUA failed to meet the 30% common equity ratio standard because of construction delays and permitting delays at Seabrook.24In granting the request, the Commission stated that it "under appropriate circumstances has applied capitalization ratio standards flexibly where, for example, there was assurance that capitalization ratios would improve over the foreseeable future, and where it was in the public interest and the interest of investors and consumers that a proposed financing should be permitted to go forward."25 In reviewing the application, the Commission took into consideration that absent an order permitting the requested financings, EUA Power would forfeit its entire investment in Seabrook and EUA's equity investment in EUA Power would become worthless. Furthermore, the Commission found that the loss of EUA Power's financial support of its share in Seabrook would carry serious adverse consequences for the project as a whole. The Commission concluded that, on balance, EUA Power's issuance of additional notes, and a further investment by EUA in EUA Power's preferred stock, was a prudent course for EUA and EUA Power in light of the continuing progress of the license procedures of the Seabrook project. The Commission also took into consideration that EUA's common equity ratio was expected to be above 30% in the near future.26
Xcel states that its circumstances meet the standard established by the Commission for relief from the 30% Test. Xcel faces special circumstances leading to its inability to maintain the 30% standard and it is likely that the standard will be met in the near future. Applicants further state that the independent power production sector has experienced significant erosion in market valuations and a fundamental shift in market perception, affecting NRG's access to external capital. As a result of these market conditions, there is an urgent need to address credit and liquidity problems at NRG. As explained above, in response to these problems, Xcel has developed two alternatives - a consensual reorganization of NRG or the continuing sale of NRG's assets to repay NRG's debt -- either of which Xcel believes would return its equity capitalization ratio to above 30%.
Under these circumstances, we do not believe that an adverse finding under section 7(d) of the Act is warranted. The impairment charges resulting from the restructuring of NRG do not appear to have a direct impact on the financial health of the remainder of the NRG system. Moreover, these circumstances are not unlike those that have previously prompted the Commission to approve lower equity ratios. Xcel's request to modify the 30% Test is directed to curing its critical financial problems, as was the case in Alabama Power Company and EUA. Xcel has requested relief from the 30% Test for a short period, of only six months, to afford it the flexibility to finalize and implement its plans for the restructuring of NRG. It is doing so at a time when the capitalization ratios of its utility subsidiaries - the customers of which are one of the key interests protected by the Act - are at acceptable levels, and in some situations, far in excess of the 30% requirement. Indeed, the capitalization of the remainder of Xcel's businesses is sufficiently strong that were Xcel to cease to own any stake in NRG, and thereby have its debt removed from Xcel's consolidated capitalization structure, Xcel would easily meet the 30% requirement. Prohibiting this healthy part of the Xcel system from engaging in financing transactions - a prohibition that could plausibly lead to Xcel's bankruptcy - would impose unnecessary costs on the customers of and investors in that system. In addition, although Xcel's capital structure is weakened each time it identifies an asset for sale, its structure is strengthened each time an asset is actually sold. Irrespective of which plan Xcel ultimately follows to reorganize NRG, it thus appears that an adverse finding under section 7(d) is not warranted. Likewise, it does not appear that, for purposes of sections 32 and 33 and rule 53, that granting the requested authority will have a significant adverse impact on the registered holding company system. Similarly, because sales of equity will improve Xcel's capital structure, no adverse finding is necessary with respect to this request. We therefore do not believe that there is a strong reason to bar Xcel from engaging in the specified financings during the period requested.27 Given, however, that Xcel has not yet adopted and begun implementing a final plan for NRG's reorganization, and is still exposed to risk because of the financial problems at NRG, we believe it is prudent to retain jurisdiction over any other transactions subject to the Financing Order during the period during which Xcel's equity capitalization is below 30%, pending completion of the record.
The Commission has carefully examined the Application under the applicable standards of the Act and has concluded that the proposed transactions are consistent with those standards. The Commission has reached these conclusions on the basis of the complete record before it. No federal or state commission other than the Commission has jurisdiction over the proposed transactions, other than as discussed above. Applicants state that fees and expenses in connection with the proposed transactions are estimated not to exceed $50,000. Due notice of the filing of the Application has been given in the manner prescribed in rule 23 under the Act, and no hearing has been requested of ordered by the Commission. On the basis of the facts in the record, it is hereby found that the applicable standards of the Act and rules 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, except as to the matters on which jurisdiction has been reserved, be and hereby is, granted and permitted to become effective, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that jurisdiction is reserved, pending completion of the record, over:
- Applicants engaging in any additional financing transactions authorized in the Financing Orders during the period that Xcel does not meet the 30% Test;
- Applicants engaging in any additional financing transactions authorized in the Financing Orders during the period between April 1, 2003 and June 30, 2003, if the 30% Test is not met, provided that the common equity of Xcel is at or above 24%; and
- Xcel and its subsidiaries making additional investments in EWGs and FUCOs during the period that Xcel does not meet the 30% Test.
IT IS FURTHER ORDERED, that Applicants will file a report with the Commission within two business days after the occurrence of any of the following:
- Any downgrade, or further downgrade, if applicable, by a nationally recognized statistical rating organization of the debt securities of any of Xcel, NRG or any Utility Subsidiaries; or
- Any event that would have a material adverse effect on the ability of Xcel or NRG to comply with any conditions or requirements of an order of the Commission in this proceeding, or that Xcel otherwise determines would be of material interest to the Commission.
The report shall describe all material circumstances giving rise to the event.
By the Commission.
Margaret H. McFarland
1 See New Century Energies, Inc., Holding Co. Act Release No. 27218 (Aug. 16, 2000).
2 Xcel has announced its intention to sell Black Mountain Gas Company. The sale is subject to approval by the Commission under the Act. See S.E.C. File No. 70-10072.
3 In addition to NRG, Xcel's nonutility subsidiaries include e prime inc. and e prime Energy Marketing, Inc. (natural gas marketing and trading), Viking Gas Transmission Company (an interstate natural gas pipeline company), Utility Engineering (engineering, construction and design), Seren Innovations Inc. (broadband telecommunication services), Eloigne Co. (investments in rental housing projects that qualify for low-income housing tax credits) and XERS, Inc. ("XERS") (a retail marketer of electricity in Texas).
4 In addition to its power generation projects, NRG also has interests in district heating and cooling systems and steam transmission operations. As of September 30, 2002, NRG's thermal and chilled water businesses had a steam and chilled water capacity equivalent to 1,643 MW, of which NRG's net ownership interest was 1,516 MW. NRG believes that, through its subsidiary, NEO Corporation, it is one of the largest landfill gas generation companies in the United States, extracting methane from landfills to generate electricity. NEO Corporation owns 31 landfill gas collection systems and has 46 MW of net ownership interests in related electric generation facilities. NEO Corporation also has 42 MW of net ownership interests in 18 small hydroelectric facilities and 109 MW of net ownership interest in seven distributed generation facilities.
5 Specifically, under the Financing Orders, Xcel is currently authorized to issue and sell through September 30, 2003 common stock and long term debt in an aggregate amount not to exceed $2 billion outstanding (other than common stock issued in respect of employee benefit plans and dividend reinvestment plans). In a separate proceeding, Xcel has requested authority to increase this amount to $3 billion. See S.E.C. File No. 70-10096.
6 See Holding Co. Act Release 27533 (May 30, 2002) ("NRG Order"). In requesting the NRG Order, Applicants noted that, since December 2001, NRG's corporate securities had been placed under review for possible downgrade. Applicants explained that numerous factors had recently led to significant erosion in the market valuations within the independent power production sector. As a result of heightened investor concerns, stock prices for independent power companies had fallen, costs of credit had increased and access to capital had diminished. In addition, Applicants stated that comparatively warm weather in winter 2001-2002 had a negative effect upon fourth quarter 2001 results and full-year 2002 earnings-per-share estimates of NRG.
Despite these circumstances, Applicants represented that the Xcel Board of Directors and management had reviewed their options with respect to NRG's funding and structure. Applicants did not believe that NRG's recent problems were a dispositive indication of its value on a long-term basis. They noted that historically, NRG had provided significant benefits to the Xcel system and that NRG had a five-year history of sustained profitability. Applicants expected that NRG would be better able to realize additional value and growth as a wholly owned subsidiary of Xcel because of the holding company's stronger balance sheet and access to less costly capital. In addition, as sole shareholder of NRG, Xcel would be in a position to make capital infusions to address the capital needs of NRG and to take the necessary steps to refocus NRG's business objectives while maintaining and improving the value that NRG could provide to Xcel and its investors.
7 Xcel intended to cancel this debt if the Exchange Offer was completed.
8 It was estimated that the consolidation and integration of certain functions of NRG with other parts of the Xcel system would result in annual cost savings of approximately $45 million and increases in net income of approximately $20 million.
9 The Extension Letter did not waive other events of default, including failure to make payment of principal and/or interest when due, or failure to comply with financial covenants.
10 This commitment is required before NRG's assets or the non-regulated businesses are classified as "held for sale." The criteria for classification of assets as "held for sale" are set forth in Statement of Financial Accounting Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets ("FASB 144"). The criteria include the following, among others: (i) management, having the authority to approve the action, commits to a plan to sell the asset, (ii) the asset is being actively marketed for sale, and (iii) the sale of the asset is expected to be completed within one year.
11 As part of the Waiver Extension, NRG submitted a restructuring plan to its lenders.
12 Xcel has historically made intercompany loans to fund the operations of its subsidiaries, particularly Cheyenne Light, Fuel and Power Company and Black Mountain Gas Company, and has provided guarantees to its various subsidiaries. In addition, with the downgrade of NRG to below investment grade, Xcel began guaranteeing various trading obligations of NRG Power Marketing, Inc. ("NRG Power Marketing"), a wholly owned subsidiary of NRG that is engaged primarily in purchasing and selling natural gas and electricity. (NRG provided guarantees while it was investment grade). Applicants state that NRG Marketing needs the credit support of Xcel through guarantees to continue operating without substantial disruption of its businesses.
13 Applicants also state that if NRG is unable to resolve its liquidity issues, Xcel will likely be required to fund its $300 million obligation under the Support Agreement and to pay in full its guarantees of obligations of NRG and its subsidiaries (approximately $110 million as of August 31, 2002). Because NRG is currently in default of its obligations under certain debt instruments, Xcel could be called upon at any time to meet its obligations under the Support Agreement. Xcel also states that at the time it was entered into, the agreement to invest further funds into NRG was permissible under its 100% Order.
Depending upon the timing of these cash requirements, Xcel projects that it could pay the obligations from available cash, but this action would deplete Xcel's cash below prudent levels. If the 30% Test were not met, Xcel would be precluded by the restrictions of the Financing Orders from issuing debt or equity to raise funds to meet these obligations. Xcel therefore notes in the Application that proceeds of the securities issuances for which it is seeking authorization may be used, in part, to make these payments if the company is required to do so. A default in Xcel's payment of its obligations under the Support Agreement could, without appropriate waivers, result in a cross-default to the debt of Xcel. Applicants state that, in such event, Xcel would aggressively negotiate with its lenders, and take all other actions necessary, to resolve these issues.
14 The aggregate outstanding principal amount of loans outstanding to Cheyenne and Black Mountain as of September 30, 2002 is approximately $25.5 million. These loans operate on a revolving basis.
15 As reflected on its most recent Form 10-K or Form 10-Q, and as adjusted to reflect subsequent events that affect capitalization.
16 In addition, section 12(b) of the Act makes it unlawful for any registered holding company "directly or indirectly, to lend or any manner extend its credit to or to indemnify any company in the same holding-company system" in contravention of rule or orders of the Commission. Rule 45 provides that no registered holding company or subsidiary company shall, directly or indirectly, lend or any manner extend its credit to or indemnify, or make any donation or capital contribution to, any company in the same holding company system, except pursuant to a declaration.
17 Announcement of Study by Division of Corporate Regulation of the Securities and Exchange Commission Regarding a Proposed Statement of Policy Relative to Capitalization Ratios for Registered Holding Company Systems Subject to the Public Utility Holding Company Act of 1935, Holding Co. Act Release No. 13255, (Sept. 5, 1956) ("Proposed Capitalization Policy") (quoting Tenth Annual Report to Congress for the fiscal year ended June 30, 1944 at 99). The Study itself was never completed.
18 Id. at 3-4 (quoting Report for the SEC Subcommittee of the House Committee on Interstate and Foreign Commerce on the Public Utility Holding Company Act at 27) (Oct. 15, 1951).
19 The Commission has also found that registered companies meeting this standard also meet the standards of section 10(b)(3) of the Act. See NiSource Inc., Holding Co. Act Release No. 27263 (Oct. 30, 2000); American Electric Power Co., Inc., Holding Co. Act Release No. 27186 (June 14, 2000), vacated and remanded on other grounds sub nom. National Rural Electric Coop v. SEC, 276 F.3d 609 (D.C. Cir. 2002); National Grid Group plc, Holding Co. Act Release No. 27154 (Mar. 15, 2000) ("National Grid"); Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), as modified, Holding Co. Act Release No. 25273 (Mar. 15, 1991), aff'd sub nom. City of Holyoke v. SEC, 972 F.2d 358 (D.C. Cir. 1992).
20 Conectiv, Holding Co. Act Release No. 27111 (Dec. 14, 1999).
21 Holding Co. Act Release No. 18517 (July 31, 1974).
22 Holding Co. Act Release No. 21711 (Sept. 10, 1980).
23 Holding Co. Act Release No. 24879 (May 5, 1989).
24 See also Eastern Utilities Associates (Holding Co. Act Releases No. 24245 and 24641) (Nov. 21, 1986 and May 12, 1988, respectively) (describing the conditions surrounding the authorization of the acquisition by EUA Power of a joint ownership interest in the Seabrook project and the appropriate capitalization requirements for that subsidiary prior to commercial operation of the plant).
25 Eastern Utilities Associates, Holding Co. Act Release No. 24879 (May 5, 1989) at n. 49 (citing Central Power & Light Co., 27 S.E.C. 185 (1947); Indiana Service Corp., 24 S.E.C. 463 (1946); Republic Service Corp., 23 S.E.C. 436 (1946); Alabama Power Co., 22 S.E.C. 267 (1946); Consumer's Power Company, 20 S.E.C. 413 (1945); and Ohio Edison Co., 18 S.E.C. 529 (1945)).
26 Similarly, although it involved a holding-company system in the midst of bankruptcy proceedings, in Columbia Gas System, Inc., Holding Co. Act Release No. 25363 (August 20, 1991), the Commission authorized the holding company to issue and sell short-term secured promissory notes at a time when Columbia's common equity ratio was below 30%. It was noted that the reduction in Columbia's common equity ratio resulted from a write-off of approximately $1.2 billion of high-cost supply contracts of one of Columbia's subsidiaries. It was further noted that the issuance of the notes would result in the reduction of Columbia's common equity ratio to 28.3%. In this context, the Commission noted:
As a matter of regulatory policy, the Commission has generally favored a minimum consolidated common equity component of 30%. The Commission has recognized that compelling circumstances such as exist in the instant matter may warrant our approval of a consolidated equity capitalization below the customary 30% level.
27 It also would not make sense to modify the 30% requirement solely for the purpose of permitting Xcel to issue additional equity to improve, at least numerically, its capital structure. As in the case of the Georgia Power Company, Xcel is facing liquidity needs at a time when the market conditions are not conducive to consummation of an equity offering by Xcel.