Holding Company Act Release 27623
SECURITIES AND EXHANGE COMMISSION
(Release No. 35-27623; 70-10088
American Electric Power Company, et. al
Order Authorizing Financing Transactions Through March 31, 2006, Issuance of Guarantees and Other Credit Support, Creation of Financing Entities, Continuation of a Utility Money Pool, Creation of a Nonutility Money Pool, and Payment of Dividends Out of Capital or Unearned Surplus.
December 18, 2002
American Electric Power Company Inc. ("AEP"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended, ("Act"), and Central and South West Corporation ("CSW"), a wholly owned subsidiary of AEP and also a registered holding company, as well as AEP's service company subsidiary, American Electric Power Service Corporation ("AEPSC"), all of Columbus, Ohio, and the following direct and indirect subsidiaries of AEP (collectively "Subsidiaries" and with AEP, CSW, and AEPSC "Applicants"):
(a) public utility subsidiaries: AEP Generating Company ("Generating"), Appalachian Power Company ("Appalachian"), Central Power and Light Company ("CPL"), Columbus Southern Power Company ("Columbus"), Indiana Michigan Power Company ("Indiana"), Kentucky Power Company ("Kentucky"), Kingsport Power Company ("Kingsport"), Ohio Power Company ("Ohio"), Public Service Company of Oklahoma ("PSO"), Southwestern Electric Power Company ("SWEPCO"), West Texas Utilities Company ("West Texas"), and Wheeling Power Company ("Wheeling") (collectively, "Utility Subsidiaries"), all of Columbus, Ohio;
(b) nonutility subsidiaries that participate in the AEP utility money pool: Cedar Coal Company, Central Appalachian Coal Company, Central Coal Company, Colomet Inc., Simco Inc., Southern Appalachian Coal Company, Blackhawk Coal Company, Conesville Coal Preparation Company, Franklin Real Estate Company, Indiana Franklin Realty Company (collectively "Nonutility Participants In The Utility Money Pool"), all of Columbus, Ohio; and
(c) nonutility subsidiaries that wish to participate in the AEP nonutility money pool: AEP Coal Inc., AEP Power Marketing Inc., AEP Pro Serv Inc., AEP Retail Energy LLC, AEP T&D Services LLC, AEP Credit Inc., Industry and Energy Associates LLC, AEP C&I Company LLC, AEP Gas Power System GP LLC, AEP Gas Power GP LLC, AEP Retail Energy, AEP Texas Commercial & Industrial Retail CP LLC, AEP Communications Inc., AEP Communications LLC, C3 Networks GP LLC, C3 Networks Limited Partnership, C3 Networks & Communications LP, AEP Fiber Venture LLC, C3 Communications, AEP Energy Services Inc., AEP EmTech LLC, AEP Investments Inc., Ventures Lease Co. LLC, AEP Resource Services LLC, AEP Resources Inc., AEP Delaware Investment Company II, AEP Delaware Investment Company III, AEP MEMCO LLC, AEP Elmwood LLC, United Sciences Testing Inc., AEP Energy Services Gas Holding Company, Mid-Texas Pipeline Company, Jefferson Island Storage & Hub LLC, AEP Acquisition LLC, AEP Energy Services Investments Inc., LIG Inc., LIG Pipeline Company, Tuscaloosa Pipeline Company, LIG Liquids Company LLC, Louisiana Intrastate Gas Company LLC, LIG Chemical Company, Houston Pipe Line Company LP, AEP Gas Marketing LP, HPL Holdings Inc., AEP Resources International Limited, AEP Resources Project Management Company Ltd., AEP Pushan Power LDC, CSW International Inc., AEP Delaware Investment Company III, AEP Holdings I CV, AEP Holdings II CV, AEP Energy Services UK Gen Ltd, AEP Energy Services Limited, CSW Energy Inc., CSW Power Marketing Inc., CSW Ft. Lupton Inc., Newgulf Power Venture, CSW Development I Inc., Eastex Cogeneration LP, CSW Eastex LP I Inc., CSW Energy Services Inc., EnerShop Inc., Mutual Energy SWEPCO LP, REP Holdco Inc., Mutual Energy CPL LP, REP General Partner LLC, Mutual Energy WTU LP, Mutual Energy Service Company LLC, AEP Ohio Commercial & Industrial Retail Company LLC, AEP Ohio Retail Energy LLC, Mutual Energy LLC, AEP Texas Retail GP LLC, POLR Power LP, Dolet Hills Lignite Company LLC, AEP Desert Sky GP LLC, AEP Desert SKY LP LLC, Universal Supercapacitators LLC (collectively, "Nonutility Money Pool Participants"), all of Columbus, Ohio,
have filed an application-declaration ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10, 12(b) and 12(c) of the Act and rules 43, 45, 46 and 54 under the Act. The Commission issued a notice of the Application on November 19, 2002 (HCAR No. 27605).
Subsidiaries may also include direct or indirect subsidiaries that AEP may form under sections 32, 33 or 34 of the Act or rule 58 under the Act ("Subsidiaries"). All of AEP's direct and indirect Subsidiaries, other than Utility Subsidiaries, are referred to as nonutility subsidiaries ("Nonutility Subsidiaries"). All Subsidiaries and AEP and CSW are sometimes referred to collectively as the "Companies."
The Applicants seek authority for various financing transactions ("Financing Plan") as described below. In summary, they request the following authorizations and approvals of the Commission for the period ending March 31, 2006 ("Authorization Period"):
(i) SWEPCO and Wheeling request authority to issue long-term debt in amounts not to exceed $350 million and $40 million, respectively; and to engage in hedging transactions.
(ii) AEP, CSW, and the Utility Subsidiaries request aggregate short-term financing in the amount of $7.2 billion outstanding;
(iii) CPL, Columbus, Ohio and West Texas seek authority to issue short- and long-term debt in an amount not to exceed $3.9 billion. Any short term debt issued by CPL, Columbus, Ohio and West Texas will be included in the aggregate short-term financing amount of $7.2 billion outstanding described at (ii) above. If long-term debt is issued by CPL, Columbus, Ohio and West Texas totaling $3.9 billion under the authority sought in this order for short- and long-term debt, then no short-term debt authority will be available under this order for these four companies, and additional short-term debt authority would be sought, if necessary;
(iv) Utility Subsidiaries seek authorization to organize financing entities for certain types of financings described more fully below;
(v) AEP, CSW and subsidiaries that are participants in the system utility money pool ("Utility Money Pool") request the continuation of the money pool through the Authorization Period;
(vi) AEP and the Nonutility Money Pool Participants request authority to form and continue a nonutility money pool ("Nonutility Money Pool") on substantially the same terms and conditions as the Utility Money Pool;
(vii) AEP and its Subsidiaries request authority to issue guarantees and other forms of credit support in an aggregate amount not to exceed $900 million outstanding at any one time as more fully described below; and
(viii) AEP and its Nonutility Subsidiaries request authorization for the Nonutility Subsidiaries to pay dividends out of capital or unearned surplus to the fullest extent allowed by law.
By order dated December 30, 1997 (HCAR No. 26811), CSW and its electric public utility subsidiary companies, CPL, PSO, SWEPCO, WTU and Central and South West Services Inc., were authorized to engage in various financing and related transactions through December 31, 2002. By order dated June 14, 2000 (HCAR No. 27186), AEP was authorized to acquire by merger all of the outstanding common stock of CSW; and AEP, its operating subsidiaries and certain other subsidiaries were added to the CSW money pool. By order dated October 26, 2001 (HCAR No. 27457) the money pool authority was extended to December 31, 2002 and certain sublimits related to restructuring of the AEP system were established.
The Applicants request authority to engage in financing transactions without further Commission approval for which the specific terms and conditions are not currently known but will engage in these transactions subject to the following conditions concerning the financial condition of the Applicants: (a) the effective cost of money on long-term debt borrowings issued will not exceed the greater of (i) 450 basis points over comparable term U.S. Treasury securities or (ii) a gross spread over U.S. Treasury securities which is consistent with similar securities of comparable credit quality and maturities issued by other companies, (b) the maturity of indebtedness will not exceed 50 years, (c) the underwriting fees, commissions, or other similar expenses paid in connection with the issue, sale or distribution of a security will not exceed 5% of the principal or total amount of the financing, (d) all debt issued by AEP or CSW will be unsecured, (e) the Applicants will not publicly issue any long-term debt unless the securities are rated at the time of issuance at the investment grade level as established by at least one "nationally recognized statistical rating organization," as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934., (f) any commercial paper issued will have at least an investment grade corporate or senior unsecured debt rating by at least one nationally recognized rating agency and short-term borrowings will have maturities of less than one year from the date of issuance. AEP represents that it will maintain during the authorization period for itself and for Utility Subsidiaries, except CPL, common equity at a minimum of 30% of consolidated capital (including short-term debt and securitization bonds). CPL, however, requests that during the Authorization Period it be permitted to maintain a common equity ratio of 25% for so long as securitization bonds are outstanding. The 25% common equity ratio is required only because of the issuance of securitization bonds.
The proceeds from the sale of securities in external financing transactions by the Applicants will be added to their respective treasuries and subsequently used principally for general corporate purposes including: (i) the financing, in part, of capital expenditures; (ii) the financing of working capital requirements; (iii) the acquisition, retirement or redemption of securities previously issued by AEP or its Subsidiaries without the need for prior Commission approval; and (iv) other lawful purposes, including direct or indirect investment in energy related companies as defined in rule 58 ("Rule 58 Companies"), other subsidiaries approved by the Commission, exempt wholesale generators ("EWGs"), and foreign utility companies ("FUCOs"). Applicants request approval for the following aggregate amounts of outstanding external financing during the Authorization Period:
(i) Long-term debt limits: SWEPCO, $350,000,000; Wheeling, $40,000,000.
(ii) Short-term borrowing limits through the Utility Money Pool, external borrowings or borrowings from AEP, as follows: Appalachian, $600,000,000; Indiana, $500,000,000; Kentucky, $200,000,000; Generating, $125,000,000; Kingsport, $40,000,000; PSO, $300,000,000; SWEPCO, $350,000,000; Wheeling, $40,000,000. In addition, AEP requests authority for short-term borrowings sufficient to fund the Utility Money Pool and the Nonutility Money Pool as well as its own requirements. The aggregate amount of short-term borrowing for which authority is requested in this order is $7.2 billion outstanding at any one time.
(iii) Short- and long-term borrowing limits, commencing on the date of this order, for CPL, Columbus, Ohio, and West Texas as follows: CPL, $1,400,000,000; Columbus, $800,000,000; Ohio, $1,200,000,000; West Texas, $500,000,000. The companies seek authority to issue debt both on the external market or from the Utility Money Pool. Any short term debt issued by CPL, Columbus, Ohio and West Texas will be included in the aggregate short-term financing amount of $7.2 billion outstanding described at (ii) above. If long-term debt is issued by CPL, Columbus, Ohio and West Texas totaling the $3.9 billion authority sought under this order for short- and long-term debt, then no short-term debt authority will be available under this order for these four companies, and additional short-term debt authority would be sought, if necessary.
All external financing will be at rates or prices and under conditions based upon, or otherwise determined, by competitive capital markets. The Applicants request authority to sell securities authorized in this order in any of the following ways: (i) through underwriters or dealers; (ii) directly to a limited number of purchasers or to a single purchaser, or (iii) through agents or dealers. If underwriters are used in the sale of the securities, the securities will be acquired by the underwriters for their own account and may be resold from time to time in one or more transactions, including negotiated transactions, at a fixed public offering price or at varying prices determined at the time of sale. The securities may be offered to the public either through underwriting syndicates (which may be represented by managing underwriters) or directly by one or more underwriters acting alone. The securities may be sold directly by AEP or a subsidiary or through agents designated from time to time. If dealers are used in the sale of any securities, the securities will be sold to the dealers as principal. Any dealer may then resell the securities to the public at varying prices to be determined by the dealer at the time of resale.
If debt securities are being sold, they may be sold in connection with "delayed delivery contracts" which permit the underwriters to locate buyers who will agree to buy the debt at the same price but at a later date than the date of the closing of the sale to the underwriters. Debt securities may also be sold through the use of medium-term notes and similar programs, including transactions covered by rule 144A under the Securities Act of 1933. Pollution control revenue bonds may be sold either currently or in forward refundings where the price of the securities is established currently for delivery at a future date.
Long-Term Debt: Under current law, the public utility commissions in the states of Indiana, Virginia, Tennessee, Ohio, Oklahoma and Kentucky approve the issuance of long-term securities by public utility companies. Therefore, rule 52(a) under the Act provides an exemption from the Commission for the issuances of long term debt securities by all of AEP's Utility Subsidiaries, except CPL, SWEPCO, West Texas and Wheeling. Financing authorization is being sought for these four subsidiaries as described above. Any long-term debt would have designations, aggregate principal amount, maturity, interest rate(s) or methods of determining these amounts, maturities or rates, interest payment terms, redemption provisions, non-refunding provisions, sinking fund terms, conversion or put terms and other terms and conditions as the Applicants may determine at the time of issuance in accordance with the parameters for financing set forth in this order.
Short-Term Debt: The Utility Subsidiaries and the Nonutility Participants in the Utility Money Pool ("Utility Money Pool Participants") are, along with AEP and CSW, members of the Utility Money Pool. The Utility Money Pool Participants make short-term borrowings from the Utility Money Pool. The Utility Money Pool is funded by AEP currently through a commercial paper program. No Utility Money Pool Participant may borrow from the Utility Money Pool if the borrowing company could borrow more cheaply directly from banks or through the issuance of its own commercial paper. In the event funds are not available from the Utility Money Pool, AEP, CSW and the Utility Money Pool Participants seek authorization for the issuance of short-term debt in the form of bank loans and commercial paper programs in the amount set forth above. Commercial paper would be sold in established domestic or European commercial paper markets and will have at least an investment grade corporate or senior unsecured debt rating by at least one nationally recognized rating agency. Short-term borrowings will have maturities of less than one year from the date of issuance. AEP, CSW or Utility Money Pool Participants may, without counting against their limits, maintain back-up lines of credit in connection with a commercial paper program in an aggregate amount not to exceed the amount of authorized commercial paper.
AEP, CSW and the Utility Money Pool Participants may engage in various types of short-term financing generally available to borrowers with comparable credit ratings as they may deem appropriate in light of their needs and market conditions at the time of issuance. AEP, CSW and the Utility Money Pool Participants request flexibility in the types of short-term debt by which they borrow externally to take advantage of new products being offered in the market for short-term securities, including but not limited to, the extendible commercial notes program currently being offered by certain commercial paper dealers and new products to provide alternate backup liquidity for commercial paper and short-term notes.
Credit Enhancements: Applicants seek authority to obtain credit enhancement for securities to be offered as proposed through the Authorization Period. Credit enhancements could include insurance, a letter of credit or a liquidity facility. Applicants anticipate that even though they would be required to pay a premium or fee to obtain the credit enhancement, they would realize a net benefit through a reduced interest rate on new securities. Applicants would obtain credit enhancement only if it is economically beneficial to do, taking into consideration fees to obtain a product.
Financing Entities: The Utility Subsidiaries seek authority to organize new corporations, trusts, partnerships or other entities that would facilitate certain types of financings, such as the issuance of tax advantaged preferred securities. Request is also made for these financing entities to issue these types of securities to third parties. Additionally, request is made for authorization with respect to (i) the issuance of debentures or other evidences of indebtedness by the Utility Subsidiaries to a financing entity in return for the proceeds of the financing and (ii) the acquisition by a Utility Subsidiary of voting interests or equity securities issued by the financing entity to establish the Utility Subsidiary's ownership of the financing entity (the equity portion of the entity generally being created through a capital contribution or the purchase of equity securities, such as shares of stock or partnership interests, involving an amount usually ranging from one to twenty-five percent of the capitalization of the financing entity). The Utility Subsidiaries also request authorization to enter into expense agreements with their respective financing entities through which they would agree to pay all expenses of a financing entity. The Utility Subsidiaries may also guarantee (i) payment of interest, dividends or distributions on the securities issued by their subsidiary financing entities if and to the extent the financing entities declare dividends or distributions or pay interest out of funds legally available for that purpose; (ii) payments to the holders of the securities issued by financing entities of amounts due upon liquidation of these entities or redemption of the securities of these entities; and (iii) certain additional amounts that may be payable in respect of these securities.
Interest rate hedging transactions with respect to existing indebtedness ("Interest Rate Hedges"), subject to certain limitations and restrictions as set forth in this order, would be entered into in order to reduce or manage interest rate cost or risk. Interest Rate Hedges would only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or whose parent companies' senior debt ratings, as published by Standard and Poor's Ratings Group, are equal to or greater than BBB, or an equivalent rating from Moody's Investors' Service or Fitch Investor Service. Interest Rate Hedges will involve the use of financial instruments and derivatives commonly used in today's capital markets, such as interest rate swaps, options, caps, collars, floors, and structured notes (i.e., a debt instrument in which the principal and/or interest payments are indirectly linked to the value of an underlying asset or index), or transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations. The transactions would be for fixed periods and stated notional amounts. In no case will the notional principal amount of any interest rate swap exceed that of the underlying debt instrument and related interest rate exposure. Applicants will not engage in speculative transactions. Fees, commissions and other amounts payable to the counterparty or exchange (excluding the swap or option payments) in connection with an Interest Rate Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality.
Interest rate hedging transactions with respect to anticipated debt offerings ("Anticipatory Hedges"), subject to certain limitations and restrictions as set forth in this order, would only be entered into with Approved Counterparties, and would be utilized to fix and/or limit the interest rate risk associated with any new issuance through (i) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury obligations and/or a forward swap (each a "Forward Sale"); (ii) the purchase of put options on U.S. Treasury obligations (a "Put Options Purchase"); (iii) a Put Options Purchase in combination with the sale of call options on U.S. Treasury obligations (a "Zero Cost Collar"); (iv) transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations; or (v) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to structured notes, options, caps and collars, appropriate for the Anticipatory Hedges. Anticipatory Hedges may be executed on-exchange ("On-Exchange Trades") with brokers through the opening of futures and/or options positions traded on the Chicago Board of Trade or the Chicago Mercantile Exchange, the opening of over-the-counter positions with one or more counterparties ("Off-Exchange Trades"), or a combination of On-Exchange Trades and Off-Exchange Trades. Each Applicant will determine the optimal structure of each Anticipatory Hedge transaction at the time of execution. Applicants may decide to lock in interest rates and/or limit its exposure to interest rate increases. Applicants represent that each Interest Rate Hedge and Anticipatory Hedge will be treated for accounting purposes under generally accepted accounting principles. Applicants will comply with the then existing financial disclosure requirements of the Financial Accounting Standards Board associated with hedging transactions, which currently are SFAS 133 and SFAS 138.
Extension of Authority for Utility Money Pool
By order dated December 30, 1976 (HCAR No. 19829) and in subsequent orders (HCAR No. 26697 (March 28, 1997), HCAR No. 24855 (April 5, 1989), HCAR No. 26254 (March 21, 1995), and HCAR No. 26854 (April 3, 1998)), the Commission authorized CSW to establish and utilize the Utility Money Pool to coordinate short-term borrowings for CSW, its electric subsidiary companies and Central and South West Services Inc. By order dated June 14, 2000 (HCAR No. 27186), the Commission authorized AEP to continue the money pool and to add its utility subsidiaries as well as Nonutility Participants In the Utility Money Pool as participants in the Utility Money Pool and established borrowing limits for all Utility Money Pool Participants. By order dated October 26, 2001 (HCAR No. 27457), AEP was authorized to increase its external borrowing from $5 billion to $6.910 billion through December 31, 2002, through the issuance and sale of short-term notes and commercial paper.
All short-term borrowing needs of the Utility Money Pool Participants may be met by funds in the Utility Money Pool to the extent funds are available. Each Utility Money Pool Participant has the right to borrow from the Utility Money Pool from time to time, subject to the availability of funds and the limitations and conditions set forth in orders of this Commission; provided, however, that the aggregate amount of all loans requested by any Utility Money Pool Participant does not exceed the applicable borrowing limits set forth in orders of the Commission and other regulatory authorities and agreements binding upon a Utility Money Pool Participant. No Utility Money Pool Participant is obligated to borrow from the Utility Money Pool if lower cost funds can be obtained from its own external borrowing. AEP and CSW will not borrow funds from the Utility Money Pool or any Utility Money Pool Participant.
AEPSC, a subsidiary service company, acts as administrative agent of the Utility Money Pool. Each Utility Money Pool Participant and AEP determine the amount of funds they have available for contribution to the Utility Money Pool. The determination of whether a Utility Money Pool Participant or AEP at any time has surplus funds, or shall lend surplus funds to the Utility Money Pool, will be made by a Utility Money Pool Participant's treasurer or by a designee of the Utility Money Pool Participant in his or her sole discretion on the basis of cash flow projections and other relevant factors. Each Utility Money Pool Participant may withdraw any of its funds at any time upon notice to AEPSC. Each Utility Money Pool Participant may borrow from the Utility Money Pool to the extent of its borrowing limits for short-term debt.
The Utility Money Pool is composed from time to time of funds from the following sources: (i) surplus funds of AEP; (ii) surplus funds of any of the Utility Money Pool Participants; or (iii) short-term borrowings by AEP or CSW. AEPSC administers the Utility Money Pool by matching up, to the extent possible, short-term cash surpluses and loan requirements of the various Utility Money Pool Participants. Utility Money Pool Participants' requests for short-term loans are met first from surplus funds of another participant which are available to the Utility Money Pool and then from AEP corporate funds to the extent available. If Utility Money Pool Participant contributions of surplus funds to the Utility Money Pool are insufficient to meet participant requests for short-term loans, borrowings are made from outside the system. Funds which are loaned from Utility Money Pool Participants into the Utility Money Pool which are not required to satisfy borrowing needs of other Utility Money Pool Participants will be invested by AEP on behalf of the lending participants in one or more short-term instruments.
The Utility Money Pool makes funds available to Utility Money Pool Participants for the interim financing of their capital expenditure programs and their other working capital needs, to AEP to loan and to make capital contributions to any of the Utility Money Pool Participants, and in both instances to repay previous borrowings incurred. External borrowings by AEP or CSW will not be made unless there are no surplus funds in the treasuries of the Utility Money Pool Participants sufficient to meet borrowing needs. However, no loan will be made by AEP, CSW or any Utility Money Pool Participant if the borrowing company could borrow more cheaply directly from banks or through the sale of its own commercial paper. When more than one Utility Money Pool Participant is borrowing, each borrowing participant will borrow pro rata from each fund source in the same proportion that the amount of funds provided by that fund source bears to the total amount of short-term funds available to the Utility Money Pool.
The interest rate applicable on any day to then outstanding loans through the Utility Money Pool will be the composite weighted average daily effective cost incurred by AEP or CSW for short-term borrowings from external sources. If there are no borrowings outstanding then the rate would be the certificate of deposit yield equivalent of the 30-day Federal Reserve "A2/P2" Non Financial Commercial Paper Composite Rate ("Composite"), or if no composite is established for that day then the applicable rate will be the Composite for the next preceding day for which the Composite is established. If the Composite shall cease to exist, then the rate would be the composite which then most closely resembles the Composite and/or most closely mirrors the pricing AEP would expect if it had external borrowings.
Interest income related to external investments will be calculated daily and allocated back to lending parties on the basis of their relative contribution to the investment pool funds on that date. Each Utility Money Pool Participant receiving a loan shall repay the principal amount of the loan, together with all accrued interest, on demand and in any event not later than the expiration date of the Commission's authorization for the operation of the Utility Money Pool. All loans made through the Utility Money Pool may be prepaid by the borrower without premium or penalty.
Nonutility Money Pool
AEP and the Nonutility Money Pool Participants propose to form and participate in a separate system of inter-corporate borrowings, the Nonutility Money Pool. The Nonutility Money Pool would be established and administered in the same manner and subject to the same conditions as the Utility Money Pool described above. AEP nor CSW will not borrow from the Nonutility Money Pool.
Applicants state that participation by a Nonutility Money Pool Participant in the Nonutility Money Pool would permit their available cash and/or short-term borrowing requirements to be matched on a daily basis with other Nonutility Money Pool Participants to minimize the need of the AEP system for external short-term borrowing. If the Nonutility Money Pool Participants are authorized to participate in the Nonutility Money Pool, funds will be loaned from the Nonutility Money Pool in the form of open account advances under the same terms and limitations as currently authorized for the Utility Money Pool. Participants in the Nonutility Money Pool will not engage in lending and borrowing transactions with participants in the Utility Money Pool. Nor will the Utility Money Pool engage in lending or borrowing transactions with the Nonutility Money Pool.
Guarantee of Indebtedness and Obligations
AEP requests authorization to enter into guarantees, obtain letters of credit, enter into support or expense agreements or otherwise provide credit support from time to time through March 31, 2006, on behalf of any of its direct or indirect Subsidiaries in amounts up to $900,000,000. AEP also requests authority to guarantee the obligations of its direct or indirect Subsidiaries as may be appropriate or necessary to enable the subsidiaries to carry on the ordinary course of their businesses. Each of the Utility Subsidiaries seeks authorization to enter into guarantees and other credit support with respect to obligations of each of its subsidiaries. Nonutility Subsidiaries also request authority for each Nonutility Subsidiary to provide guarantees and other forms of credit support to other Nonutility Subsidiaries. Certain of the guarantees referred to above may be in support of the obligations of Subsidiaries that are not capable of exact quantification. In these cases, AEP will determine the exposure of the instrument for purposes of measuring compliance with the total guarantee limit. The aggregate amount of the guarantees will not exceed $900 million (excluding obligations exempt under rule 45 and authorized under other Commission orders). Applicants anticipate that approximately $450 million will be used by AEP to provide credit support to its subsidiaries; $150 million will be used by AEP to provide other support, including performance guarantees, to its subsidiaries in the ordinary course of business; $125 million will be used by Utility Subsidiaries to support the Utility Subsidiaries; and $175 million will be used by Nonutility Subsidiaries to guarantee obligations of other Nonutility Subsidiaries.
Payments of Dividends Out of Capital or Unearned Surplus
Section 12(c) of the Act and rule 46 under the Act generally prohibit the payment of dividends out of capital or unearned surplus, except according to an order of the Commission. AEP and the Nonutility Subsidiaries hereby request authority for the direct and indirect Nonutility Subsidiaries to pay dividends out of capital or unearned surplus to the fullest extent of the law.
Certificates of Notification
AEP will file certificates of notification according to rule 24 that report each of the transactions carried out in accordance with the terms and conditions of and for the purposes represented in this order. The certificates will be filed within 60 days after the end of each of the first three fiscal quarters, and 90 days after the end of the last fiscal quarter in which transactions occur. The rule 24 certificates will contain the following information for the reporting period:
- The amount and terms of any long-term debt issued by CPL, SWEPCO, West Texas or Wheeling issued under the authority granted in this order;
- If a guarantee is issued during the quarter according to the authority granted in this order, the name of the guarantor, the name of the beneficiary of the guarantee and the amount of the guarantee;
- The amount and terms of any short-term debt issued by AEP, CSW or any of the Utility Subsidiaries during the quarter;
- The notional amount and principal terms of any hedge instruments or Anticipatory Hedges entered into during the quarter and the identity of the other parties to the transaction;
- The name, parent company and the amount invested in any financing entity during the quarter;
- A table showing at the end of each quarter a capitalization chart for AEP and each of the Utility Subsidiaries;
- With respect to each participant in the Utility Money Pool and each participant in the Nonutility Money Pool, the maximum borrowings from and loans to the respective money pool during the quarter and the interest rate applied to borrowings and loans;
- A list of Form U-6B-2 statements filed with the Commission, including the name of the filing entity and the date of the filing.
- The date, amount and payee of dividends out of capital or unearned surplus paid by any Nonutility Subsidiary.
Fees, Commissions and Expenses
Fees, commissions and expenses paid or incurred in connection with the transactions for which authority is sought are estimated to be $118,000.
The Virginia State Corporation Commission and the West Virginia Public Services Commission have approved Appalachian's participation in the Utility Money Pool. No other state or federal regulatory entity, other than the Commission, has jurisdiction over the proposed transactions.
Rule 54 Analysis
AEP currently meets all of the conditions of rule 53(a), except for clause (1). At September 30, 2002, AEP's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1.923 billion, or about 61.9% of AEP's "consolidated retained earnings," as defined in Rule 53(a)(1), for the four quarters ended September 30, 2002 ($3.106 billion). With respect to rule 53(a)(1), the Commission authorized AEP to finance investments in EWGs and FUCOs in an amount up to 100% of consolidated retained earnings1 of AEP and CSW combined. AEP has complied and will continue to comply with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of utility company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. None of the circumstances described in Rule 53(b) has occurred.
As of December 31, 1999, the most recent period for which financial statement information was evaluated for a rule 53(c) order, AEP's consolidated capitalization (including CSW on a pro forma basis) consisted of 37.3% common and preferred equity, 61.3% debt and $335 million principal amount of certain subsidiary obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of these subsidiaries ("Trust Preferred Securities") representing 1.4%. As of September 30, 2002, AEP's consolidated capitalization consisted of 55.5% debt, 38.2% common and preferred equity (consisting of 347,835,212 shares of common stock representing 37.6% and $145 million principal amount of preferred stock representing 0.6%), $321 million principal amount of Trust Preferred Securities representing 1.4% and $750 million minority interest in finance subsidiary representing 3.3%.
Since the date of the Rule 53(c) Order, Applicants state that the operating subsidiaries, which have an influence on the determination of the AEP corporate rating, continue to show strong financial statistics as measured by the rating agencies. As of December 31, 1999, Standard & Poor's rating of secured debt for AEP's operating subsidiaries was as follows: APCo, A; CSP, A-; I&M, A-; KPCo, A; and OPCo, A-. As of December 31, 1999, Standard & Poor's rating of secured debt for CSW's operating subsidiaries was as follows: CPL, A; PSO, AA-; SWEPCO, AA-; and WTU, A. As of September 30, 2002, Standard & Poor's rating of secured debt for AEP's operating subsidiaries was as follows: APCo, BBB+; CSP, BBB+; I&M, BBB+; KPCo, BBB+, and OPCo, BBB+. As of September 30, 2002, Standard & Poor's rating of secured debt for CSW's Operating Subsidiaries was as follows: CPL, BBB+; PSO, BBB+; SWEPCO, BBB+; and WTU, BBB+.
Due notice of the filing of the Application, as amended, 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 the rules under the Act, that the Application, as amended, be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
1 HCAR No. 27186, June 14, 2000, and HCAR No. 27316, Dec. 26, 2000 ("Rule 53(c) Order").