(Release No. 35-27681; 70-10096)
Order Authorizing the Payment of Dividends out of Capital and Unearned Surplus; Reserving Jurisdiction
Xcel Energy Inc. ("Xcel"), a registered public-utility holding company, Minneapolis, Minnesota, and its wholly owned subsidiaries (collectively, "Applicants"), 1 have filed with the Securities and Exchange Commission ("Commission") an application-declaration ("Application") under sections 6(a), 7, 12(c), 32 and 33 of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 46, 53 and 54 under the Act. Xcel seeks authority to declare and pay dividends out of capital and unearned surplus in an aggregate amount not to exceed $152 million.2 Xcel's request is conditioned on Xcel's common equity ratio being at least 30% of capitalization. The Commission issued a notice of the proposed transactions on December 19, 2002 (HCAR No. 27624).
I. Executive Summary
Xcel, which owns six utility subsidiaries that operate in twelve states ("Utility Subsidiaries"), also engages in a variety of nonutility activities permitted under the Act. The most significant of its nonutility 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. During 2002, NRG had experienced severe financial problems as a result of the deterioration in the merchant generation and energy trading sectors,3 and, on May 14, 2003, NRG filed a voluntary petition for relief in the United States Bankruptcy Court for the Southern District of New York ("New York Bankruptcy Court").4 Following the commencement of the NRG voluntary bankruptcy on May 14, 2003, the officers of Xcel serving as officers and/or directors of NRG resigned from their positions with NRG.
Xcel, with NRG, has negotiated an agreement on a financial restructuring of NRG with NRG's numerous creditors ("Settlement Agreement").5. The terms of the Settlement Agreement call for Xcel to make payments to NRG totaling up to $752 million for the benefit of NRG and NRG's creditors in partial consideration for their waiver of any existing and potential claims against Xcel. The restructuring plan also calls for the cancellation of the stock of NRG held, directly or indirectly, by Xcel.6
Applicants state that the making of this voluntary filing constitutes an order for relief under the United States Bankruptcy Code ("Bankruptcy Code") and NRG thus became a debtor in possession subject to the jurisdiction of the bankruptcy court and of the Bankruptcy Code. As a result of the voluntary bankruptcy filing and the resignation of the officers of Xcel from their positions as officers and directors of NRG, Xcel no longer has the ability to control the operations of NRG and no longer consolidates NRG on its financial statements. As a result of the deconsolidation, Xcel now accounts for NRG using the equity method. Under this method, Xcel records the net gains and losses of NRG, except that Xcel will not record any losses if, as a result, Xcel's negative investment in NRG would exceed Xcel's aggregate commitment to NRG under the plan of reorganization. Thus, Xcel's exposure to additional losses and charges at NRG is effectively capped.
In addition, as a result of its deconsolidation of NRG, Xcel's common equity ratio increased to and should remain above 30%7 ("30% Test") throughout the rest of 2003. Xcel states that its retained earnings reflect, in large part, the performance of its Utility Subsidiaries.8 Applicants project that Xcel's common equity will be above 40% by the end of 2003.
As discussed below, we find that Xcel's request is consistent with the statutory standards applicable to the specific transactions for which authorization is sought. We, therefore, approve Xcel's Application, subject to the requirement that Xcel's equity capitalization is at least 30% of its total capitalization.
II. Background and Current Proposal
In the Prior Financing Order, the Commission authorized Xcel to, among other things, (i) issue and sell common stock and long-term debt securities during a period through September 30, 2003 ("Authorization Period"), provided that the aggregate proceeds of these issuances, together with any long-term debt and preferred securities issued by financing entities established by Xcel, did not exceed $2.0 billion;9 and (ii) issue and sell short-term debt in an aggregate principal amount of up to $1.5 billion outstanding at any time. By order dated March 7, 2002 (HCAR No. 27494) ("100% Order" and together with the Prior Financing Order, "Financing Orders"), the Commission authorized Xcel to use the proceeds of its securities issuances to invest up to 100% of its "consolidated retained earnings," as defined in Rule 53(a)(1)(i) under the Act, in exempt wholesale generators, as defined in section 32 of the Act, and in foreign utility companies, as defined in section 33 of the Act. The authorization sought by this Application does not seek to increase or alter in any respect the authorization granted in the 100% Order and the terms and conditions of the 100% Order.10
Xcel requests authorization under section 12(c) of the Act and rule 46 under the Act to declare and pay two quarterly dividends on its common stock and its preferred stock, in an aggregate amount of up to $152 million, in whole or in part out of capital and unearned surplus.
Xcel states that it has historically declared dividends on its preferred stock in February and on its common stock in March, for payment on April 15 and April 20, respectively. On March 26, 2003, Xcel announced that it would delay declaration of the March dividend on its common stock, having already paid the dividends on its preferred stock. Xcel now seeks authorization to declare and pay the delayed dividend on its common stock and to declare and pay its next regularly scheduled quarterly dividend on its common stock and preferred stock. Xcel proposes to declare the delayed dividend on its common stock in May 2003 for payment in June 2003 and would declare its next regularly scheduled quarterly dividend on its common stock and preferred stock in June 2003 for payment in July 2003 in accordance with past practice. Subject to a $260 million limit, Xcel requests that the Commission reserve jurisdiction over the declaration and payment of dividends out of capital and unearned surplus for any subsequent quarterly period pending completion of the record.
Xcel believes that the payment of dividends, consistent with its current dividend policy, is appropriate and in the best interests of Xcel and its security holders. Xcel's dividend yield and payout are broadly in line with those of other utilities that pay dividends. Xcel states that any reduction, elimination or further delay of a dividend is expected to have a negative impact on the share price of Xcel's common stock and thus to affect adversely Xcel's current shareholders. Xcel states that more than 50% of the common stock of Xcel is held by retail (as opposed to institutional) shareholders. It is the belief of Xcel management, based upon advice of its financial advisor and numerous calls by shareholders to the investor relations department of Xcel, that many shareholders are both expecting and relying upon the dividend payments in their personal financial planning and that the failure to pay the dividend in a timely manner could result in a sell-off of shares of Xcel's common stock. In such event, if the dividend were paid later in the year, the dividend would not be made available to the existing retail shareholders, but would potentially be paid to a large group of new purchasers.
Section 12(c) of the Act makes it unlawful for any registered holding company to declare or pay a dividend in contravention of rules or regulations or orders the Commission may prescribe "to protect the financial integrity of companies in holding company systems, to safeguard the working capital of public utility companies, to prevent the payment of dividends out of capital or unearned surplus, and to prevent the circumvention of the provisions of the Act." In particular, rule 46 under the Act prohibits a registered holding company from "declar[ing] or pay[ing] any dividend on any security ... out of capital or unearned surplus" unless such payment has been authorized by the Commission.
In determining whether to permit a registered holding company to pay dividends out of capital and unearned surplus, the Commission is guided by the standards of section 12(c) of the Act.11 Factors considered by the Commission have included: (i) the asset value of the company in relation to its capitalization; (ii) the company's prior earnings; (iii) the company's current earnings in relation to the proposed dividend; and (iv) the company's projected cash position after payment of a dividend.12 Further, the payment of the dividend must be "appropriate in the public interest" and in the best interests of the security holders.13
The Commission has previously authorized the payment of dividends out of capital on a number of occasions. For example, in Eastern Utilities Associates, (HCAR No. 25330) (June 13, 1991), the Commission authorized Eastern Utilities Associates ("EUA"), a registered holding company, to pay dividends out of capital and/or unearned surplus. The Commission noted, among other things, that EUA had incurred losses from a failed investment in the Seabrook Nuclear Power Generation Project and EUA Power Corporation, a wholly owned subsidiary of EUA, had filed for voluntary bankruptcy. The Commission in that instance determined that EUA had a "long and generally favorable history of prior earnings," "its current earnings will be sufficient to support its 1991 forecasted dividend," EUA's "current cash position is adequate," and "its projected cash position after paying the proposed 1991 dividends should and continue to be adequate to meet the demands of the operating utility companies."
Similar to the situation in Eastern Utilities Associates, apart from the impact of NRG, the Xcel system is in sound financial condition. The total assets of Xcel on a consolidated basis were $27.3 billion as of December 31, 2002, in relation to $21.1 billion of capitalization. The Xcel system on a consolidated basis has had a history of positive earnings.
Xcel's forecasted earnings of the Xcel system, excluding NRG, are sufficient to support the requested dividend. As shown above, the current quarterly dividend requirement on Xcel common stock and preferred stock is approximately $76 million, which represents approximately 1.5% of Xcel's capital and unearned surplus at December 31, 2002. This amount compares favorably with other proposed dividends out of capital or unearned surplus authorized by the Commission.14
Moreover, as noted above, upon the filing of voluntary bankruptcy by NRG and the deconsolidation of NRG on the financial statements of Xcel, Xcel's common equity ratio is above 30%. Xcel projects that its common equity ratio will improve to above 40% by the end of 2003.
Finally, the current cash position of Xcel is adequate to support the dividend. The projected cash position of Xcel after payment of the proposed dividends is forecasted to be adequate and will not impair the working capital of the Utility Subsidiaries.15 It should be noted further that operating losses or impairment charges or other write-offs at NRG or its subsidiaries do not affect the liquidity of Xcel or its Utility Subsidiaries. To the extent these items require cash, they are funded by NRG and its subsidiaries. We, therefore, conclude that Xcel's request is consistent with the factors stated in section 12(c) of the Act.
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. Xcel states that fees and expenses in connection with the proposed transactions are estimated not to exceed $75,000. 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, except as to the matters over which jurisdiction has been reserved, 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, except as to the matters over which jurisdiction has been reserved, the Application, as amended be and hereby is, granted and permitted to become effective immediately, 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:
By the Commission.
1 The term "Subsidiaries" includes each of Xcel's utility subsidiaries and nonutility subsidiaries, as well as any future direct or indirect nonutility subsidiaries of Xcel whose equity securities may be acquired in accordance with an order of the Commission or in accordance with an exemption under the Act or the Commission's rules under the Act.
2 Xcel also requests that the Commission reserve jurisdiction, pending completion of the record, over the following matters: The authority to increase the aggregate amount of common stock and long-term debt securities that it may issue from $2.0 billion to $2.5 billion; the authority to pay dividends out of capital and unearned surplus for any subsequent quarterly period; and certain modifications of financing terms and conditions in a prior Commission order (HCAR No. 27218) (August 22, 2000) ("Prior Financing Order").
3 NRG's liquidity was significantly affected when the credit rating agencies downgraded NRG to below investment grade status. As a result of this and other factors, NRG defaulted on significant portions of its outstanding debt obligations.
4 Prior to this filing in the New York Bankruptcy Court, NRG had been the subject of an involuntary petition for involuntary bankruptcy in the United States Bankruptcy in Minneapolis ("Minnesota Bankruptcy Court"). On May 12, 2003, the Minnesota Bankruptcy Court abstained from exercising jurisdiction over the involuntary petition and dismissed the proceeding.
5 For a description of the restructuring of NRG, see Xcel's Annual Report on Form 10-K for the year ended December 31, 2002. On March 26, 2003, Xcel announced the tentative Settlement Agreement with certain NRG creditors.
6 Applicants state that the Xcel system, other than NRG and NRG's subsidiaries, remains financially sound. Despite the fact that Xcel had very limited contractual exposure in respect of the liabilities and obligations of NRG, the financial statements of Xcel reflected the entire losses and charges recorded by NRG. As a result of its ownership of NRG, Xcel has experienced a significant reduction in retained earnings and, in turn, a reduction in its common equity as a percentage of its capitalization
7 Common equity, as reflected on the most recent Form 10-K or Form 10-Q and as adjusted to reflect subsequent events that affect capitalization, will be at least 30% of consolidated total capitalization.
8 The common equity ratios of Xcel's Utility Subsidiaries are each in excess of 45% as of December 31, 2002.
9 The authorization was in addition to the authorization in the Prior Financing Order for Xcel to issue up to 30 million shares of its common stock under various employee benefit and dividend reinvestment plans.
10 By order dated May 30, 2002 (HCAR No. 27533) ("NRG Order"), the Commission authorized Xcel to acquire through an exchange offer and subsequent short-form merger (collectively, "Exchange Offer") the outstanding publicly-held stock of its 74%-owned subsidiary, NRG, and to issue up to 33,394,564 shares of common stock pursuant to such transaction. Such 33,394,564 shares can only be issued for the purposes set forth in the NRG Order and are not available for general issuance. The requests in this Application are supplemental to and addition to the authorization granted by the Commission on November 7, 2002 (HCAR No. 27597) ("Xcel 30% Order"). In the Xcel 30% Order, the Commission authorized Xcel to engage in certain specified financing transactions through March 31, 2003, at a time when Xcel's common equity ratio was less than 30%, provided that Xcel's common equity ratio was at least 24%.
11 See Standard Power and Light Corp., 35 S.E.C. 440, 443 (1953).
12 See, e.g., International Utils. Corp., 5 S.E.C. 403 (1939); United Light and Power Co., 18 S.E.C. 336 (1948); General Gas & Elec. Corp., 20 S.E.C. 485 (1945).
13 Commonwealth & So. Corp., 13 S.E.C. 489, 492 (1943); see also People Light and Power Co., 14 S.E.C. 555, 563 (1943).
14 In Eastern Utilities Associates (HCAR No. 25330) (June 13, 1991), the proposed dividend payment constituted 3.4% of the applicant's consolidated capital surplus. See also Conectiv, et al. (HCAR No. 27079) (September 27, 1999) (proposed dividend was less than 2% of capital or unearned surplus).
15 Upon payment to NRG and/or the settlement of any claims in the restructuring of NRG, or in the event that Xcel is otherwise required to fund $300 million under the Support Agreement and/or make payment on the outstanding guarantees, Xcel may need to access the capital markets to meet these funding requirements. Based upon discussions with its financial advisor and investment bankers, Xcel believes that the capital markets would be receptive to an issuance by Xcel of equity and/or debt to meet these funding requirements.