(Release No. 35-27727; 70-09701)
The Southern Company, et. al.
Supplemental Order Authorizing Release of Jurisdiction for the Payment of Dividends Out of Capital or Unearned Surplus
September 26, 2003
The Southern Company ("Southern"), a registered holding company, and its public-utility subsidiary company, Southern Power Company ("Southern Power"), both of Atlanta, Georgia (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment under section 12(c) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rule 46 under the Act, to their previously filed declaration ("Declaration").
By order dated December 27, 2000 (Holding Company Act Release No. 35-27322)1 ("2000 Order") the Commission authorized Southern to, among other things, form Southern Power and also approved certain financing authority for Southern Power. The Commission reserved jurisdiction, pending completion of the record, over Southern Power's ability to pay dividends to Southern out of capital and unearned surplus. According to the Applicants, since December 27, 2000, Southern Power has commenced operations as contemplated by the 2000 Order, has acquired and/or constructed several generating plants in the southeastern United States, and is currently selling power from a number of these plants, predominantly under long-term power-purchase agreements with creditworthy counterparties.
Applicants state that under the terms of Southern Power's bank credit facility, funds for the construction of a generating plant are unavailable until all regulatory approvals of the power purchase agreement applicable to the plant have been obtained. As a result, during the period between commencement of construction and the obtaining of all regulatory approvals related to the power purchase agreement under which power from the plant will be sold, the generating plant must be financed totally with equity from Southern.
A large portion of Southern's equity in Southern Power has resulted from the conversion of notes payable to Southern into capital contributions. In March 2003, Southern Power's notes payable to Southern were in excess of $200 million, and Applicants decided to convert $190 million of these notes to a capital contribution. In July 2003, Southern Power issued $575 million in senior notes. The proceeds from the sale were used to repay a substantial portion of Southern Power's existing short-term debt, to settle interest rate hedges and for general corporate purposes. If the notes payable to Southern had not been converted into capital contributions in March 2003, the proceeds from the July 2003 issuance of additional debt could also have been used to reduce Southern Power's indebtedness to Southern, with no further authority necessary from the Commission.
In order to accomplish the same result of returning capital to Southern, while at the same time maintaining an appropriate level of retained earnings and an otherwise strong balance sheet, Southern Power seeks authority to declare dividends out of capital or unearned surplus in an amount not to exceed $190 million, the amount of notes payable to Southern that were converted to a capital contribution in March 2003.2
Southern Power's senior notes and bank facility, and Southern Power as an issuer are all rated BBB+ by Standard & Poor's Ratings Service and Baa1 by Moody's Investor Services. Under Southern Power's bank credit facility, Southern Power's ratio of common equity to total capitalization must be maintained at a level of 35% or higher. Moreover, certain of the offering documents for Southern Power's senior notes contemplate a similar equity ratio. Applicants state that the declaration and payment of dividends from capital surplus of $190 million would not result in Southern Power's common equity ratio going below 35%. Applicants state that Southern Power had $921.6 million of capital surplus at June 30, 2003, and a ratio of common equity to total capitalization (including notes payable) of 48.6%. Applicants state that after giving effect to the payment to Southern of the $190 million of dividends contemplated by the Declaration, Southern Power's ratio of common equity to total capitalization (including notes payable) would be 43.5% at June 30, 2003.
Applicants request that the Commission release jurisdiction over the payment of dividends by Southern Power out of capital or unearned surplus in amounts not to exceed $190 million and in accordance with Delaware law, so long as the payment of the dividends would not cause the common equity component of Southern Power's consolidated capitalization to fall below 35%.
The proposed transaction is also subject to rule 54 under the Act, which provides that, in determining whether to approve an application which does not relate to any "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO"), the Commission shall not consider the effect of the capitalization or earnings of any such EWG or FUCO which is a subsidiary of a registered holding company if the requirements of rule 53(a), (b) and (c) under the Act are satisfied.
Southern states that it currently meets all of the conditions of rule 53(a). At June 30, 2003, Southern's "aggregate investment" (as defined in rule 53(a)(1)) in EWG's and FUCO's did not exceed 50% of its "consolidated retained earnings" (as defined in rule 53(a)(1)). In addition, Southern 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 operating 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. Further, Applicants state that none of the circumstances described in rule 53(b) has occurred. Rule 53(c), by its terms, is inapplicable.
Applicants state that no other state or federal commission has jurisdiction over the proposed transaction. Applicants state that the fees, commissions and expenses to be incurred in connection with the proposed transaction are estimated to be approximately $20,000.
Due notice of the filing of the Declaration 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 now complete record, the Commission finds that the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Declaration is 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, under delegated authority.
Margaret H. McFarland
Action as set forth herein APPROVED