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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION

(Release No. 35-27736; 70-10152)

Xcel Energy Inc.

Memorandum Opinion and Order Approving Plan of Reorganization of Registered Holding Company Subsidiary Under Section 11(f) and Registered Holding Company's Participation in Subsidiary's Plan of Reorganization and Related Transactions; and Issuing Report Under Section 11(g)

October 10, 2003

THIS ORDER AND REPORT IS REQUIRED BY THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935. SECURITY HOLDERS SHOULD READ THE DISCLOSURE STATEMENT PROVIDED TO THEM BY THE DEBTORS-IN-POSSESSION BEFORE DETERMINING WHETHER OR NOT TO ACCEPT THE PLAN.

Xcel Energy, Inc. ("Xcel"), a registered holding company, and its wholly owned subsidiaries, NRG Energy, Inc. ("NRG") and NRG Power Marketing, Inc. ("NRG PMI"), all of Minneapolis, Minnesota (Xcel, NRG and NRG PMI are collectively referred to as "Applicants" and NRG and NRG PMI are together referred to as "NRG Applicants") have filed an application-declaration, as amended, ("Application") with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 11(f), 11(g) and 12(e) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 54, 60, 62, 63, and 64 under the Act, in connection with a third amended joint plan of reorganization ("Plan") filed by the NRG Applicants and certain of NRG's other subsidiaries (collectively, the "Debtors") in the bankruptcy proceedings (the "Proceedings") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").1 Applicants request authorization for the solicitation regarding the Plan pursuant to section 11(g) of the Act and authorization under section 12(e) to solicit consents and approvals from the holders of the securities of the Debtors. Applicants also request approval of the Plan pursuant to section 11(f) of the Act, together with such ancillary and related authorizations as are necessary to implement the Plan, as described more fully below.

The Commission issued a notice of the Application on August 4, 2003.2 No request for a hearing was received. The Commission is filing a Notice of Appearance in the Proceeding, under Section 1109 of the Bankruptcy Code, contemporaneously with the issuance of this Order.

I. Background

A. Xcel System

Xcel holds the securities of six public-utility company subsidiaries that serve electric and/or natural gas customers in twelve states.3 These six utility subsidiaries (collectively, the "Utility Subsidiaries") are Northern States Power Company, a Minnesota corporation ("NSP-M"); Northern States Power Company, a Wisconsin corporation; Public Service Company of Colorado; Southwestern Public Service Company; Black Mountain Gas Company; and Cheyenne Light, Fuel and Power Company. As previously announced publicly, Xcel has entered into a contract to sell Black Mountain Gas Company.

Xcel also engages through subsidiaries (collectively, "Nonutility Subsidiaries") in various energy-related and nonutility businesses. The Nonutility Subsidiaries that are directly or indirectly owned by Xcel include: NRG;4 Seren Innovations, Inc., a provider of cable, telephone and high-speed internet access systems and an exempt telecommunications company under section 34 of the Act; e prime, inc., a marketer of electricity and natural gas; and Eloigne Company, an investor in projects that qualify for low-income housing tax credits.

NRG is an energy company primarily engaged in the ownership and operation of power generation facilities and the sale of energy, capacity and related products in the United States and abroad. NRG PMI, the energy marketing subsidiary of NRG, provides a full range of energy management services for NRG's generation facilities in its Eastern and Central regions.

B. Disclosure Statement

Under Section 1125 of the Bankruptcy Code, the Debtors may not solicit votes for acceptances of the Plan until the Bankruptcy Court approves the Disclosure Statement as containing information of a kind, and in sufficient detail, adequate to enable creditors to make an informed judgment whether to vote for acceptance or rejection of the Plan. The Bankruptcy Court held a hearing on the Disclosure Statement on June 30, 2003, and is continuing its review of the Disclosure Statement.

Upon receipt of requisite approvals of the Disclosure Statement, the Debtors will solicit votes on the Plan. Applicants state that the solicitation process is expected to take approximately 45 days. The Bankruptcy Court has scheduled a hearing on November 21, 2003 regarding confirmation of the Plan. The hearing will be continued to November 24, 2003, if necessary. Creditors and parties in interest will have an opportunity to object to the confirmation of the Plan at the confirmation hearing.

At the confirmation hearing, the Bankruptcy Court must determine whether the confirmation of the Plan meets the requirements of Section 1129 of the Bankruptcy Code. Among the requirements for confirmation of the Plan, are that the Plan: (i) is accepted by all impaired classes of claims and equity interests, or if rejected by an impaired class, that the Plan "does not discriminate unfairly" and is "fair and equitable" as to such class; (ii) is feasible;5 and (iii) is in the "best interests" of creditors and stockholders that are impaired under the Plan. If the Bankruptcy Court determines that the Plan meets the requirements of Section 1129, the Bankruptcy Court should confirm the Plan.

In connection with confirmation of the Plan, and at the confirmation hearing, the Bankruptcy Court will determine whether the Settlement Agreement, described in section I. C. 6a infra, is fair and reasonable. The determination will be made in connection with the Plan for the Debtors, which are parties to the Plan, and by separate motion under Bankruptcy Rule 9019 for the Non-Plan Debtors, which are not parties to the Plan and are identified in section I. C. 2 and 5 infra. Approval of the Settlement Agreement is a condition to confirmation of the Plan.

C. The Plan

1. Overview

The Plan includes the following components:

  • Xcel's ownership interest in NRG will be cancelled and ownership of NRG will vest in its creditors. The creditors' claims will be exchanged, on a pro rata basis, for 100 million shares of New NRG common stock.
     
  • Creditors will also receive a combination of debt and cash on a pro rata basis. Under the Plan, New NRG will issue to creditors $500 million of New NRG Senior Notes and Xcel will provide $640 million in cash to NRG for distribution to the creditors.
     
  • Xcel will pay an additional $112 million in cash to certain of NRG's bank creditors, outside of the Plan.
     
  • Xcel will receive releases from NRG and the creditors in consideration for the payments Xcel makes under the Plan.
     
  • NRG will provide Xcel a $10 million note to resolve all of Xcel's claims against NRG.

Upon implementation of the Plan, the ownership interests, direct and indirect, of Xcel in NRG and its subsidiaries will terminate. In addition, Xcel and its subsidiaries (other than NRG and its subsidiaries) (the "Xcel Entities") will have limited obligations going forward with respect to the Debtors. Xcel believes that its disaffiliation with the Debtors is beneficial to Xcel and its investors.6

2. Purposes

Applicants state that the Plan is structured to: (i) permit the Debtors (excluding the Non-Plan Debtors) to reorganize and emerge from bankruptcy in 2003; (ii) maximize the recovery of their claims by creditors of the Debtors; (iii) fix the exposure and/or commitment of Xcel to the Debtors and their creditors; and (iv) eliminate the direct and indirect equity ownership of Xcel in NRG and its subsidiaries.7

The Plan is intended to provide NRG with a capital structure that can be supported by cash flows from operations. To this end, NRG will reduce its debt and reduce its annual interest payments. NRG is restructuring its operations to become a domestic based owner-operator of a fuel-diverse portfolio of electric generation facilities engaged in the sale of energy, capacity and related products. NRG is working toward this goal by selective divestiture of non-core assets, consolidation of management, reorganization and redirection of power marketing philosophy and activities and an overall financial restructuring that will improve liquidity and reduce debt. NRG does not anticipate any new significant acquisitions or construction, and instead will focus on operational performance and asset management.8

NRG believes that consummation of the Plan will best facilitate its business and financial restructuring and is in its best interests, as well as those of its creditors and other parties in interest. NRG further believes that the Plan provides the best and promptest possible recovery to the holders of claims.9 In addition, Applicants state that the Plan is fair to Xcel and its investors. It simplifies Xcel's holding company structure and reduces Xcel's exposure to contingent liabilities. In particular, the reorganization will reduce Xcel's exposure to NRG and the creditors. It also reduces the possibility that Xcel's credit rating will be downgraded, and it will have a positive effect upon Xcel's access to the capital markets.

3. Tentative Settlement

The Plan incorporates the terms of a tentative settlement ("Tentative Settlement") announced on March 26, 2003 among NRG, Xcel and members of NRG's major creditor constituencies. The Tentative Settlement provides for payments by Xcel to NRG and its creditors of up to $752 million to settle claims of NRG and its creditors against Xcel ("Xcel Contribution"). The Tentative Settlement is discussed further in section I. C. 6 infra. For the reasons discussed in section I. C. 4 infra, Xcel will not make the Xcel Contribution if NRG does not emerge from bankruptcy by December 15, 2003. 10

4. Timing Considerations

Xcel has conditioned its Tentative Settlement on NRG's emergence from bankruptcy by December 15, 2003. A significant portion of the cash that Xcel will use to fund the Xcel Contribution is to be derived from a worthless stock deduction that Xcel expects to recognize as a result of the loss of its investment in NRG. The loss is anticipated to arise when Xcel's existing NRG common stock is cancelled as part of the Plan. If the Plan becomes effective and NRG emerges from bankruptcy in 2003, Xcel would expect to receive a cash refund during the first part of 2004 of taxes paid in 2001 and 2002. In contrast, if NRG emerges from bankruptcy in 2004, no refund would be received until 2005 and the refund, when received, would be significantly smaller. For this reason, Xcel's willingness to make the Xcel Contribution is conditioned on NRG's emerging from bankruptcy in 2003.

5. Non-Plan Debtors

Certain subsidiaries of NRG are not parties to the Plan.11 Applicants explain that, in view of the variety of issues involving the restructuring of the Northeast Debtors and South Central Debtors, it was questionable whether NRG could address these Debtors in the Plan and still emerge from bankruptcy by December 15, 2003.12 NRG decided that the creditors' interests were best served by omitting these Debtors from the Plan. Applicants state that this decision did not harm the interests of the creditors of the Northeast Debtors and South Central Debtors.13

6. Xcel's Obligations under the Plan and Settlement Agreement
a. Settlement Agreement

In connection with the implementation of the Plan, Xcel will enter into a settlement agreement ("Settlement Agreement") with NRG. The Settlement Agreement constitutes the definitive documentation in respect of the Tentative Settlement terms agreed to in the Plan Support Agreement.

(1) Payments by Xcel

Under the Settlement Agreement and the Plan, Xcel will pay up to $752 million to NRG and its creditors to settle all claims of NRG against Xcel, including all claims under the Support Agreement,14 and in return for releases of claims against Xcel from NRG, the other Debtors in the Proceedings and NRG's creditors.

In general terms, the Settlement Agreement provides for: (i) payment by Xcel of $250 million in exchange for the release of claims and causes of action which NRG may have in respect of the Support Agreement; and (ii) payment by Xcel of up to $390 million (the "Release-Based Amount") in exchange for releases of claims and courses of action which NRG's creditors may have against Xcel.15

In addition, under a Separate Bank Release Agreement between Xcel and the lenders under the NRG Credit Facilities, defined in section I. 8. b infra, Xcel would agree to pay $112 million (the "Separate Bank Settlement Payment") for the benefit of the lenders under the NRG Credit Facilities in exchange for such lenders' release of claims against Xcel.

The schedule for the payments by Xcel is as follows:

  • $350 million would be paid at the later of (i) 90 days after entry of the confirmation order by the Bankruptcy Court and (ii) the business day following the Effective Date (the "Xcel Payment Date"). Of this amount, $112 million will constitute payment of the Separate Bank Settlement Payment. It is expected that this payment would be made during the first quarter of 2004. If Xcel's credit rating is downgraded by Standard & Poor's Rating Service ("Standard & Poors") or Moody's Investors Service, Inc. ("Moody's") (a "Downgrade"), Xcel may pay up to $150 million of the initial payment in its common stock,16 provided that the creditors may elect under certain circumstances to receive payment of cash at such time that Xcel's credit ratings improve to their prior levels for not less than 120 consecutive days.
     
  • An additional $50 million would be paid on the later of the Xcel Payment Date and January 1, 2004, and all or any part of such payment could be made, at Xcel's election, in Xcel common stock.
     
  • Up to $352 million would be paid starting on the later of the Xcel Payment Date and April 30, 2004, except that to the extent that Xcel had not received at such time cash refund of taxes associated with the loss on its investment in NRG equal to the portion of the $352 million due at such time, the difference would be due 30 days later.17 In addition, if there is a Downgrade, the final payment by Xcel would be extended to the later of June 30, 2004 or 60 days after the initial payment is due.

(2) Release of Guarantees

The Settlement Agreement also provides that on the Effective Date all guarantees, equity contribution obligations, indemnification obligations, arrangements whereby Xcel has posted cash collateral, and all other credit support obligations with respect to NRG and/or its subsidiaries will either be terminated or Xcel and NRG shall enter into other satisfactory arrangements with respect to such obligations (with Xcel having no further liability for such obligations or arrangements) and all cash collateral posted by Xcel will be returned to Xcel on the Effective Date. 18

7. Outstanding Securities of NRG Applicants

The following provides a summary of the outstanding securities issued by, or guaranteed by, the NRG Applicants.

a. NRG:
  • $1 billion credit facility ("NRG Unsecured Revolver") with ABN Amro Bank, N.V., as administrative agent, and various other lending institutions. The facility matured on March 7, 2003 and is currently fully drawn. As of March 31, the aggregate outstanding amount was $1 billion. Aggregate accrued and unpaid interest and fees were approximately $48.1 million.
     
  • $125 million letter of credit facility ("NRG Letter of Credit Facility") with Australia and New Zealand Banking Group Limited, as agent, and various other financial institutions. The facility has a maturity date of November 30, 2004. As of May 14, 2003, the aggregate outstanding amount was $104.6 million. There was an aggregate of approximately $1.5 million of unpaid fees and expenses.
     
  • Cash collateralized bilateral letters of credit (the "Bilateral LCs") with Australia and New Zealand Banking Group Limited. As of May 14, 2003, the aggregate outstanding amount was $21.8 million and there was an aggregate of approximately $1,350 of unpaid fees and expenses.
     
  • NRG Senior Notes. As of March 31, 2003, the aggregate outstanding principal amount was approximately $2.2 billion and an aggregate of approximately $159.2 million of accrued and unpaid interest, excluding certain of the notes.
     
  • $240 million of 8% Remarketable or Redeemable Securities due November 1, 213, with a remarketing date of November 1, 2003 (the "NRG 13 ROARS"). As of March 31, 2003, the aggregate outstanding principal amount was $240 million and there was an aggregate of approximately $17.9 million of accrued and unpaid interest.
     
  • $250 million of 8.7% Remarketable or Redeemable Securities due March 15, 2005 (the "NRG 05 ROARS") issued by a Trust. As of March 31, 2003, the aggregate outstanding principal amount was $250 million and there was approximately $21.4 million of accrued and unpaid interest.
     
  • On March 13, 2001, NRG completed the sale of 11.5 million equity units for an initial price of $25 per unit. Each consists of a corporate unit comprising a $25 principal amount of NRG's senior debentures (the "NRG 06 Debentures") and an obligation to acquire shares of Xcel common stock no later than May 18, 2004.19 As of March 31, 2003, the aggregate outstanding principal amount was $285.7 million and there was an aggregate of approximately $11.8 million of accrued and unpaid interest. The Settlement Agreement between NRG and Xcel requires that the order of the Bankruptcy Court confirming the Plan confirm that the right and obligation of any holder of an equity unit to acquire shares of Xcel terminate as of the Petition Date. Pursuant to an order of the Bankruptcy Court dated July 16, 2003, the right and obligation of the holders of the NRG 06 Senior Debentures to purchase common stock of Xcel was deemed to have been terminated as of the Petition Date.

All of the common stock of NRG, comprising one share of NRG common stock and three shares of Class A common stock, is owned by Xcel Wholesale.

b. NRG Finance Company I LLC

NRG FinCo has a $2 billion credit facility (the "NRG FinCo Secured Revolver," and collectively with the NRG Unsecured Revolver and the NRG Letter of Credit Facility, the "NRG Credit Facilities") with Credit Suisse First Boston, an administrative agent, various other lending institutions and various NRG-affiliated sub-borrowers. The lenders accelerated the NRG FinCo Secured Revolver on November 6, 2002. As of the Petition Date, the aggregate outstanding amount was approximately $1.1 billion and there was an aggregate of approximately $58 million of accrued and unpaid interest and commitment fees. In addition, holders have unsecured recourse claims against NRG in the amount of $840 million (plus post-petition costs).

8. Treatment of Creditors under the Plan

The Plan generally classifies the creditors of, and other investors in, the NRG Applicants into several classes. In general terms, the Plan provides for the treatment of the creditors of the NRG Applicants, as follows:

  • Holders of priority claims will receive payment in full;
     
  • Holders of unsecured claims against any NRG Applicant, which are equal to or less than $50,000 or are reduced to $50,000 at the election of the holder of such claim, will receive cash in the amount of such claim;
     
  • Holders of secured claims against the NRG Applicants will receive, at the Debtor's option, either the collateral securing such claim or cash in an amount equal to the net proceeds realized upon the sale of such collateral, or as may otherwise be agreed upon by the Debtors and the claimant;
     
  • Each holder of NRG's unsecured debt and claims will receive its pro rata share of senior notes of Reorganized NRG20 (subject to allocations to holders of unsecured claims against NRG PMI), common stock of Reorganized NRG ("New NRG Common Stock") and, if such holder makes the election on its ballot to release Xcel from claims or such holder is bound by a final order of the Bankruptcy Court to releases of claims against Xcel as provided in the Plan, equal to its pro rata share of the Release-Based Amount (as defined supra in section I.C.6.a (1));
     
  • Each of the holders of unsecured claims against NRG PMI will receive its pro rata share of senior notes of Reorganized NRG and New NRG Common Stock;
     
  • Intercompany claims among the Debtors and between the Debtors and certain of NRG's other subsidiaries will be divided into two classes: (1) claims that will be cancelled without any distribution to the holders and (2) claims that will be reinstated on the Effective Date (as described below);
     
  • Any and all outstanding equity interests in NRG will be canceled without consideration; and
     
  • NRG will retain its 100% ownership in NRG PMI.

The Plan contains a mechanism that would allow holders of unsecured debt and claims against NRG and NRG PMI to elect to receive equity instead of cash and/or debt, or cash and/or debt instead of equity. Reallocation will occur to the extent there are willing parties on each side.21

9. Claims of Xcel and the Xcel Entities

Generally, the claims of the Xcel Entities against the Debtors would receive one of two different types of treatment under the Plan. As to claims of approximately $32 million arising prior to January 31, 2003 for the provision of intercompany goods and services under the Service Agreement and for amounts paid by Xcel under guarantees, Xcel has agreed to settle such claims in exchange for a promissory note to be issued by NRG to Xcel in the original principal amount of $10 million ("Xcel Note").22

After January 31, 2003, NRG will be responsible only for amounts billed under the Services Agreement related to corporate insurance obtained for the benefit of NRG and other services requested by NRG. Otherwise, any intercompany claims of Xcel against NRG or any of its subsidiaries arising from the provision of intercompany goods or services after January 31, 2003 will be paid in full in cash in the ordinary course. Payments on Guarantees and indemnities made by Xcel after January 31, 2003 will be reimbursed in full by NRG on the Effective Date of the Plan.

The ownership interests, direct and indirect, of Xcel in NRG and its subsidiaries will terminate.

10. New Securities of NRG Applicants

The new stock and other securities to be issued by the NRG Applicants under the Plan are as follows:

  • The New NRG Common Stock shall consist of 100,000,000 shares of new common stock, par value $0.01 per share. The New NRG Common Stock (subject to dilution for management incentive plan) will be distributed on a pro rata basis to holders of NRG's unsecured debt and claims and holders of unsecured claims against NRG PMI;
     
  • Reorganized NRG will also issue senior notes which shall (i) be in an initial principal amount of $500,000,000, (ii) accrue interest at a rate of 10% per annum if payable in cash or 12% per annum if payable in kind, and (iii) mature on the seventh anniversary of the issuance. The senior notes are to be distributed on a pro rata basis to holders of NRG's unsecured debt and claims and holders of unsecured claims against NRG PMI; and
     
  • The Xcel Note shall (i) be a non-amortizing promissory note in an initial principal amount of $10 million, (ii) accrue interest at a rate of 3% per annum and (iii) mature 2-1/2 years after the Effective Date of the Plan.
11. Tax Matters Agreement

NRG and its direct and indirect subsidiaries will not be reconsolidated with Xcel or any of its other affiliates for federal income tax purposes at any time or otherwise be entitled to the benefits of the Tax Allocation Agreement with respect to federal income taxes at any time after their March 2001 disaffiliation. 23 Likewise, Xcel alone will be entitled to the tax benefits associated with the worthless stock deduction that Xcel expects to claim with respect to its investment in NRG.

Xcel and NRG and certain of their respective affiliates, may enter into a tax matters agreement ("Tax Matters Agreement") that addresses liability for any unpaid taxes of NRG and Xcel for periods during which NRG and Xcel were part of the same consolidated, combined or unitary tax group, entitlement to any tax refunds for such periods, the control of contests for such periods, cooperation with respect to audits and such other matters as would be customary in a tax matters agreement between similarly-situated corporations. Consistent with the division of rights and obligations implemented in the Tax Allocation Agreement, the Tax Matters Agreement will require Xcel to make certain payments to NRG in respect of tax benefits realized by Xcel as a result of its use of NRG's losses during (i) the pre-March 2001 period when NRG was part of Xcel's consolidated federal tax group, and (ii) the pre-May 2003 period when NRG was part of Xcel's Minnesota unitary tax group. Xcel's payments will be adjusted to reflect certain audit adjustments to NRG's taxable federal and Minnesota income during these periods. It is currently estimated that Xcel could be required to make payments to NRG in an amount of up to $15 million within two business days of the Effective Date. In addition, pursuant to the Tax Matters Agreement, Xcel will pay to NRG any additional tax benefits realized by Xcel derived from a carryback of NRG's stand-alone 2002 loss. Pursuant to the Tax Matters Agreement, any such benefits will be paid to NRG following realization by Xcel. The Tax Matters Agreement will be substantially in the form attached to the Application as Exhibit 4.

12. Employee Matters Agreement

Xcel and NRG will enter into an Employee Matters Agreement under which various obligations with respect to employees and benefit plans will be allocated between Xcel and NRG. The Employee Matters Agreement will be substantially in the form attached to the Application.

13. Conditions to Xcel's Obligations

Xcel's obligations under the Settlement Agreement and the Plan, including its obligations to make the payments discussed above, will be contingent upon, among other things, the following:

  • Effective date of the Plan occurring on or prior to December 15, 2003;
     
  • The receipt of releases in favor of Xcel from holders of at least 85% of the general unsecured claims held by NRG's creditors, unless third party releases and injunctions for the benefit of Xcel and its subsidiaries are approved pursuant to the final order of the Bankruptcy Court in form acceptable to Xcel;
     
  • Approval of the final Plan by the Bankruptcy Court and related documents containing terms satisfactory to Xcel, NRG and various groups of NRG's creditors; and
     
  • Receipt by Xcel of all necessary regulatory approvals.24
14. Post-Reorganization Ownership Structure

Under the Plan, the pre-petition shares of common stock issued by NRG and held indirectly by Xcel, through Xcel Wholesale, shall not receive any distributions under the Plan, and the shares shall be canceled and extinguished on the effective date of the Plan. As a consequence, Xcel's pre-petition shares in NRG will no longer have any claim to voting rights, dividends or any other rights with respect to NRG. The existing creditors of NRG will then hold the entire equity interest in Reorganized NRG. NRG will continue to own 100% of the equity ownership of NRG PMI.

II. Requested Authorizations

Sections 11(f) and 11(g) and rules 60, 62, 63 and 64 are applicable to the Plan. Specifically, Applicants seek Commission approval of the Plan under section 11(f) of the Act25 and authorization under the Act, to the extent applicable for:

  • Payment by Xcel of up to $752 million for the benefit of NRG and its creditors pursuant to the Plan, the Settlement Agreement and the Release-Based Amount Agreement;
     
  • Allocation of tax benefits and liabilities by and among Xcel and the Excel Entities and NRG and its subsidiaries as, and to the extent, provided in the Tax Matters Agreement;
     
  • Allocation of obligations in respect of employee benefit plans by and among Xcel and NRG as, and to the extent, provided in the Employee Matters Agreement;
     
  • Issuance of common stock (if any) by Xcel in an aggregate amount not to exceed $200 million, pursuant to the terms of the Settlement Agreement;26
  • Cancellation of Xcel's equity ownership interests in NRG; and

  • Such other actions as may be necessary to consummate the Plan.

Applicants further seek Commission authorization under section 11(g) of the Act and related rules to disseminate the Plan, together with the Disclosure Statement, to parties of interest in order to solicit votes to approve the Plan. Applicants request that the Commission issue a report pursuant to section 11(g) of the Act to accompany the solicitation.26

Applicants request authorization under section 6(a) of the Act to modify the terms of NRG's securities, to reorganize NRG, as and to the extent contemplated by the Plan, and to issue new securities of Reorganized NRG.28 Applicants also request authorization under section 6(a) of the Act for Xcel to issue common stock, as and to the extent provided in the Settlement Agreement.29 Commission approval of the issuance by NRG of securities contemplated by the Plan is not required.30

As noted above, Xcel and NRG agree to indemnify each other with respect to certain obligations and liabilities pursuant to the Tax Matters Agreement and the Employee Matters Agreement. In addition, in consideration for its payment of up to $640 million, Xcel is obtaining releases from the Debtors and certain of their creditors from various claims against the Xcel Entities, including their claims arising under the Support Agreement and from specified causes of action, and release of the Guarantees and indemnities. Also, in consideration for its payment of the Separate Bank Settlement Payment of $112 million, Xcel is obtaining releases from specified claims and causes of action from the lenders receiving such payment. Applicants state that the terms and conditions and conditions of the Tax Matters Agreement and the Employee Matters Agreement, while specific to the circumstances, are typical of those associated with divestitures of business units. Such agreements are entered into in this matter solely to facilitate the divestiture of NRG and to preserve the responsibility for these costs that NRG bears as a subsidiary of Xcel.

The cross-indemnities at issue are designed to untangle the network of obligations and exposure to which Xcel is subject under the present arrangements and thus facilitate the disaffiliation of the Debtors from Xcel. The Commission considers the substance of a transaction over its form.31 The reciprocal arrangements in this matter do not involve a proposal to borrow or to receive "any extension of credit or indemnity" within the meaning of the Act.32

III. Discussion

The Commission has reviewed the proposed transactions and finds that the applicable statutory standards and rules are satisfied. The Commission further finds that approval of the Application would likely not be detrimental to the protected interests under the Act, i.e., the public interest and the interests of investors and consumers.

Section 11(f) of the Act does not provide a specific standard for the Commission to use in analyzing a plan of reorganization. Instead, in approving a plan of reorganization, the Commission must conclude that the plan meets any applicable requirements of the Act.33 Were they to be considered in isolation, various specific statutory provisions would be applicable to various of the transactions included as part of the Plan. For example, section 7(d) permits an issue or sale of a security if, among other things, the Commission does not find that the terms and conditions are detrimental to the interests protected by the Act. As another example, section 7(e) permits the exercise of a right to alter the priorities, preferences, voting power, or other rights of the holders of an outstanding security if the Commission does not find that the exercise of the privilege "will result in an unfair or inequitable distribution of voting power among holders of the securities . . . or [be] otherwise detrimental to" the protected interests." As we have done in prior bankruptcy and reorganization matters, however, we believe it is more appropriate to consider the Plan in its entirety in the context of the goals and policies of the Act rather than to discuss individual transactions.34 Accordingly, the Commission discusses this matter as a whole.

For the reasons discussed below, it appears that the Plan is fair to investors and consumers.35 Applicants state that the continuation of the Debtors in bankruptcy results in uncertainty for the creditors of the Debtors, as well as for the investors and creditors of Xcel. Applicants assert that the Plan will provide substantial benefits to Xcel by resolving numerous disputes on terms that Applicants believe to be fair to both investors and customers. In addition, the Plan will permit NRG to emerge from bankruptcy as promptly as possible, to pay their creditors, and to pursue ongoing business objectives free from the burdens and constraints of Chapter 11.

A. Xcel

The Settlement Agreement and the Plan appear to be a reasonable approach adopted by Xcel's management to resolve NRG's bankruptcy. Moreover, the Settlement Agreement and Plan appear to be fair to Xcel and its investors. Implementation of the Plan would simplify Xcel's holding company structure, free management from significant commitments of time to the Debtors' affairs, and eliminate or minimize the burden of a number of significant contingent liabilities.

Xcel has devoted significant resources and time to the enterprise during the course of its investment in NRG. The holding company's level of commitment will be radically reduced, and soon eliminated, upon successful implementation of the Plan.

Xcel's contingent risk exposure is reduced under the Plan. The Plan provides that on the Effective Date all guarantees, equity contribution obligations, indemnification obligations, arrangements whereby Xcel has posted cash collateral, and all other credit support obligations with respect to NRG and/or its subsidiaries will either be terminated or Xcel and NRG shall enter into other satisfactory arrangements with respect to such obligations (with Xcel's having no further liability for such obligations or arrangements) and all cash collateral posted by Xcel will be returned to Xcel on the Effective Date. In addition, the Plan provides for the release of Xcel from its obligation to provide up to $300 million to NRG under the Support Agreement and the release of Xcel by the Debtors, their affiliates, and certain creditors from specified claims and causes of action.

The process of reducing Xcel's exposures arising from its various roles has come about through negotiations with NRG, the Ad Hoc Creditors Committees and others. Xcel has sought to reduce potential claims upon, and liabilities of, Xcel and the Xcel Entities based upon their respective roles as stockholder, potential financier, guarantor, indemnitor, contract party, etc. of the Debtors. Xcel's ability to move out of its historical roles and remove its credit exposure to the bankrupt entities is conditioned upon its compliance with the obligations contemplated by the Plan and the Settlement Agreement.

The obligations of Xcel under the Settlement Agreement and the Plan provide a means to remove Xcel from prior, much more expansive obligations and exposures. Absent the Settlement Agreement, for example, Xcel believes that NRG and/or its creditors would seek to compel the holding company to fund its $300 million obligation under the Support Agreement. In addition, Xcel could be required to honor its obligations under guarantees to NRG affiliates, which, as noted previously, aggregated approximately $108 million (face amount) as of July 31, 2003. Further, absent the Settlement Agreement, Xcel expects that NRG and its creditors would argue that Xcel must consolidate NRG and its subsidiaries for federal income tax purposes. In this event, Xcel would not realize the tax benefits of approximately $811 million relating to the worthless stock deduction; furthermore, Xcel would owe this amount, or perhaps a larger amount, to NRG and its subsidiaries under the Tax Allocation Agreement.

Another significant benefit of the Settlement Agreement and the Plan to Xcel and, indirectly, to the Utility Subsidiaries is the reduction of the uncertainty regarding Xcel's exposure to NRG and its creditors. Absent an agreement, Xcel faced the almost certain prospect of protracted litigation from NRG creditors seeking billions of dollars from Xcel based on attempts to pierce the corporate veil between the companies or to consolidate Xcel with NRG substantively. Furthermore, the failure to reach a settlement or further delay would likely have resulted in a credit downgrade at Xcel and, collaterally, at the Utility Subsidiaries.36 Xcel also believes that the settlement evidenced by the Settlement Agreement and the Plan has affected positively the price of its common stock and its access to the capital markets. Applicants state that the Plan, and the related transactions, provide the best opportunity for each of the stakeholders to obtain value, and/or limit exposure, under the circumstances.

In addition, the consummation of the Settlement Agreement and emergence of NRG from bankruptcy will significantly enhance Xcel's financial position. Before it filed for bankruptcy on May 14, 2003, NRG was consolidated on the financial statements of Xcel. As a result, charges and losses incurred by NRG prior to May 14, 2003 were reflected in their entirety on the financial statements of Xcel, thereby reducing the consolidated retained earnings of Xcel. As of May 14, 2003, Xcel had recognized NRG losses to the point where they exceeded the investment made in NRG to date by $867 million, $115 million more than Xcel's financial commitment to NRG under the Tentative Settlement of $752 million.

Upon the bankruptcy filing by NRG, Xcel ceased to show NRG as a consolidated subsidiary and began to account for NRG on the equity method on its financial statements. Under the equity method, Xcel is limited in the amount of NRG's losses that it must record after the bankruptcy date. These limitations provide for loss recognition until Xcel's investment is written off to zero, and beyond if financial commitments exist beyond amounts already invested. Because Xcel's negative investment in NRG of $867 million at the time of NRG's bankruptcy filing was greater than Xcel's financial commitment to NRG of $752 million, Xcel will not be required to record any additional NRG losses. The NRG losses recognized in excess of the financial commitment to NRG (i.e., $115 million) will be reversed and recognized as a non-cash gain upon NRG's emergence from bankruptcy.

Xcel will also realize tax benefits of approximately $275.9 million associated with Xcel's settlement with NRG. These tax benefits will be accrued at the time that such benefits are considered likely to be realized in the foreseeable future. Xcel's obligations under the Settlement Agreement are subject to the successful completion of the Chapter 11 confirmation process. It is expected that confirmation will occur in the fourth quarter of 2003. The approval of the Settlment Agreement, as part of the Plan confirmation, will provide sufficient likelihood of realization of tax benefits to support the accrual of the $275.9 million, which is in addition to the $811 million of tax benefits previously accrued by Xcel.

Finally, Xcel seeks authorization to issue common stock, as and to the extent provided in the Settlement Agreement. Under section 7(d)(1) of the Act, we generally consider whether a new security is reasonably adapted to the security structure of the issuer and other system companies. Applicants state that, as of June 30, 2003, Xcel's common equity ratio was approximately 39%. On a pro forma basis, to give effect to the proposed issuances of common stock, Xcel's common equity ratio would increase to approximately 39.8%. As of June 30, 2003, the common equity ratios of each of the principal subsidiaries of Xcel were in excess of 44%. None of such ratios will be negatively affected by the proposed issuance. No adverse finding under section 7(d)(1) of the Act is required.

B. NRG

It also appears that there is no basis to conclude that the Plan and related transactions are unreasonable from the perspective of investors in the NRG Applicants.37 The NRG Applicants are currently unable to make the payments required under their existing debt instruments. Under the Plan and related transactions, the NRG Applicants will be permitted to implement a business plan that presents the opportunity for continued operations. By reducing costs, reconfiguring operations and converting existing debt into equity, the NRG Applicants have a better opportunity to generate cash for payment when due of its restructured debt and for distribution on equity.38 Furthermore, with the cancellation of Xcel's equity interest in NRG, the NRG Applicants will no longer be subject to the regulatory constraints imposed on them by the Act as an associate company in a registered holding company system. Based upon an analysis contained in the Disclosure Statement, the Debtors believe that holders of claims will receive greater value as of the Effective Date under the Plan than they would receive in a liquidation under chapter 7 of the Bankruptcy Code.39 Thus, creditors of NRG can potentially experience significantly better recovery under the Plan than under liquidation. In addition, the creditors will obtain the entire equity ownership of NRG, thus enhancing their ability to affect management of the Debtors.

V. Conclusion

The Commission has carefully examined the above transactions as proposed by the Applicants and has concluded, based on the complete record before it, that the applicable standards of the Act are satisfied and that no adverse findings are warranted. In particular, the Commission does not find that the security issuances are not reasonably adapted to Applicants' earning power, or that the indemnities contemplated by the Plan give rise to the extensions of credit that the Act was intended to prohibit.

Applicants state that fees, commissions and expenses in the estimated amount of $100,000 are expected to be incurred in connection with this Application.40 The change of ownership of NRG and resulting indirect change in the ownership of such subsidiaries could require the approval of the Federal Energy Regulatory Commission ("FERC"). Applicants state that an application for a change in the ownership of NRG has been submitted to the FERC under Section 203 of the Federal Power Act. Applicants state that, other than authorization of the FERC, no other state or federal regulatory authorization not previously discussed is necessary in order to implement the transactions contemplated by the Plan.

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 or ordered by the Commission. Upon the basis of the facts in the record, it is hereby found that the applicable standards of the Act and rules under 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, except as to matters as to which jurisdiction has been reserved, 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. Further, because certain contemplated transactions may be accomplished over a period of time after this order is issued, authorization isgranted to implement the proposed transactions as described in the Application.

IT IS FURTHER ORDERED, that jurisdiction is reserved, pending the completion of the record, over the payment by Xcel of any fees or expenses in excess of $19 million.

By the Commission.


Margaret H. McFarland
Deputy Secretary



The Plan and the third amended disclosure statement ("Disclosure Statement") are included in the Application.

A holder of a claim that has accepted the Plan shall be deemed to have accepted the Plan as altered, amended or modified, if the proposed alteration, amendment or modification does not materially and adversely change the treatment of the claim of such holder. Applicants state that modification of or amendments to the Plan will be promptly filed with the Commission by amendment to the Application.

Xcel has indemnified various sureties that issued bonds on behalf of Dunkirk Power LLC ("Dunkirk") and Huntley Power LLC ("Huntley"), Debtors in the Proceedings, but neither of these companies is an applicant because neither is a party to the Plan. Other Non-Plan Debtors are identified in I. C. 3 infra.

Applicants state that NRG intends to file either separate plans or one or more joint plans of reorganization for the other Non-Plan Debtors as soon as possible.

If Xcel obtains a full third party release pursuant to a final order of the Bankruptcy Court as proposed by the Plan, Xcel will pay the entire $390 million of Release-Based Amount to NRG for distribution to the unsecured creditors of NRG, as provided in the Plan. If the third party release is not so approved, Xcel will only consummate a settlement pursuant to a "check the box" release mechanism. Subject to the terms of an agreement between NRG and Xcel, in a form to be attached to the Settlement Agreement, which will specify how to calculate the Release-Based Amount payable by Xcel to NRG at any time (the "Release-Based Amount Agreement"), the Release-Based Amount will be distributable pro rata to each holder of unsecured claims against NRG that checks the appropriate box on the relevant ballot indicating that such holder is releasing Xcel and its affiliated parties. Creditors not checking the box on their relevant ballots will not receive any portion of the Release-Based Amount; instead, the aggregate share of the Release-Based Amount of those creditors will be credited against and deducted from Xcel's obligation in respect of the Release-Based Amount.

In addition to the foregoing agreements, Xcel entered into certain third-party agreements for the benefit of NRG, including but not limited to the issuance of guarantees to trading counterparties of NRG PMI as credit support for trading transactions of NRG PMI (the "Guarantees"). The outstanding face amount of such Guarantees as of June 30, 2003 was approximately $226 million. Since then, approximately $71 million (face amount) of Guarantees have expired and/or terminated without any residual liabilities. Xcel has paid $26.6 million to settle obligations under Guarantees with a face amount of $47 million. These payments are a liability of NRG under the Settlement Agreement. As of July 31, 2003, there were $108 million (face amount) of Guarantees outstanding. The Applicants anticipate that the outstanding Guarantees will result in minimal, if any liability or payment obligation, based on, among other things, (i) current mark-to-market values of the contracts which the Guarantees secure, which are positive to NRG; and (ii) prepayments by NRG to certain vendors that result in no risk of liability under the Guarantees. Xcel has also guaranteed certain obligations of NRG under employment agreements for three current and/or former employees of NRG.

Xcel has indemnified various sureties that issued bonds on behalf of NRG and certain of its subsidiaries, including certain of the Debtors. The aggregate amount of bonds issued for the benefit of Debtors that are identified by Xcel as of June 30, 2003 was approximately $3.75 million. In addition, NSP-M has retained liability under service contracts, loan facilities and other related agreements relating to solid waste resource processing facilities previously transferred by NSP-M to NRG.

The acquisition of the Xcel Note by Xcel is exempt under rule 40 from the requirement of section 9(a)(1) of the Act that a registered holding company obtain an order of the Commission approving the acquisition of a security under the standards of section 10. Rule 40(a)(3) in pertinent part makes section 9(a) inapplicable to an acquisition from a non-affiliate of securities received as the result of a reorganization.


http://www.sec.gov/divisions/investment/opur/filing/35-27736.htm

Modified: 10/14/2003