SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27791; 70-10160)
Ohio Valley Electric Corporation
Order Authorizing the Issuance of $200 Million Principal Amount of Short-Term Debt; and Reservation of Jurisdiction
December 30, 2003
Ohio Valley Electric Corporation ("OVEC"), Piketon, Ohio, an electric public utility subsidiary as defined under the Public Utility Holding Company Act of 1935, as amended ("Act"), of American Electric Power Company, Inc. ("AEP"), Allegheny Energy, Inc. ("Allegheny"), and FirstEnergy Corporation ("FirstEnergy"), each a registered public utility holding company under the Act, has filed with the Securities and Exchange Commission ("Commission") a declaration ("Declaration") under sections 6 and 7 of the Act and rule 54 under the Act. A notice of the Declaration was issued on November 21, 2003 (Holding Company Act Release No. 35-27767).
Description of Proposed Transaction
By order dated December 6, 1999 (Holding Company Act Release No. 35-27109), OVEC was authorized to incur short-term indebtedness through the issuance and sale of notes to banks or other financial institutions in an aggregate principal amount not to exceed $100 million outstanding at any one time, from time-to-time, through December 31, 2003, provided that no note would mature later than June 30, 2004.
OVEC requests authorization to incur short-term indebtedness through the issuance and sale of notes ("Notes") to banks or other financial institutions in an aggregate principal amount not to exceed $200 million outstanding at any one time, from time-to-time, through December 31, 2006, provided that no Note shall mature later than June 30, 2007. OVEC requests that the Commission reserve jurisdiction over the issuance of $100 million principal amount of Notes, out of the $200 million principal amount of debt authority requested, until completion of the record.
OVEC and its wholly-owned subsidiary, Indiana-Kentucky Electric Corporation, own two generating stations located in Ohio and Indiana with a combined electric production capability of approximately 2,256 megawatts. OVEC is owned directly or indirectly by several registered holding companies and other utility holding companies that are not registered under the Act, as set forth below:
The operation of OVEC's generating stations requires the storage of substantial quantities of coal to ensure the availability of power to its customers. OVEC has used short term debt to: (1) finance the coal inventory at its plants; (2) purchase SO2 allowances; (3) purchase material supplies and inventory; (4) provide interim financing of capital improvements pending the issuance of long-term debt; and (5) for cash management to pay general obligations. The proceeds of the short-term debt incurred by OVEC will be used to pay for these and other general obligations and for other corporate purposes.
The Notes will mature not more than 365/366 days after the date of issuance or renewal, provided that no Note will mature later than June 30, 2007. Notes will be offered at terms consistent with those of similar companies and will bear interest at an annual rate not greater than the prime commercial rate of Citibank, N.A. (or any successor) in effect from time-to-time. Any credit arrangements may require payment of a fee that is not greater than ½ of 1% of the size of the line of credit made available by the bank and the maintenance of additional balances of not greater than 20% of the line of credit. Any other line of credit fees will be consistent with fees paid for like transactions. The maximum effective annual interest cost under the above arrangements, assuming full use of the line of credit, will not exceed 125% of the prime commercial rate in effect from time to time or not more than 7.5% on the basis of a prime commercial rate of 6%.
OVEC's generating stations produce low cost power that is committed for sale to its owners or their affiliates ("Sponsoring Companies") in accordance with the terms of an Inter-Company Power Agreement ("Power Agreement"). The Sponsoring Companies are entitled to the specified percentage of OVEC's net electrical output set forth below and are obligated to pay as a demand charge for their entitlement the same percentage of all of OVEC's costs of owning, operating and maintaining its generation facilities, including amounts sufficient to cover amortization, interest expenses and other costs associated with OVEC's financings.
As of September 30, 2003 OVEC's consolidated capitalization consisted of 97.2% debt and 2.8% common equity and retained earnings (consisting of 100,000 shares of common stock). Maintaining a relatively low common equity ratio lowers OVEC's cost of capital and allows OVEC to sell electricity to the Sponsoring Companies at a lower cost. OVEC's debt is not rated. OVEC is not consolidated with AEP, FirstEnergy or Allegheny for GAAP or financial reporting purposes, and they account for OVEC on a cost basis. As such, the amount of their original investment in OVEC does not change. Instead, OVEC pays quarterly dividends to its owners.
Rule 54 Discussion
The proposed transaction is subject to rule 54. Rule 54 provides that, in determining whether to approve the issue or sale of any securities for purposes other than the acquisition of any exempt wholesale generator ("EWG") or foreign utility company ("FUCO") or other transactions unrelated to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs if the requirements of rule 53(a), (b) and (c) are satisfied. Under rule 53(a), the Commission shall not make certain specified findings under sections 7 and 12 in connection with a proposal by a holding company to issue securities for the purpose of acquiring the securities of or other interest in an EWG, or to guarantee the securities of an EWG, if each of the conditions in paragraphs (a)(1) through (a)(4) of rule 53 are met, provided that none of the conditions specified in paragraphs (b)(1) through (b)(3) of rule 53 exists. Set forth below is a discussion of the compliance with rule 53 for each of AEP, Allegheny and FirstEnergy.
AEP consummated the merger with Central and South West Corporation, now AEP Utilities, Inc. ("CSW"), on June 15, 2000 in accordance with a Commission order dated June 14, 2000 (Holding Company Act Release No. 35-27186), which authorized AEP to invest up to 100% of its consolidated retained earnings in EWGs and FUCOs, with consolidated retained earnings to be calculated on the basis of the combined consolidated retained earnings of AEP and CSW ("Rule 53(c) Order").
AEP currently meets all of the conditions of rule 53(a), except for clause (1). At September 30, 2003, AEP's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $1.724 billion, or about 77.5% of AEP's "consolidated retained earnings," also as defined in rule 53(a)(1), for the four quarters ended September 30, 2003 ($2.226 billion). With respect to rule 53(a)(1), however, the Commission determined in the Rule 53(c) Order that AEP's financing of investments in EWGs and FUCOs in an amount greater than the amount that would otherwise be allowed by rule 53(a)(1) would not have either of the adverse effects set forth in rule 53(c).
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 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, none of the circumstances described in rule 53(b)(1) or (3) has occurred or is continuing.
The circumstances described in rule 53(b)(2) have occurred. As a result of the recording of a loss with respect to impairment charges within the last year, AEP's consolidated retained earnings declined. The average consolidated retained earnings of AEP for the four quarterly periods ended September 30, 2003 was $2.226 billion, or a decrease of approximately 28.3% from AEP's average consolidated retained earnings for the four quarterly periods ended September30, 2002 of $3.106 billion. AEP's "aggregate investment" in EWGs and FUCOs as of September 30, 2003 exceeded 2% of the total capital invested in utility operations.
In 2002 AEP recorded pre-tax impairments of assets (including goodwill) and investments totaling $1.426 billion that reflected downturns in energy trading markets, projected long-term decreases in electricity prices, and other factors. The impairments consisted of $866.6 million related to asset impairments, $321.1 million related to investment value and other impairment losses, and $238.7 million related to discontinued operations. Of the total impairment, $548.7 million was attributable to the impairment of the fixed-asset carrying value of AEP's two coal-fired generation plants in the United Kingdom, and $217.0 million of the total impairment was attributable to the impairment in the investment value of AEP's equity investments in two Brazilian electric operating companies (Vale and Caiua). AEP recorded a pre-tax impairment of $70 million on certain of its independent power projects in the third quarter of 2003. Applicant indicates that AEP meets the requirements of rule 53(c).
Because AEP is not in compliance with rule 53(b), the Commission has considered the effect on the AEP system of the capitalization or earnings of any AEP subsidiary that is an EWG or FUCO. The authority requested by the Applicant would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of AEP's EWGs and FUCOs, have a material adverse effect on the financial integrity of the AEP system, or an adverse impact on AEP's public-utility subsidiaries, their customers, or the ability of state commissions to protect such public-utility customers.
As of December 31, 1999, the most recent period for which financial statement information was evaluated in the 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 such subsidiaries representing 1.4%.
As of September 30, 2003, AEP's consolidated capitalization consisted of 60.9% debt and 39.1% common and preferred equity (consisting of 395,004,720 shares of common stock representing 36.8%, $376 million principal amount of equity units representing 1.6% and $144 million principal amount of preferred stock representing 0.7%).
As a result of certain financial problems, Allegheny does not satisfy certain standards set forth in rule 53. Allegheny does not satisfy the requirements of rule 53(a)(1). In Holding Company Act Release No. 35-27486, dated December 31, 2001 ("Original Financing Order"), the Commission authorized Allegheny to invest up to $2 billion in EWGs and FUCOs and found that such an investment would not have either of the adverse effects set forth in rule 53(c). As of June 30, 2003, Allegheny's aggregate investment, as defined in rule 53(a)(l), was approximately $553 million. These investments by Allegheny were made in compliance with the Original Financing Order.
Allegheny is no longer in compliance with the financing conditions set forth in the Original Financing Order. In Holding Company Act Release No. 35-27652, dated February 21, 2003 ("Capitalization Order"), Allegheny was authorized to make additional investments in EWGs to the extent necessary to complete any project or desirable to preserve or enhance the value of Allegheny's investment or in connection with the qualification of an existing project as an EWG, as long as the revised financing conditions set forth in that order were met. However, as reflected in Allegheny's financial statements, as of June 30, 2003, Allegheny's common equity ratio was below 28 percent. As a result, Allegheny is no longer able to make any investments in EWGs and FUCOs without further authorization from the Commission.
Allegheny currently complies with, and will comply with, the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of the Allegheny system's domestic public-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 regulatory commissions.
None of the circumstances described in 53(b)(1) have occurred.
The circumstances described in rule 53(b)(2) and rule 53(b)(3) have occurred, as described in Exhibit I-1 to this Declaration. Applicant indicates that Allegheny meets the requirements of rule 53(c).
Since Allegheny is not in compliance with rule 53(b), the Commission has considered the effect on the Allegheny system of the capitalization or earnings of any Allegheny subsidiary that is an EWG or FUCO. Allegheny states that the requested authorization will not have any adverse impact upon the financial integrity of Allegheny and its utility companies5 or on Allegheny's customers. The ratio of common equity to total capitalization of each of the Allegheny Operating Companies will continue to be maintained at not less than 30 percent. Further, the common equity ratios of the Allegheny Operating Companies will not be affected by the proposed issuances.
FirstEnergy currently meets all of the conditions of rule 53(a), except for clause (1). However, by order dated October 29, 2001 (Holding Company Act Release No. 27459) ("Merger Order") the Commission, among other things, authorized FirstEnergy to invest in EWGs and FUCOs so that its "aggregate investment" as defined in rule 53(a)(1) in EWGs and FUCOs does not exceed $5 billion. The $5 billion investment amount allowed in the Merger Order is greater than the amount which would otherwise be permitted by rule 53(a)(1) (which based on FirstEnergy's "consolidated retained earnings" as defined in rule 53(a)(1) of $1.6 billion as of September 30, 2003, would be $800 million). The Merger Order also specifies that this $5 billion amount may include amounts invested in EWGs and FUCOs by FirstEnergy and GPU, Inc. ("GPU") at the time of the Merger Order ("Current Investments") and amounts relating to possible transfers to EWGs of certain generating facilities owned by certain of FirstEnergy's operating utilities ("GenCo Investments").
FirstEnergy has made the commitment that through December 31, 2005, its aggregate investment in EWGs and FUCOs other than the Current Investments and GenCo Investments ("Other Investments") will not exceed $1.5 billion. Under the Merger Order, the Commission reserved jurisdiction over Other Investments that exceed $1.5 billion. As of September 30, 2003, and on the same basis as set forth in the Merger Order, FirstEnergy's "aggregate investment" in EWGs and FUCOs was approximately $1.06 billion, an amount significantly below the $5 billion amount authorized in the Merger Order. Additionally, as of September 30, 2003, "consolidated retained earnings" were $1.6 billion. By way of comparison, FirstEnergy's consolidated retained earnings as of December 31, 2001 were $1.52 billion.
With respect to rule 53(b), none of the circumstances enumerated in subparagraphs (1), (2) and (3) have occurred. Applicant indicates that FirstEnergy meets the requirements of rule 53(c).
As a result, the Commission has considered the effect on the FirstEnergy system of the capitalization or earnings of any FirstEnergy subsidiary that is an EWG or FUCO in determining whether to approve the proposed transactions. FirstEnergy states that since the date of the Merger Order, there has been no material adverse impact on FirstEnergy's consolidated capitalization resulting from its investments in EWGs and FUCOs, and the proposed transactions will not have any material impact on the FirstEnergy's capitalization.
As of September 30, 2003, the FirstEnergy's consolidated capitalization consisted of 38.7% common equity, 1.7% cumulative preferred stock, 1.3% subsidiary - obligated mandatorily redeemable preferred securities, 57.1% long-term debt and 1.2% notes payable. As of December 31, 2001, those ratios were as follows: 30.3% common equity, 3.1% cumulative preferred stock, 2.2% subsidiary-obligated mandatorily redeemable preferred securities, 60.9% long term debt and 3.5% notes payable.
Since the date of the Merger Order, FirstEnergy's investments in EWGs and FUCOs have contributed positively to its level of earnings, other than for the negative impact on earnings due to FirstEnergy's writedowns of its investments in Avon Energy Partners Holdings and GPU Empresa Distribuidora Electrica Regional S.A. Finally, since the date of the Merger Order, and, after taking into account the effects of FirstEnergy's acquisition of GPU, there has been no material change in the FirstEnergy's level of earnings from EWGs and FUCOs.
Applicant states that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions. Applicant states that the fees, commissions and expenses incurred or expected to be incurred in connection with the proposed transactions are estimated not to exceed $2,000, plus the cost of any financing authorized by this order.
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 record, the Commission finds that, as to the $100 million principal amount of short-term debt securities to be issued, the applicable standards of the Act are satisfied and no adverse findings are necessary.
IT IS ORDERED, under the applicable provisions of the Act and rules under the Act, that the Declaration is permitted to become effectively immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that jurisdiction be reserved over OVEC's issuance and sale of an additional $100 million principal amount of short-term debt securities.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Jill M. Peterson
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