SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27832; 70-10182)
System Energy Resources, Inc.
Order Authorizing Issuance and Sale of Secured Lease Obligation Bonds; Reservation of Jurisdiction
April 2, 2004
System Energy Resources, Inc. ("SERI"), Jackson, Mississippi, an electric utility subsidiary of Entergy Corporation ("Entergy"), a registered holding company, has filed with the Securities and Exchange Commission ("Commission") an application-declaration under sections 6(a), 7 9(a), 10, 12(b) and 12(d) of the Public Utility Holding Company Act of 1935, as amended ("Act") and rules 44, 45 and 54 under the Act. The Commission issued a filing of the application-declaration on February 27, 2004 (HCAR No. 27804).
By prior Commission order dated December 23, 1988 (HCAR No. 24791), was authorized to sell and lease back from certain trusts acting as lessors ("Lessors"), on a long-term net lease basis, an approximate 11.5% aggregate ownership interest ("Undivided Interests") in Unit No. 1 of the Grand Gulf Steam Electric Generating Station ("Grand Gulf 1") in two substantially identical, but entirely separate, transactions. SERI now has an approximate 78.5% undivided ownership interest and an approximate 11.5% leasehold interest in Grand Gulf I.1 The remaining 10% of Grand Gulf I is owned by an electric cooperative, South Mississippi Electric Power Association. The purchase price of the Undivided Interests was $500 million, of which approximately $64,898,000 was provided by the equity contributions of two owner participants in the two Lessor trusts and approximately $435,102,000 was provided by loans from a group of interim lenders ("Interim Borrowings").
By subsequent order dated April13, 1989 (HCAR No. 24861), 's financing subsidiary, GG1A Funding Corporation ("Funding Corporation"), was authorized to issue $435,102,000 of Secured Lease Obligation Bonds ("Original Bonds") in an underwritten public offering in two series, consisting of $163,666,000, principal amount due 2004, Series 11.07% Bonds and $271,436,000, principal amount due 2014, Series 11.50% Bonds. The proceeds from the sale of the Original Bonds were applied to refunding of the Interim Borrowings.
Finally, by order dated January 14, 1994 (HCAR No. 25974), a new financing subsidiary, GG1B Funding Corporation ("New Funding Corporation'), was authorized to issue an additional $435,102,000 million of Secured Lease Obligation Bonds ("Original Refunding Bonds") in an underwritten public offering in two series, consisting of $356,056,000, principal amount due 2011 ("Series 7.43% Bonds") and $79,046,000, principal amount due 2014 ("Series 8.20% Bonds"). The proceeds from the sale of the Original Refunding Bonds were applied to refund the Original Bonds.
SERI now proposes to cause New Funding Corporation or a comparable entity to issue not in excess of $293,093,025 of additional Secured Lease Obligation Bonds in one of more separate series ("New Refunding Bonds"), through December 31, 2005 ("Authorization Period"). The New Refunding Bonds will be issued under the New Funding Corporation's Collateral Trust Indenture dated as of January 1, 1994, as amended ("Indenture"), among New Funding Corporation, SERI and Deutsche Bank Trust Company Americas, as trustee ("Trustee"), or a comparable instrument in order to refund the Original Refunding Bonds. Likewise the New Refunding Bonds will be structured and issued under the documents and procedures applicable to the issuance of the Original Refunding Bonds.
The proceeds from the sale of the New Refunding Bonds, together with funds provided by SERI and/or the Lessors, will be applied to the cost of redeeming the Original Refunding Bonds and may be applied to meet associated issuance costs.2 Series 7.43 Bonds were first optionally redeemable on January 15, 2004 at 102.477%. Series 8.20 Bonds were first optionally redeemable on January 15, 2004 at 104.100%.
The New Refunding Bonds may be issued in one or more series bearing interest at various fixed rates. However, the interest rate on the New Refunding Bonds will not exceed at the time of issuance, the greater of (a) 500 basis points over U.S. Treasury securities having a remaining term comparable to the term of the New Refunding Bonds to be issued and (b) a spread over U.S. Treasury securities that is consistent with similar securities of comparable credit quality and maturities issued by other companies. Neither the term of the New Refunding Bonds nor the amortization schedule will extend beyond the current term of the leases of the Undivided Interests, which expire on July 15, 2015. For certain purposes, however, at the time of the refunding of the Original Refunding Bonds, SERI may seek to extend the current term of the leases and adjust its lease payments as appropriate, provided that any extension does not exceed its operating license.
The New Refunding Bonds will be subject to redemption upon certain terminations of the leases at a redemption price equal to the unpaid principal amount, plus accrued interest to the redemption date. Other redemption and sinking fund provisions, as well as fees and expenses, will be determined by negotiation. The New Refunding Bonds will be structured and issued under the documents and pursuant to the procedures applicable to the issuance of the Original Refunding Bonds or comparable documents having similar terms and provisions.
The proceeds of the sale of the New Refunding Bonds will be loaned by the New Funding Corporation to the Lessors, and the Lessors will issue lessor notes ("Lessor Notes") to the New Funding Corporation under the terms of two trust indentures, deeds of trust, mortgages, security agreements and assignments of facility leases, dated as of December 1, 1988 ("Lease Indentures'), as supplemented from time-to-time. The Lessors in turn will apply the proceeds to repayment of similar Lessor Notes issued in 1994 to secure the Original Refunding Bonds, and the New Funding Corporation will repay the Original Refunding Bonds. SERI is unconditionally obligated to make payments under the Lease in amounts that will be at least sufficient to provide for scheduled payments of the principal of and interest on the Lessor Notes, which amounts, in turn, will be sufficient to provide for scheduled payments of the principal of, and the interest on, the New Refunding Bonds.
Neither the New Refunding Bonds nor the associated Lessor Notes will be direct obligations of, or guaranteed by, SERI. However, under certain circumstances, SERI may assume all, or a portion of, the Lessor Notes. The New Refunding Bonds will be secured by the Lessor Notes, which will be held by the Trustee under the Indenture. Each Lessor Notes will, in turn, be secured by, among other things (a) a lien on and security interest in the Undivided Interest of the Lessor issuing the Lessor Notes and (b) certain of the rights of such Lessor under its Lease with SERI, including the right to receive the basic rent and certain other amounts payable by SERI.
Upon the occurrence of certain events of default under the Indenture, subject to certain exceptions, the Trustee may declare all New Refunding Bonds to be immediately due and payable. The New Funding Corporation's obligations under the Indenture may be discharged prior to the maturities of New Refunding Bonds in whole, or in part, by depositing with the Trustee sufficient funds to meet related principal, interest and premium obligations as they become due or paying down the Lessor Notes of a corresponding es of New Refunding Bonds.
SERI shall not cause the sale of the New Refunding Bonds unless (a) the estimated present value savings derived from the net difference between interest payments on a new issue of comparable securities and those securities refunded is, on an after-tax basis, greater that the present value of all redemption and issuing costs, assuming an appropriate discount rate, determined on the basis of the then estimated after-tax cost of capital of Entergy and its subsidiaries, consolidated, or (b) SERI shall have notified the Commission of the terms and conditions of the proposed refinancing transaction by post-effective amendment and obtained appropriate supplemental authorization from the Commission to consummate the transactions.
SERI represents that all times during the Authorization Period, SERI and Entergy will each maintain common equity of at least 30% of total capitalization (based on the financial statements filed for the most recent quarterly report on Form 10-Q or annual report on form 10-K).3 SERI represents further that it will not issue securities in reliance upon the authorization that may be granted by the Commission in this matter, unless (1) the security to be issued by SERI, if rated, is rated investment grade ("Investment Grade"); (2) all outstanding securities of SERI that are rated are rated Investment Grade; and (3) all outstanding securities of Entergy that are rated are rated Investment Grade (collectively, "Investment Grade Ratings Criteria").4 For purposes of this provision, a security will be deemed to be rated Investment Grade" if it is rated investment grade by Moody's Investors Services, Standard & Poor's Fitch Ratings or any other nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi) (E), (F) and (H) of rule 15c3-1 under the Securities Exchange Act of 1934. SERI further requests that the Commission reserve jurisdiction over the issuance of any security for which at any time one or more of the Investment Grade Ratings Criteria are not satisfied.
SERI currently meets all of the conditions of rule 53(a), except for rule 53(a)(1), which limits SERI's "aggregate investment" in exempt wholesale generators ("EWGs"), as defined in section 32 of the Act, and foreign utility companies ("FUCOs"), as defined in section 33 of the Act, to 50% of the system's "consolidated retained earnings," provided that none of the adverse conditions specified in Rule 53(b) exist ("Safe Harbor Limitation"). SERI states that as of December 31, 2003, SERI's "aggregate investment", as defined in rule 53(a)(1), in EWGs and FUCOs, was approximately $2.6 billion. As of the same date, its "average consolidated retained earnings", also defined in rule 53(a)(1), were approximately $4.5 billion for the previous four quarters. SERI's "aggregate investment" in EWGs and FUCOs constituted about 58% of its retained earnings, and, therefore, exceeds the Safe Harbor Limitation contained in the rule.
However, regarding rule 53(a)(1), the Commission determined that SERI investments in EWGs and FUCOs in amounts not exceeding 100% of its "average consolidated retained earnings" ("Investment Limitation"), would not have either of the adverse effects described in rule 53(c) (HCAR No. 27184; June 13, 2000) ("Rule 53(c) Order").5 At December 31, 2003, SERI's average consolidated retained earnings were approximately $4.5 billion, so that SERI's $2.6 billion aggregate investment in EWGs and FUCOs, representing 58% of "consolidated retained earnings", remained below the Investment Limitation. SERI continues to be in compliance with the other provisions of rule 53(a) and none of the conditions enumerated in rule 53(b) exist.
The Rule 53(c) Order was predicated, in part, on an assessment of SERI's overall financial condition, which considered Entergy's consolidated capitalization ratio, which remains within industry ranges for BBB-rated electric utility companies.6 Entergy's consolidated retained earnings have grown by an average of 13% annually during the period since the Rule 53(c) Order. SERI states that its EWG and FUCO investments contributed positively to its consolidated earnings since the Rule 53(c) Order.
Fees and expenses will not exceed 3% of the principal amount of the New Refunding Bonds in connection with the proposed transaction. No state or federal commission has jurisdiction over the proposed transactions.
Due notice of the filing of the application-declaration 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. On the basis of the facts in the record, it is found that the applicable standards of the Act and the rules under the Act are satisfied, and that no adverse findings are necessary.
IT IS ORDERED under the applicable standards of the Act and the rules under the Act, that, except as to those matters over which jurisdiction is reserved, the application-declaration be granted and allowed to take effect immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that jurisdiction is reserved over the issuance of any security under this order for which at any time one or more of the Investment Grade Ratings Criteria is not satisfied.
For the Commission, by the Division of Investment Management, under delegated authority.
Margaret H. McFarland
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