SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27842; 70-9353)
American Electric Power Company, Inc., et al.
Supplemental Order Authorizing Refinancing Transactions in Connection with Nonutility Assets and Nonutility Subsidiaries and Reserving Jurisdiction
April 30, 2004
American Electric Power Company, Inc. ("AEP"), a registered public-utility holding company, AEP Energy Services, Inc. ("AEPES") and AEP Resources, Inc. ("Resources"), both wholly owned nonutility subsidiaries of AEP, all located in Columbus, Ohio (collectively, "Applicants"), have filed with the Securities and Exchange Commission ("Commission") a post-effective amendment to their application-declaration ("Application") under sections 6(a), 7, 9(a), 10 and 12(b) and (c) of the Public Utility Holding Company Act of 1935, as amended ("Act"), and rules 45, 46 and 54 under the Act. The Commission issued a notice of the Application on July 8, 2002 (Holding Co. Act Release No. 27549).
By previous orders, the Commission authorized AEP to form direct or indirect nonutility subsidiaries to broker and market energy commodities, including electric power, natural and manufactured gas, emission allowances, coal, oil, refined petroleum products and natural gas liquids in the United States and Canada ("Commodities Business").1 Applicants were also authorized to acquire nonutility energy assets in the United States, including, without limitation, oil and natural gas production, gathering, processing, storage and transportation facilities and equipment, liquid oil reserves and storage facilities, and associated facilities, that would be incidental to and would assist Applicants and their subsidiaries (or any other energy trading, marketing or brokering subsidiary acquired by Applicants) in connection with the marketing, brokering and trading activities ("Energy Assets"), in one or more transactions, from time to time, through December 31, 2003. See Orders dated November 2, 1998 (Holding Co. Act Release No. 26933), December 22, 1999 (Holding Co. Act Release No. 27120), December 21, 2000 (Holding Co. Act Release No. 27313), and August 13, 2001 (Holding Co. Act Release No. 27432) (collectively, "Previous Orders"). AEP, Resources and AEPES (and any existing or new, direct or indirect subsidiaries of either Resources and AEPES (collectively, "Holding Subs")) were also authorized by these Previous Orders to invest, up to an aggregate of $2 billion, in Energy Assets or in the equity securities of companies substantially all of whose physical properties consist of nonutility energy assets ("Energy Assets Subs") and to utilize direct or indirect special purpose financing subsidiaries, organized specifically for the purpose of financing any of these investments ("Finance Subsidiaries"). Under this authority, Applicants have, among other things, acquired midstream gas assets, including intrastate pipeline systems in Louisiana and Texas, natural gas processing plants and storage facilities.
II. Summary of Proposed Transactions
Applicants are now seeking approval, subject to the reservation, through June 30, 2004 ("Authorization Period"):
(1) To acquire additional Energy Assets in Canada, as well as the United States, and the securities of Energy Assets Subs, Holding Subs and Finance Subsidiaries (specifically for the purpose of financing the acquisition of Energy Assets and Energy Assets Subs);2
(2) To invest in an aggregate amount of up to $4.0 billion (consisting of $2.0 billion, as has been authorized in the past under Previous Orders, plus an additional $2.0 billion, together, increasing the aggregate amount Applicants may invest to $4.0 billion) ("Investment Limitation") in Energy Assets or Energy Assets Subs;3 and
(3) For the Holding Subs and Energy Assets Subs, to declare and pay dividends to their parent companies, from time to time, out of capital or unearned surplus to the extent permitted by applicable law.
Applicants request the Commission to reserve jurisdiction over all of these proposals (including any payment of dividends out of capital or unearned surplus), except for the authority to issue securities in an amount of up to $550 million necessary to refinance or support indebtedness or obligations incurred in connection with Applicants' existing Energy Assets or Energy Assets Subs (acquired under the Previous Orders), pending completion of the record.4
Applicants state that it is their intention to add nonutility, marketing-related assets as and when market conditions warrant, consistent with the Previous Orders, whether through acquisitions of specific assets or groups of assets that are offered for sale or by acquiring existing companies (for example, other gas marketing companies that own significant physical assets in the areas of gas production, processing, storage, and transportation). Applicants state that it is their objective, ultimately, to control a portfolio of Energy Assets and Energy Assets Subs that would provide them with the flexibility and capacity to compete for sales in all major markets in the United States and, with this authorization, Canada, as well.
Applicants state that any investments and acquisitions, both in Canada and in the United States, would be incidental to and would assist Applicants and their subsidiaries (or any other energy, marketing or brokering subsidiary acquired by Applicants) in connection with the Commodities Business. Applicants maintain that approval of this portion of their request would be consistent with the integration of the North American energy market and the competitive benefits of allowing holding companies to transact Commodity Businesses.5
For financial flexibility, Applicants also request that, consistent with the Previous Orders, they be authorized to acquire Energy Assets or Energy Assets Subs for cash or in exchange for common stock of AEP or other securities of Applicants or to include the assumption of debt of the seller of Energy Assets or Energy Assets Subs or utilize any combination of these methods to effect their acquisitions. Also consistent with the Previous Orders, if common stock of AEP is used as consideration in connection with any acquisition, the market value on the date of issuance will be counted against the proposed Investment Limitation. Furthermore, Applicants state that, consistent with the Previous Orders, under no circumstances will they acquire, directly or indirectly, any assets or properties the ownership, or operation, of which would cause the companies to be considered an "electric utility company" or "gas utility company" as defined under the Act.
By the Previous Orders, AEP was authorized to issue securities in order to finance the purchase of Energy Assets or Energy Assets Subs by AEP, Resources and AEPES, or any Holding Subs, in an aggregate amount not to exceed $2 billion and is now requesting, as previously described, that an amount of $2.0 billion plus an additional $2.0 billion, for an aggregate amount of $4.0 billion, the Investment Limitation, be authorized. The Previous Orders allowed these securities to consist of any combination of (i) shares of common stock of AEP; (ii) borrowings by AEP from banks or other financial institutions under credit lines or otherwise; (iii) guarantees of indebtedness issued by the Holding Subs; or (iv) guarantees of securities issued by any Finance Subsidiary. AEP requests this authority to issue securities, as described, in order to provide it with maximum flexibility and up to an aggregate amount which, when added to all other outstanding securities issued to purchase Energy Assets and Energy Assets Subs, would not exceed the Investment Limitation.
Use of Holding Subs and Finance Subsidiaries in Connection with the Financing Proposals
By the Previous Orders, the Holding Subs and Finance Subsidiaries were authorized to issue debt, equity or preferred securities of any type, including guarantees, as appropriate, to finance acquisitions of Energy Assets or Energy Assets Subs. Applicants request that this financing authority again be approved, through the Authorization Period, in an amount which, when added to all other outstanding securities issued to purchase Energy Assets or Energy Assets Subs, would not exceed the new Investment Limitation.
AEP and the Holding Subs request, in addition, authority to guarantee financial commitments, other than indebtedness, of any entity owning or operating Energy Assets (e.g., guaranteeing the completion of a construction contract) (collectively "Performance Guarantees"), entered into during the Authorization Period, in an aggregate principal amount not to exceed the Investment Limitation outstanding at any one time, exclusive of any guarantees and other forms of credit support that are exempt under rule 45(b) and rule 52(b). Applicants state that each guarantor proposes to charge each subsidiary a fee for each Performance Guarantee that would not exceed the guarantor's cost of obtaining the liquidity necessary to perform on the Performance Guarantee for the period of time the guarantee remains outstanding and the credit risk is assumed by the guarantor.6 Applicants represent that Performance Guarantee issued under this authority will not be secured by any "utility assets" as defined under the Act.
With respect to the Finance Subsidiaries organized under the requested authority, Applicants state that any Finance Subsidiary will be organized only if, in management's opinion, the creation and utilization of the Finance Subsidiary will likely result in tax savings, increased access to capital markets and/or lower cost of capital for AEP. AEP states that the ability to use Finance Subsidiaries can sometimes offer increased state and federal tax efficiency.7 AEP states that decreasing tax exposure is, however, usually not the primary goal when establishing a Finance Subsidiary; rather, the primary goal is typically access to new capital or lower cost of capital.
Applicants maintain that Financing Subsidiaries can increase a company's ability to access new sources of capital by enabling it to undertake financing transactions with features and terms attractive to a wider investor base. Applicants also state that Financing Subsidiaries can be established in jurisdictions or in forms that have terms favorable to its sponsor and, at the same time, provide targeted investors with attractive incentives to provide financing. Many of these investors would not be participants in the sponsor's bank group, according to AEP, and they typically would not hold sponsor bonds or commercial paper.8 Therefore, these investors represent potential new sources of capital to Applicants.
Applicants state that the following financing parameters will be applicable to the proposed transactions. The effective cost of money on long-term debt borrowings will not exceed the greater of (i) 500 basis points over the comparable term U.S. Treasury securities or (ii) a gross spread over U.S. Treasuries that is consistent with similar securities of comparable credit quality and maturities issued by other companies. The effective cost of money on short-term debt borrowings will not exceed the greater of (i) 350 basis points over the comparable term London Interbank Offered Rate ("LIBOR") or (ii) a gross spread over LIBOR that is consistent with similar securities of comparable credit quality and maturities issued by other companies.
The dividend rate on any series of preferred securities will not exceed the greater of (i) 700 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal to the term of the series of preferred securities or (ii) a rate that is consistent with similar securities of comparable credit quality and maturities issued by other companies. The maturity of unsecured indebtedness will not exceed 50 years. All preferred securities will be redeemed no later than 50 years after their issuance.
Applicants also state that the total of any of Applicants' financings for which approval is requested, and any financings performed on an exempt basis under rule 52, will not exceed the Investment Limitation. In addition, any debt security issued to AEP to evidence loans by AEP will comply with the requirements of rule 52(b)(2).
AEP also commits that its common equity will be maintained at no less than 30% of its consolidated capitalization. Applicants further represent that, apart from the securities issued for the purpose of funding money pool operations, no guarantees or other securities, other than common stock, may be issued in reliance upon this Order, unless: (i) the security to be issued, if rated, is rated investment grade; (ii) all outstanding securities of the issuer, that are rated, are rated investment grade; and (iii) all outstanding securities of the unsecured debt rating registered holding companies, that are rated, are rated investment grade. For purposes of this condition, a security will be considered rated investment grade if it is rated investment grade by at least one nationally recognized statistical rating agency 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, as amended (the "34 Act").
Dividends Out of Capital or Unearned Surplus
Applicants request that the Holding Subs and Energy Assets Subs be authorized to declare and pay dividends to their parent companies from time to time out of capital or unearned surplus to the extent permitted by applicable law.9 Resources and AEPES may then pay dividends to AEP to the extent that the dividend is based upon: (i) a corresponding dividend paid to them out of capital or unearned surplus by a Holding Sub or an Energy Asset Sub that is a direct subsidiary of Resources or AEPES, as the case may be, or (ii) Resources' or AEPES' direct or indirect ownership of an Energy Assets Sub.
Applicants maintain that the ability of the Holding Subs and Energy Assets Subs to use distributable cash to pay dividends ultimately to Resources or AEPES will benefit the AEP system by enabling Resources and AEPES to dividend the cash to AEP or to apply these amounts to the reduction or refinancing of outstanding bank borrowings and to fund operations of other AEP subsidiaries. Applicants state that the payment of dividends out of capital or unearned surplus by them or the Holding Subs will not adversely affect the financial integrity of the AEP system or jeopardize the working capital of AEP's utility subsidiaries.
Reservation of Jurisdiction
Applicants request the Commission to reserve jurisdiction over all of these proposals (including any payment of dividends out of capital or unearned surplus), pending completion of the record, except for Applicants' authority to issue securities in an amount of up to $550 million necessary to refinance or support indebtedness or obligations incurred in connection with Applicants' existing Energy Assets or Energy Assets Subs (acquired under the Previous Orders).10
In addition, with reference to section 10(f) of the Act, while Applicants do not anticipate that any state commission has jurisdiction over the proposed transactions, Applicants cannot provide definitive assurance that no state commission would have jurisdiction over the proposed transactions. Accordingly, with a view to potential circumstances where a state commission may have jurisdiction over a proposed acquisition of Energy Assets or Energy Assets Subs ("State-Jurisdictional Acquisitions"), Applicants request that the Commission reserve jurisdiction over the proposed transactions solely in respect of any such State-Jurisdictional Acquisition, pending in each case the receipt of the required state commission authorization and filing of a copy as a supplement to the record in this proceeding and the issuance of a supplemental order of the Commission authorizing the State-Jurisdictional Acquisition.
IV. Rule 54 Analysis and Other Information
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"), if the requirements of rule 53(a), (b) and (c) are satisfied, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs. Applicants state that AEP currently meets all of the conditions of rule 53(a), except for clause (1).11 Applicants state further that, while 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.
With respect to rule 53(a)(1), on June 14, 2000, the Commission 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").12 Consequently, with respect to rule 53(a)(1), in the Rule 53(c) Order, the Commission has previously determined 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). See Rule 53(c) Order.
With respect to rule 53 (b)(2), Applicants state that, as a result of the recording of a loss due 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 December 31, 2003, was $2.099 billion, or a decrease of approximately 24.6% from the company's average consolidated retained earnings for the four quarterly periods ended December 31, 2002, of $2,782 billion. In addition, AEP's "aggregate investment" in EWGs and FUCOs, as of December 31, 2003, exceeded 2% of the total capital invested in utility operations.13
AEP submits that it meets the requirements of rule 53(c). It asserts that, if the effect of the capitalization and earnings of EWGs and FUCOs, in which AEP has an ownership interest, upon the AEP holding company system were considered, there would be no basis for the Commission to withhold or deny approval for the requested authority. AEP states that the authority requested 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 ("Utility Subsidiaries"),14 their customers, or the ability of state commissions to protect the public utility customers. AEP further states that the Rule 53(c) Order was predicated, in part, upon an assessment of AEP's overall financial condition in 2000, which took into account, among other factors, AEP's consolidated capitalization ratio and the growth trend in AEP's retained earnings.15 AEP states that, as of December 31, 2003, its consolidated capitalization consisted of 64.3% debt and 35.7% common and preferred equity (common stock representing 35.1%, preferred stock representing 0.6% ($137 million principal amount)). AEP asserts that the ratio of common equity to total capitalization, net of securitization debt, of each of the AEP utility subsidiaries will continue to be maintained at not less than 30%. AEP further asserts that, in addition, each of the AEP Utility Subsidiaries is subject to regulation by one or more state commissions that are able to protect utility customers within their respective states.
AEP further asserts that, although since the date of the Rule 53(c) Order, there has been a decrease in AEP's consolidated equity capitalization ratio, it remains within acceptable ranges and limits of rating agencies for strong investment grade corporate credit ratings. AEP states that the AEP Utility Subsidiaries, which will have a significant influence on the determination of the AEP corporate rating, continue to show strong financial statistics as measured by the rating agencies. As of December 31, 2003, S&P's rating of unsecured debt for AEP was BBB, and of secured debt for the AEP Utility Subsidiaries was as follows: APCo, BBB; CSPCo, BBB; I&M, BBB; KPCo, BBB; OPCo, BBB; TCC, BBB; PSO, BBB; SWEPCo, BBB; and ATNC, BB.
As of December 31, 1999, Standard and Poor's ("S&P") rating of secured debt for the AEP Utility Subsidiaries was as follows: APCo, A; CSPCo, A-; I&M, A-; KPCo, A; OPCo"), A-; TCC, A; PSO, AA-; SWEPCo, AA-; and ATNC, A. Ohio Valley Electric Company has no debt rating. AEP did not have a long-term debt rating as of December 31, 1999.
Applicants state 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, including fees and expenses to be billed at cost by American Electric Power Service Corporation. Applicants will obtain any required state commission approvals prior to the acquisition of Energy Assets or Energy Assets Subs. To the extent any state has jurisdiction over the proposed acquisitions under section 10(f) of the Act, the State-Jurisdictional Acquisitions referred to above, this Commission will reserve jurisdiction over the acquisition pending completion of the record. The pre-notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976 may apply to certain acquisitions of Energy Related Assets or Energy Assets Subs, depending upon, among other factors, the dollar amount of the transaction. Also, the Federal Energy Regulatory Commission may have jurisdiction over acquisitions of Energy Assets Subs.
Due notice of the filing of the post-effective amendment to the Application 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, with respect to Applicants' request for authorization of up to $550 million necessary to refinance or support indebtedness or obligations incurred in connection with Applicants' existing Energy Assets or Energy Assets Subs and except as to those matters over which jurisdiction is reserved, the applicable standards of the Act are satisfied and that no adverse findings are necessary.
IT IS ORDERED that the Application be granted and permitted to become effective immediately as to the Applicants' authority to issue securities in an amount of up to $550 million necessary to refinance or support indebtedness or obligations incurred in connection with Applicants' existing Energy Assets or Energy Assets Subs, subject to the terms and conditions prescribed in rule 24 under the Act, except that Applicants will file, on a quarterly basis corresponding with the periodic reporting requirements of the 34 Act, a report that:
(1) With respect to any Financing Subsidiary organized or otherwise acquired under the authority requested, will include:
(a) A representation that (i) the financial statements of AEP shall account for any Finance Subsidiary in accordance with U.S. generally accepted accounting principles and (ii) it maintains sufficient internal controls to enable it to monitor the creation and use of any Finance Subsidiary and
(b) Information providing (i) the name of the Finance Subsidiary; (ii) the value of AEP's investment account in the subsidiary; (iii) the balance sheet account where the investment and the cost of the investment are booked; (iv) the amount invested in the subsidiary by AEP; (v) the type of corporate entity; (vi) the percentage owned by AEP; (vii) the identification of other owners (if not 100% owned by AEP); (viii) the purpose of the investment in the subsidiaries; and (ix) the amounts and types of securities to be issued by the subsidiaries; and (x) for any securities issued by any entity under the requested authority and not set forth on the balance sheet of the issuer, the terms and conditions of the securities; and
(2) With respect to Energy Assets and Energy Assets Subs, the amount of Energy Assets and Energy Assets Subs purchased or constructed in the preceding period, along with a brief description, including the amount, type and, if a debt security, the maturity and interest rate, of securities issued by AEP, a Holding Sub or Financing Subsidiary, in connection with the acquisition of Energy Assets or Energy Assets Subs.
IT IS FURTHER ORDERED that jurisdiction be reserved over all other aspects of the Application pending completion of the record, including any section 10(f) State-Jurisdictional Acquisitions, pending in each case the receipt of the required state commission authorization and filing of a copy as a supplement to the record in this proceeding and the issuance of a supplemental order of the Commission authorizing the State-Jurisdictional Acquisition.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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