SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27867A; 70-10186)
The Southern Company, et. al.
Order Authorizing Various External Financing Transactions Through June 30, 2007 and Reserving Jurisdiction; Correction
July 23, 2004
By order dated June 30, 2004 (Holding Company Act Release No. 27867) ("Order"), the Securities and Exchange Commission ("Commission") granted and permitted to become effective immediately a declaration-application ("Declaration") filed by The Southern Company ("Southern"), a registered holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"); the following wholly-owned public utility subsidiaries of Southern: Georgia Power Company ("Georgia Power"), Gulf Power Company ("Gulf Power"), Mississippi Power Company ("Mississippi Power"), Savannah Electric and Power Company ("Savannah Power"), and Alabama Power Company ("Alabama Power"); and the following wholly-owned subsidiaries of Southern: Southern Company Services, Inc. ("SCS"), Southern Company Energy Solutions, Inc., Southern Communications Services, Inc., Southern Company Capital Funding, Inc. ("Capital Funding"), and Southern Nuclear Operating Company, Inc. (collectively, "Applicants"), under sections 6(a), 7, 9(a), 10, and 12(b), 12(c), and 12(f) of the Act and rules 42, 45, 53, and 54 under the Act. The purpose of this corrective order is to delete certain language contained in clause (c) of the Investment Grade Criteria in the Order.
IT IS ORDERED, that beginning with the second paragraph, the Order is deleted in it entirety and replaced, in accordance with the record, with the following:
Southern owns the following public utilities: Alabama Power, Georgia Power, Gulf Power, Mississippi Power, Savannah Power, Southern Power Company and Southern Electric Generating Company.
I. Current Authority
Southern currently has authority to issue the following securities:
Upon the effectiveness of the order in this filing, Applicants will relinquish their authority to issue securities and engage in the transactions authorized in the orders listed above.
II. Overview of Request
Applicants request authorization to engage in the following financing transactions during the period from the effective date of the order for this filing through June 30, 2007 ("Authorization Period"):
III. Financing Parameters
Applicants propose that the following general terms will be applicable where appropriate to the financing transactions requested:
1. Effective Cost of Money. The effective cost of capital on Long-term Debt, preferred stock, Preferred Securities, Equity-linked Securities and Institutional Debt will not exceed competitive market rates available at the time of issuance for securities having the same or reasonably similar terms and conditions issued by similar companies of reasonably comparable credit quality; provided that in no event will the effective cost of capital (a) on any series of Long-term Debt and any term loan notes with a maturity of greater than one year exceed 500 basis points over a U.S. Treasury security having a remaining term equal to the term of the security, (b) on any series of Institutional Debt (other than term loan notes with a maturity of greater than one year) exceed 300 basis points over the London Interbank Offered Rate for maturities of less than one year, (c) on any series of preferred stock, Preferred Securities or Equity-linked Securities exceed 500 basis points over a U.S. treasury security having a remaining term equal to the term of the series, and (d) on any guarantee by Southern of debt of SCS exceed 500 basis points over a U.S. Treasury security having an amount equal to the guaranteed amount.
2. Maturity. The maturity of Long-term Debt and Preferred Securities will be between one and 50 years after the issuance. Equity-linked Securities will be redeemed or mature no later than 50 years after the issuance, unless converted into common stock. Preferred stock will be redeemed no later than 50 years, unless it is perpetual in duration.
3. Issuance Expenses. The underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of (a) Long-term Debt and Institutional Debt will not exceed 6% of the principal or total amount of the securities being issued and (b) preferred stock, common stock, Preferred Securities or Equity-linked Securities will not exceed 6% of the principal or total amount of the securities being issued. However, no commission or fee will be payable in connection with the issuance and sale of commercial paper, except for a commission, payable to the dealer, not to exceed one-eighth of one percent per annum in respect of commercial paper sold through the dealer as principal.
4. Common Equity Ratio. At all times during the Authorization Period, Southern represents that it, and each of its public utility subsidiaries, will maintain a common equity ratio of at least thirty percent of their consolidated capitalization (common equity, preferred stock and long-term and short-term debt) as reflected in its most recent Form 10-K and Form 10-Q filed with the Commission adjusted to reflect changes in capitalization since the balance sheet date, unless otherwise authorized.
5. Investment Grade Ratings. Southern and Capital Funding represent that no guarantees or securities, other than common stock, commercial paper or short-term bank debt (with a maturity of one year or less), may be issued in reliance upon the authorization that may be granted by the Commission, unless upon original issuance (a) the security to be issued, if rated, is rated investment grade; (b) all outstanding securities of the issuer that are rated are rated investment grade; and (c) all outstanding securities of Southern that are rated are rated investment grade (collectively, "Investment Grade Criteria"). For purposes of this provision, a security will be deemed to be rated "investment grade" if it is rated investment grade by at least one 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, as amended. Southern and Capital Funding also request that the Commission reserve jurisdiction over the issuance of any guarantees or securities that do not satisfy these conditions.
6. Use of Proceeds. Applicants state that the proceeds from the issuance or sale of securities in the proposed transactions will be used by Southern for general corporate purposes, to acquire the securities of associate companies and to acquire interests in other businesses, as permitted under the Act, including interests in "exempt wholesale generators" ("EWGs"), "energy related companies" under Rule 58 and "foreign utility companies" ("FUCOs"), in transactions permitted under Act, and for other lawful purposes. Southern does not seek in this proceeding any increase in the amount it is permitted to invest in EWGs and FUCOs.2 However, no proceeds will be used to acquire interests in other businesses or the securities of associate companies unless the financing is consummated in accordance with Commission order or is exempt from the Act. The proceeds of any financing by Capital Funding or a financing subsidiary will be remitted, paid as a dividend, loaned or otherwise transferred directly or indirectly to Southern. The proceeds realized by SCS from borrowings guaranteed by Southern will be used to fund the general requirements of the business of SCS including the possible refunding of outstanding indebtedness.
IV. Financial Condition
Applicants state that the ratings of the securities issued by Southern and Capital Funding are:
V. Description of Specific Types of Financings
1. Common Stock. Southern proposes to issue and sell up to 35 million shares of common stock in ordinary regular-way transactions in the auction market on the floor of the New York Stock Exchange, or any regional exchange on which Southern's common stock may be admitted to trading privilege, in block transactions on exchanges or in the over-the-counter market, in which a broker or dealer may act as a principal for its own account and in "fixed-price offerings" off the floor of the exchanges, or "special offerings" and "exchange distributions" in accordance with the rules of the exchanges. Public distributions may be as a result of private negotiations with underwriters, dealers or agents, or effected through competitive bidding among underwriters. In addition, sales may be made through private placements or other non-public offerings to one or more persons. The sale of the common stock will be made at market prices prevailing at the time of sale in the case of transactions on exchanges and at prices negotiated by the broker or dealer and related to prevailing market prices in the case of over-the-counter transactions.
2. Institutional Debt. Southern proposes to issue and sell from time to time unsecured Institutional Debt in an aggregate principal amount at any time outstanding not to exceed $3 billion. These borrowings will be evidenced by short-term and/or term loan notes, dated as of the date of the borrowings, and maturing not more than seven years after the date of issue, or "grid" short-term and/or long-term notes, evidencing all outstanding borrowings from each lender, dated as of the date of the initial borrowings, and maturing not more than seven years after the date of issue. Southern proposes to issue commercial paper in the form of promissory notes with varying maturities not to exceed one year. The commercial paper maturities may be subject to extension to a final maturity not to exceed 390 days. Actual maturities will be determined by market conditions, the effective interest costs and Southern's anticipated cash flow, including the proceeds of other borrowings, at the time of issuance.
3. Common Stock Issuable under Stock-based Plans. Southern proposes to issue up to 85 million shares of common stock under several stock-based plans as described below and any similar stock based plans adopted in the future (collectively, "Plans"). The common stock issuable under the Plans would be in addition to the common stock issuable under paragraph V.1 above.
4. Guarantees. SCS provides certain services for Southern and its associate companies in the Southern electric system. Southern proposes to guarantee indebtedness or other obligations incurred by SCS in an aggregate amount not to exceed $330 million at any time outstanding. Applicants state that security issuances by SCS are exempt from prior Commission review in accordance with rule 52(b) under the Act, as they will be in the routine course of its business.
SCS may issue and sell notes ("SCS Notes") to lenders other than Southern. The SCS Notes would be issued under agreements with lenders and may be guaranteed by Southern as to principal, premium, if any, and interest. The SCS Notes may have terms of up to 50 years, contain sinking funds and bear interest at a rate or rates not to exceed 500 basis points per annum over the rate for United States Treasury securities of corresponding maturity at the time the lenders commit to purchase the particular issue. SCS may engage an agent to place the SCS Notes for a commission based upon the principal amount borrowed.
SCS also may effect short-term or term-loan borrowings under one or more revolving credit commitment agreements. Short-term borrowings would have a maximum maturity of one year; term loans would have a maximum maturity of ten years. It is expected that the borrowings would be evidenced by a "grid" promissory note to be dated the date of the initial borrowing and the date of each borrowing thereafter when a "grid" short-term or term-loan note, as the case may be, is not outstanding. Borrowings would bear interest at rates to be negotiated with the lending financial institution or institutions. In addition, it is expected that SCS will be obligated to pay fees in connection with the credit arrangements. Interest rates and fees will be negotiated based upon prevailing market conditions.
SCS also may effect borrowings from certain banks and other institutions. Institutional borrowings will be evidenced by notes to be dated as of the date of the borrowings and to mature in not more than ten years after the date of borrowing or by "grid" notes evidencing all outstanding borrowings from each lender to be dated as of the date of the initial borrowing and to mature in not more than ten years after the date of borrowing. Generally, borrowings will be prepayable in whole, or in part, without penalty or premium, and will be at rates to be negotiated with the lending institutions based upon prevailing market conditions. SCS also may negotiate separate rates for, and/or agree not to prepay, particular borrowings if it is considered more favorable to SCS.
Southern further proposes that it may guarantee obligations incurred by SCS in connection with installment purchases, sale-leasebacks, leases or other acquisitions of equipment or other assets.
5. Preferred Stock, Preferred Securities, Equity-linked Securities and Long-term Debt. Southern and Capital Funding request authority to issue and sell from time to time, directly, preferred stock, and directly or indirectly through one or more financing subsidiaries, Preferred Securities, Equity-linked Securities and/or Long-term Debt in an aggregate amount at any time outstanding not to exceed $1.5 billion. Any of these securities may be convertible into common stock of Southern, provided that the value of the common stock issuable upon conversion may not exceed $2 billion in the aggregate, and will be in addition to the common stock authorized for issuance under paragraphs V.1 and V.3 above. For purposes of calculating compliance with the limitation in the preceeding sentence, Southern's common stock will be valued based upon an agreement between the buyer and the seller of the securities.
Preferred Stock. Southern and Capital Funding propose to issue and sell from time to time shares of their preferred stock. Any issue of preferred stock will have a specified par or stated value per share and, in accordance with applicable state law, will have voting powers (if any), designations, preferences, rights and qualifications, limitations or restrictions as shall be stated and expressed in the resolution or resolutions providing for the issue adopted by the board of directors of Southern or Capital Funding, as the case may be, under authority vested in it by the provisions of its certificate of incorporation. The foregoing may include rights of conversion or exchange into common stock of Southern.
Preferred Securities. Southern and Capital Funding request the authority to issue, directly or indirectly through one or more Financing Subsidiaries (as defined below) preferred securities (including, without limitation, trust preferred securities) ("Preferred Securities"). Preferred Securities may be issued in one or more series with rights, preferences and priorities as may be designated in the instrument creating each series, as determined by the board of directors of Southern or Capital Funding, as applicable. Dividends or distributions on the Preferred Securities will be made periodically and to the extent funds are legally available for that purpose, but may be made subject to terms which allow the issuer to defer dividend payments for specified periods. Southern proposes to guarantee certain payments made by a Financing Subsidiary in regard to the issuance of any Preferred Security.
Southern expects that one or more statutory or business trusts or other finance subsidiary (each a "Financing Subsidiary") established by Southern and/or Capital Funding would issue the Preferred Securities.3 Southern proposes to organize one or more separate Financing Subsidiaries as a statutory trust of the State of Delaware or other comparable trust in any jurisdiction considered advantageous by Southern or any other entity or structure, foreign or domestic, that is considered advantageous by Southern. Southern requests that the Commission reserve jurisdiction over the use of a foreign entity as a Financing Subsidiary. The Financing Subsidiary would lend, dividend or otherwise transfer to Southern or Capital Funding, as applicable, the proceeds of the Preferred Securities it issues, together with the equity contributed to the Financing Subsidiary.4 In turn, Capital Funding would lend, dividend or otherwise transfer the proceeds to Southern. Southern or Capital Funding would issue guarantees5 related to: (a) payment of dividends or distributions on the Preferred Securities of any Financing Subsidiary, if, and to the extent that, the Financing Subsidiary has funds legally available for this purpose; (b) payments to holders of the Preferred Securities of amounts due upon liquidation of the Financing Subsidiary or redemption of its Preferred Securities; and (c) certain additional amounts that may be payable in respect of the Preferred Securities.
Equity-linked Securities. Southern or Capital Funding may also issue and sell equity-linked securities, typically in the form of stock purchase units, which combine a security with a fixed obligation (e.g., Long-term Debt, Preferred Securities, preferred stock or other debt obligations of third parties, including U.S. Treasury securities) with a stock purchase contract that is exercisable (either mandatorily or at the option of the holder) within a relatively short period (e.g., one to six years after issuance) ("Equity-linked Securities"). Any securities issued by Capital Funding or a trust or other finance subsidiary may be guaranteed by Southern. In addition, Southern proposes to issue and sell stock purchase contracts ("Stock Purchase Contracts") either separately or as part of units ("Stock Purchase Units"). The Stock Purchase Units would consist of (a) Stock Purchase Contracts and (b) Preferred Securities, Long-term Debt and/or debt obligations of third parties.
Long-term Debt. Southern and Capital Funding propose that, in addition to, or as an alternative to, any Preferred Securities financing, Southern or Capital Funding may issue and sell notes directly to investors. It is proposed that any notes so issued will be unsecured, may be either senior or subordinated obligations of Southern or Capital Funding, as the case may be, may be convertible or exchangeable into common stock of Southern or preferred stock and may have the benefit of a sinking fund ("Long-term Debt"). Long-term Debt of Capital Funding will have the benefit of a guarantee or other credit support by Southern and may be subject to redemption or remarketing or a put option. Southern or Capital Funding will not issue Long-term Debt unless it has evaluated all relevant financial considerations (including, without limitation, the cost of equity capital) and has determined that to do so is preferable to issuing Southern common stock or short-term debt.
Applicants state that the proposed transactions are subject to rule 54 which provides that, in determining whether to approve the issue or sale of a security for purposes of financing the acquisition of an EWG or FUCO, as those terms are defined in sections 32 and 33, respectively, of the Act, the Commission shall not make certain adverse findings if the conditions set forth in rule 53(a)(1) through (a)(4) are met, and are not otherwise made inapplicable by reason of the existence of any of the circumstances described in rule 53(b).
Applicants state that Southern currently meets all of the conditions of rule 53(a). At March 31, 2004 Southern's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $244 million, or about 4.57% of Southern's "consolidated retained earnings," also as defined in rule 53(a)(1), as of March 31, 2004 ($5.336 billion).6
With respect to rule 53(a)(1), however, the Commission has determined that Southern'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).7 In addition, Southern states that it 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) has occurred. Finally, rule 53(c) is, by its terms, inapplicable since the requirements of rules 53(a) and 53(b) are satisfied.
Fees and expenses in connection with the proposed transactions (other than those stated above) are estimated not to exceed $5,000,000. Applicants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of 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, except as to those matters over which jurisdiction is reserved, 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 the rules under the Act, that, except as to matters as to which jurisdiction has been reserved, the Application is granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
IT IS FURTHER ORDERED, that Applicants will file, on a quarterly basis corresponding with the periodic reporting requirements of the Securities Exchange Act of 1934, as amended, the following information in accordance with rule 24 under the Act: (1) the issuances of any Common Stock under the authority granted by this order (except pursuant to the Plans), Preferred Securities, Preferred Stock, or Equity-linked Securities during the quarter, including the number of shares, the purchase price per share and the market price per share at the date of the agreement of sale, and also showing, separately the cumulative amount of each type of security issued to date during the Authorization Period; (2) the amount and terms of any Long-term Debt issued during the quarter which shall also separately show the amount of Long-term Debt cumulatively issued to date during the Authorization Period and the amount of Institutional Debt outstanding as of the end of the quarter; (3) a statement describing the uses for the proceeds of the securities issued; (4) the total capitalization ratio of Southern as of the end of the quarter, including the dollar and percentage components of the capital structure on a consolidated basis, with consolidated debt to include all short-term debt and nonrecourse debt of all EWGs and FUCOs; (5) market-to-book ratio of Southern's common stock; (6) the total number of shares of Southern Common Stock issued or issuable under any of the Plans, together with the cumulative number of shares issued under the Plans to date during the Authorization Period; (7) consolidated balance sheets as of the end of the quarter for Southern and Capital Funding (if either are engaged in any financings authorized under this order during the quarter); (8) if a guaranty is issued during the quarter, the name of the guarantor, the name of the beneficiary of the guarantee and the amount, terms and purpose of the guaranty; (9) if Southern Common Stock has been transferred to a seller of securities of a company being acquired, the number of shares so issued, the value per share and whether the shares are restricted in the hands of the acquirer; (10) information on significant variable interest entities where Southern is not the primary beneficiary, formed with any financing proceeds pursuant to this order, including a description of any financing transactions conducted during the reporting period that were used to fund variable interest entities and a description of the accounting for such transactions under FASB Interpretation 46R; and (11) future registration statements filed under the Securities Act of 1933 with respect to securities that are the subject of the Declaration will be filed or incorporated by reference as exhibits to the next certificate filed under rule 24. Southern will file Rule 24 certificates to notify the Commission of its issuances of securities that are exempt under the rules and regulations of the Act. Portions of Securities Act of 1933 filings or Securities Exchange Act of 1934 reports that contain disclosures of transactions occurring pursuant to the authorizations granted in this order may be incorporated by reference into rule 24 certificates of notification if the filings or reports contain the specific information required as set forth above. The certificates will also contain all other information required by rule 24, including the certification that each transaction being reported on has been carried out in accordance with the terms and conditions of, and for the purposes represented in, the Declaration.
IT IS FURTHER ORDERED, that jurisdiction is reserved, pending completion of the record, over: (1) the issuance by an Applicant of any security that does not meet the Investment Grade Criteria; and (2) the use of a foreign entity as a Financing Subsidiary.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
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