SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27871; 70-10214)
American Transmission Company, LLC
ATC Management, Inc.
Order Authorizing Issuance of Short-Term Debt, Long-Term Debt, Preferred Securities, Guarantees, Equity Interests; Hedging Transactions; and Reserving Jurisdiction
July 1, 2004
American Transmission Company, LLC ("ATC"), an electric transmission public utility company subsidiary of Alliant Energy Corporation ("Alliant"), a registered holding company, and ATC Management, Inc. ("ATCMI"), a public utility company, corporate manager of ATC, and holding company subsidiary of Alliant, claiming exemption from registration under section 3(a)(1) by rule 2 of the Public Utility Holding Company Act of 1935, as amended ("Act"), both located in West Waukesha, Wisconsin (together, "Applicants"), have filed an application-declaration, as amended ("Application"), with the Securities and Exchange Commission ("Commission") under sections 6(a), 7, 9(a), 10 and 12(b) of the Act and rule 54 under the Act. The Commission issued a notice of the filing of the Application in this matter on June 2, 2004 (Holding Co. Act Release No. 27852).
In 1999, the state of Wisconsin enacted legislation ("Transco Legislation") that facilitated the formation of for-profit transmission companies ("Transcos"). ATC was created under the Transco Legislation and ATCMI was created to be the general manager of ATC. The legislation obligates these Transcos to construct, operate, maintain, and expand transmission facilities to provide adequate, reliable transmission services under an open-access transmission tariff.
By order dated December 29, 2000 (Holding Co. Act Release No. 27331) ("December Order"), the Commission authorized ATC to acquire the transmission assets of the subsidiaries of four investor owned public utility holding companies with service areas in Wisconsin and adjacent areas in Illinois and Michigan. The following utility companies transferred ownership and operation of their transmission assets to ATC in exchange for member interests in ATC proportional to their contributions ("Member Interests"): Wisconsin Power and Light Company ("WPL") and South Beloit Water, Gas and Electric Company ("South Beloit");1 Wisconsin Electric Power Company and Edison Sault Electric Company ("Edison Sault");2 Madison Gas and Electric Company;3 and Wisconsin Public Service Corp.4 Wisconsin Public Power Inc. ("WPPI"), a Wisconsin municipal electric company, contributed cash in exchange for an equity interest in ATC proportional to WPPI's load ratio share in Wisconsin.5 These entities together are referred to as the "Initial Members."
Applicants state that as a limited liability company, ATC may be formed to be "member managed" or "manager managed" according to Wisconsin law. Applicants state that it was decided that ATC would be "manager managed" by ATCMI. In the December Order, the Commission authorized ATCMI to acquire a nominal interest in ATC and operate as the sole manager of ATC. Due to the extent of the operational control ATCMI has over the utility assets of ATC, the Commission found that both ATC and ATCMI were jurisdictional public utilities under the Act. ATCMI is also an intermediate holding company by virtue of its ownership interest in ATC and claims exemption from registration by rule 2 under section 3(a)(1) of the Act.
In June 2001, eighteen more contributors, including twelve municipal utilities, four cooperatives, one public power entity and one investor-owned utility invested transmission assets and/or cash in ATC. Two new members joined ATC on December 31, 2002; and a third member joined ATC on December 31, 2003. These three members are Alger Delta Cooperative Electric Association; the Ontonagon County Rural Electrification Association and the Upper Peninsula Public Power Agency. These members are referred to collectively as the "Additional Members." Effective February 1, 2002, ATC transferred operational control of its facilities to the Midwest Independent Transmission System Operator, Inc. ("MISO").
The Initial Members contributed cash and/or transmission assets to ATC and they or their associate companies received in exchange Member Interests in ATC proportional to their contributions. They or their associate companies also purchased a proportionate amount of Class A shares in ATCMI and one Class B share each of ATCMI.
The Additional Members contributed cash and/or transmission assets to ATC and received in exchange Member Interests in ATC proportional to their contributions. They also purchased a proportionate amount of Class A shares in ATCMI.
II. Existing Authorization
By order dated May 15, 2003 (Holding Co. Act Release No. 27678), as modified by an order issued on June 23, 2003 (Holding Co. Act Release No. 27688) (collectively, "Prior Financing Order") the Commission authorized through June 30, 2004:
- ATC LLC to issue debt securities in an aggregate amount not to exceed $710 million at any one time outstanding, provided that the aggregate amount of short-term debt issued pursuant to the requested authority will not exceed $200 million at any one time outstanding;6
- ATC LLC to issue Member Interests and ATCMI to issue equity interests and preferred securities in an aggregate amount of $500 million at any one time outstanding, provided that the aggregate amount of Member Interests and Class A and Class B Shares outstanding at any one time will not exceed $393 million plus the value at that time of the Member Interests and Class A and Class B Shares outstanding as of May 12, 2003;7
- ATC LLC and ATCMI to provide guarantees and other credit support in an aggregate amount not to exceed $125 million outstanding at any one time;8 and
- ATC LLC and ATCMI to enter into interest rate hedging transactions.
III. Current Request
Applicants now request financing authority from the date of the issuance of the order in this matter (the "Order") through June 30, 2005 ("Authorization Period") as follows:
- Applicants seek authority for ATC to issue debt securities in an aggregate amount not to exceed $710 million at any one time outstanding during the Authorization Period, provided that the aggregate amount of short-term debt issued pursuant to the requested authority will not exceed $200 million at any one time outstanding during the Authorization Period;
- ATC seeks authorization to issue Member Interests and ATCMI seeks authority to issue equity interests and preferred securities in an aggregate amount of $500 million at any one time outstanding during the Authorization Period, provided that the aggregate amount of Member Interests and Class A and Class B Shares outstanding at any one time during the Authorization Period will not exceed $393 million plus the value at that time of the Member Interests and Class A and Class B Shares outstanding as of the date of the order in this matter;
- Applicants request authority to provide guarantees and other credit support as described below in an aggregate amount not to exceed $125 million outstanding at any one time during the Authorization Period;
- Applicants request authority to enter into interest rate hedging transactions as described below; and
- Applicants request authority to undertake transactions to extend the terms of or replace, refund or refinance existing obligations, as well as the issuance of new obligations in exchange for existing obligations, subject to the financings conditions specified in this order.
IV. Financing Conditions
All requested authorization is subject to the following terms and conditions: (1) the maturity of short-term debt will not exceed one year and the maturity of long-term debt will not exceed fifty years; (2) any short-term or long-term debt security or credit facility will have such designation, aggregate principal amount, interest rate(s) or methods of determining the same, terms of payment of interest, collateral, redemption provisions, non-refunding provisions, sinking fund terms, conversion or put terms and other terms and conditions as ATC and ATCMI might determine at the time of issuance, provided that, in no event, however, will the effective cost of money on short-term debt exceed 300 basis points over the London Interbank Offered Rate for maturities of one year or less in effect at the time; (3) any convertible or equity-linked security will be convertible into or linked to only securities that ATC and ATCMI are otherwise authorized to issue pursuant to rule or Commission order; (4) the interest rate on long-term debt will not exceed 500 basis points over the yield-to-maturity of a U.S. Treasury security having a remaining term approximately equal to the average life of the debt; and (5) the underwriting fees, commissions or other similar remuneration paid in connection with the non-competitive issue, sale or distribution of securities under this Application will not exceed 7% of the principal or total amount of the securities being issued.
Applicants represent that at all times during the Authorization Period, ATCMI and ATC will each maintain common equity of at least 30% of its consolidated capitalization (common equity, preferred stock, long-term and short-term debt). Applicants further represent that, other than Class A and Class B Shares and Member Interests, no security may be issued in reliance upon this Order, unless: (1) the security to be issued, if rated, is rated investment grade; (2) all outstanding rated securities of the issuer are rated investment grade; and (3) all outstanding rated securities of ATCMI and any registered holding company in the Alliant system 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 organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the 1934 Act. Applicants request that the Commission reserve jurisdiction over the issuance by ATCMI or ATC of any securities that are rated below investment grade. Applicants further request that the Commission reserve jurisdiction over the issuance of any guarantee or other securities at any time that the conditions set forth in clauses (1) through (3) above are not satisfied.9
Applicants state that the proceeds from the sale of securities in external financing transactions will be used for general corporate purposes including (1) the financing of capital expenditures of ATC and ATCMI; (2) the financing of working capital requirements of ATC and ATCMI, (3) the refinancing or acquisition, retirement or redemption of securities previously issued by ATC or ATCMI, (4) to meet unexpected contingencies, payment and timing differences, and cash requirements, and (5) other lawful purposes
V. Specific Financing Requests
A. Short Term Debt
Short-term debt will be unsecured and may include institutional borrowings, commercial paper and privately-placed notes. ATC may sell commercial paper or privately placed notes from time to time, in established commercial paper markets. Commercial paper may be sold at a discount or bear interest at a rate per annum prevailing at the date of issuance for commercial paper of a similarly situated company. ATC may, without counting against the limit on financing set forth above, maintain back up lines of credit in connection with one or more commercial paper programs in an aggregate amount not to exceed the amount of authorized commercial paper.
Credit lines may also be set up for use by ATC for general corporate purposes. Credit lines, which will not be counted against the financing limit, may be utilized to obtain letters of credit or may be borrowed against, from time to time, as it is deemed appropriate or necessary.
B. Long-Term Debt
Long-term debt securities may include notes or debentures under one or more indentures or long-term indebtedness under agreements with banks or other institutional lenders directly or indirectly. Long-term debt may be secured or unsecured.10 Long-term debt may be convertible or exchangeable into forms of equity or indebtedness authorized in this filing, or into other securities or assets the acquisition of which is either exempt or approved by Commission order. Specific terms of any borrowings will be determined by ATCMI at the time of issuance and will comply in all regards with the parameters on financing authorization set forth above.11
C. Equity Interests
In the event Applicants determine to seek capital through equity or to acquire new facilities in exchange for equity interests, ATC seeks authorization to issue Member Interests and ATCMI seeks authority to issue Class A and B Shares in an aggregate amount at any one time outstanding during the Authorization Period of $393 million plus the value at that time of any Member Interests and Class A and B Shares outstanding at the time of the Order. Member Interests may be issued in the form of member interests, preferred member interests or convertible member interests.
Applicants contemplate that from time to time ATC may require an additional equity infusion. ATC could reduce the amount of distributions to Members. Each Member's equity would be increased by the amount of undistributed earnings on a pro rata basis. In the alternative, there could be a capital call for Members to make additional cash contributions on a pro rata basis. If a Member opts not to make an additional contribution, any other Member could make the requested contribution. Members do not, however, have the obligation to make additional contributions. Another possibility, therefore, would be for ATC to issue preferred securities that are convertible into Member Interests and/or Class A Shares and/or Class B Shares. The securities would have a stated par value and dividend rate and would be convertible into Member Interests and/or Class A and/or Class B Shares based on a predetermined ratio or formula. The conversion rights and terms and conditions for exercise of those rights would be set forth at the time of purchase. At the end of 2003, ATC made a capital call for additional contributions in the amount of $68 million to be paid in four quarterly installments in 2004. The Applicants request that the Commission reserve jurisdiction over the issuance of equity by either ATCMI or ATC in connection with an initial public offering ("IPO").
ATC would issue Member Interests in exchange for cash or the transfer of transmission facilities to ATC by current or future members. The entities transferring transmission assets and their transferring asset values have not yet been determined. In order to maintain its 50/50 debt to equity ratio, ATC would reimburse the contributors for 50% of the net book value of the transmission assets contributed. In addition, ATCMI will issue to each new member of ATC Class A Shares in an amount that is proportional to that member's interest in ATC, with a par value of $0.01 per share and a sales price of $10 per share.
Additionally, it is anticipated that ATC will issue Member Interests and ATCMI will issue Class A Shares to Wisconsin Public Service Corporation or its affiliate in exchange for that company's contribution of 50% of the ongoing cash requirements of the Arrowhead to Weston Transmission Line Project. Current cost estimates are approximately $400 million over the 2002-2008 period.12
D. Preferred Stock
ATCMI seeks authority to issue preferred stock or other types of preferred securities (including convertible preferred securities). It is contemplated that preferred stock or other types of preferred securities may be issued in one or more series with rights, preferences, and priorities as may be designated in the instrument creating series, as determined by ATCMI's board of directors, or a pricing committee or other committee of the board performing similar functions. Preferred securities may be redeemable or may be perpetual in duration. Dividends or distributions on preferred securities will be made periodically and to the extent funds are legally available for the purpose, but may be made subject to terms which allow Applicants to defer dividend payments for specified periods. Preferred securities may be convertible into forms of equity or indebtedness authorized in this filing, or into other securities or assets the acquisition of which is either exempt or approved by Commission order.
Preferred securities may be sold directly or through underwriters or dealers in any manner. The dividend rate on any series of preferred securities issued by ATCMI would not exceed 500 basis points over the yield to maturity of a U.S. Treasury security having a remaining term equal to the term of that series of preferred securities at the time of issuance.
Applicants request authorization to enter into guarantees, obtain letters of credit, enter into expense agreements or otherwise provide credit support with respect to the obligations of their affiliates or members in the ordinary course of Applicants' business, in an amount not to exceed $125 million outstanding at any one time during the Authorization Period.
Applicants state that certain of the guarantees referred to above may be in support of obligations that are not capable of exact quantification. Applicants will determine the exposure under the guarantee by appropriate means including estimation of exposure based on loss experience or projected potential payment amounts. As appropriate, the estimates will be made in accordance with generally accepted accounting principles and/or sound financial practices and re-evaluated periodically.
F. Interest Rate Hedging Transactions
ATC seeks authority to enter into interest rate hedging transactions with respect to existing indebtedness ("Interest Rate Hedges"), subject to certain limitations and restrictions, in order to reduce or manage interest rate cost. Interest Rate Hedges will only be entered into with counterparties ("Approved Counterparties") whose senior debt ratings, or the senior debt ratings of the parent companies of the counterparties, as published by Standard and Poor's Ratings Group, are equal to or greater than BBB, or an equivalent rating from Moody's Investors Service, Fitch, or Duff and Phelps. Interest Rate Hedges will involve the use of financial instruments commonly used in today's capital markets, such as interest rate swaps, caps, collars, floors, and structured notes (i.e., a debt instrument in which the principal and/or interest payments are indirectly linked to the value of an underlying asset or index), or transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations. The transactions will be for fixed periods and stated notional amounts. Fees, commissions and other amounts payable to the counterparty or exchange (excluding, however, the swap or option payments) in connection with an Interest Rate Hedge will not exceed those generally obtainable in competitive markets for parties of comparable credit quality. Applicants state that ATC will not engage in speculative hedging transactions and all transactions in financial instruments and products are matched to an underlying business requirement. In no case will the notational principal amount of any hedging instrument exceed that of the underlying instrument and related interest rate exposure.
ATC also seeks authority to enter into interest rate hedging transactions with respect to anticipated debt offerings (the "Anticipatory Hedges"), subject to certain limitations and restrictions. Anticipatory Hedges will only be entered into with Approved Counterparties, and will be utilized to fix and/or limit the interest rate risk associated with any new issuance through (1) a forward sale of exchange-traded U.S. Treasury futures contracts, U.S. Treasury obligations and/or a forward swap (each a "Forward Sale"), (2) the purchase of put options on U.S. Treasury obligations (a "Put Options Purchase"), (3) a Put Options Purchase in combination with the sale of call options on U.S. Treasury obligations (a "Zero Cost Collar"), (4) transactions involving the purchase or sale, including short sales, of U.S. Treasury obligations, or (5) some combination of a Forward Sale, Put Options Purchase, Zero Cost Collar and/or other derivative or cash transactions, including, but not limited to structured notes, caps and collars, appropriate for the Anticipatory Hedges.
Applicants state that they will comply with existing and future financial disclosure requirements of the Financial Accounting Standards Board associated with hedging transactions, and that these hedging transactions will qualify for hedge accounting treatment under generally accepted accounting principles. Specifically, Applicants will comply with Statement of Financial Accounting Standard ("SFAS") 133 (Accounting for Derivative Instruments and Hedging Activities) and SFAS 138 (Accounting for Certain Derivative Instruments and Certain Hedging Activities) or other standards relating to accounting for derivative transactions as are adopted and implemented by the Financial Accounting Standards Board.
Applicants undertake to file rule 24 certificates of notification within 60 days after the end of the first three calendar quarters and within 90 days after the end of the last calendar quarter in which transactions occur. The rule 24 certificates will contain the following information as of the end of the applicable quarter:
- The sales of any equity securities by ATC LLC or ATCMI and the purchase price per share or Member Interest;
- The amount and terms of any long-term debt issued by ATC LLC during the quarter, and the aggregate amount of short-term debt outstanding as of the end of the quarter, as well as the weighted average interest rate for such short-term debt as of such date;
- the aggregate amount issued and outstanding during the Authorization Period for each type of issued securities (Member Interest, preferred stock, long-term and short-term debt);
- A description of any utility assets acquired during the quarter and the consideration for each;
- Balance sheets and income statements prepared in accordance with generally accepted accounting principles for ATC as of the end of each of the quarter for the first three calendar quarters; and
- Audited financial statements with notes as of the end of the calendar year.
In the rule 24 Certificate filed for the last calendar quarter, a report listing by expense category the amount of operational, managerial and administrative services provided by ATCMI to ATC LLC during the calendar year. Applicants also undertake to file a Form U-13E-1 with respect to any jurisdictional service or sales contracts with Alliant or its subsidiary companies.
For purposes of rule 54, Alliant is not in compliance with all requirements of rule 53(a), except clause (1). In an order dated October 3, 2001 (Holding Co. Act Release No. 27448) ("2001 Order"), the Commission, among other things, authorized Alliant to increase its aggregate investment in exempt wholesale generators ("EWGs") and foreign utility companies ("FUCOs"), as defined in sections 32 and 33 of the Act ("EWG/FUCO Financing Limit") to 100% of Alliant's average "consolidated retained earnings." As of March 31, 2004, Alliant's aggregate investment in EWGs and FUCOs was approximately $518.3 million or 63.8% of Alliant's average "consolidated retained earnings," as defined in rule 53(a)(1), for the four quarters ended March 31, 2004 ($812.6 million).
Although Alliant's aggregate investment exceeds the 50% "safe harbor" limitation contained in rule 53, Alliant's aggregate investment is below the EWG/FUCO Financing Limit authorized in the 2001 Order. In addition, Applicants state that Alliant has complied and will comply with the record-keeping requirements of rule 53(a)(2), the employee limitation under rule 53(a)(3) and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail regulatory commissions. Finally, none of the circumstances described in rule 53(b) has occurred or is continuing.
Applicants state that with regard to capitalization, Alliant has experienced an increase in consolidated common stock equity since September 30, 2001, the end of the quarterly period immediately preceding the issuance of the October 3, 2001 order, due in part to the sale of certain non-regulated businesses (including Alliant's FUCO investments in Australia in April 2003, the sale of its affordable housing and SmartEnergy businesses in mid-2003, and the sale of approximately 94% of its oil and gas exploration and production business in November 2003) and the application of the proceeds to retire more than $800 million of debt; halving the targeted dividend on common stock from $2.00 per share to $1.00 per share; reducing anticipated capital expenditures in 2002 and 2003 (including no new investments in Brazil through 2003); completion of a public offering of 17,250,000 shares of common stock in July 2003, the net proceeds of which (approximately $318 million) were used to make capital contributions to IP&L and WP&L; and implementation of other cost control measures.
Since the issuance of the October 3, 2001 order, Alliant has experienced a modest increase in its level of losses from its portfolio of FUCOs. Alliant's share of losses associated with its portfolio of FUCOs in fiscal year 2000 (the last fiscal year prior to issuance of the October 3, 2001 order) totaled approximately $17.7 million, after interest expense, taxes and currency transaction losses. In fiscal years 2001 and 2002, Alliant's share of losses totaled approximately $25.3 million and $26.7 million, respectively. Alliant's losses on its Brazil investments were unexpectedly large in 2002, resulting primarily from the impact of a decline in currency translation rates, as well as from charges related to recovery of the impacts of electricity rationing in Brazil and other prior costs. Since then, energy demand has increased and several rate increases have been approved. In fiscal year 2003, Alliant's share of income was approximately $3.8 million (not including gain from sale of Australian FUCO investments).
As of December 31, 2000, the most recent period for which financial statement information was evaluated in the 2001 Order, Alliant's consolidated capitalization consisted of 54.2% common equity. As of March 31, 2004, Alliant's common equity as a percentage of capitalization was 47.1%; the common equity ratios of ATC and ATCMI as of March 31, 2004, were 49.5% and 100%, respectively. Applicants state that the proposed transactions should have no adverse impact on the consolidated capitalization of Alliant.
Fees and expenses to be incurred in connection with the proposed transactions are estimated to be $25,000. Applicants maintain that no other 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 with respect to those matters over which jurisdiction has been reserved, the applicable standards of 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 those matters over which jurisdiction in reserved, the Application be granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act as modified above.
IT IS FURTHER ORDERED, that jurisdiction be reserved over the issuance of equity by either ATCMI or ATC in connection with an initial IPO, the issuance by ATCMI or ATC of any securities that are rated below investment grade, and the issuance of any guarantee or other securities at any time that the conditions set forth in clauses (1) through (3) in section IV above are not satisfied.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland