SECURITIES AND EXCHANGE COMMISSION
(Release No. 35-27939; 70-10252)
Southwestern Electric Power Company, and Dolet Hills Lignite Company, LLC
Order Authorizing Payment of dividends out of capital or unearned surplus
January 19, 2005
Southwestern Electric Power Company, a Delaware corporation ("SWEPCO"), Columbus, Ohio, an indirect public utility subsidiary of American Electric Power Company, Inc. ("AEP"), a registered public utility holding company under the Public Utility Holding Company Act of 1935, as amended ("Act"), and Dolet Hills Lignite Company, LLC, a Delaware limited liability company ("Dolet Hills"), a wholly-owned nonutility subsidiary of SWEPCO (collectively, "Declarants"), have filed with the Securities and Exchange Commission ("Commission") a declaration ("Declaration"), under section 12(c) of the Act and rules 46 and 54 under the Act. The Commission issued a notice of the filing of the Application on November 19, 2004 (HCAR No. 27912).
Applicants request authorization from the Commission for Dolet Hills to pay SWEPCO dividends in an amount up to the full amount of its capital surplus on its common stock to the full extent of the Delaware Limited Liability Company Act.
By order dated July 1, 2004, (HCAR No. 27872), the Commission granted the direct and indirect nonutility subsidiaries of AEP authority to pay dividends out of capital or unearned surplus to the fullest extent of the law, providing however that without further approval of the Commission, no nonutility subsidiary would declare or pay any dividend out of capital or unearned surplus if the nonutility subsidiary derived any material part of its revenues from the sale of goods, services or electricity to any public utility subsidiary of its parent.
Dolet Hills is a mining company which provides lignite to the Dolet Hills Power Plant ("Plant"), a 650-megawatt lignite fired generating plant located in northern Louisiana. The Plant is jointly owned by SWEPCO, the nonaffiliate plant operator, Cleco Power LLC, and two other nonaffiliated minority owners. Because Dolet Hills derives a material part of its revenue from the sale of lignite to its parent SWEPCO, the Commission's approval is required for Dolet Hills to pay dividends out of capital to SWEPCO.
Dolet Hills proposes that its Board of Managers declare and pay dividends out of its capital surplus over time in an amount up to the full amount of $4,712,000, when cash is available. As of June 30, 2004, Dolet Hills has paid in capital of $4,712,000.
The Delaware Limited Liability Company Act (Title 6, Chapter 18, Section 607) provides that: "A limited liability company shall not make a distribution to a member to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited liability company, other than liabilities to members on account of their limited liability company interests and liabilities for which the recourse of creditors is limited to specified property of the limited liability company, exceed the fair value of the assets of the limited liability company, except that the fair value of property that is subject to a liability for which the recourse of creditors is limited shall be included in the assets of the limited liability company only to the extent that the fair value of that property exceeds that liability."
SWEPCO is entitled to earn a specified rate of return on its capital contributions to Dolet Hills. This return is factored in to the cost of the lignite sold to the Plant. If the Commission authorizes Dolet Hills to pay the requested dividends out of capital, SWEPCO's total capital investment in Dolet Hills would be reduced by the amount of those dividends. The effect of this reduction in SWEPCO's capital investment would be to reduce the cost of the lignite provided to the Plant.
The proposed transaction is also subject to rule 54, and meets the requirements set forth in that rule. Rule 54 provides that, in determining whether to approve the issue or sale of any securities for purposes other than the acquisition of any "exempt wholesale generator" ("EWG") or "foreign utility company" ("FUCO") or other transactions unrelated to EWGs or FUCOs, the Commission shall not consider the effect of the capitalization or earnings of subsidiaries of a registered holding company that are EWGs or FUCOs if the requirements of rule 53(a), (b) and (c) are satisfied.
No fees and expenses are expected to be incurred in connection with the proposed transactions, other than fees and expenses to be billed at cost by the American Electric Power Service Corporation and not to exceed $1,000 in the aggregate. Declarants state that no state or federal commission, other than this Commission, has jurisdiction over the proposed transactions.
Due notice of the filing of the 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 rules under 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 the Declaration be, and hereby is, granted and permitted to become effective immediately, subject to the terms and conditions prescribed in rule 24 under the Act.
For the Commission, by the Division of Investment Management, pursuant to delegated authority.
Margaret H. McFarland
AEP consummated its merger with Central and South West Corporation, now AEP Utilities, Inc. ("CSW"), on June 15, 2000 in accordance with a Commission order dated June 14, 2000 (HCAR No. 27186) that also 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").
Declarants state that AEP currently meets all of the conditions of rule 53(a). At September 30, 2004, AEP's "aggregate investment," as defined in rule 53(a)(1), in EWGs and FUCOs was approximately $332 million, or about 19.9% of AEP's "consolidated retained earnings," also as defined in rule 53(a)(1), for the four quarters ended September 30, 2004 ($1.675 billion).
Declarants state that AEP has complied and will continue to comply with the record-keeping requirements of rule 53(a)(2), the limitation under rule 53(a)(3) on the use of operating company personnel to render services to EWGs and FUCOs, and the requirements of rule 53(a)(4) concerning the submission of copies of certain filings under the Act to retail rate regulatory commissions. Further, Declarants state, none of the circumstances described in rule 53(b)(1) or (3) has occurred or is continuing.
Declarants report that circumstances described in rule 53(b)(2) have occurred. As a result of the recording of a loss with respect to impairment charges, AEP's consolidated retained earnings declined for the period ending December 31, 2003. The average consolidated retained earnings of AEP for the four quarterly periods ended September 30, 2004 was $1.695 billion, or a decrease of approximately 24.8% from the company's average consolidated retained earnings for the four quarterly periods ended June 30, 2004 of $2.226 billion. In addition, AEP's "aggregate investment" in EWGs and FUCOs as of June 30, 2004 exceeded 2% of the total capital invested in utility operations.
In the fourth quarter of 2003 AEP recorded pre-tax impairments of assets (including goodwill) and investments totaling $1.4 billion that reflected downturns in energy trading markets, projected long-term decreases in electricity prices, and other factors. The impairments consisted of $650 million related to asset impairments, $70 million related to investment value and other impairment losses, and $711 million related to discontinued operations. Of the discontinued operations, $577 million was attributable to the impairment of the fixed-asset carrying value of AEP's two coal-fired generation plants in the United Kingdom. AEP recorded a pre-tax impairment of $70 million on certain of its qualifying facilities, as defined under the Public Utility Regulatory Policies Act of 1978, as amended, in the third quarter of 2003.
Declarants assert that AEP meets the requirements of rule 53(c), arguing 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 proposal made in the Declaration. Declarants assert that the authorization requested in the Declaration would not, by itself, or even considered in conjunction with the effect of the capitalization and earnings of AEP's EWGs and FUCOs, have a material adverse effect on the financial integrity of the AEP system, or an adverse impact on AEP's public utility subsidiaries, their customers, or the ability of state commissions to protect those public utility customers Declarants also assert that the Rule 53(c) Order was predicated, in part, upon an assessment of AEP's overall financial condition which took into account, among other factors, AEP's consolidated capitalization ratio and the growth trend in AEP retained earnings.
As of December 31, 1999, the most recent period for which financial statement information was evaluated in the Rule 53(c) Order, AEP's consolidated capitalization (including CSW on a pro forma basis) consisted of 37.3% common and preferred equity, 61.3% debt and $335 million principal amount of certain subsidiary obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures of such subsidiaries representing 1.4%.
As of September 30, 2004, AEP's consolidated capitalization consisted of 60.4% debt, 39.6% common and preferred equity (consisting of common stock representing 39.0% and $133 million principal amount of preferred stock representing 0.6%).
Declarants state that since the date of the Rule 53(c) Order there has been an increase in AEP's consolidated equity capitalization ratio. In addition, AEP's public 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, 1999, Standard and Poor's rating of secured debt for AEP's operating subsidiaries was as follows: Appalachian Power Company, A; Columbus Southern Power Company, A-; Indiana Michigan Power Company, A-; Kentucky Power Company, A; Ohio Power Company, A-; AEP Texas Central Company (formerly Central Power and Light Company), A; Public Service Company of Oklahoma, AA-; Southwestern Electric Power Company, AA-; and AEP Texas North Company, A. AEP did not have a long-term debt rating as of December 31, 1999.
As of September 30, 2004, S&P's rating of secured debt for AEP's utility subsidiaries was as follows: Appalachian Power Company, BBB; Columbus Southern Power Company, BBB; Indiana Michigan Power Company, BBB; Kentucky Power Company, BBB, Ohio Power Company, BBB, AEP Texas Central Company (formerly Central Power and Light Company), BBB; Public Service Company of Oklahoma, BBB; Southwestern Electric Power Company, BBB; and AEP Texas North Company (formerly, West Texas Utilities Company), BBB.