File No. 70-9785
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 3
TO
FORM U-1
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APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
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AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
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CENTRAL AND SOUTH WEST CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
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CENTRAL POWER AND LIGHT COMPANY
539 North Carancahua Street, Corpus Christi, Texas 78401-2802
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COLUMBUS SOUTHERN POWER COMPANY
1 Riverside Plaza, Columbus, Ohio 43215
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OHIO POWER COMPANY
301 Cleveland Avenue, S.W., Canton, Ohio 44702
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SOUTHWESTERN ELECTRIC POWER COMPANY
428 Travis Street, Shreveport, Louisiana 71156-0001
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WEST TEXAS UTILITIES COMPANY
301 Cypress Street, Abilene, Texas 78601-5820
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(Name of company or companies filing this statement
and addresses of principal executive offices)
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
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(Name of top registered holding company
parent of each applicant or declarant)
* * *
Jeffrey D. Cross, General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
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(Name and address of agent for service)
TABLE OF CONTENTS
Page
Number
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Glossary of Terms ......................................................... I
Item 1. Description of the Proposed Transaction .......................... 1
A. Introduction ................................................. 1
B. Description of the Applicants ................................ 3
C. Overview of the Proposed Restructuring ....................... 5
1. Reorganization of the Texas Operating Companies .......... 7
2. Reorganization of the Ohio Operating Companies ........... 9
D. Overview of Requested Authorizations ......................... 9
1. The Transaction .......................................... 9
a. Formation and Capitalization of Enterprises,
Wholesale Holdco and Domestic Holdco ................. 10
b. Formation of Texas PGCs and Tax Beneficial Entities .. 10
c. Formation of EDC Subsidiaries ........................ 11
d. Capitalization of Subsidiaries ....................... 11
e. Transfers ............................................ 12
2. Agreements ............................................... 15
E. Financing Plan ............................................... 17
1. Overview of the Financing Request ........................ 17
2. Parameters for Financing and Hedging Transaction
Authorization ............................................ 18
a. Effective Cost of Money .............................. 18
b. Maturity of Debt and Final Redemption on
Preferred Securities ................................. 19
c. Insurance Expenses ................................... 19
d. Use of Proceeds ...................................... 19
e. Financial Condition .................................. 20
f. Hedging Transactions ................................. 22
3. AEP Guarantees, Intra-system Advances and
EWG Investment ........................................... 23
a. Guarantees ........................................... 23
b. Intra-system Advances ................................ 25
c. EWG Investment ....................................... 25
4. Enterprises Holding Companies Authority .................. 26
a. Financing Authority .................................. 26
b. Guarantee Authority .................................. 27
c. Hedging Transaction Authority ........................ 27
d. Intra-system Advances ................................ 27
5. Enterprises Subsidiaries Authority ....................... 27
a. Financing Authority .................................. 27
b. Guarantee Authority .................................. 28
c. Hedging Transaction Authority ........................ 28
6. Reg Holdco Authority ..................................... 28
a. Financing Authority .................................. 28
b. Guarantee Authority .................................. 29
c. Hedging Transaction Authority
d. Money Pool Authority ................................. 29
e. Intra-system Advances ................................ 29
7. Regulated Subsidiaries Authority ......................... 29
a. Financing Authority .................................. 29
b. Guarantee Authority .................................. 30
c. Money Pool Authority ................................. 30
d. Hedging Transaction Authority ........................ 30
8. Finance Subsidiary Authority ............................. 30
F. AEP's Non-utility Holdings ................................... 31
G. Request for Authority to Pay Dividends Out of Capital or
Unearned Surplus by the
Utility Subsidiaries ......................................... 31
H. Other Regulatory Approvals ................................... 32
Item 2. Fees, Commissions and Expenses ................................... 33
Item 3. Applicable Statutory Provisions .................................. 33
A. Sections 9 and 10 ............................................ 34
1. The Transaction Complies With State Law .................. 35
2. The Capital Structure is not Unduly Complicated .......... 35
3. The Consideration is Fair and Reasonable ................. 37
B. Section 12 and Rule 46 ....................................... 37
C. Section 13(b) Compliance ..................................... 38
D. Rule 54 Compliance ........................................... 39
Item 4. Regulatory Approval .............................................. 40
Item 5. Procedure ........................................................ 40
Item 6. Exhibits and Financial Statements ................................ 41
a. Exhibits ............................................ 41
b. Financial Statements ................................ 41
Item 7. Information as to Environmental Effects .......................... 42
Signature ................................................................. 42
GLOSSARY OF TERMS
When the following terms and abbreviations appear in the text of this
Application, they have the meanings indicated below:
TERM MEANING
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1935 Act .......................... Public Utility Holding Company Act of 1935
AEP ............................... American Electric Power Company, Inc.
AEPSC ............................. American Electric Power Service
Corporation
Applicants ........................ AEP, AEPSC, CPL, CSP, CSW, OPCo, SWEPCO
and WTU
Commission ........................ Securities and Exchange Commission
Consolidated Capitalization ....... common equity, preferred stock and
long-term and short-term debt, including
current maturities of long-term debt
CPL ............................... Central Power and Light Company
CPL EDC ........................... CPL following the transfer of its
generating assets and related liabilities
CPL PGC ........................... collectively, one or more to-be-formed
PGCs organized to hold the generating
assets and related liabilities of CPL;
when referred to in the singular tense,
the plural is intended to be included
CPL PGC LLC ....................... collectively, one or more to-be-formed
limited liability companies organized by
CPL PGC to act as the general partner of
CPL PGC LP; when referred to in the
singular tense, the plural is intended to
be included
CPL PGC LP. ....................... collectively, one or more to-be-formed
limited partnerships organized by CPL PGC
to hold its generation assets and related
liabilities; when referred to in the
singular tense, the plural is intended to
be included
CSP ............................... Columbus Southern Power Company
CSP EDC ........................... a to-be-formed EDC organized to hold the
transmission and distribution assets and
related liabilities of CSP
CSP PGC ........................... CSP following the transfer of its
transmission and distribution assets and
related liabilities
CSW ............................... Central and South West Corporation
Domestic Holdco ................... Domestic Generating Holding Company, a
to-be-formed wholly owned subsidiary
corporation or limited liability company
of Wholesale Holdco
EDC ............................... Energy Delivery Company
Enterprises ....................... AEP Enterprises, a to-be-formed wholly
owned subsidiary corporation or limited
liability company of AEP, including one or
more to-be-formed wholly owned energy
commodity trading or marketing subsidiary
corporations or limited liability
companies of Enterprises
Enterprises Holding Companies ..... Enterprises, Wholesale Holdco and Domestic
Holdco
Enterprises Subsidiaries .......... CPL PGC, CPL PGC LLC, CPL PGC LP, CSP,
OPCo, WTU PGC, WTU PGC LLC and WTU PGC LP
Enterprises Unit .................. the direct and indirect subsidiaries of
Enterprises
EWG Investment Amount ............. $3.911 billion, consisting of the sum of
(i) the aggregate of the equity accounts
of the Enterprises Subsidiaries upon
completion of the Transaction
(approximately $2.411 billion as of
December 31, 2001) (see Exhibit B-2) and
(ii) up to an aggregate of $1.5 billion of
related guarantees and credit support by
and from AEP for the benefit of the
Enterprises Subsidiaries
FERC .............................. Federal Energy Regulatory Commission
Finance Applicants ................ CPL EDC, CPL PGC, CPL PGC LLC, CPL PGC LP,
CSP EDC, CSP PGC, Domestic Holdco,
Enterprises, OPCo EDC, OPCo PGC, Reg
Holdco, SWEPCO EDC, SWEPCO Transco,
Wholesale Holdco, WTU EDC, WTU PGC, WTU
PGC LLC and WTU PGC LP (provided, however,
that when an Enterprises Subsidiary
obtains EWG status, that particular entity
will no longer be a Finance Applicant and
when all Enterprises Subsidiaries obtain
EWG status, then the Enterprises Holding
Companies will no longer be Finance
Applicants)
FUCOs ............................. Foreign Utility Companies within the
meaning of Section 33 of the 1935 Act and
related rules thereunder
Holding Companies ................. collectively, Enterprises, Wholesale
Holdco, Domestic Holdco and Reg Holdco
LPSC .............................. Louisiana Public Service Commission
OPCo .............................. Ohio Power Company
OPCo EDC .......................... a to-be-formed EDC organized to hold the
transmission and distribution assets and
related liabilities of OPCo before and
after merger with and into OPCo EDC LLC
OPCo EDC LLC ...................... a to-be-formed single member limited
liability company (whose sole member shall
be Reg Holdco) and into which OPCo EDC
will merge; following such merger OPCo EDC
LLC is referred to herein as OPCo EDC
OPCo PGC .......................... OPCo following the transfer of its
transmission and distribution assets and
related liabilities
Operating Companies ............... collectively, CPL, CSP, OPCo, SWEPCO and
WTU
PGC ............................... Power Generating Company
PUCO .............................. Public Utilities Commission of Ohio
PUCT .............................. Public Utility Commission of Texas
Reg Holdco ........................ Central and South West Corporation
Regulated Subsidiaries ............ CPL EDC, CSP EDC, OPCo EDC, SWEPCO EDC,
SWEPCO Transco and WTU EDC
REP ............................... Retail Electric Provider
Restructured Generation Assets .... the generation assets of CPL, CSP, OPCo
and WTU immediately prior to the
Transaction
Rule 58 Subsidiaries .............. energy related companies within the
meaning of Rule 58
STP ............................... South Texas Project 2,630 MW nuclear
generating station
Subsidiaries ...................... the to-be-formed wholly-owned direct and
indirect subsidiaries of each Operating
Company
SWEPCO ............................ Southwestern Electric Power Company
SWEPCO EDC ........................ a to-be-formed EDC organized to hold the
distribution assets and related
liabilities of SWEPCO situated in Texas
SWEPCO Transco .................... a to-be formed EDC organized to hold the
Texas Transmission Assets and Related
Liabilities of SWEPCO
Texas Transmission Assets and
Related Liabilities ............. an undivided interest in a load-based
allocation of all of SWEPCO's transmission
assets and related liabilities
Utility Subsidiaries .............. CPL EDC, CPL PGC, CPL PGC LLC, CPL PGC LP,
CSP EDC, CSP PGC, OPCo EDC, OPCo PGC,
SWEPCO, SWEPCO EDC, SWEPCO Transco, WTU
EDC, WTU PGC, WTU PGC LLC and WTU PGC LP
(provided, however, that when any of the
foregoing obtains EWG status, it will no
longer be a Utility Subsidiary)
Vertically-Integrated Companies ... AEP Generating Company, Appalachian Power
Company, Indiana Michigan Power Company,
Kentucky Power Company, Kingsport Power
Company and Wheeling Power Company (each
of which is currently directly owned by
AEP and (except for AEP Generating
Company) remains subject to regulation by
at least one state utility commission)
Wholesale Holdco .................. Wholesale Holding Company, a to-be-formed
wholly owned subsidiary corporation or
limited liability company of Enterprises
WTU ............................... West Texas Utilities Company
WTU EDC ........................... WTU following the transfer of its
generation assets and related liabilities
WTU PGC ........................... collectively, one or more to-be-formed
PGCs organized to hold the generation
assets and related liabilities of WTU;
when referred to in the singular tense,
the plural is intended to be included
WTU PGC LLC ....................... collectively, one or more to-be-formed
limited liability companies organized by
WTU PGC to act as the general partner of
WTU PGC LP; when referred to in the
singular tense, the plural is intended to
be included
WTU PGC LP. ....................... Collectively, one or more to-be-formed
limited partnerships organized by WTU PGC
to hold its generation assets and related
liabilities; when referred to in the
singular tense, the plural is intended to
be included
This amendment restates in its entirety Amendment No. 2 to the
Application-Declaration filed on October 12, 2001.
ITEM 1. DESCRIPTION OF THE PROPOSED TRANSACTIONS
A. INTRODUCTION
AEP and CSW, holding companies registered under the 1935 Act, CPL, CSP,
OPCo, SWEPCO, WTU, each a direct or indirect wholly owned public utility
electric subsidiary of AEP, and AEPSC, hereby file this Application-Declaration
with the Commission under Sections 6(a), 7, 9(a), 10, 12 and 13(b) of the 1935
Act, and Rules 43(a), 44, 45, 46, 54, 90 and 91 thereunder, for authority to
engage in certain transactions in connection with state mandated restructuring
in Ohio and Texas.
AEP holds vertically-integrated electric utility companies with retail
utility operations in eleven states - Arkansas, Indiana, Kentucky, Louisiana,
Michigan, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia. These
states have reached different decisions as to whether, when and how to
restructure their electric industries. Texas and Ohio have opted to deregulate
generation, require separation of the generation and energy delivery functions,
and eliminate the concept of native load retail service, all in favor of free
and open competition at retail and have approved restructuring plans that are to
be implemented by January 1, 2002.
Under these approved plans, the Operating Companies will legally
separate their assets between:
o PGC affiliates that will sell power and energy at wholesale, and
o EDC affiliates that will own transmission and local distribution
facilities and transport the energy and perform metering
functions.
In connection with this restructuring, AEP proposes to realign certain of its
utility and non-utility businesses under three first-tier subsidiaries in a
manner similar to that approved in EXELON CORPORATION, HCAR No. 27256 (Oct. 19,
2000). Of interest here:
o CSW, as the Reg Holdco(1), will serve as an intermediate holding
company for the EDC affiliates and certain other AEP
public-utility subsidiary companies that are not required to
restructure, including, subject to any necessary state approval,
the Vertically-Integrated Companies.
o Enterprises will serve as an intermediate holding company for
AEP's non-utility businesses and, through Wholesale Holdco and
Domestic Holdco, for the PGC affiliates and the system's other
"unregulated" generation.
o AEPSC will continue to provide services to the AEP system
companies. Among other things, AEPSC will provide centralized and
regionalized management and support for both regulated and
unregulated generation.
Charts setting forth the AEP system and the Operating Companies
post-restructuring are attached hereto as Exhibit B-1. The mechanics of the
proposed restructuring are described more fully herein.
AEP respectfully requests authority to form and capitalize Enterprises,
Wholesale Holdco, Domestic Holdco and Subsidiaries to be formed for the purpose
of acquiring and holding certain utility and other assets of each Operating
Company and for each Operating Company to transfer to the applicable Subsidiary
certain utility and other associated assets (the "Transfers") and for certain of
the Operating Companies and Subsidiaries to be dividended to AEP and for AEP to
contribute certain of the Operating Companies and Subsidiaries to Enterprises,
Wholesale Holdco, Domestic Holdco and/or Reg Holdco to implement their
respective plans to separate their generation and power marketing businesses
from their transmission and distribution businesses in the states of Texas and
Ohio as more fully described herein (the "Transaction").
Certain financing authority will be required in connection with the
restructuring. These financing requests, which are
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(1) Throughout this Application-Declaration names are used for affiliates of the
Applicants that are intended to be descriptive of the functions such affiliates
will serve after the reorganization of the AEP system to comply with the state
restructuring laws of Ohio and Texas is completed. Such names are fictitious and
used as a matter of descriptive convenience. The actual legal names of such
affiliates will be determined as part of the implementation of such
reorganization.
2
described more fully herein at Item 1.E., are consistent with the ongoing needs
of the restructured entities and similar to the "housekeeping" authority that
the Commission has granted to other companies.
B. DESCRIPTION OF THE APPLICANTS
AEP is a corporation organized and existing under the laws of New York,
with its principal offices in Columbus, Ohio. AEP is one of the largest investor
owned electric public utility holding companies in the United States serving
over 4.8 million retail customers in eleven states and selling bulk power at
wholesale both within and beyond its domestic retail service area. AEP and CSW
completed their merger on June 15, 2000 and as a result AEP now has 38,000
megawatts of generation, over 38,000 miles of transmission lines and 186,000
miles of distribution lines in the United States. Subsidiaries own 544 megawatts
as qualifying facilities (as defined in the Public Utility Regulatory Policies
Act of 1978) or exempt wholesale generators (as defined in the 1935 Act) in
Colorado, Florida and Texas. In recent years AEP has expanded its domestic
operations to include gas marketing, processing, storage and transportation
operations, electric, gas and coal trading operations and telecommunication
services. Subsidiaries also provide power engineering, generation and
transmission plant maintenance and construction, and energy management services
worldwide. AEP is one of the largest traders of electricity and gas in the
United States.
AEP intends to continue to expand its competitive energy business by
growing the trading and marketing business through expanding operations to be a
leading trader in all energy commodities; optimizing the operations of its
assets to yield maximum value in competitive markets; and acquiring generation
and natural gas assets that complement this strategy.
As of February 8, 2002, Standard & Poor's rating of AEP's senior
unsecured indebtedness was BBB+ while Moody's was Baa1.
CPL is a corporation organized and existing under the laws of the state
of Texas, and has its principal office in Corpus Christi, Texas. CPL is a wholly
owned subsidiary of CSW, and an indirect subsidiary of AEP and is a public
utility under the 1935 Act. CPL is engaged in generating, transmitting and
distributing electric energy to the public in south Texas. CPL also owns an
undivided 25.2% interest in STP Nuclear Operating Company, which operates and
maintains the STP, of which CPL owns
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a 25.2% undivided interest. CPL serves approximately 661,000 retail customers.
CPL also owns 3,861 MW of coal- and gas-fired generating capacity. As of
February 8, 2002, Standard & Poor's rating of CPL's senior unsecured
indebtedness was BBB+ while Moody's was Baa1.
CSP is a corporation organized and existing under the laws of the state
of Ohio, and has its principal office in Columbus, Ohio. CSP is a wholly owned
subsidiary of AEP and is a public utility under the 1935 Act. CSP is engaged in
generating, transmitting and distributing electric energy to the public in
central and southern Ohio. CSP owns 2,595 MW of coal-fired generating capacity
which includes 1,330 MW in generating facilities jointly owned with two
unaffiliated utilities. CSP serves approximately 658,000 retail customers in
Ohio. CSP also sells electricity to wholesale customers. As of February 8, 2002,
Standard & Poor's rating of CSP's senior unsecured indebtedness was BBB+ while
Moody's was A3.
OPCO is a corporation organized and existing under the laws of the
state of Ohio, and has its principal office in Canton, Ohio. OPCo is a wholly
owned subsidiary of AEP and is a public utility under the 1935 Act. OPCo is
engaged in generating, transmitting and distributing electric energy to the
public in northwestern, east central, eastern and southern Ohio. OPCo owns 8,464
MW of coal-fired generating capacity and 48 MW of hydroelectric generating
capacity. OPCo serves approximately 679,000 retail customers in Ohio. OPCo also
sells electricity to wholesale customers. As of February 8, 2002, Standard &
Poor's rating of OPCo's senior unsecured indebtedness was BBB+ while Moody's was
A3.
SWEPCO is a corporation organized and existing under the laws of the
state of Delaware, and has its principal office in Shreveport, Louisiana. SWEPCO
is a wholly owned subsidiary of CSW, and an indirect subsidiary of AEP and is a
public utility under the 1935 Act. SWEPCO is engaged in generating, transmitting
and distributing electric energy to the public in east Texas, northwestern
Louisiana and southwestern Arkansas. SWEPCO owns 4,487 MW of coal- and gas-fired
generating capacity. SWEPCO serves approximately 422,000 retail customers.
SWEPCO also sells electricity to wholesale customers. As of February 8, 2002,
Standard & Poor's rating of SWEPCO's senior unsecured indebtedness was BBB+
while Moody's was A2.
WTU is a corporation organized and existing under the laws of the state
of Texas, and has its principal office in Abilene,
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Texas. WTU is a wholly owned subsidiary of CSW, and an indirect subsidiary of
AEP and is a public utility under the 1935 Act. WTU is engaged in generating,
transmitting and distributing electric energy to the public in western and
northern parts of Texas. WTU owns 1,376 MW of coal and gas-fired generating
capacity. WTU serves approximately 189,000 retail customers. WTU also sells
electricity to wholesale customers. As of February 8, 2002, Standard & Poor's
rating of WTU's senior unsecured indebtedness was BBB+ with no corresponding
Moody's rating of senior unsecured indebtedness.
ENTERPRISES, WHOLESALE HOLDCO AND DOMESTIC HOLDCO. For a variety of
tax, regulatory and business reasons, AEP has determined that the best way to
organize certain of its non-state regulated utility subsidiaries and its
non-utility subsidiaries is through the creation of Enterprises. Enterprises
will be a first tier subsidiary of AEP. It will own all of Wholesale Holdco.
Wholesale Holdco, in turn, will own Domestic Holdco, which will hold, directly
or indirectly, the PGCs. The Enterprises Holding Companies will be formed to
hold utility (until such time as EWG status is obtained) and non-utility
subsidiaries of AEP whose revenues derive from competitive, usually
market-based, activity. This structure allows AEP to align its non-utility
enterprises and its non-State regulated electric generating business in an
efficient and simple manner.(2) AEP is seeking EWG status for CPL PGC, WTU PGC,
their respective subsidiaries, CSP PGC and OPCo PGC. If one or more of the
states refuses to provide the requisite consent and EWG status is not
immediately obtained from the FERC, the Enterprises Holding Companies would
each, among other things, be required to register under the 1935 Act and file
Forms U5A and U5B. Accordingly, for a period of twelve months beginning with the
date of the order in this file, the Enterprises Holding Companies seek a waiver
from the otherwise applicable requirement to file Form U5B with respect to the
Enterprises Holding Companies. If EWG status is not obtained before the
expiration of the twelve month period, the Enterprises Holding Companies will
file the pertinent Form U5B and supplement the record in this file to
demonstrate compliance with Section 11(b)(2) of the 1935 Act.
REG HOLDCO. Likewise, for a variety of tax, regulatory and business
reasons, AEP has determined that it wishes to retain
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(2) Exelon Corporation, HCAR No. 27256 (Oct. 19, 2000) (approving intermediate
holding company structure resulting from merger); National Grid Group plc, HCAR
No. 27154 (Mar. 15, 2000) (intermediate holding companies necessary for
cross-border tax considerations).
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another intermediate holding company - Reg Holdco - in its corporate
organization. This company would hold the EDCs and, in some instances subject to
any necessary state approval, other operating utility subsidiaries that are not
required to restructure, including the Vertically-Integrated Companies. Reg
Holdco is a holding company and will remain a registered company following the
Transaction.
C. OVERVIEW OF THE PROPOSED RESTRUCTURING
The assets involved in the Transfers are generating facilities, the
step-up transformers, circuit breakers, interconnection facilities, related
facilities and other assets associated with generating units and their
operations that CPL and WTU will transfer to CPL PGC and WTU PGC, respectively,
and transmission lines and other transmission facilities and distribution lines
and other distribution facilities and other assets that CSP and OPCo will
transfer to CSP EDC and OPCo EDC, respectively, that will be chartered to own,
maintain and operate transmission and distribution facilities located in the
states of Ohio and Texas, respectively. Other assets involved in the Transfers
are the distribution lines and other distribution facilities located in Texas
that SWEPCO will transfer to SWEPCO EDC and the Texas Transmission Assets and
Related Liabilities that SWEPCO will transfer to SWEPCO Transco. Applicants
request the Commission reserve jurisdiction over all Transfers and other
authority requested herein relating to SWEPCO, SWEPCO EDC and SWEPCO Transco.
Exhibit B-1 to this Application contains diagrams of the
pre-Transaction and post-Transaction organizations of Applicants and their
relevant affiliates. Exhibit D-7 to this Application contains a list of the
generating stations that CPL and WTU will transfer to CPL PGC and WTU PGC,
respectively, and a description of the transmission and distribution facilities
that CSP, OPCo and SWEPCO will transfer to CSP EDC, OPCo EDC, SWEPCO EDC and
SWEPCO Transco, respectively.
CPL, SWEPCO and WTU will make their Transfers to comply with the
provisions of a Texas statute commonly referred to as S.B. 7.(3) S.B. 7 requires
vertically integrated electric utilities to separate ownership of their
generating and other power supply assets from ownership of their transmission
and distribution assets. Under S.B. 7, vertically integrated utilities are
generally obligated to disaggregate into at least
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(3) Tex. Util. Code Ann.ss.39.001-909 (Vernon Supp. 2000).
6
three separate corporate units: (1) a PGC that will sell power and energy at
wholesale; (2) an EDC that will own transmission and local distribution
facilities and perform metering functions, but is prohibited from owning power
supply facilities or selling electricity; and (3) a REP that will sell
electricity to retail customers. By order issued July 7, 2000, as amended, the
PUCT approved corporate separation plans CPL, WTU and SWEPCO filed to explain
how they will comply with S.B. 7 (see Exhibit D-2 to this Application). Per PUCT
Substantive Rule 25.342(d)(4), all transfers made in compliance with S.B. 7 must
be recorded at book value.
CSP and OPCo will make their Transfers to comply with the provisions of
an Ohio statute that provides for Competitive Retail Electric Service, commonly
referred to as S.B. 3.(4) The statute directs vertically integrated electric
utilities that offer retail electric service in Ohio to separate their
generating and other competitive operations (such as aggregation, marketing, and
brokering) and related assets from their transmission and distribution
operations and assets. On September 28, 2000, the PUCO approved corporate
separation plans CSP and OPCo filed to explain how they will comply with S.B. 3
(see Exhibit D-4 to this Application). Under their approved corporate separation
plans (which plans assume that all transfers will be made at book value), CSP
and OPCo proposed, subject to receipt of federal regulatory approvals, to
transfer their transmission and distribution assets and operations to EDC
affiliates.
1. REORGANIZATION OF THE TEXAS OPERATING COMPANIES
To comply with S.B. 7, each of CPL and WTU will contribute their
generating assets to newly formed PGC affiliates, WTU PGC and CPL PGC.(5)
Subsequently, CPL EDC and WTU
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(4) Ohio Rev. Code Ann.ss.ss.4928.01-67 (Anderson 2000).
(5) CPL has committed to divest by June 2002 its Lon Hill Units 1-4 (net book
value as of March 31, 2002, $21,866,211.85), which have an aggregate generating
capability of 546 MW, its Nueces Bay plant (net book value as of March 31, 2002,
$22,938,141.01), which has a generating capability of 559 MW, and its Joslin
Unit 1 (net book value as of March 31, 2002, $12,070,185.31), which has a
generating capability of 249 MW, subject to certain recall rights with respect
to CPL's obligation to serve retail customers in ERCOT. CPL made this commitment
in connection with the PUCT proceedings brought to consider the merger of CSW
and AEP. AEP is seeking EWG status for the entity owning these units. In the
event EWG status is not obtained in time, divestiture of such generating
capability to third parties is sought from the Commission pursuant to Section
12(d) of the 1935 Act. AEP anticipates that
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EDC will dividend the common stock of, or limited liability interest in, CPL PGC
and WTU PGC to Reg Holdco, which, in turn, will dividend the stock or limited
liability interest to AEP.(6) In turn, AEP will contribute such common stock or
limited liability interest to Enterprises, which will contribute such common
stock or limited liability interest to Wholesale Holdco, which will contribute
such common stock or limited liability interest to Domestic Holdco. AEP is
seeking state consent for EWG status for CPL PGC and WTU PGC including their
respective subsidiaries as more fully described below.(7)
SWEPCO will retain title to its generating assets because it provides
bundled retail electric service in Louisiana, which to date has not adopted
retail competition legislation, and in Arkansas, where SWEPCO is not obligated
to
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the divestment of such units to
non-affiliate purchasers would be at their fair market value.
(6) CPL and WTU may delay the transfer of their stock in CPL PGC and WTU PGC
until sometime after June 15, 2002, in order to avoid adverse tax consequences
relating to intra-corporate transfers after a merger.
(7) In addition to the foregoing affiliate transfers, CPL, SWEPCO and WTU seek
authority to sell certain utility assets to non-affiliates as required by
Section 39.051 of S.B. 7 which states "On or before September 1, 2000, each
electric utility shall separate from its regulated utility activities its
customer energy services business activities that are otherwise also already
widely available in the competitive market". In accordance with this Section,
PUCT developed and adopted PUCT Substantive Rule 25.341(6) which prohibits
regulated utilities from providing certain facilities and/or services that the
PUCT believes to be generally available in the open market. The prohibited
facilities and/or services identified in the Rule are classified as "competitive
energy services" and consist of nonroadway lights, distribution facilities
including distribution transformers, conductors, and associated distribution
equipment beyond the customer's primary metering point and substation facilities
dedicated to serving individual customers. CPL, SWEPCO and WTU have offered
their customers the option to (i) purchase such facilities from the utility;
(ii) provide their own facilities; or (iii) convert their service to secondary
metering. Should the customer elect to purchase the affected facilities, CPL,
SWEPCO and WTU request authority to sell the affected assets, the proceeds of
which could total up to an aggregate of $30 million. By order of the PUCT, the
price for purchased facilities agreed to prior to October 1, 2001 will be based
on the original market cost at the time the facility was placed in service
adjusted for depreciation and undepreciated contributions in aid to construction
("CIAC") multiplied times 1.10; provided that the total cost of the facility
will not exceed original market cost adjusted for depreciation and undepreciated
CIAC plus $15,000. After October 1, the price for purchased facilities will be
based on reproduction cost less depreciation. The actual purchase does not have
to be completed until January 1, 2004. The purchase price for nonroadway
lighting facilities must be 50% of their replacement cost as mandated by the
PUCT.
8
separate ownership of its generating assets from its transmission and
distribution assets.(8) In order to comply with S.B. 7, however, on or before
January 1, 2002 (or such later date as determined by the PUCT), SWEPCO will
contribute (i) its distribution assets located in Texas to a wholly-owned EDC
subsidiary, SWEPCO EDC and (ii) the Texas Transmission Assets and Related
Liabilities to a wholly owned EDC subsidiary, SWEPCO Transco. CPL EDC and WTU
EDC will retain their respective transmission and distribution assets and after
transfer of their generating assets to CPL PGC and WTU PGC, CPL EDC and WTU EDC
will operate as EDCs.
The PUCT has announced the delay of the implementation of competition
from January 1, 2002 until March 31, 2003 in those portions of the state that
lie in the Southwest Power Pool. The purpose of the delay is to allow adequate
time for infrastructure, processes and procedures to be in place for fair
competition. The delay effects all of SWEPCO's service territory in Texas and a
small portion of WTU's service territory.
As illustrated by the post-Transaction organization chart in Exhibit
B-1, Reg Holdco will also hold the common stock of the Vertically-Integrated
Companies, subject to any required state approval.
As a part of the Texas retail access program, the Texas retail rates of
CPL, WTU and SWEPCO are frozen until December 31, 2001. On and after January 1,
2002, subject to PUCT-approved delay in the non-ERCOT portion of Texas, bundled
Texas retail residential and small commercial customers formerly served by CPL,
WTU and SWEPCO began being served by REPs at the "price to beat" established for
their respective Texas service areas.
2. REORGANIZATION OF THE OHIO OPERATING COMPANIES
To comply with S.B. 3, CSP and OPCo will contribute their transmission
and distribution assets to CSP EDC and OPCo EDC, respectively. The common stock
of, or limited liability interest in, OPCo EDC and CSP EDC will be dividended to
AEP. AEP, in turn, will contribute such common stock or limited liability
interest to Reg Holdco. Surviving CSP PGC and OPCo
----------
(8) The Arkansas legislature recently postponed the start of retail electric
competition in Arkansas to a date no earlier than October 1, 2003 and no later
than October 1, 2005.
9
PGC will be PGCs whose common stock AEP will contribute to Enterprises, which
will contribute such common stock to Wholesale Holdco, which will contribute
such common stock to Domestic Holdco. AEP is seeking state consent for EWG
status for CSP PGC and OPCo PGC.
Under S.B. 3, CSP EDC and OPCo EDC must serve as default suppliers to
residential customers that do not choose an alternative power supplier. The
retail rates for power supply that OPCo EDC and CSP EDC will charge Ohio retail
residential customers that do not choose an alternative supplier will be frozen
for the first five years of retail competition, unless the PUCO finds that
effective competition with respect to particular customer classes is occurring
before the end of a five-year market development period.
D. OVERVIEW OF REQUESTED AUTHORIZATIONS
1. THE TRANSACTION
AEP's corporate separation is designed to align the company's legal
structure and business activities with the realities of a restructuring electric
industry. Corporate separation responds to the changing laws, regulations and
business requirements of the electric industry. AEP's realigned corporate legal
structure complies with restructuring statutory and regulatory requirements and
provides greater flexibility to conduct business. This realignment consists of
actual legal corporate separation of certain subsidiaries and companies of AEP
and is not a functional reorganization of those entities. See Exhibit B-1 (the
post-Transaction corporate structure chart) for a complete diagram of the final
corporate structure sought by Applicants. Each Applicant represents that the
Transaction, as it relates to that Applicant, will not violate the rights of any
security holder of any security of that Applicant outstanding at the time of the
Transaction.
(a) Formation and Capitalization of Enterprises, Wholesale
Holdco and Domestic Holdco
AEP seeks authorization to form and capitalize Enterprises, a
first tier wholly owned corporation or limited liability company,
Wholesale Holdco (a wholly-owned subsidiary corporation or limited
liability company of Enterprises) and Domestic Holdco (a wholly-owned
subsidiary corporation or limited liability company of Wholesale
Holdco). AEP, Enterprises and Wholesale Holdco,
10
respectively, propose to make an initial capital contribution to
Enterprises, Wholesale Holdco and Domestic Holdco, respectively, in an
amount to be determined, in exchange for all of the common stock of, or
limited liability interest in, Enterprises, Wholesale Holdco and
Domestic Holdco, respectively. AEP, Enterprises and Wholesale Holdco,
respectively, seek authorization for Enterprises, Wholesale Holdco and
Domestic Holdco to issue, and for AEP, Enterprises and Wholesale
Holdco, respectively, to acquire, all of the common stock of, or
limited liability interest in, Enterprises, Wholesale Holdco and
Domestic Holdco, respectively.
(b) Formation of Texas PGCs and Tax Beneficial Entities
AEP seeks approval for: (1) CPL to form and capitalize CPL PGC
for the purpose of holding the generation assets and related
liabilities of CPL (see Exhibit B-2); (2) WTU to form and capitalize
WTU PGC for the purpose of holding the generation assets and related
liabilities of WTU (see Exhibit B-2); (3) CPL PGC to form and
capitalize CPL PGC LLC, which would serve as the general partner of CPL
PGC LP (see Exhibit B-2); (4) CPL PGC and CPL PGC LLC to form and
capitalize CPL PGC LP for the purpose of holding the generation assets
and related liabilities of CPL PGC (see Exhibit B-2); (5) WTU PGC to
form and capitalize WTU PGC LLC, which would serve as the general
partner of WTU PGC LP (see Exhibit B-2); and (6) WTU PGC and WTU PGC
LLC to form and capitalize WTU PGC LP for the purpose of holding the
generation assets and related liabilities of WTU PGC (see Exhibit B-2).
(c) Formation of EDC Subsidiaries
AEP seeks approval for: (1) OPCo to form and capitalize OPCo
EDC for the purpose of holding the transmission and distribution assets
and related liabilities of OPCo (see Exhibit B-2); (2) CSP to form and
capitalize CSP EDC for the purpose of holding the transmission and
distribution assets and related liabilities of CSP (see Exhibit B-2);
(3) SWEPCO to form and capitalize (i) SWEPCO EDC for the purpose of
holding its distribution assets and related liabilities located in
Texas and (ii) SWEPCO Transco for the purpose of holding the Texas
Transmission Assets and Related Liabilities; and
11
(4) Reg Holdco to form and capitalize OPCo EDC LLC for the purpose of
merging OPCo EDC with and into it.
(d) Capitalization of Subsidiaries
(i) AEP seeks approval for CPL to acquire all of the
common stock of, or limited liability interest in, CPL PGC in
exchange for transferring its generation assets (including its
interest in STP) and related liabilities to CPL PGC and for CPL
PGC to issue, and for CPL to acquire, all of the common stock
of, or limited liability interest in, CPL PGC.
(ii) AEP seeks approval for CPL PGC to acquire all of the
membership interests of CPL PGC LLC in exchange for sufficient
capitalization for CPL PGC LLC to act as general partner of CPL
PGC LP and for CPL PGC LLC to issue, and for CPL PGC to
acquire, all of the membership interests of CPL PGC LLC.
(iii) AEP seeks approval for CPL PGC to acquire all of the
limited partnership interest of CPL PGC LP in exchange for
transferring its generation assets and related liabilities to
CPL PGC LP, for CPL PGC LLC to acquire the general partnership
interest of CPL PGC LP, for CPL PGC LP to issue, and for CPL
PGC to acquire, all of the limited partnership interest of CPL
PGC LP and for CPL PGC LP to issue, and for CPL PGC LLC to
acquire, the general partnership interest of CPL PGC LP.
(iv) AEP seeks approval for WTU to acquire all of the
common stock of, or limited liability interest in, WTU PGC in
exchange for transferring its generation assets and related
liabilities to WTU PGC and for WTU PGC to issue, and for WTU to
acquire, all of the common stock of, or limited liability
interest in, WTU PGC.
(v) AEP seeks approval for WTU PGC to acquire all of the
membership interests of WTU PGC LLC in exchange for sufficient
capitalization for WTU PGC LLC to act as general partner of WTU
PGC LP and for WTU PGC LLC to issue, and for WTU PGC to
acquire, all of the membership interests of WTU PGC LLC.
12
(vi) AEP seeks approval for WTU PGC to acquire all of the
limited partnership interest of WTU PGC LP in exchange for
transferring its generation assets and related liabilities to
WTU PGC LP, for WTU PGC LLC to acquire the general partnership
interest of WTU PGC LP, for WTU PGC LP to issue, and for WTU
PGC to acquire, all of the limited partnership interest of WTU
PGC LP and for WTU PGC LP to issue, and for WTU PGC LLC to
acquire, the general partnership interest of WTU PGC LP.
(vii) AEP seeks approval for OPCo to acquire all of the
common stock of, or limited liability interest in, OPCo EDC in
exchange for transferring its transmission and distribution
assets and related liabilities to OPCo EDC and for OPCo EDC to
issue, and for OPCo to acquire, all of the common stock of, or
limited liability interest in, OPCo EDC.
(viii) AEP seeks approval for CSP to acquire all of the
common stock of, or limited liability interest in, CSP EDC in
exchange for transferring its transmission and distribution
assets and related liabilities to CSP EDC and for CSP EDC to
issue, and for CSP to acquire, all of the common stock of, or
limited liability interest in, CSP EDC.
(ix) AEP seeks approval for SWEPCO to acquire all of the
common stock of, or limited liability interests in, (i) SWEPCO
EDC in exchange for transferring its distribution assets and
related liabilities located in Texas to SWEPCO EDC and (ii)
SWEPCO Transco in exchange for transferring the Texas
Transmission Assets and Related Liabilities to SWEPCO Transco;
and for SWEPCO EDC and SWEPCO Transco, respectively, to issue,
and SWEPCO to acquire, all of the common stock of, or limited
liability interest in, SWEPCO EDC and SWEPCO Transco,
respectively.
(x) AEP seeks approval for Reg Holdco to acquire all of
the limited liability interest in OPCo EDC LLC and for OPCo EDC
LLC to issue all of its limited liability interest to Reg
Holdco.
(e) Transfers
13
(i) AEP seeks approval for CPL to transfer or contribute a
total of 100% of its ownership interests in its generation
assets (estimated net book value at December 31, 2001, $2,412
million) and related liabilities (estimated book value at
December 31, 2001, $1,074 million) to CPL PGC at their net book
value at the transfer date and for CPL PGC to transfer or
contribute a total of 100% of its ownership interests in such
generation assets and related liabilities to CPL PGC LP at the
same book value (see Exhibit B-2).(9)
(ii) AEP seeks approval for WTU to transfer or contribute
a total of 100% of its ownership interests in its generation
assets (estimated net book value at December 31, 2001, $394
million) and related liabilities (estimated book value at
December 31, 2001, $208 million) to WTU PGC at their net book
value at the transfer date and for WTU PGC to transfer or
contribute a total of 100% of its ownership interests in such
generation assets and related liabilities to WTU PGC LP at the
same book value (see Exhibit B-2).(10)
(iii) AEP seeks approval for OPCo to transfer or
contribute a total of 100% of its ownership interests in its
transmission and distribution assets (estimated net book value
at December 31, 2001, $2,263 million) and related liabilities
(estimated book value at December 31, 2001, $816 million) to
OPCo EDC at their book value at the transfer date (see Exhibit
B-2).(11)
(iv) AEP seeks approval for CSP to transfer or contribute
a total of 100% of its ownership interests in its transmission
and distribution assets (estimated net book value at December
31, 2001, $1,515
----------
(9) CPL will retain its transmission and distribution assets (estimated net book
value at December 31, 2001, $2,703 million) and related liabilities (estimated
book value at December 31, 2001, $2,203 million, including securitization assets
and debt).
(10) WTU will retain its transmission and distribution assets (estimated net
book value at December 31, 2001, $529 million) and related liabilities
(estimated book value at December 31, 2001, $376 million).
(11) OPCo will retain its generation assets (estimated net book value at
December 31, 2001, $2,814 million) and related liabilities (estimated book value
at December 31, 2001, $2,252 million).
14
million) and related liabilities (estimated book value at
December 31, 2001, $474 million) to CSP EDC at their book value
at the transfer date (see Exhibit B-2).(12)
(v) AEP seeks approval for SWEPCO to transfer or
contribute a total of 100% of its ownership interests in (i)
its distribution assets and related liabilities located in
Texas to SWEPCO EDC and (ii) the Texas Transmission Assets and
Related Liabilities to SWEPCO Transco at their book value at
the transfer date.(13)
(vi) After the transfers are executed, AEP seeks approval
for:
- CPL EDC to dividend CPL PGC's common stock or
limited liability interest to CSW, which will
dividend the stock to AEP, which will contribute
the stock to Enterprises, which will contribute
the stock or limited liability interest to
Wholesale Holdco, which will contribute the stock
or limited liability interest to Domestic Holdco
(see Exhibit B-2).
- WTU EDC to dividend WTU PGC's common stock or
limited liability interest to CSW, which will
dividend the stock to AEP, which will contribute
the stock or limited liability interest to
Enterprises, which will contribute the stock or
limited liability interest to Wholesale Holdco,
which will contribute the stock to Domestic Holdco
(see Exhibit B-2).
- OPCo PGC to dividend OPCo EDC's common stock or
limited liability interest to AEP, which will
contribute the stock or limited liability interest
to Reg Holdco (see Exhibit B-2).
----------
(12) CSP will retain its generation assets (estimated net book value at December
31, 2001, $1,680 million) and related liabilities (estimated book value at
December 31, 2001, $1,320 million).
(13) The value of the assets and liabilities to be transferred and retained have
not yet been determined.
15
- OPCo EDC to merge with and into OPCo EDC LLC such
that, following the merger, OPCo EDC shall be a
single member limited liability company all of
whose limited liability interest is held by Reg
Holdco.
- CSP PGC to dividend CSP EDC's common stock or
limited liability interest to AEP, which will
contribute the stock or limited liability interest
to Reg Holdco (see Exhibit B-2).
- SWEPCO to dividend the common stock or limited
liability interest of SWEPCO EDC to CSW.
(vii) Upon completion of the Transaction, Reg Holdco
will hold CPL EDC, WTU EDC, SWEPCO, SWEPCO EDC, OPCo EDC
and CSP EDC, and, indirectly, SWEPCO Transco, each of
which will own transmission and/or distribution assets and
related liabilities (other than SWEPCO which will continue
to be a vertically integrated utility with respect to its
operations located outside of Texas.) Domestic Holdco will
hold, among other things, CPL PGC, WTU PGC, OPCo PGC and
CSP PGC, each of which will own, directly or indirectly,
generation assets and related liabilities and, upon all
necessary state and federal regulatory approval, will be
EWGs.
(viii) Subject to any required state approval, AEP
seeks authorization to contribute the stock of the
Vertically-Integrated Companies to Reg Holdco and for Reg
Holdco to acquire the stock of the Vertically-Integrated
Companies.
2. AGREEMENTS
(a) Authorization is requested for AEPSC to render services to any
direct or indirect subsidiary of any Applicant to be formed as permitted in this
file, pursuant to the existing AEP Service Agreement. All services will be
performed in adherence with the 'at cost' provisions of Rules 90 and 91 under
the 1935 Act.
16
(b) AEP may establish a specialized service company for dispatch,
wholesale trading, and fuel procurement of the generation assets not subject to
state regulation and/or other energy-related services ("GenServCo"). The
GenServCo will pay the salaries of its employees and be responsible for the
administration of all employee benefit plans. Affiliate companies will reimburse
GenServCo for its expenses on a full cost basis in accordance with the
requirements imposed by Section 13 of the 1935 Act and the Rules promulgated
thereunder. AEP will provide information regarding such a service company by
pre- or post-effective amendment hereto which will include a services agreement.
AEP requests the Commission to reserve jurisdiction over its proposed
organization of GenServCo.
(c) In order to comply with S.B. 7, a division of AEPSC may be
established to meet Texas code of conduct concerns which in general prohibit
PGCs and EDCs in that state from sharing the services of a single service
provider with respect to engineering, purchasing of electric transmission,
transmission and distribution system operations and marketing services. If
created, this division would perform some but not all of the services
contemplated in the existing AEP Service Agreement and would function pursuant
to a service agreement substantially the same as the existing AEP Service
Agreement and pursuant to the allocation methods approved for AEPSC.
(d) Authorization is requested for the time period following
receipt of respective state regulatory approval of relevant portions of the
Transaction but prior to the Transaction for the Operating Companies to enter
into Operating Agreements with the respective Subsidiaries for the purpose of
allowing the Operating Companies to operate the respective utility and related
assets of the Subsidiaries. These agreements may be necessary to transfer
control of such assets before assets can be transferred because of mortgage or
financial restrictions or delays in obtaining assignments of environmental
permits or other regulatory approvals.
(e) Exemptions for Transactions with Non-utility Companies
17
Each Finance Applicant and, following the Transaction, any
subsidiary controlled by a Finance Applicant, requests authorization under
Section 13(b) of the 1935 Act to provide services and sell goods to non-utility
associate companies at fair market prices determined without regard to cost, and
requests an exemption under Section 13(b) of the 1935 Act from the cost
standards of Rules 90 and 91 as applicable to these transactions, in any case in
which the non-utility subsidiary purchasing these goods or services is:
(i) a FUCO or foreign EWG which derives no part of its income,
directly or indirectly, from the generation, transmission, or of
electric energy for sale within the United States.
(ii) an EWG which sells electricity at market-based rates which
have been approved by the FERC, provided that the purchaser is not a
public utility company in the AEP System;
(iii) a "qualifying facility" ("QF") within the meaning of the
Public Utility Regulatory Policies Act of 1978, as amended ("PURPA")
that sells electricity exclusively (A) at rates negotiated at arms'
length one or more industrial or commercial customers purchasing the
electricity for their own use and not directly for resale, and/or (B)
to an electric utility company other than a public utility in the AEP
System at the purchaser's "avoided cost" as determined in accordance
with PURPA regulations;
(iv) a domestic EWG or QF that sells electricity at rates based
upon its cost of service, as approved by FERC or any state public
utility commission having jurisdiction, provided that the purchaser is
not a public utility company in the AEP System;
(v) a subsidiary engaged in Rule 58 activities or any other
non-utility subsidiary that (A) is partially owned by a member of the
AEP System, (B) is engaged solely in the business of developing,
owning, operating and/or providing services or goods to the non-utility
subsidiaries described in clauses (i) through (iv) immediately above,
or (C) does not
18
derive any part of its income from a public-utility company within the
AEP System.
See Energy East Corporation HCAR No. 27228 (Sep. 12, 2000), and Powergen plc
HCAR No. 27291 (Dec. 6, 2000).
19
E. FINANCING PLAN
1. OVERVIEW OF THE FINANCING REQUEST
The Applicants hereby request authorization to engage in the
financing transactions set forth herein through June 30, 2005 (the
"Authorization Period"). Approval by the Commission of this Application will
give the Applicants the flexibility that will allow them to respond quickly and
efficiently to their financing needs and to changes in market conditions,
allowing them to efficiently and effectively carry on competitive business
activities designed to provide benefits to customers and shareholders.
The financing authorizations requested herein relate to:
(a) issuances by AEP of guarantees of obligations of affiliated
or unaffiliated persons in favor of other unaffiliated persons and the
acquisition of the securities of the Holding Companies;
(b) issuances of securities and guarantees, the entering into
of transactions to manage interest rate risk ("hedging
transactions")(14) and the acquisition of the securities of the
Enterprises Subsidiaries by the Enterprises Holding Companies;
(c) issuances of securities and guarantees and the entering
into of hedging transactions by the Enterprises Subsidiaries to the
extent not exempt pursuant to Rule 52 (although each Enterprises
Subsidiary will be an "electric utility company" under the 1935 Act,
none will be subject to the jurisdiction of any State commission in
connection with the issuance of securities - therefore, all securities
issuances for the Enterprises Subsidiaries will require approval of the
Commission until EWG status is obtained);
----------
(14) "Hedging Transactions" include only those transactions related to financing
activities. Engaging in futures and other commodity related risk management by
AEP and its subsidiaries constitute part of their normal business activities and
as such do not require Commission approval. SEE Southern Energy, Inc., HCAR No.
27020 (May 13, 1999); Entergy Corp., HCAR No. 26812 (Jan. 6, 1998); New Century
Energies, HCAR No. 26748 (Aug. 1, 1997); National Fuel Gas Co., HCAR No. 26667
(Feb. 12, 1997).
20
(d) issuances of securities and guarantees, participation in
the AEP Money Pool, the entering into of hedging transactions and the
acquisition of the securities of the Regulated Subsidiaries by Reg
Holdco to the extent not exempt pursuant to Rules 52 and 45;
(e) issuances of securities and guarantees and participation in
the AEP Money Pool and the entering into of hedging transactions by the
Regulated Subsidiaries to the extent not exempt pursuant to Rule 52;
(f) the ability of AEP and its subsidiaries to pay dividends
out of capital or unearned surplus;
(g) the formation of financing entities and the issuance by
such entities of securities otherwise authorized to be issued and sold
pursuant to this Application or pursuant to applicable exemptions under
the 1935 Act, including intra-system guarantees of such securities; and
(h) obtaining authorization to 'invest' (pursuant to the
transactions described herein), in the Enterprises Subsidiary EWGs up
to the EWG Investment Amount.
2. PARAMETERS FOR FINANCING AND HEDGING TRANSACTION AUTHORIZATION
Authorization is requested herein to engage in certain
financing transactions during the Authorization Period for which the specific
terms and conditions are not at this time known, and which may not be covered by
Rule 52, without further prior approval by the Commission. The following general
terms will be applicable where appropriate to the financing transactions
requested to be authorized hereby:
(a) Effective Cost of Money
The effective cost of money on unsecured long-term debt
borrowings occurring pursuant to the authorizations granted under this
Application 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
21
issued by other companies.(15) The effective cost of money on
short-term debt borrowings pursuant to authorizations granted under
this Application 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 (a) 700 basis points over the yield to
maturity of a U.S. Treasury security having a remaining term equal to
the term of such series of preferred securities or (b) a rate that is
consistent with similar securities of comparable credit quality and
maturities issued by other companies.
(b) Maturity of Debt and Final Redemption on Preferred Securities
The maturity of unsecured indebtedness will not exceed 50 years.
All preferred securities will be redeemed no later than 50 years after
the issuance thereof.
(c) Issuance Expenses
The underwriting fees, commissions or other similar remuneration
paid in connection with the non-competitive issue, sale or distribution
of a security pursuant to this Application (not including any original
issue discount) will not exceed 5% of the principal or total amount of
the security being issued.
(d) Use of Proceeds
Provided that no proceeds from the sale of securities authorized in
this File by Reg Holdco or any Regulated Subsidiary will be used for
the direct or indirect investment in Rule 58 companies, EWGs, FUCOs and
ETCs, the proceeds from the sale of securities in external financing
transactions will be used for general corporate purposes including:
o the financing, in part, of the capital expenditures of the AEP
System;
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(15) SEE The Southern Company, HCAR No. 27134 (Feb. 9, 2000).
22
o the financing of working capital requirements of the AEP
System;
o the acquisition, retirement or redemption pursuant to Rule 42
of securities previously issued by AEP subsidiaries without the
need for prior Commission approval; and
o other lawful purposes, and, for the Enterprises Holding
Companies, the direct or indirect investment in companies
authorized by order in File No. 70-9353, Rule 58 companies,
other subsidiaries approved by the Commission, EWGs, FUCOs and
ETCs.(16) The Applicants represent that no such financing
proceeds will be used to acquire or form a new subsidiary
unless such financing is consummated in accordance with an
order of the Commission or an available exemption under the
1935 Act.
Direct or indirect investments by AEP in Rule 58 Subsidiaries would
be subject to the limitations of Rule 58.
(e) Financial Condition
The Operating Companies are financially sound and each have
investment grade ratings from major national rating agencies as
indicated in Item 1.B. The business of the Enterprises Unit will be
conducted by companies that will also be financially sound.(17) AEP has
an investment grade rating (a senior unsecured debt rating of BBB+ from
Standard & Poor's and Baa1 from Moody's). The consolidated
----------
(16) AEP will make additional investments in EWGs and FUCOs during the
Authorization Period. Accordingly, Rules 53 and 54 apply to this Application.
Compliance with these rules is addressed below.
(17) As a newly formed group, companies in the Enterprises Unit may not have a
rating from nationally recognized rating agencies immediately when it commences
operations. As noted herein, the absence of an investment grade rating will
likely increase the necessity for the Enterprises Unit to receive financial
support from AEP.
23
common equity of AEP was 33.5% of total Consolidated Capitalization as
of June 30, 2001.(18)
AEP and each Finance Applicant commit that (a) its common equity
(as reflected on the balance sheets contained in its most recent 10-K
or 10-Q filed with the Commission pursuant to the 1934 Act) will be
maintained at no less than 30% of its Consolidated Capitalization;
provided, however, that CPL may exclude securitization debt from the
calculation of indebtedness and total capitalization)(19) and (b) it
will not publicly issue any secured or unsecured indebtedness or
preferred securities pursuant to this File unless it has maintained at
least an investment grade corporate or senior unsecured debt rating by
at least one nationally recognized rating agency. The consequences of
failing to meet either of the foregoing criteria is that such company
would require additional Commission approval to issue securities except
for securities which would result in an increase in such common equity
percentage or restoration of such rating. Regardless if any securities
are issued hereunder, AEP and the Finance Applicants commit that each
will maintain
----------
(18) See footnote 19 below for the reasons it is appropriate to consider the
special status of securitization debt for purposes of consideration of the
financial condition of AEP and its Utility Subsidiaries.
(19) The Commission has recognized that it is appropriate to consider
securitization debt in the calculation of capitalization to determine compliance
with its traditional test of a minimum equity component of capitalization of
30%. SEE West Penn Power Co., HCAR No. 27091 (Oct. 19, 1999) (exemption from 30%
equity standard granted where utility's equity ratio was 15% because of
transition bonds and other factors; excluding transition bonds, utility would
satisfy 30% test). This approach is consistent with the rating agencies analysis
of the impact of securitization on a utility's capital structure. AEP
anticipates that the outstanding securitization bonds of any subsidiary will be
rated "AAA." The structure of these financings, the orders of the respective
State commissions and the statutory provisions of each State ensure that there
will be sufficient cash flow from a dedicated portion of payments made by
utility customers to at all times provide for principal and interest on the
securitization bonds. The rates paid by customers are subject to adjustment in
accordance with procedures of the respective states to ensure that amounts
collected are sufficient to meet debt service and other requirements under the
securitization financings. SEE Utility Stranded Costs: Rating the Securitization
of Transition Tariffs, Special Report, FitchIBCA (September 24, 1998) (available
at WWW.FITCHIBCA.COM). Applicants request the Commission to reserve jurisdiction
over CPL's exclusion of securitization debt from its calculation of Consolidated
Capitalization until such time that its common equity would otherwise be less
than 30% of its Consolidated Capitalization, assuming the inclusion of
securitization debt.
24
common equity of at least 30% of its Consolidated Capitalization.
(f) Hedging Transactions
Interest rate hedging transactions with respect to existing
indebtedness ("Interest Rate Hedges"), subject to certain limitations
and restrictions, would be entered into in order to reduce or manage
interest rate cost or risk. Interest Rate Hedges would only be entered
into with counterparties ("Approved Counterparties") whose senior debt
ratings, or whose parent companies' senior debt ratings, 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 or Fitch
Investor Service. Interest Rate Hedges will involve the use of
financial instruments and derivatives commonly used in today's capital
markets, such as interest rate swaps, options, 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 would be for fixed periods and stated notional amounts. In
no case will the notional principal amount of any interest rate swap
exceed that of the underlying debt instrument and related interest rate
exposure. Applicants will not engage in speculative transactions. 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.
Interest rate hedging transactions with respect to anticipated debt
offerings (the "Anticipatory Hedges") and subject to certain
limitations and restrictions would only be entered into with Approved
Counterparties, and would be utilized to fix and/or limit the interest
rate risk associated with any new issuance through (i) a forward sale
of exchange-traded U.S. Treasury futures contracts, U.S. Treasury
obligations and/or a forward swap (each a "Forward Sale"); (ii) the
purchase of put options on U.S. Treasury obligations (a "Put Options
Purchase"); (iii) a Put Options Purchase in combination with the sale
of call options on U.S. Treasury obligations (a "Zero Cost Collar");
(iv) transactions involving the purchase or sale,
25
including short sales, of U.S. Treasury obligations; or (v) 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, options, caps and collars, appropriate for
the Anticipatory Hedges. Anticipatory Hedges may be executed
on-exchange ("On-Exchange Trades") with brokers through the opening of
futures and/or options positions traded on the Chicago Board of Trade
or the Chicago Mercantile Exchange, the opening of over-the-counter
positions with one or more counterparties ("Off-Exchange Trades"), or a
combination of On-Exchange Trades and Off-Exchange Trades. Each
Applicant will determine the optimal structure of each Anticipatory
Hedge transaction at the time of execution. Applicants may decide to
lock in interest rates and/or limit its exposure to interest rate
increases. Applicants represent that each Interest Rate Hedge and
Anticipatory Hedge will be treated for accounting purposes under
generally accepted accounting principles. Applicants will comply with
the then existing financial disclosure requirements of the Financial
Accounting Standards Board associated with hedging transactions.(20)
3. AEP GUARANTEES, INTRA-SYSTEM ADVANCES AND EWG INVESTMENT
(a) Guarantees
Prior to the Transaction, no debt of any entity, the assets of
which are being transferred pursuant to the Transaction, shall be
recourse to AEP. AEP requests authorization to enter into guarantees,
obtain letters of credit, enter into support or expense agreements or
otherwise provide credit support with respect to the obligations of the
Finance Applicants as may be appropriate or necessary to enable such
Finance Applicant to carry on in the ordinary course of its respective
business in an aggregate principal amount, and to enter into guarantees
of non-affiliated third parties obligations in the ordinary course of
AEP's business ("AEP Guarantees") in an amount not to exceed $15.0
billion outstanding at any one time
----------
(20) The proposed terms and conditions of the Interest Rate Hedges and
Anticipatory Hedges are substantially the same as the Commission has approved in
other cases. SEE Entergy Corporation, HCAR No. 27371 (April 3, 2001); New
Century Energies, Inc., et al., HCAR No. 27000 (April 7, 1999); and Ameren
Corp., et al., HCAR No. 27053 (July 23, 1999).
26
(not taking into account obligations exempt pursuant to Rule 45)
provided that AEP may issue up to $1.5 billion of the $15 billion in
guarantees and related credit support for the benefit of the
Enterprises Subsidiaries. Any such guarantees shall also be subject to
the limitations of Rule 58(a)(1) or the Rule 53 limitation then in
effect for AEP, as applicable and explained in Item 1.E.3.c, below.
Each guarantor proposes to charge each subsidiary a fee for each
guarantee provided on its behalf that is comparable to those obtainable
by the beneficiary of the guarantee from third parties.
A substantial amount of the guarantees proposed to be issued by
AEP will be in connection with the Enterprises Unit. As a result of the
Transaction, the Enterprises Unit will be a newly formed business
consisting of the generating assets of CPL, WTU, CSP and OPCo. The
Enterprises Unit will also conduct the power marketing and trading
operations previously conducted by CPL, WTU, CSP and OPCo. For various
business reasons, AEP may wish to provide credit support in connection
with the Enterprises Unit's obligations to independent power producers
to purchase the output of generating units, in connection with the
trading positions of the Enterprises Unit entered into in the ordinary
course of the Enterprises Unit's energy marketing and trading business
and for other purposes. AEP may wish to provide guarantees to the
Enterprises Unit for reasons that are not unusual in today's
increasingly competitive electricity markets.
The second reason for the requested level of guarantee
authority is that many of the counterparties with whom the Enterprises
Unit will buy and sell power may demand that the Enterprises Unit
provide credit support, as its credit rating may not be as strong as
the present credit ratings of CPL, CSP, OPCo and WTU.
The provision of parent guarantees by holding companies to
affiliates in the generation and power marketing business is a standard
industry practice. Given the substantial volume of the Enterprises
Unit's business, AEP's $15.0 billion request for authority to issue
guarantees, including the guarantees relating to the Enterprises Unit,
is reasonable and appropriate under current industry practice. AEP
expects the Enterprises Unit to grow quickly and obtain its own
investment grade rating soon after the Restructuring. To the extent the
27
Enterprises Unit has such a rating, the need for support from AEP will
likely be reduced. In that situation, the Enterprises Unit will likely
be required to offer its guarantee in connection with the business
activities of its subsidiaries through which AEP's generation business
will be developed.
Certain of the guarantees referred to above may be in support
of the obligations of subsidiaries which are not capable of exact
quantification. In such cases, AEP will determine the exposure under
such guarantee for purposes of measuring compliance with the $15.0
billion limitation by appropriate means including estimation of
exposure based on loss experience or projected potential payment
amounts. Such estimates will be made in accordance with generally
accepted accounting principles. Such estimation will be reevaluated
periodically.
AEP requests that this guarantee authority include the ability
to guarantee debt. The debt guaranteed, including any guarantees of
non-affiliates, will comply with the parameters set forth in Item
1.E.2. Any guarantees or other credit support arrangements outstanding
at the end of the Authorization Period will continue until expiration
or termination in accordance with their terms.
The aggregate amount of the guarantees issued by AEP for the
purpose of funding any direct or indirect investment in an EWG or FUCO
would not, when added to AEP's "aggregate investment" (as defined in
Rule 53(a)(1)) in all such companies, exceed the Rule 53 limitation
then in effect for AEP.
Direct or indirect investments by AEP in Rule 58 Subsidiaries
would be subject to the limitations of Rule 58.
(b) Intra-system Advances
Authority is sought for AEP to acquire the debt or other
securities of the Holding Companies for the purpose of lending to them.
All such intra-company conduit financing transactions shall comply with
the "at cost" requirements of Rules 45 and 52.
(c) EWG Investment
28
As noted above, AEP is seeking EWG status for the PGC
affiliates, i.e., the Enterprises Subsidiaries, that will own the
Restructured Generation Assets. Immediately following the Transaction,
the Enterprises Subsidiaries will be "public-utility companies" under
the 1935 Act. Once EWG status is obtained, each Enterprises Subsidiary
will be an EWG and the Restructured Generation Assets owned by each
will be "eligible facilities" under the 1935 Act. AEP seeks
authorization to 'invest' (pursuant to the transactions described
herein), in the Enterprises Subsidiary EWGs up to the EWG Investment
Amount(21).
This Application contemplates that (i) generation assets
currently owned by WTU and CPL (the "Generation Assets") will be
transferred to PGC subsidiaries (the "Texas PGCs"), (ii) upon transfer
of their transmission and distribution assets and related liabilities,
OPCo and CSP will be PGCs (the "Ohio PGCs" which, together with the
Texas PGCs, are also the Enterprises Subsidiaries), and (iii) the
Enterprises Subsidiaries will be held by a direct or indirect
subsidiary of Enterprises. The Enterprises Subsidiaries will be
public-utility companies within the meaning of the Act until such time
as the FERC grants them EWG status.
Rule 53(a)(1)(i) provides in pertinent part that "aggregate
investment" means "the fair market value of assets acquired by an
exempt wholesale generator or a foreign utility company from a system
company (other than an exempt wholesale generator or a foreign utility
company)." The Generation Assets will be transferred to the Texas PGCs
at book value, as required by Texas state law. The fair market value of
the Generation Assets is not known at this time.
Applicants propose that, once EWG status is obtained for the
Enterprises Subsidiaries, the aggregate investment in them will be
$3.911 billion consisting of (i) $2.411 billion, as of December 31,
2001, which is the aggregate of the equity accounts of the Enterprises
Subsidiaries as projected on in Exhibit B-2, and which
----------
(21) The authority to invest in the Enterprises Subsidiary EWGS requested herein
will be in addition to AEP's authority to invest up to 100% of its consolidated
retained earnings in EWGs and FUCOs pursuant to the Rule 53(c) Order defined
below.
29
amount reflects the equity investment of AEP in the Enterprises
Subsidiaries and, therefore, recourse to AEP (the "Recourse Amounts"),
and (ii) $1.5 billion of related guarantees and other credit support by
AEP for the benefit of these subsidiaries. If AEP subsequently
determines to retain the Texas PGCs, the fair market value of the
Generation Assets will be substituted for the Texas PGC portion of the
Recourse Amounts in the $3.911 billion aggregate investment amount.
AEP is currently authorized by the Rule 53(c) Order to engage
in EWG and FUCO financings in an amount equal to 100% of consolidated
retained earnings, as defined in rule 53(a)(1). That amount was $3.308
billion as of March 31, 2002. Current investment in these entities is
$2.970 billion.
No new financing is associated with the obtaining of EWG status
for the Enterprises Subsidiaries. AEP will require the authority to
'invest' (pursuant to the transactions described herein, including the
financings and guarantees) in the Enterprises Subsidiary EWGs up to the
EWG Investment Amount. The authority requested herein is essential if
AEP is to successfully adapt to the state-law mandated restructuring
described in this file and which materially impacts significant
portions of its regulated utility operations. AEP must obtain
sufficient investment flexibility under the 1935 Act to obtain EWG
status for the PGCs owning the Restructured Generation Assets.
(i) RULE 53 REQUIREMENTS.
Rule 53 provides that, if each of the conditions of
paragraph (a) thereof is met, and none of the conditions of
paragraph (b) thereof is applicable, then the Commission may
not make a finding that the issuance or sale of a security by a
registered holding company for the purposes of financing the
acquisition of an EWG or the guarantee of a security of an EWG
by a registered holding company is not reasonably adapted to
the earning power of such company or to the security structure
of the companies in the holding company system, or that the
circumstances are such as to constitute the making of such
guarantee an improper risk for the company. Generally,
paragraph (a) limits the aggregate amount invested in EWGs and
FUCOs to not more than 50% of the
30
holding company's consolidated retained earnings. Paragraph (b)
relates to certain events of bankruptcy and recent significant
declines in the amount of consolidated retained earnings.
As of December 31, 2001, AEP's "aggregate investment", as
defined in Rule 53(a)(1), in EWGs and FUCOs was approximately
$2.211 billion, or about 67.5% of AEP's "consolidated retained
earnings", also as defined in Rule 53(a)(1), for the four
quarters ended December 31, 2001 ($3.277 billion).
Consequently, AEP satisfies the safe harbor requirement of Rule
53(a) except for clause (1). As outlined in this
Application-Declaration, AEP is seeking EWG status for the
Enterprises Subsidiaries (the entities holding the Restructured
Generation Assets).
Assuming the foregoing, as of December 31, 2001, AEP's
"aggregate investment", as defined in Rule 53(a)(1), in EWGs
and FUCOs would be approximately $6.1 billion (actual of $2.2
billion and the EWG Investment Amount of $3.9 billion), or
about 186.1% of AEP's "consolidated retained earnings", also as
defined in Rule 53(a)(1), for the four quarters ended December
31, 2001 ($3.277 billion).
(ii) AEP'S COMPLIANCE WITH RULE 53 REQUIREMENTS.
Giving effect to the proposals contained herein AEP will
satisfy all of the conditions of Rule 53(a) except for clause
(1) thereof, which requires that the aggregate at risk
investment of the registered holding company in EWGs and FUCOs
not exceed 50% of the holding company system's consolidated
retained earnings. The other requirements of Rule 53(a) provide
(1) that the holding company keep certain books and records
relating to EWGs and FUCOs in accordance with generally
accepted accounting principles, (2) limitations on the number
of employees of a domestic public utility company in the
holding company system who may provide services for the EWGs
and FUCOs and (3) for the holding company to make certain
filings. None of the conditions specified in Rule 53(b) is or
will be applicable. Rule 53(b) makes the safe harbor
unavailable if (1) the holding company or certain
31
subsidiaries have been in bankruptcy, (2) the holding company's
consolidated retained earnings have declined more than 10% from
the prior year measured as provided in the rule or (3) the
holding company has reported operating losses related to its
EWG or FUCO investments. AEP will demonstrate below why giving
effect to the proposals contained herein will not result in any
adverse consequences to AEP, its utility subsidiaries or AEP
investors.
Rule 53(c) states that, in connection with a proposal to
issue and sell securities to finance an investment in an EWG,
or to guarantee the securities of an EWG, a registered holding
company that is unable to satisfy, among other provisions, the
provision that such investments may not exceed 50% of
consolidated retained earnings, must "affirmatively
demonstrate" that such proposal:
(A) will not have a substantial adverse impact upon
the financial integrity of the registered holding company
system; and
(B) will not have an adverse impact on any utility
subsidiary of the registered holding company, or its
customers, or on the ability of State commissions to
protect such subsidiary or customers.
The following paragraphs provide data analyzing the impact of the
investments in EWGs and FUCOs on the AEP system in light of the tests developed
by the staff in the course of adopting orders permitting registered holding
companies to issue securities up to 100% of their respective consolidated
retained earnings for investment in EWGs and FUCOs (the "100% Orders"). These
tests involve (1) analysis of ratios of EWG/FUCO investment to (a) consolidated
capitalization, (b) consolidated net utility plant, (c) total consolidated
assets, (d) market value of outstanding stock, (e) growth in consolidated
retained earnings, (f) stock price to earnings ratio, (g) market to book ratio,
(h) dividend payout ratio, and (i) capitalization ratios.
CAPITALIZATION RATIOS. AEP's proposed aggregate investment in EWGs and
FUCOs would represent a reasonable commitment of AEP capital for a company the
size of AEP, based on various financial ratios at December 31, 2001. For
example, investments of this amount would be equal to only approximately
32
(a) 24.7% of AEP's total consolidated capitalization ($24.7 billion); (b) 24.9%
of consolidated net utility plant ($24.5 billion); (c) 12.9% of total
consolidated assets ($47.3 billion); and (d) 41.2% of the pro forma market value
of AEP's outstanding common stock ($14.8 billion) as of April 26, 2002.
CONSOLIDATED RETAINED EARNINGS GROWTH. Consolidated retained earnings
growth has been negatively impacted by Cook Nuclear Plant restart costs ($337
million), a disallowance of tax deductions for corporate owned life insurance
(COLI) ($319 million), and expensing of costs relating to AEP's merger with CSW
($203 million). Adjusted to exclude the non-recurring items noted above in 2000,
AEP's consolidated retained earnings as of December 31, 2001 would be $4,155
million, or a 14.5% increase since December 31, 1999. AEP's average consolidated
retained earnings history for the seven most recent quarters is set forth below:
o AEP's average consolidated retained earnings for the four quarters
ended December 31, 2001 ($3,277 million) represented a decrease of
approximately $98 million (or 2.9%) in the average consolidated
retained earnings from the four quarters ended December 31, 2000
($3,375 million);
o AEP's average consolidated retained earnings for the four quarters
ended September 30, 2001 ($3,225 million) represented a decrease of
approximately $285 million (or 8.1%) in the average consolidated
retained earnings from the four quarters ended September 30, 2000
($3,510 million);
o AEP's average consolidated retained earnings for the four quarters
ended June 30, 2001 ($3,242 million) represented a decrease of
approximately $303 million (or 8.5%) in the average consolidated
retained earnings from the four quarters ended June 30, 2000
($3,545 million);
o AEP's average consolidated retained earnings for the four quarters
ended March 31, 2001 ($3,275 million) represented a decrease of
approximately $299 million (or 8.4%) in the average consolidated
retained earnings from the four quarters ended March 31, 2000
($3,574 million);
o AEP's average consolidated retained earnings for the four quarters
ended December 31, 2000 ($3,375 million) represented a decrease of
approximately $179 million (or
33
5.0%) in the average consolidated retained earnings from the four
quarters ended December 31, 1999 ($3,554 million);
o AEP's average consolidated retained earnings for the four quarters
ended September 30, 2000 ($3,510 million) represented a decrease of
approximately $9 million in the average consolidated retained
earnings from the four quarters ended September 30, 1999 ($3,519
million);
SHARE PRICE TO EARNINGS RATIO. The financial strength of AEP is
reflected in the current Price/Earnings ratios of AEP, which, as of February 14,
2002, exceeded that of most other registered holding companies. AEP's
Price/Earnings ratio as of February 14, 2002 was 13.96, compared to 9.44 for
Allegheny, 12.18 for Cinergy, 12.72 for Entergy, 11.2 for Exelon, 13.43 for
FirstEnergy, 15.61 for Southern and 10.32 for Xcel.
MARKET TO BOOK RATIO. AEP's market to book ratio is currently 1.80
based on a book value of $25.49 per share as of December 31, 2001 and a market
price of $45.97 per share as of April 26, 2002. This ratio is above the industry
average, which was 1.65 as of February 14, 2002, according to First Call
consensus estimates.
DIVIDEND PAYOUT RATIO. AEP's payout ratio in 2001 was 71%, based on
reported Earnings Per Share for 2001. Based on the anticipated dividend and
estimates for 2002 earnings, AEP's payout ratio will be approximately 60% to
70%. This range is above the industry average of 49.5%. A payout ratio at this
level will enable AEP to build its equity to support future growth.
CAPITALIZATION RATIOS. The credit ratings from major nationally
recognized rating agencies for AEP and its major utility subsidiaries are set
out the in the table below.
RATING AGENCY SUMMARY
As of February 8, 2002
----------------------
Moody's S&P Fitch
------------------- ------------------- -------------------
Senior Senior Senior Senior Senior Senior
Company Secured Unsecured Secured Unsecured Secured Unsecured
------- ------- --------- ------- --------- ------- ---------
AEP -- Baa1 -- BBB+ -- BBB+
APCo A3 Baa1 A BBB+ A- BBB+
CPL A3 Baa1 A- BBB+ A A-
CSPCo A3 A3 A- BBB+ A A-
I&M Baa1 Baa2 A- BBB+ BBB+ BBB
KPCo Baa1 Baa2 A- BBB+ BBB+ BBB
OPCo A3 A3 A- BBB+ A- BBB+
PSO A1 A2 A BBB+ A+ A-
SWEPCO A1 A2 A BBB+ A+ A-
WTU A2 -- A- BBB+ A --
34
RULE 53(B) FACTORS. With respect to the relevant financial benchmarks
specifically contemplated by Rule 53(b), none is applicable:
o there has been no bankruptcy of AEP or any of its associate
companies (Rule 53(b)(1));
o pro forma average consolidated retained earnings for the four most
recent quarterly periods have not decreased by more than 10% from
the average for the preceding four quarterly periods (Rule
53(b)(2));
o AEP reported no operating losses attributable to its direct or
indirect investments in EWGs and FUCOs that exceeded an amount
equal to 5% of its consolidated retained earnings in the previous
fiscal year (Rule 53(b)(3)).
AEP undertakes to notify the Commission by filing a post-effective
amendment in this proceeding in the event that any of the circumstances
described in Rule 53(b) arise during the Authorization Period.
(iii) RISK ANALYSIS.
AEP's investments in EWGs and FUCOs involve a variety of
risks that are not necessarily present in the traditional,
regulated, electric utility industry. AEP has established
comprehensive procedures to identify and address (i.e., limit
and/or mitigate) these risks. The following discussion
summarizes the standard procedures in place before AEP would
issue securities to invest in an EWG or FUCO and is neither
directly nor indirectly applicable to AEP's request to
redesignate the Restructured Generation Assets which it already
owns.
THE PROJECT REVIEW PROCESS.
Every potential project investment opportunity developed by AEP
is subjected to a series of formal reviews to ensure the project's soundness.
The process begins with a
35
consideration of AEP's strategic plans which survey independent power
opportunities domestically and throughout the world and provide a variety of
tools to assist in the evaluation of risks. These plans, which are updated
periodically, lead to the identification of projects and countries where AEP
intends to pursue project development efforts. The plans also lead to the
development of budgeted levels of expenditure on foreign development activities.
This careful planning and budgeting process helps to mitigate an important risk:
the expenditure of development funds without a realistic expectation of success
in terms of both making investments in projects and in obtaining appropriate
levels of non-recourse financing on commercially reasonable terms.
Before AEP makes any investment in a foreign country, an
analysis of that opportunity, including the specific country risk, is presented
first to the executive management group, then to the Finance Committee of the
board of directors, and finally to AEP's board of directors. The analysis
includes a review of the political and economic stability of the particular
country, the government's commitment to private power, the legal and regulatory
framework for private investment in electricity facilities, the local business
support for long-term investment of private capital, the economic viability of
the project, the technology and fuel supply, the environmental impact, the
currency conversion and repatriation and the potential for future partial sales
of the investment interest to other investors. The board of directors of AEP
must approve investments in any foreign country.
Once development of a project is undertaken, milestones are
established to ensure that continuing expenditures on development are producing
acceptable results. Project teams are required to identify the major technical,
financial, commercial and legal risks associated with their particular project
and whether and how those risks have been mitigated. The members of the project
team are responsible for the due diligence investigation of those risks that
have been identified and must present their findings to an officer of AEP with
functional oversight over the relevant risk factor subject matter.
Finally, every project is subjected to increasing levels of
management review. Depending on the amount of AEP's projected financial exposure
to a particular project, the proposed investment must be approved successively
by the entire
36
executive management group, the Finance Committee of the board of
directors and the board of directors of AEP.
Significantly, the final project review process, in most cases,
is to a large extent replicated by the lenders who agree to provide construction
or permanent debt financing on a non-recourse basis, since repayment of that
debt will depend solely upon the success of the project. Project debt maturities
are frequently long-term (e.g., 15 or more years), meaning that the lenders'
exposure to the risks of a project extends for many years after closing or
completion of construction. Project debt documents customarily require the
establishment of plant overhaul or utility system maintenance, debt service and
other funded reserves, all of which are designed to preserve the asset and
protect the financial performance of the project against interruptions in
revenues and other contingencies.
RISK MITIGATION OF EWGS AND FUCOS.
AEP carefully evaluates the potential risks of an independent
power project or foreign utility system before its funds are committed.
o OPERATING RISKS. AEP has focused its project development efforts on
projects using fuel technologies with which the AEP system has
existing competencies in generation, transmission and distribution.
Due diligence of operating assumptions is carried out by AEP
engineers with experience in the technology being evaluated and by
outside technical consultants. Other operating risks can be covered
by equipment warranties and by casualty, business interruption and
other forms of insurance. If AEP or one of its affiliates is
responsible for the operations of a project, the operating risk
will be further reduced.
o CONSTRUCTION RISKS. Construction risks are commonly addressed under
fixed-price contracts with milestones and performance guarantees
(e.g., guaranteed heat rates, availability factors), backed by
appropriate levels of liquidated damages. The creditworthiness and
'track record' of the construction contractor is a very important
consideration in this regard. In those cases where AEP or its
respective affiliate serves as its own general construction
contractor, it looks to pre-negotiated cost and damage provisions
from sub-contractors, including, without limitation, equipment
vendors, to protect against performance shortfalls, cost overruns
and schedule delays.
37
o COMMERCIAL RISKS. Many independent power projects rely on the
'off-take' commitment of a single power purchaser to eliminate all
or most of the risk of variation in revenues. In such cases, AEP
makes an assessment of the creditworthiness of the power purchaser
over the life of the project and/or seeks to have a contingency
plan in the event of off-take defaults.
In competitive power markets, long-term off-take contracts are not
always available and electricity prices may be determined by supply
and demand. AEP conducts extensive investigations of the
electricity markets in these environments to ensure the viability
of long-term demand. AEP seeks projects that will be capable of
producing electricity at or below long-run marginal costs in the
region, thus providing that the project will be a competitive
supplier.
o FINANCIAL RISKS. AEP addresses the financial risks of its projects
in a variety of ways. First and foremost, AEP seeks to secure the
maximum amount of permanent debt financing for such projects that
is available at reasonable cost and that is, by its express terms,
non-recourse to AEP. This means that the non-recourse debt of each
project or foreign utility system is secured solely by its assets
and revenues, and creditors have no ability to seek repayment upon
default from AEP. This method of financing ensures that AEP's
exposure to any independent power project is limited to the amount
of its equity commitment and that AEP's utility operating companies
and their customers bear no risk of a project's failure or
financial distress. From time to time, AEP may agree to provide
guarantees in connection with EWG and FUCO financings, but these
financial supports will be carefully monitored and treated as a
part of AEP's equity commitment for regulatory reporting purposes.
In addition to the non-recourse nature of most project debt
financing, project debt is carefully structured to meet, or match,
the characteristics of the particular project. For example, when
the value of a project depends on a long-term, fixed-price,
off-take contract (i.e., a power purchase contract), the project
debt is often designed to be of a similar term, with scheduled debt
payments covered by fixed charges (usually the capacity payment
component in the contract). On the other hand, where there is no
long-
38
term, fixed source of revenue, the percentage of non-recourse debt
financing should be smaller, so that financial risk is not
increased by excessive debt levels. Thus, while AEP' projects with
long-term off-take contracts may have debt capitalization levels in
the 70% to 80% range, AEP' other projects are anticipated to be
leveraged at levels similar to those of United States regulated
utilities, in the 50% to 60% range.
Another financing risk is the potential variability of interest
rates. This risk is addressed, in part, by borrowing, to the extent
possible, on a long-term, fixed-rate basis. After contractual terms
for a project have been agreed to but before financial closing, AEP
is also exposed to interest rate variability. This risk can be (and
will be, upon approval of the Treasurer of AEP, as described in the
next sentence) mitigated by purchasing financial instruments which
provide hedges against interest rate volatility. The Treasurer and
the financial staff of AEP are responsible for reviewing, analyzing
and comparing the costs of such financial instruments and the
perceived interest rate risk, for approving the purchase of such
financial instruments when the cost of the perceived risk exceeds
the costs associated with the financial instrument and for
monitoring the use of these instruments to ensure they are used
properly.
o FOREIGN CURRENCY EXCHANGE RISK. There are several ways in which AEP
may address the foreign currency exchange risk element, depending
on the status of the host country. In countries which do not have a
history of stability in the management of their exchange policy,
part or all of the revenue from a project may be payable in or
indexed to hard currency (almost invariably U.S. dollars). Back-up
guarantees or other undertakings by the central government may be
available to ensure that the U.S. dollar payments due under an
off-take contract are actually made available by the central bank
or ministry of finance.
In other cases, the non-recourse project debt is borrowed in the
same currency as the project's revenues, thereby ensuring a match
between debt service obligations and operating income. In more
developed countries, long-term currency swaps are available to
provide further hedging for the equity component of the investment.
39
o LEGAL RISKS. Legal risks are addressed by careful review of any
investment by legal counsel, including local and international
counsel where foreign projects are concerned. Such legal reviews
address regulatory and permitting risks, environmental risks, the
adequacy and enforceability of guarantees or other contractual
undertakings of third parties, the status of title to utility
property and the obligations inherent in the financing
arrangements.
In addition to the specific risks mentioned above, investment
outside the United States can entail country-specific risks related
to political or economic performance. As indicated above, AEP
evaluates country risk at the outset of any project development
effort and attempts to mitigate this risk through a number of
measures. Most important, the country review process described
above ensures that the political and economic stability of any
country has been reviewed at several levels up to and including
AEP's board of directors before any investment occurs. The country
analysis also focuses specifically on the country's electric sector
and on the government's support for private ownership in that
sector.
At the outset of development work in a foreign country, AEP seeks
local partners who are experienced in doing business in the host
country. Local partners are a very important element in reducing
the risk of future expropriation or unfair regulatory treatment.
Another mitigating factor is the participation of official or
multilateral agencies in a project. When funds for the project are
supplied by government-sponsored export credit agencies or other
governments or institutions such as the World Bank through its
International Finance Corporation affiliate, the host country has
strong incentives not to take actions which would harm a project's
viability.
Most political risk can be addressed through political risk
insurance obtained from the Overseas Private Investment
Corporation, a United States agency, or the Multilateral Investment
Guaranty Agency, a World Bank affiliate, or in the commercial
insurance market. Political risk insurance is available to insure
the project debt or the return of an investor's equity. One can
also insure against outright expropriation, acts of civil violence
or even 'creeping' nationalization brought about by punitive
regulation. AEP analyzes the perceived risk and its costs and
compares that with the cost of obtaining such insurance.
40
(iv) IMPACT OF INVESTMENTS IN EWGS AND FUCOS ON UTILITY
SUBSIDIARIES.
AEP's request in this Application/ Declaration to
authorize the existing and proposed investments in EWGs and
FUCOs will not have an "adverse impact" on its utility
subsidiaries, its customers, or on the ability of the state
commissions to protect such utility subsidiaries or such
customers.
This conclusion is supported by (i) the insulation of
AEP's utility subsidiaries and their customers from potential
direct adverse effects of AEP's investments in EWGs and FUCOs;
(ii) the effects of utility regulation restructuring in Texas
and Ohio, including certain retail rate caps and rate freeze
imposed and the opening of the energy supply business to retail
customer choice; (iii) AEP's current financial health and (iv)
the proven effectiveness of state commission oversight over
AEP's utility subsidiaries.
(v) INSULATION FROM RISK.
All of AEP's investments in EWGs and FUCOs are, and in the
future will remain, segregated from its utility subsidiaries.
Any losses that may be incurred by such utility subsidiaries
would have no effect on the rates of AEP even after the rate
caps and rate freezes now in effect expire. AEP represents that
it will not seek recovery through higher rates from the
customers of AEP's utility subsidiaries in order to compensate
AEP for any possible losses that it or any subsidiary may
sustain on the investment in EWGs or FUCOs or for any
inadequate returns on such investments.
Moreover, to the extent that there may be indirect impacts
on AEP's utility subsidiaries from its EWG and FUCO investments
through effects on its capital costs, the state commissions
have broad discretion to set the cost of capital for the
utility subject to their jurisdiction by a variety of accepted
means and are free to exclude any adverse impacts due to EWGs
and FUCOs. Therefore, the state commissions
41
have the authority and the mechanisms to prevent any adverse
effects on the cost of capital due to investments in EWGs and
FUCOs from being passed on to utility customers.
AEP will comply with the requirements of Rule 53(a)(3)
regarding the limitation on the use of employees of its utility
subsidiaries in connection with providing services to EWGs and
FUCOs. No utility subsidiary will increase staffing levels to
support the operations of any EWG or FUCO. Development of new
EWG or FUCO projects will be conducted through Enterprises or
one or more of its subsidiaries.
Finally, AEP will comply with the other conditions of Rule
53(a) providing specific protections to customers of its
utility subsidiaries and their state commissions, in
particular, the requirements of Rule 53(a)(2) regarding the
preparation and making available of books and records and
financial reports regarding EWGs and FUCOs, and the
requirements of Rule 53(a)(4) regarding filing of copies of
applications and reports with other regulatory commissions.
(vi) FINANCIAL HEALTH OF AEP UTILITY SUBSIDIARIES.
AEP utility subsidiaries are financially strong companies
with stable earnings and cash flows. As noted above, the rated
utility subsidiaries have sound investment grade ratings by the
major nationally recognized rating agencies.
AEP's current and proposed investments in EWGs and FUCOs will
not have any negative impact on the ability of its utility subsidiaries to fund
operations and growth. None of AEP's utility subsidiaries anticipate any further
major asset sales or any significant additional securitization apart from that
discussed in this File. Moreover, there is ongoing evidence that AEP's utility
subsidiaries can access capital markets as needed, although their ability to
issue debt and preferred equity securities in the future depends upon earnings
coverages and market factors at the time such securities are issued.
42
(vii) ADEQUACY OF STATE COMMISSION OVERSIGHT.
In the opinion of AEP, the eleven state commissions of
Arkansas, Indiana, Kentucky, Louisiana, Michigan, Ohio,
Oklahoma, Tennessee, Texas, Virginia and West Virginia having
jurisdiction over the Operating Companies are able to protect
utility customers within their respective states. The state
commissions have not raised objections to AEP's current
investments in EWGs and FUCOs.(22) To provide the Commission
with added assurances, AEP will meet with each of the state
commissions having jurisdiction over the Operating Companies
and request each to provide the Commission with a letter or
order certifying that such state commission has jurisdiction
over certain Operating Companies and that such state commission
will protect ratepayers from any adverse effect or costs that
might result from AEP's investments in EWGs and FUCOs.
Rule 54 provides that the Commission, in determining
whether to approve the issue or sale of a security by a
registered holding company for purposes other than the
acquisition of an EWG or FUCO, or other transactions by such
registered holding company or its subsidiary other than with
respect to EWGs and FUCOs, shall not consider the effect of the
capitalization or earnings of any subsidiary which is an EWG or
FUCO upon the registered holding company system if the
provisions of Rule 53(a), (b) and (c) are satisfied. AEP is
subject to ongoing reporting requirements that are intended to
enable the Commission to monitor the impact of the transactions
for which authority is sought hereby. The Applicants believe
that such reporting requirements will assist the Commission in
its determinations concerning the effect of EWGs and FUCOs on
other transactions for which AEP will require authorization.
4. ENTERPRISES HOLDING COMPANIES AUTHORITY
----------
(22) Section 33(c)(2) provides that the state commissions may make
recommendations to the Commission regarding a registered holding company's
relationship to FUCOs, and that the Commission shall 'reasonably and fully
consider' such recommendations.
43
The finance authority requested in the following categories is
necessary until such time that each Enterprises Subsidiary obtains EWG status.
AEP is currently seeking the requisite state consent for EWG status for each.
Once EWG status is obtained for each Enterprises Subsidiary (such that the
Enterprises Holding Companies would no longer hold any interest in any utility
subsidiary), the finance authority sought below will no longer be necessary, as
all such activity will be exempt.
(a) Financing Authority
Authority is sought for each Enterprises Holding Company to
engage in financings and to issue securities to non-affiliated and
affiliated entities subject to and in accordance with the parameters
set forth in Item E.2., above, in an aggregate principal amount not to
exceed $5.0 billion, other than the refunding of outstanding
securities, which would not be limited.
(b) Guarantee Authority
Authority is sought for each Enterprises Holding Company to
issue guarantees and extend credit support to any Enterprises
Subsidiary, Finance Subsidiary, as defined below, owned by it, any
other Enterprises Holding Company, any direct or indirect subsidiary of
any Enterprises Holding Company, or any non-affiliate subject to and in
accordance with the parameters set forth in Item E.3.(a), above, in an
aggregate amount not to exceed $10.0 billion, exclusive of any
guarantees and other forms of credit support that are exempt pursuant
to Rule 45 and Rule 52, provided however, that the amount of guarantees
in respect of obligations of any Rule 58 Subsidiaries shall remain
subject to the limitations of Rule 58(a)(1).
(c) Hedging Transaction Authority
Authority is sought for each Enterprises Holding Company to
enter into any hedging transaction subject to and in accordance with
the parameters set forth in Item E.2., above.
(d) Intra-system Advances
Authority is sought for each Enterprises Holding Company to
acquire the debt or other securities of any
44
Enterprises Subsidiary or other Enterprises Holding Company for the
purpose of lending to such Enterprises Subsidiary or other Enterprises
Holding Company. All such intra-company conduit financing transactions
shall comply with the "at cost" requirements of Rules 45 and 52.
45
5. ENTERPRISES SUBSIDIARIES AUTHORITY
The finance authority requested in the following categories is
necessary until such time that each Enterprises Subsidiary obtains EWG status.
AEP is currently seeking the requisite state consent for EWG status for each.
Once EWG status is obtained, the finance authority sought below will no longer
be necessary, as all such activity will be exempt.
(a) Financing Authority
Authority is sought for each Enterprises Subsidiary, to the
extent not exempt under Rule 52, to engage in financings(23) and to
issue securities to non-affiliated and affiliated entities subject to
and in accordance with the parameters set forth in Item E.2., above, up
to the following principal amounts, other than the refunding of
outstanding securities, which would not be limited:
CPL PGC, CPL PGC LP, CPL PGC LLC................ 1,000,000,000
CSP PGC......................................... 500,000,000
OPCo PGC........................................ 1,000,000,000
WTU PGC, WTU PGC LP, WTU PGC LLC................ 250,000,000
(b) Guarantee Authority
Authority is sought for each Enterprises Subsidiary to issue
guarantees and extend credit support to any subsidiary owned by it
(including any Finance Subsidiary, as defined below), to any other
Enterprises Subsidiary or any non-affiliate subject to and in
accordance with the parameters set forth in Item E.3.(a), above, in
amounts not to exceed the amounts set forth in Item E.5.(a), above,
exclusive of any guarantees and other forms of credit support that are
exempt pursuant to Rule 45 and Rule 52, provided however, that the
amount of guarantees in respect of obligations of any Rule 58
Subsidiaries shall remain subject to the limitations of Rule 58(a)(1).
----------
(23) CPL PGC or an Enterprises Holding Company is expected to assume the
obligations on certain pollution control loan obligations of CPL issued in
connection with facilities located at the generating stations to be transferred
to CPL PGC from CPL. WTU PGC or an Enterprises Holding Company is expected to
assume the obligations on certain pollution control loan obligations of WTU
issued in connection with facilities located at the generating stations to be
transferred to WTU PGC from WTU.
46
(c) Hedging Transaction Authority
Authority is sought for each Enterprises Subsidiary to enter
into any hedging transaction subject to and in accordance with the
parameters set forth in Item E.2., above.
(6) REG HOLDCO AUTHORITY
(a) Financing Authority
Authority is sought for Reg Holdco to engage in financings and
to issue securities to non-affiliated and affiliated entities subject
to and in accordance with the parameters set forth in Item E.2., above,
in an aggregate principal amount not to exceed $10.0 billion, other
than the refunding of outstanding securities, which would not be
limited.
(b) Guarantee Authority
Authority is sought for Reg Holdco to issue guarantees and
extend credit support to any Regulated Subsidiary, any Finance
Subsidiary, as defined below, owned by it or any non-affiliate subject
to and in accordance with the parameters set forth in Item E.3.(a),
above, in an aggregate amount not to exceed $10.0 billion.
(c) Hedging Transaction Authority
Authority is sought for Reg Holdco to enter into any hedging
transaction subject to and in accordance with the parameters set forth
in Item E.2., above.
(d) Money Pool Authority
AEP currently administers the AEP Money Pool as authorized by
AMERICAN ELECTRIC POWER COMPANY, INC. ET AL., HCAR No. 27186 (June 14,
2000) subject to the general authority set forth therein and CENTRAL
AND SOUTH WEST CORP., HCAR No. 26697 (March 28, 1997) and CENTRAL AND
SOUTH WEST CORP., HCAR No. 26854 (April 3, 1998) and any subsequent
orders which may be issued relating to the AEP Money Pool
(collectively, the "Money Pool Orders"). Authority is sought for Reg
Holdco to (1) participate in the AEP Money Pool subject to and as set
forth in the Money Pool Orders provided that Reg Holdco will be
permitted to
47
borrow only from AEP and to lend only to the public utility
participants in the AEP Money Pool owned by Reg Holdco and (2) issue
short-term debt up to $3 billion (by participating in the Money Pool or
other than by participation in the Money Pool), in accordance with the
parameters set forth in Item E.2. above and to the extent not exempt
under Rule 52 (which amount shall be included in the limits set forth
in Item E.6.(a), above):
(e) Intra-system Advances
To the extent not exempt under Rule 52, authority is sought for
Reg Holdco to acquire the debt or other securities of any affiliated
public utility company whose common equity is owned, directly or
indirectly, entirely by Reg Holdco for the purpose of lending to such
affiliate. All such intra-company conduit financing transactions shall
comply with the "at cost" requirements of Rules 45 and 52.
7. REGULATED SUBSIDIARIES AUTHORITY
(a) Financing Authority
Under current law, the states of Indiana, Virginia, Tennessee,
Ohio, Oklahoma and Kentucky approve the issuance of long-term unsecured
securities by public utility companies. Therefore, Rule 52(a) provides
an exemption from this Commission for the issuances of long term debt
securities by the relevant public utility companies. Authority is
sought for each Regulated Subsidiary, to the extent not exempt under
Rule 52, to engage in financings and to issue securities to
non-affiliated and any affiliated entity owning all of the common
equity of such Regulated Subsidiary subject to and in accordance with
the parameters set forth in Item E.2., above, up to the following
principal amounts, other than the refunding of outstanding securities,
which would not be limited:
CPL EDC........................................ 1,000,000,000
SWEPCO EDC..................................... 500,000,000
SWEPCO Transco................................. 500,000,000
WTU EDC........................................ 500,000,000
(b) Guarantee Authority
48
Authority is sought for each Regulated Subsidiary to issue
guarantees and extend credit support to any subsidiary owned by it
(including any Finance Subsidiary, as defined below) or any
non-affiliate subject to and in accordance with the parameters set
forth in Item E.3.(a), above, in amounts not to exceed the amounts set
forth in Item E.7.(a), above.
(c) Money Pool Authority
Authority is sought for each Regulated Subsidiary to
participate in the AEP Money Pool subject to and as set forth in the
Money Pool Orders and (by participating in the Money Pool, or, in the
event the Money Pool is terminated, other than by participation in the
Money Pool) to be permitted to issue, in accordance with the parameters
set forth in Item E.2., above, to the extent not exempt under Rule 52,
short-term debt up to the amounts set forth below (which amounts shall
be included in the limits set forth in Item E.7.(a), above):
CPL EDC.......................................... 200,000,000
CSP EDC.......................................... 175,000,000
OPCo EDC......................................... 250,000,000
SWEPCO EDC....................................... 100,000,000
SWEPCO Transco................................... 100,000,000
WTU EDC.......................................... 75,000,000
(d) Hedging Transaction Authority
Authority is sought for each Regulated Subsidiary to enter into
any hedging transaction subject to and in accordance with the
parameters set forth in Item E.2., above.
8. FINANCE SUBSIDIARY AUTHORITY
Authority is sought for any Finance Applicant to organize and
acquire all of the common stock or other equity interests of one or more
subsidiaries (collectively, the "Financing Subsidiary") for the purpose of
effecting any financing as described herein. Authority is further sought for any
Financing Subsidiary to effect any such transaction for which any Finance
Applicant has received authority herein to effect per this Section E.
F. AEP'S NON-UTILITY HOLDINGS
49
In the interest of tax savings, financing efficiencies, aligning
corporate ownership structures together and/or for administrative, cost tracking
or other reasons, Applicants propose to restructure AEP's non-utility holdings
(including utility holdings that are no longer subject to state regulation) from
time to time (either to or within the Enterprises ownership chain) as may be
necessary or appropriate in the furtherance of its authorized non-utility
activities. The restructuring could involve the creation, capitalization and
acquisition of a subsidiary to hold the non-utility interest, the acquisition of
one or more new special-purpose subsidiaries to acquire and hold direct or
indirect interests in any or all of the AEP system's existing or future
authorized non-utility businesses. The restructuring could also involve the
transfer of authority among AEP subsidiaries as well as the transfer of existing
subsidiaries, or portions of existing businesses, among AEP associates and/or
the reincorporation of existing subsidiaries in a different state. This would
enable the AEP system to consolidate similar businesses and to participate
effectively in authorized non-utility activities, without the need to apply for
or receive additional Commission approval.(24)
These direct or indirect subsidiaries might be corporations,
partnerships, limited liability companies or other entities in which AEP,
directly or indirectly, might have a 100% interest, a majority equity or debt
position, or a minority debt or equity position. These subsidiaries would engage
only in businesses to the extent the AEP system is authorized, whether by
statute, rule, regulation or order, to engage in those businesses. AEP does not
seek authorization to acquire an interest in any non-associate Company as part
of the authority requested in this Application and states that the
reorganization will not result in the entry by the AEP system into a new,
unauthorized line of business.
G. REQUEST FOR AUTHORITY TO PAY DIVIDENDS OUT OF CAPITAL OR UNEARNED
SURPLUS BY THE UTILITY SUBSIDIARIES
As more fully explained below, the Operating Companies and Reg Holdco
request authority to pay dividends from paid-in capital in the amounts projected
in Exhibit B-2 for the purpose of placing the PGCs under the Enterprises Holding
Companies and the EDCs under Reg Holdco pursuant to the Transaction.
----------
(24) PowerGen plc, HCAR No. 27291 (Dec. 6, 2000); Columbia Energy Group, HCAR
No. 27099 (Nov. 5, 1999).
50
Following the Transaction, through June 30, 2004, each Utility Subsidiary and
Reg Holdco requests authority to pay dividends in an aggregate amount up to but
not exceeding the retained earnings of the respective Operating Company
associated with such Utility Subsidiary (or, in the case of Reg Holdco, of Reg
Holdco) immediately preceding the Transaction.
By way of example, as of December 31, 2001, CSP had retained earnings
of approximately $176 million (see Exhibit B-2). Pursuant to the Transactions
described herein, CSP will form, capitalize and transfer its transmission and
distribution assets and liabilities to CSP EDC (after which CSP will be CSP
PGC). Because no retained earnings can be transferred to CSP EDC and because the
retained earnings of CSP PGC will be eliminated when it dividends CSP EDC to
AEP, neither CSP EDC nor CSP PGC will have any retained earnings as a result of
the Transactions (see Exhibit B-2). Accordingly, granting the authority
requested herein would permit CSP EDC and CSP PGC to dividend an amount (when
added to amounts already dividended by either ) equal to $176 million through
June 30, 2004, assuming the Transactions had occurred on December 31, 2001,
which amount would be increased by any retained earnings of either (such
increases applying only to the company earning them).
Section 12 of the 1935 Act, and Rule 46 thereunder, generally prohibit
the payment of dividends out of "capital or unearned surplus" except pursuant to
an order of the Commission. The legislative history explains that this provision
was intended to "prevent the milking of operating companies in the interest of
the controlling holding company groups." S. Rep. No. 621, 74th Cong., 1st Sess.
34 (1935).(25) In determining whether to permit a registered holding company to
pay dividends out of capital surplus, as discussed in the 1991 case involving
Eastern Utilities Associates, the Commission considers various factors,
including: (i) the asset value of the company in relation to its capitalization;
(ii) the company's prior earnings; (iii) the company's current earnings in
relation to the proposed dividend; and (iv) the company's projected cash
position after payment of a dividend. In recent cases, the Commission has
determined that holding company systems may continue to pay dividends although
retained earnings have been reduced or eliminated because of write-offs
associated with State utility regulation restructuring legislation or because of
application of generally accepted accounting principles to a merger involving
two previously unaffiliated companies.
----------
(25) Compare Section 305(a) of the Federal Power Act.
51
For extraordinary reasons related to the adoption of utility
restructuring legislation in Texas and Ohio, the Operating Companies and Reg
Holdco will each be declaring and distributing significant portions of their
respective assets (the equity interest each Operating Company owns in the
Subsidiaries created by each, and the equity interest in the Texas PGCs owned by
Reg Holdco) to their respective immediate parents as more fully described in
Item 1.D.1.(e). The following, each contemplated by the Transaction as set forth
herein, result in separate but related entries on the equity account of each
entity involved: (i) the direct or indirect contribution by AEP of additional
paid-in capital to the Operating Companies in amounts such that: (y) assuming
the elimination of retained earnings, sufficient paid-in capital is available to
effect the dividend, and, (z) following the distribution of the newly
capitalized Subsidiaries, the equity portion of Consolidated Capitalization of
each entity declaring a dividend is no less than 30%, and (ii) the distribution
by the Operating Companies (and, with respect to the Texas PGCs, by Reg Holdco)
of the common stock or limited liability interests of the newly capitalized
Subsidiaries to their ultimate parent, AEP. Subsequent contributions of common
stock or limited liability interests of the newly capitalized Subsidiaries or
common stock of applicable Operating Companies and Vertically-Integrated
Companies (each as more fully described in Item 1.D.1.(e)) in order to achieve
the corporate structure set forth in Exhibit B-1 are not expected to impact the
equity account of any entity involved.
The distribution of the common stock or limited liability interest of
each Subsidiary will result in a debit in the equity account of each entity
declaring the dividend in an amount equal to the value of the common stock or
limited liability interest of the applicable Subsidiary, I.E., the value of the
utility assets and liabilities contributed to such Subsidiary. Generally
speaking, there are three components to the equity account of a corporation:
stated capital (common stock), paid-in capital and retained earnings. Under
general corporate principles, no dividend may exceed the aggregate amount of
paid-in capital and retained earnings.
There are two constraints on the distribution by the Operating
Companies (and, with respect to the Texas PGCs, by Reg Holdco) of the common
stock or limited liability interest of their respective newly capitalized
Subsidiaries: (i) unless expressly approved by the Commission, the amount of any
dividend
52
may not exceed the amount of retained earnings of the entity declaring the
dividend, and, (ii) consistent with Commission policy, following the dividend,
the equity portion of each entity declaring a dividend may not be less than 30%.
Currently, in all but one Operating Company and Reg Holdco the amount of the
dividend, I.E., the value of the common stock or limited liability interest of
the applicable Subsidiary, is greater than the retained earnings of the entity
declaring the dividend. Accordingly, in order to effect the Transaction, each
such Operating Company requests authority to pay dividends out of paid-in
capital in an amount necessary to make the distributions set forth in Item
1.D.1.(e) pursuant to the Transaction. Exhibit B-2 sets forth projections of the
amounts of paid-in capital, if any, that will be necessary, following the
elimination of retained earnings, in order to make the contemplated dividends.
As noted, except in one Operating Company and Reg Holdco, the
distribution of the Subsidiaries to AEP will (i) eliminate the retained earnings
component of the equity account of each Operating Company, and (ii) reduce, in
varying degrees, or eliminate the paid-in capital component of the equity
account of each Operating Company. Such reductions in the equity account of each
entity declaring a dividend might otherwise cause the equity portion of the
Consolidated Capitalization of the entity declaring the dividend to fall below
30%. Therefore, in order to effect the dividend out of paid-in capital and
maintain a 30% equity ratio, AEP, directly or indirectly, will contribute
sufficient capital into each entity declaring a dividend prior to such dividend
in the amount needed to increase the paid-in capital component of the equity
account to a level where the equity portion of the Consolidated Capitalization
of each entity declaring a dividend will be no less than 30%. Exhibit B-2 sets
forth the projected accounting impact of the dividends and the projected amount
of additional paid-in capital needed to preserve the 30% equity ratio of each
entity declaring a dividend. AEP uses the equity method of accounting; the
retained earnings and equity account of AEP will not be impacted by these
dividends or by any of the subsequent contributions of common stock or limited
liability interests of the newly capitalized Subsidiaries or common stock of
applicable Operating Companies and Vertically-Integrated Companies contemplated
by the Transaction.
In addition to the foregoing dividends, Reg Holdco will borrow,
directly or indirectly, an amount projected to be approximately $1.4 billion and
authority is sought for Reg
53
Holdco to dividend the cash proceeds, from paid-in capital, to AEP. AEP will
contribute the cash proceeds of such dividend to each of CSP and OPCo to permit
them to pay down existing indebtedness as contemplated by the Transaction. CSP
EDC will borrow an amount projected to be approximately $600 million from Reg
Holdco and authority is sought for CSP EDC to dividend the cash proceeds of such
borrowing, from paid-in capital, to Reg Holdco. OPCo EDC will also borrow an
amount projected to be approximately $800 million from Reg Holdco and authority
is sought for OPCo EDC to dividend the cash proceeds of such borrowing, from
paid in capital to Reg Holdco. Such borrowings, dividends, contributions and
retirements of indebtedness are necessary to achieve the appropriate
capitalization and equity ratio for each entity involved. See Exhibit B-2.
Through a series of internal transactions which will be recorded on the
books of the AEP affiliates involved as corresponding dividends and
contributions of capital, CPL and WTU will transfer certain of their pollution
control bonds to Wholesale Holdco via Reg Holdco, AEP and Enterprises. Such
transfers are necessary to prevent pollution control bonds remaining on the
books of CPL and WTU following the transfer by each of their respective
generation assets and related liabilities to CPL PGC and WTU PGC, respectively.
Moreover, indebtedness cannot be transferred to CPL PGC and WTU PGC without
incurring substantial tax liability when those entities are dividended to Reg
Holdco and AEP and contributed to Domestic Holdco. Authority is requested to
make the necessary dividends from paid-in capital to transfer such pollution
control bonds from CPL and WTU to Wholesale Holdco as set forth in Exhibit B-2.
As noted earlier, such distributions will also result, on a pro forma
basis, in unusual reductions in, and/or elimination of, the retained earnings of
the Operating Companies, Wholesale Holdco and Reg Holdco, which may make it
difficult in some cases for each to continue to pay dividends at historical
levels without such dividends being paid from paid-in capital. Enterprises,
Domestic Holdco and each of the newly created Subsidiaries will inherit utility
assets which have historically contributed to the retained earnings of their
respective Operating Company parent but cannot, under generally accepted
accounting principles, inherit any of such retained earnings conceptually
associated with those assets. This incongruity may make it difficult in some
cases for Enterprises, Domestic Holdco and the Subsidiaries to pay dividends at
any appreciable levels without such dividends being paid from paid-in capital.
54
Accordingly, until June 30, 2004 each Utility Subsidiary, Enterprise
Holding Company and Reg Holdco requests authority to pay dividends out of
paid-in capital up to an amount not to exceed the aggregate retained earnings
(immediately prior to the Transaction) of the Operating Companies and Reg
Holdco. The effect of this limit shall be to preserve for a short interval the
historical retained earnings of each Operating Company or Reg Holdco, as
applicable, to permit its respective post-Transaction successors to pay
dividends without increasing the amount of dividends any could have paid, but
for the Transaction. Until June 30, 2004 each Utility Subsidiary and Reg Holdco
shall pay dividends out of paid-in capital only if its common equity is at least
30% of its Consolidated Capitalization (calculated in the same manner set forth
in Item 1.E.2.(e)).
H. OTHER REGULATORY APPROVALS
The goals of the proposed restructuring are to comply with the
requirements of Texas and Ohio while maintaining the benefits of integrated
operations for system consumers and, in particular, continuing to provide
customers with a reliable power supply. To that end, all of AEP's energy
regulators will be involved in some aspect of the restructuring.
The Transaction will require approvals from the Federal Energy
Regulatory Commission ("FERC") under Sections 203 and 205 of the Federal Power
Act in connection with the transfer of assets and the restructuring of
FERC-approved Operating and Interconnection agreements (to remove companies in
deregulated states). Applications were filed with the FERC on February 8, 2002
and copies are attached hereto as Exhibit D-7. The Transaction will also require
approval by the Nuclear Regulatory Commission to move STP from CPL and CSW to
CPL PGC and Domestic Holdco, the application for which is attached hereto as
Exhibit D-9. No further state approval is necessary to complete the Transaction.
AEP is seeking orders from each of its state regulators, pursuant to
Section 32(c) of the 1935 Act, to establish EWG status for all Enterprises
Subsidiaries, which will likely occur following the Transaction. EWG status is
needed to enable AEP to divest certain generation by July, 2002, in fulfillment
of its merger commitments. AEP will seek FERC certification once the state
orders have been received. Following the Transaction, the approval of the
Nuclear Regulatory Commission (to move
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Indiana Michigan Power Company, which owns a nuclear generating facility), and
the state utility commissions of Kentucky, Tennessee, Virginia and West
Virginia, will be required to contribute the stock of the relevant
Vertically-Integrated Companies, as applicable, to Reg Holdco.
ITEM 2. FEES, COMMISSIONS AND EXPENSES
Estimated fees and expenses expected to be incurred by Applicants in
connection with the Transaction will be filed by amendment.
ITEM 3. APPLICABLE STATUTORY PROVISIONS
SECTIONS OF THE 1935 ACT TRANSACTIONS TO WHICH SECTION OR RULE
MAY BE APPLICABLE:
9, 10 and 11 and rules Creation of Enterprises, Wholesale Holdco and
thereunder Domestic Holdco
11(b)(2) and rules thereunder Declaration that Enterprises, Wholesale
Holdco, Domestic Holdco and Reg Holdco are
not subsidiary companies or holding companies
solely with respect to the
"great-grandfather" provisions of Section
11(b)(2)
9, 10 and 12 and rules Transfers of utility assets and securities of
thereunder public utility subsidiaries
13 and rules thereunder Approval of services to be provided by AEPSC
to the direct and indirect subsidiaries formed
herein; approval of the performance of certain
services between AEP system companies
6, 7, 9, 10 and 12 and rules Transfers of utility assets and securities of
thereunder public utility subsidiaries
6 and 7 and rules thereunder Issuance of securities
12 and rules thereunder Dividends out of paid-in capital
The relevant standards for Commission review of this Application under
Sections 6, 7, 9, 10, 11, 12 and 13 of the 1935 Act, and Rules 43(a), 44, 45,
46, 54, 90 and 91 thereunder.
A. SECTIONS 9 & 10
Section 9(a)(1) provides that unless the Commission under Section 10
has approved the acquisition, it shall be unlawful for any registered holding
company or any subsidiary company
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thereof "to acquire, directly or indirectly, any securities or utility assets or
any other interest in any business." Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may apply in
respect of such acquisition have been complied with, except where the
Commission finds that compliance with such State laws would be
detrimental to the carrying out of the provisions of Section 11.
If the requirements of subsection (f) of this section are satisfied,
the Commission shall approve the acquisition unless the Commission finds that:
(1) such acquisition will tend towards interlocking relations or
the concentration of control of public-utility companies, of a kind or
to an extent detrimental to the public interest or the interest of
investors or consumers;
(2) in case of the acquisition of securities or utility assets, the
consideration, including all fees, commissions, and other remuneration,
to whomsoever paid, to be given, directly or indirectly, in connection
with such acquisition is not reasonable or does not bear fair relation
to the sums invested in or the earning capacity of the utility assets
to be acquired or the utility assets underlying the securities to be
acquired; or
(3) such acquisition will unduly complicate the capital structure
of the holding-company system of the applicant or will be detrimental
to the public interest or the interest of investors or consumers or the
proper functioning of such holding-company system.
The Transaction, for the reasons set forth below, satisfy the standards
of Section 10 of the 1935 Act.
1. THE TRANSACTION COMPLIES WITH STATE LAW
The Transaction complies with, or upon completion of the record
shall comply with, applicable state laws on the matter of restructuring and the
transfer of utility assets. Specifically, each Operating Company has structured
the
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Transaction in response to state law and legislative mandate. The Transaction
puts into effect the state regulatory and legislative determination that
restructuring is in the public interest.
The Transaction is reasonably incidental, economically necessary
and appropriate to the operations of each Operating Company and the AEP system.
Specifically, the Transaction will (a) allow AEP to continue to serve the needs
of its regulated customers while positioning the AEP system for competition in
the deregulated generation market; (b) segregate the transmission and
distribution assets into rate-regulated subsidiaries; (c) allow each deregulated
Operating Company to manage and operate its respective generating assets with
due regard to market considerations; and (d) increase the flexibility for
financing activities on cost-effective terms that reflect the costs of capital
for each area of business activity.
2. THE CAPITAL STRUCTURE IS NOT UNDULY COMPLICATED
AEP seeks approval to form one first tier holding company,
Enterprises, to hold the interests in Wholesale Holdco; a second tier holding
company, Wholesale Holdco, to hold the interests in Domestic Holdco and a third
tier holding company, Domestic Holdco, to hold the PGCs. Each holding company is
necessary to achieve a simple corporate structure while minimizing the Federal
and State income tax impact of combining the unregulated businesses of AEP.
Alternative structures were considered but each had serious disadvantages
including potential tax liabilities.
Alternative structures which would minimize tax liability were much
less desirable from a business organization viewpoint and involved much more
complicated corporate structures. With respect to Reg Holdco, AEP wishes to
emphasize the separation of its "wires" business -- the transmission and
distribution functions of the EDCs - from its non-State regulated utilities --
the PGCs -- and non-utility -- Enterprises -- businesses. Providing a corporate
organization that clearly and fully separates the distribution business from
other businesses will better insulate the distribution business, which will
continue to be regulated, from unregulated business. Providing a separate
management structure for the distribution business will provide for management
focus on that business enabling better integration and efficient development of
that business.
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The Commission has recognized in recent cases that there are
organizational, regulatory and tax benefits to the creation of intermediate
holding companies that should be considered. The harms that the 1935 Act
envisioned would be prevented by the reduction or elimination of intermediate
holding companies are unlikely to occur given modern financial reporting and
affiliate transaction requirements. AEP's proposal will not result in harmful
pyramiding of holding company groups. There is no risk of unfair or inequitable
distribution of voting power from the proposal. No proposed holding company will
issue any voting securities to anyone other than AEP or a directly or indirectly
wholly owned subsidiary of AEP. Consequently, the Commission should approve the
formation of such entities, "look through" the intermediate holding companies or
treat them as a single company for purposes of analysis under Section 11(b)(2)
of the 1935 Act.(26)
Enterprises and Reg Holdco will be wholly-owned, directly by AEP.
Other than to enhance the full integration of the regulated utilities, Reg
Holdco will not affect the operation of CPL EDC, WTU EDC, SWEPCO, SWEPCO EDC,
SWEPCO Transco, CSP EDC or OPCo EDC. Likewise, Enterprises will not affect the
operation of CPL PGC, WTU PGC, CSP PGC and OPCo PGC. Thus, there is no
possibility that implementation and continuance of the proposed transaction
structure could result in an undue or unnecessarily complex capital structure or
inequitable distribution of voting power to the detriment of the public interest
or the interest of consumers. This is not the type of situation that concerned
the drafters of the 1935 Act and AEP urges the Commission to exercise its
discretion to find that any apparent complexity of the proposed transaction
structure is neither undue nor unnecessary.
The Transaction does not unduly complicate the capital structure of
the AEP system. The capital structure of the AEP system on a consolidated basis
will be essentially unchanged. The Transaction will tend toward the proper
functioning of the AEP system in a partly deregulated, partly regulated
operating environment. The Transaction results in a more economical and
efficient system. The resulting increased efficiency of
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(26) Exelon Corporation, HCAR No. 27256 (Oct. 19, 2000) (approving intermediate
holding company structure resulting from merger); National Grid Group plc, HCAR
No. 27154 (Mar. 15, 2000) (intermediate holding companies necessary for
cross-border tax considerations); Dominion Resources, HCAR No. 27113 (Dec. 15,
1999) (intermediate holding company "CNG Acquisitions" to hold CNG's utility
subsidiaries under alternative form of merger).
59
operations significantly offsets any perceived added complexity caused by the
Transaction.(27) Being done in part because of state mandate and for all of the
foregoing reasons, the Transaction satisfies the requirements of, and is
entirely consistent with the 1935 Act.
3. THE CONSIDERATION IS FAIR AND REASONABLE
The consideration to be paid in connection with the Transaction is
fair and reasonable. Indeed, each state public utility commission has approved
or will approve the corporate separation plan as it relates to its particular
jurisdiction.
B. SECTION 12 & RULE 46
Section 12(c) governs the proposed dividends for which authorization
has been sought. Section 12(c) provides that:
It shall be unlawful for any registered holding company or any
subsidiary company thereof, by use of the mails or any means or
instrumentality of interstate commerce, or otherwise, to declare or pay
any dividend on any security of such company or to acquire, retire, or
redeem any security of such company, in contravention of such rules and
regulations or orders as the Commission deems necessary or appropriate
to protect the financial integrity of companies in holding-company
systems, to safeguard the working capital of public-utility companies,
to prevent the payment of dividends out of capital or unearned surplus,
or to prevent the circumvention of the provisions of this chapter or
the rules, regulations, or orders thereunder.
AEP expects that the distribution of entities owning utility assets of
this magnitude, in each instance could be a dividend out of "capital or unearned
surplus" within the meaning of Rule 46 under the 1935 Act. Applicants believe
that, in the overall context of the Transaction, neither shareholders,
ratepayers nor the public will be adversely affected.(28) The distributions will
be structured as such in order to minimize
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(27) SEE Wisconsin's Environmental Decade, Inc. v SEC, 882 F.2d 523, 527 (D.C.
Cir. 1989); Northeast Utilities, HCAR No. 25221 (Dec. 21, 1990); Entergy Corp.,
HCAR No. 25136 (Aug. 27, 1990).
(28) IBID. The Commission, among other things, authorized the dividending of
interests to Genco.
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the tax burden on the Applicants. The distributions are fundamentally necessary
to effect the transfer of their respective generation or transmission and
distribution assets to an affiliate in the AEP system in accordance with the
relevant order of each respective state utility commission. The distributions
will be the necessary steps in the reorganization of the AEP system, in
accordance with, and fulfillment of, the regulations and legislative policies
and objectives that culminated in deregulation of and competition in electrical
generation in Texas and Ohio, as described herein. The distributions are not
intended to harm the interests of any Operating Company, Subsidiary or,
ultimately, AEP. The AEP system will continue to own the assets transferred by
such distributions. Subject to any necessary state approvals, the regulated
parts of the AEP system that are not subject to deregulation and competition
will be owned directly by Reg Holdco. For these reasons, the proposed
distributions are entirely consistent with the policies and principles behind
Section 12 of the 1935 Act.
C. SECTION 13(B) COMPLIANCE
Section 13(b) of the 1935 Act provides that:
It shall be unlawful for any subsidiary company of any registered
holding company or for any mutual service company, by use of the mails
or any means or instrumentality of interstate commerce, or otherwise,
to enter into or take any step in the performance of any service,
sales, or construction contract by which such company undertakes to
perform services or construction work for, or sell goods to, any
associate company thereof except in accordance with such terms and
conditions and subject to such limitations and prohibitions as the
Commission by rules and regulations or order shall prescribe as
necessary or appropriate in the public interest or for the protection
of investors or consumers and to insure that such contracts are
performed economically and efficiently for the benefit of such
associate companies at cost, fairly and equitably allocated between
such companies.
Any transaction between AEPSC and any newly formed affiliates and any
related service agreements shall be in compliance with section 13(b) of the 1935
Act and Rules 87, 90 and 91 under the 1935 Act.
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D. RULE 54 COMPLIANCE
The proposed transactions are subject to Rule 54, which provides that,
in determining whether to approve an application which does not relate to any
EWG or FUCO, the Commission shall not consider the effect of the capitalization
or earnings of any such EWG or FUCO which is a subsidiary of a registered
holding company if the requirements of Rule 53(a), (b) and (c) are satisfied.
AEP consummated the merger with Central and South West Corporation
("CSW") on June 15, 2000 pursuant to an order dated June 14, 2000 (HCAR No.
27186), which further authorized AEP to invest up to 100% of its consolidated
retained earnings, with consolidated retained earnings to be calculated on the
basis of the combined consolidated retained earnings of AEP and CSW (as extended
pursuant to HCAR No. 27316, December 26, 2000, the "Rule 53(c) Order").
AEP currently meets all of the conditions of Rule 53(a), except for
clause (1). At March 31, 2002, AEP's "aggregate investment", as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $2.970 billion, or about 89.8% of
AEP's "consolidated retained earnings", also as defined in Rule 53(a)(1), for
the four quarters ended December 31, 2001 ($3.308 billion). With respect to Rule
53(a)(1), however, the Commission has 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 the Rule 53(c) Order.
In addition, 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,
none of the circumstances described in Rule 53(b) has occurred.
Moreover, even 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 this Application-Declaration.
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The action requested in the instant filing 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 such
public-utility customers. 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 recent growth
trend in AEP's retained earnings.
As of December 31, 1999, the most recent period for which financial
statement information was evaluated in the 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
("Trust Preferred Securities") representing 1.4%. As of March 31, 2002, AEP's
consolidated capitalization consisted of 62.6% debt, 33.1% common and preferred
equity (consisting of 331,618,850 shares of common stock representing 32.5% and
$156 million principal amount of preferred stock representing 0.6%), $321
million principal amount of Trust Preferred Securities representing 1.3% and
$750 million minority interest in finance subsidiary representing 3.0%.
Since the date of the Rule 53(c) Order, there has been a reduction in
AEP's consolidated equity capitalization ratio; however, it remains within
acceptable ranges and limits of rating agencies for strong investment grade
corporate credit ratings. In addition, the operating 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 & Poor's rating of secured debt for
AEP's operating subsidiaries was as follows: APCo, A; CSP, A-; I&M, A-; KPCo, A;
and OPCo, A-. As of December 31, 1999, Standard & Poor's rating of secured debt
for CSW's operating subsidiaries was as follows: CPL, A; PSO, AA-; SWEPCO, AA-;
and WTU, A.
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As of February 8, 2002, Standard & Poor's rating of secured debt for
AEP's operating subsidiaries was as follows: APCo, A; CSP, A-; I&M, A-; KPCo, A-
and OPCo, A-. As of December 31, 2001, Standard & Poor's rating of secured debt
for CSW's Operating Subsidiaries was as follows: CPL, A-; PSO, A; SWEPCO, A; and
WTU, A-.
ITEM 4. REGULATORY APPROVAL
The FERC must approve the sale of utility assets and other action
contemplated in this Application. The LPSC must approve the business unbundling
plan of SWEPCO.
On July 7, 2000, the PUCT issued an order approving the corporate
separation plan of CPL, SWEPCO and WTU (Exhibit D-2.) On September 28, 2000, the
PUCO issued an order on each of OPCo and CSP's request to separate its
generation assets from its transmission and generation assets. In that order,
the PUCO approved the Stipulation Agreement requiring the separation of each of
OPCo and CSP's generation assets from its transmission and distribution assets
as determined in accordance with accepted PUCO procedures (Exhibit D-4). On
September 1, 2000, SWEPCO filed an application before the LPSC seeking approval
to transfer its Texas transmission and distribution assets to SWEPCO EDC
(Exhibit D-5).
ITEM 5. PROCEDURE
It is requested that the Commission's order granting this Application
or Declaration be issued on or before __________, 2002. There should be no
recommended decision by a hearing or other responsible officer of the Commission
and no 30-day waiting period between the issuance of the Commission's order and
its effective date. Applicants consent to the Division of Corporate Regulation
assisting in the preparation of the Commission's decision and order in this
matter, unless the Division opposes the Transaction covered by this Application
or Declaration.
ITEM 6. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
B-1 Form of Proposed AEP Structure (previously filed on Form SE)
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B-2 Corporate Separation Transaction Steps with a request for
confidential treatment
C Cash flow analysis and capitalization forecast with a
request for confidential treatment
D-1 PUCT Application (previously filed)
D-2 PUCT Order (previously filed)
D-3 PUCO Application (previously filed)
D-4 PUCO Order (previously filed)
D-5 LPSC Application (previously filed)
D-6 LPSC Order (to be filed by amendment)
D-7 FERC Application (previously filed)
D-7-1 Cover letter for FERC 205 filing
D-8 FERC Order (to be filed by amendment)
D-9 NRC Application
D-10 NRC Order (to be filed by amendment)
F Opinion of Counsel (to be filed by amendment)
(b) Financial statements:
Consolidated balance sheets as of March 31, 2002 and consolidated
statements of income for the period ended March 31, 2002 of AEP, CPL, CSP, OPCo,
SWEPCO and WTU. (Incorporated by reference from AEP's Form 10-Q for the quarter
ended March 31, 2002, File No. 1-3525.)
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ITEM 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
As described in Item 1, the proposed transactions are of a routine and
strictly financial nature in the ordinary course of AEP's business and the
Commission's action in this matter will not constitute any major federal action
significantly affecting the quality of the human environment.
No other federal agency has prepared or is preparing an environmental
impact statement with regard to the proposed transactions.
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned companies have duly caused this statement to be signed
on their behalf by the undersigned thereunto duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
AMERICAN ELECTRIC POWER SERVICE CORPORATION
CENTRAL AND SOUTH WEST CORPORATION
CENTRAL POWER AND LIGHT COMPANY
COLUMBUS SOUTHERN POWER COMPANY
OHIO POWER COMPANY
SOUTHWESTERN ELECTRIC POWER COMPANY
WEST TEXAS UTILITIES COMPANY
/s/ A. A. Pena
-------------------------------------------
Treasurer
Dated: June 17, 2002
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