-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, SZbA5tB2i178TUKW/s4X/jG4itvGhQRNQKJ89m5nybT3QFmLFJFZTAiBqTzCYhZB fxdSwI6m+rz4xwNK0+GlPw== 0000092122-94-000069.txt : 19941110 0000092122-94-000069.hdr.sgml : 19941110 ACCESSION NUMBER: 0000092122-94-000069 CONFORMED SUBMISSION TYPE: U-1/A PUBLIC DOCUMENT COUNT: 5 FILED AS OF DATE: 19941109 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN CO CENTRAL INDEX KEY: 0000092122 STANDARD INDUSTRIAL CLASSIFICATION: 4911 IRS NUMBER: 580690070 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: U-1/A SEC ACT: 1935 Act SEC FILE NUMBER: 070-08505 FILM NUMBER: 94558213 BUSINESS ADDRESS: STREET 1: 64 PERIMETER CTR EAST CITY: ATLANTA STATE: GA ZIP: 30346 BUSINESS PHONE: 4043930650 U-1/A 1 AMENDMENT NO. 1 TO FORM U-1 File No. 70-8505 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 1 to APPLICATION OR DECLARATION on FORM U-1 under The Public Utility Holding Company Act of 1935 THE SOUTHERN COMPANY 64 Perimeter Center East Atlanta, Georgia 30346 (Name of company or companies filing this statement and addresses of principal executive offices) THE SOUTHERN COMPANY (Name of top registered holding company parent of each applicant or declarant) Tommy Chisholm, Secretary Thomas G. Boren, President The Southern Company Southern Electric International, 64 Perimeter Center East Inc. Atlanta, Georgia 30346 900 Ashwood Parkway, Suite 500 Atlanta, Georgia 30338 (Names and addresses of agents for service) The Commission is requested to mail signed copies of all orders, notices and communications to: W.L. Westbrook John F. Young Financial Vice-President Vice President The Southern Company Southern Company Services, Inc. 64 Perimeter Center East One Wall Street, 42nd Floor Atlanta, Georgia 30346 New York, New York 10005 Thomas G. Boren John D. McLanahan, Esq. President Troutman Sanders Southern Electric 600 Peachtree Street, N.E. International, Inc. Suite 5200 900 Ashwood Parkway Atlanta, Georgia 30308-2216 Suite 500 Atlanta, Georgia 30338 The Application or Declaration heretofore filed in this proceeding is hereby amended as follows: 1. Item 1.5(b) - Tax Exempt Bonds, is amended by deleting the third paragraph thereof any substituting the following new paragraph in lieu thereof: "Under the terms of the Trust Indenture, Scott may cause the interest rate on the Tax Exempt Bonds to be fixed for various periods of time ranging from one day up to the entire term of the bonds. (Trust Indenture, Article IV). Currently, the Tax Exempt Bonds bear interest at a rate which is reset weekly by the Remarketing Agent (Goldman, Sachs & Co.), pursuant to a Remarketing Agreement, dated as of October 30, 1987 (the "Remarketing Agreement"), among the Board, Scott and Goldman, Sachs & Co. The interest rate so established is a rate that, considering relevant market conditions, is calculated to cause the Tax Exempt Bonds to sell at par. Each bondholder has the right to tender its Tax Exempt Bonds for purchase upon seven days' notice. If Tax Exempt Bonds are tendered, the Remarketing Agent attempts to remarket such bonds to another purchaser. The Remarketing Agent is entitled to a fee from Scott equal to 1/8th of 1% per annum of the outstanding principal amount of the Tax Exempt Bonds. At Closing, Mobile Energy will assume Scott's obligations under the Remarketing Agreement." 2 2. Item 1.5 is amended by restating paragraph (d) thereof in its entirety, as follows:. "(d) Interest Rate Swap Agreements. At Closing, Mobile Energy will enter into separate interest rate swap agreements in order to hedge against adverse movements in long-term interest rates between Closing and the date on which the Notes are sold, and between Closing and the date (not earlier than six months after Closing) on which the Tax Exempt Bonds are either converted to a fixed rate or redeemed with the proceeds of new Tax Exempt Bonds issued by the Board. In each case, the counterparty to the swap instrument would be a financial institution rated above "A" by Standard & Poor's Corporation and above "A2" by Moody's Investors Services, Inc. Southern proposes to guaranty absolutely and unconditionally Mobile Energy's obligations under the interest rate swap agreements. The interest rate swap with respect to the Notes will be a "forward" swap under which Mobile Energy would in effect lock in the fixed rate at the time of Closing, although the exchange in interest rates would not be scheduled to occur until the anticipated financial closing date, which would be not later than June 30, 1995. Since Southern anticipates that Mobile Energy will reverse this interest rate swap when the Notes are sold, however, it is unlikely that there would ever be an actual exchange of coupons. The notional principal amount of the swap 3 would be not more than $230 million, and the term of the swap and amortization schedule would match the anticipated maturities and amortization schedule of the Notes, as described above. The interest rate swap with respect to the $85 million principal amount of Tax Exempt Bonds would hedge the conversion or redemption of the bonds from the current weekly variable rate to a long-term fixed rate. The exchange of coupons would be scheduled to commence six months after Closing. However, since Southern contemplates that Mobile Energy will reverse the swap at the time of converting or redeeming the existing Tax Exempt Bonds, it is unlikely that there would ever be an actual exchange of coupons. The term of the swap and amortization schedule would match the anticipated maturity and amortization of the converted or new Tax Exempt Bonds, as described above." 3. Item 1.7 - Operations and Maintenance Services, is hereby amended by adding the following new sentences at the end thereof: "The Operating Companies will not provide any services directly to Mobile Energy. In addition to usual and customary plant operations and maintenance services, SEI will also prepare and maintain the books and records and financial and regulatory reports of Mobile Energy, provide capital improvements services, administer all project and financing contracts to which Mobile Energy is a party, and provide fuel and materials procurement, waste handling, and used part disposition services, among other services that Mobile Energy may request." 4 4. Item 3 - Applicable Statutory Provisions, is hereby amended by adding the following at the end thereof: "Analysis of Section 10 Issues. As set forth more fully below, the transactions described in this Application or Declaration will satisfy all of the applicable provisions of Section 10 of the Act and should be approved by the Commission. Section 10(b) of the Act provides that, if the requirements of Section 10(f) are satisfied, the Commission shall approve an acquisition under Section 9(a) 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 a 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. There is no basis for the Commission to make any adverse findings under Section 10(b). Interlocking Relationships. Mobile Energy will be a wholly-owned subsidiary of Southern and its board of directors will consist of members of the Southern system's current 5 management.1 The Commission has held in numerous cases that having common directors among companies in the same holding company system is not inappropriate; that, in fact, an integrated holding company system presupposes, in the interest of efficiency and economy, the existence of interlocking officers and directors.2 Concentration of Control. As the Commission has stated, Section 10(b)(1) was intended to prevent utility acquisitions that would result in "huge, complex and irrational holding company systems at which the Act was primarily aimed." American Electric Power Co.,Inc., 46 SEC 1299, 1307 (1978). The acquisition of Mobile Energy, in contrast, will have a negligible impact on the size of the Southern system. On a pro forma basis, the net book value of Southern's consolidated utility plant in service (electric and steam heat plant) will increase by less than 2% as a result of Mobile Energy's investment in the Energy Complex and certain planned improvements.3 Furthermore, Southern's anticipated equity investment, which will not exceed $105 million, will amount to only 1.3% of Southern's common shareholder equity, 0.6% of total capitalization, and 3.5% of 1 Initially, the sole director of Mobile Energy will be a vice president of SEI. 2 See, e.g., Entergy Corporation, et al., HCAR No. 25136 (August 27, 1990); American Natural Gas Co., HCAR No. 12992 (September 20, 1955). 3 At June 30, 1994, consolidated net utility plant in service was $20,102,814,000. consolidated retained earnings.4 Finally, the acquisition will not expand or extend the service area of the Southern system into geographic areas not already served. Competitive Effects. There is no basis in the record for the Commission to conclude that the acquisition of the Energy Complex by Mobile Energy will have any anti-competitive effects. Scott and Southern have each filed notifications pursuant to the Hart-Scott-Rodino Antitrust Improvements Act with the Department of Justice and the Federal Trade Commission describing the effects of the transaction on competition in the relevant market, and the expiration of the waiting period provided thereunder is a condition precedent to Closing. Southern undertakes to notify the Commission of any adverse action or request for additional information by the Department of Justice or Federal Trade Commission. Fairness of Consideration. In order to disapprove an acquisition, Section 10(b)(2) requires that the Commission find that the consideration, including all fees, commissions and other remuneration, to be given directly or indirectly in connection with the transaction is not reasonable or does not bear a fair relation to the investment in and earning capacity of the utility assets underlying the securities being acquired. In this case, 4 At June 30, 1994, Southern's common shareholder equity, total capitalization, and consolidated retained earnings were $7,822 million, $16,702 million, and $2,984 million, respectively. 7 because Mobile Energy will be a single purpose project subsidiary, it is appropriate to analyze the reasonableness of Southern's investment in Mobile Energy in terms of Mobile Energy's investment in the Energy Complex and its projected earnings under the terms of the Energy Services Agreements. In the course of its due diligence effort, SEI and its outside consultants were given access to Scott's books and records, including confidential and proprietary production data. Using this information, as well as manufacturer quotes on the costs of replacement equipment, SEI was able to verify that the purchase price negotiated with Scott bears a fair relation to Scott's depreciated cost and estimated replacement cost. Following the issuance of the Notes and repayment of the Interim Note with the proceeds thereof, and the release of Southern's guaranty of the Tax Exempt Bond obligations, Southern's expected equity investment in Mobile Energy will be no greater than $105 million. Southern is providing herewith financial projections (see Item 6(b)(iv))5 that demonstrate that the anticipated revenues of Mobile Energy will support the servicing of Mobile Energy's debt and lease obligations and provide a return on equity that is substantially in excess of Southern's authorized return on its investment in its regulated operating utility subsidiaries, which currently ranges from about 5 The financial projections are being filed separately, pursuant to Rule 104, as a part of Item 6(b) - Financial Statements. 8 11% to 14.5%. The higher return is commensurate with the greater risks involved in this investment, which are discussed below. As described in Item 1.6, Mobile Energy's revenues will be derived under three separate 25-year Energy Services Agreements that Mobile Energy and each of the Mill owners will enter into at Closing. These revenues will consist of both demand and usage charges for steam and electricity processing services and, in the case of the Pulp Mill, black liquor processing services as well. Projected expenses are based on confidential and proprietary production cost data provided by Scott. The demand charges are based upon specified peak levels of demand for steam, electricity and liquor processing. The projections assume that, during the term of the Energy Services Agreements, the Mill will reach these levels of demand. SEI has confirmed through its inspection of operating data provided by Scott that the specified peak levels are consistent with those typically reached in the current operations of the three mills. The financial projections demonstrate that Southern will recover its equity investment, and earn an acceptable return thereon, through the demand charges that the Mill owners will be contractually bound to pay. The demand and usage charge structure under the Energy Services Agreements is described in greater detail in Exhibit B-6(e), which has been filed separately pursuant to Rule 104. The principal risk associated with Southern's investment in the Energy Complex is the risk of a Mill closure or sustained curtailments in production (the "Mill Risk"). Such events could 9 occur, for example, if either the U.S. pulp and paper industry as a whole or Scott's Mobile operations in particular experienced a decline in competitiveness, due to plant obsolescence, shrinking markets, interruptions in the supply of necessary raw materials, environmental constraints, or otherwise. However, since Southern's projections indicate that it will recover its investment in Mobile Energy over a period of years that is substantially shorter than the 25-year term of the Energy Services Agreements, the Mill Risk becomes less critical in the later years. Further, the contractual demand charge structure will tend to insulate Mobile Energy from the effects of production cutbacks during the early years. SEI's analysis of the Mill Risk has focused on the financial health of the paper and pulp industry as a whole, Scott's competitive position in the industry, and the competitiveness of the Mobile facility in particular. To assist in its due diligence, SEI engaged Jaakko Poyry Consulting, Inc. ("Jaakko Poyry"), an internationally recognized pulp and paper industry consulting firm, to prepare a study of the Mill Risk.6 Scott agreed to provide Jaakko Poyry with highly confidential production and raw material cost data, current plans for capital improvements to the Mill, and product marketing strategies, among other information. 6 SEI also engaged Rust Engineering Company and Southern Company Services, Inc. to conduct a technical review of the Energy Complex. 10 Jaakko Poyry has prepared a preliminary draft of a confidential report which addresses the Mill Risk on various levels, including viability of wood supply, the competitiveness of the Pulp Mill, and the integrity of current and planned environmental systems. The draft report also assesses the competitive position of both Scott and S.D. Warren relative to other tissue and paper product suppliers worldwide. In its draft report, Jaakko Poyry has concluded that the Mill's access to wood fiber compares favorably with the industry in the area, due primarily to Scott's large captive timberlands operations in the Southeast, from which it supplies substantially all of the pine fiber requirements of the Mill, and Scott's cost effective marine-based transportation network. Further, Jaakko Poyry concluded that, although the market for hardwood pulpwood is expected to become tighter in the southern U.S., Scott again enjoys certain competitive advantages, including the location of its pulping operations and the existence of certain exclusive contracts between Scott and independent producers for hardwood chips which could possibly provide an additional source of hardwood fiber to the Mill in the future. Jaakko Poyry also found that the Pulp Mill is a competitive supplier of fiber to Scott's worldwide operations, and should remain so if planned investments in the fiber lines are made. Specifically, Jaakko Poyry concluded that the investment options identified by Scott to meet tighter environmental regulations that will go into effect are realistic and will assure the 11 technical and economic viability of the Pulp Mill. Jaakko Poyry found that Scott's record on waste treatment and environmental compliance compared favorably with the industry. Specifically, environmental testing disclosed toxicity levels lower than allowable limits. Further, Jaakko Poyry confirmed that Scott's current available landfill space is adequate and that test results for particulate emissions into the air have been favorable. Jaakko Poyry also concluded that Scott has a leading position worldwide in tissue production, and that, due to its scale, proximity to the growing Southeastern market, and secure source of wood fiber, the Mobile Tissue Mill will tend over time to become even more closely integrated into Scott's worldwide tissue operations. Tissue Mill technology was considered competitive. The Paper Mill is also regarded as a leading U.S. producer in certain categories (free-sheet papers), although the paper operations of the Mill are dependent upon the success of S.D. Warren's marketing strategy. Overall, Jaakko Poyry concluded that the risk of significant production curtailments at the Mill are relatively small. Reasonableness of Fees. The fees, commissions and expenses incurred and to be incurred in connection with the acquisition of Mobile Energy's common shares and the transactions contemplated under the Asset Purchase Agreement are expected not 12 to exceed $4 million, or roughly 1% of the negotiated purchase price for the Energy Complex.7 Southern believes that this amount is reasonable and fair in light of the size and complexity of the transaction relative to other similar transactions. Capital Structure. To disapprove an acquisition, Section 10(b)(3) requires the Commission to find that the transaction will unduly complicate the capital structure of the holding company system or will be detrimental to the public interest, the interest of investors or consumers or the proper functioning of the holding company system. Southern's consolidated capital structure will not be unduly complicated by Mobile Energy's issuance and sale of common stock and Interim Note to Southern at Closing or by its assumption or issuance of long-term secured obligations. There will be no other class of stock of Mobile Energy outstanding, and its funded senior debt will be ranked equally. The pro forma 75% debt - 25% equity capitalization ratio of Mobile Energy will be comparable to the more leveraged capitalization ratios that the Commission has approved in other cases involving single purpose independent power producers,8 and will have a negligible effect on the pro forma consolidated 7 It should be noted that the expenses paid to third parties for legal and financial advisory services, and to other consultants in connection with SEI's due diligence review, were incurred by SEI as project development expenses in accordance with its authorization under HCAR No. 24476 (October 20, 1987). 8 See Sierra Pacific Resources, HCAR No. 24566 (January 28, 1988), aff'd sub nom. Environmental Action, Inc. v. Securities and Exchange Commission, 895 F.2d 1255 (9th Cir. 1990). 13 capital structure of Southern. Assuming that the transaction had closed June 30, 1994, an investment in Mobile Energy's common equity of $105 million, and long-term debt of $315 million, the pro forma effect of the transactions would reduce Southern's consolidated common equity as a percentage of total capitalization from 46.8% to 46.3% and increase long-term debt from 45.2% to 45.9%. These pro forma capitalization ratios are well within acceptable industry standards. Section 10(c) of the Act provides that, notwithstanding the provisions of Section 10(b), the Commission shall not approve: (1) an acquisition of securities or utility assets, or of any other interest, which is unlawful under the provisions of Section 8 or is detrimental to the carrying out of the provisions of Section 11; or (2) the acquisition of securities or utility assets of a public utility or holding company unless the Commission finds that such acquisition will serve the public interest by tending towards the economical and the efficient development of an integrated public utility system . . .. Provisions of Section 11. Section 11(b)(1) generally requires a registered holding company system to limit its operations "to a single integrated public utility system, and to such other businesses as are reasonably incidental, or economically necessary or appropriate to the operations of such integrated public utility system." Section 11(b)(2) directs the Commission "to ensure that the corporate structure or continued existence of any company in the holding company system does not unduly or unnecessarily complicate the structure, or unfairly or inequitably distribute voting power among security holders, of 14 such holding company system." The Southern System is an integrated public utility system9 and will not cease to be such as a consequence of the transactions proposed herein. The Energy Complex is located inside the retail electric service territory of Alabama Power, and the generating units comprising the Energy Complex are already physically interconnected with the facilities of Alabama Power and will remain so. Over these interconnections, Alabama Power will continue to provide back-up and supplemental electric service to the Energy Complex and Mill at rates set by the Alabama Public Service Commission. Components of the Energy Complex used to produce and deliver steam and to process black liquor, which is one of the primary sources of fuel for the Energy Complex, may be regarded as interests in "other businesses" within the meaning of Section 11. Under cases interpreting Section 11(b)(1), an interest in an "other business" is retainable, and hence may be acquired under the standards of Section 10(c)(1), if there is an operating or "functional relationship" between the utility system and such other business interests.10 The Commission has approved numerous applications involving acquisitions of interests in fuel 9 See The Commonwealth & Southern Corporation, et al., HCAR No. 7615 (August 2, 1947). 10 See CSW Credit, Inc. et al., HCAR No. 25995 (March 2, 1994). 15 related assets,11 and the steam business has historically been recognized as an appropriate adjunct of the electric utility business.12 As to Section 11(b)(2), the Commission has consistently recognized that the creation of a direct subsidiary of a registered holding company does not per se unduly or unnecessarily complicate a system's capital structure.13 Further, the Commission has previously approved of acquisitions of special purpose subsidiaries organized to produce and sell power to a single customer.14 In this case, the organization of Mobile Energy serves a useful purpose in that it insulates Southern's other operating utility subsidiaries from the unique project related risks associated with the Energy Complex. Efficiencies and Economies. The transactions will produce economies and efficiencies more than sufficient to satisfy the standards of Section 10(c)(2) of the Act. In this regard, it is reasonable to anticipate that Scott (and its successors), will achieve savings and other benefits over the long run from the 11 See e.g., Public Service Company of Oklahoma, HCAR No. 19090 (July 17, 1975), and cases cited therein. 12 In many cases, the Commission permitted holding companies to retain an interest in the steam business upon a showing of a close operating relationship between the steam and electric departments of a utility subsidiary. See e.g., North American Co., 11 S.E.C. 194 (1942); Engineers Public Service Company, et al., 12 S.E.C. 41 (1942). 13 See Entergy Corporation et al., HCAR No. 25136 (August 27, 1990); Sierra Pacific Resources, supra, note 8. 14 See Electric Energy, Inc., 38 SEC 658 (1958); Mississippi Valley Generating Company, 36 SEC 159 (1955). 16 applied efficiencies and economies brought to it by integration of the Energy Complex into the much larger Southern system, especially in the areas of operations and maintenance and access to personnel and resources.15 Presumably, Scott will also achieve significant capital savings by being able to redeploy its capital investment in the Energy Complex to its core industrial operations. Finally, Scott will achieve savings in labor costs through the transfer of approximately 130 current employees to SEI. Section 10(c)(2) does not call for a precise dollar forecast of anticipated savings and efficiencies in a case such as this.16 Scott is not a utility. Its decision to sell the Energy Complex is not subject to review for fairness or adequacy of consideration by any regulatory authority, nor are the rates that Scott (and its successors) will pay for the processing services. We presume that Scott carefully evaluated the economic trade-offs involved in continued ownership of the Energy Complex, on the one hand, with a sale of the facility to a third party 15 In cases involving combinations of a very small utility systems with much larger utility systems, the Commission has tended to focus on the potential for these kinds of savings to the customers of the acquired system, recognizing that the potential for savings to the acquiring company may be inconsequential or difficult to quantify. See e.g., New England Electric System, et al., HCAR No. 22699 (November 8, 1982); Ohio Edison Company, HCAR No. 17842 (January 5, 1973). 16 As the Commission has stated in other cases in respect of Section 10(c)(2), "specific dollar forecasts of future savings are not necessarily required; a demonstrated potential for economies will suffice even when these are not precisely quantifiable." Centerior Energy Corporation, HCAR No. 24073 (April 29, 1986). 17 coupled with a long-term obligation to purchase the Mill's requirements for electricity, steam and liquor processing. Integrated Public Utility System. As applied to electric utility companies, the term "integrated public utility system" is defined in Section 2(a)(29)(A) of the Act as: a system consisting of one or more units of generating plants and/or transmission lines and/or distributing facilities, whose utility assets, whether owned by one or more electric utility companies, are physically interconnected or capable of physical interconnection and which under normal conditions may be economically operated as a single interconnected and coordinated system confined in its operation to a single area or region, in one or more states, not so large as to impair (considering the state of the art and the area or region affected) the advantages of localized management efficient operation, and the effectiveness of regulation. The Commission has held that the definition of an integrated electric system in Section 2(a)(29)(A) is a four-part test, each part of which must be satisfied.17 First, the utility assets of the system must be physically interconnected or capable of physical interconnection. Second, the utility assets, under normal conditions, may be economically operated as a single interconnected and coordinated system. Third, the system must be confined in its operations to a single area or region. And fourth, the system must not be so large as to impair (considering the state of the art and the area or region affected) the 17 See Environmental Action, Inc. v. Securities and Exchange Commission, 895 F.2d 1255, 1263 (9th Cir. 1990) (citing Electric Energy, Inc., 38 SEC 658, 668 (1958)). 18 advantages of localized management, efficient operation, and the effectiveness of regulation. The transaction proposed herein satisfies all four of these requirements: First, as previously shown, the facilities of Alabama Power and the Energy Complex are already physically interconnected and are operated synchronously in parallel, and Alabama Power provides and will continue to provide back-up and supplemental electric service to the Mill and Energy Complex. Second, the facilities of Mobile Energy will be economically operated with those of Southern's other operating subsidiaries as a single interconnected and coordinated system. This is not to suggest that Energy Complex will be dispatched from a central dispatch point with all other generating plants in the Southern system. The Energy Complex was designed and constructed by Scott to satisfy its own needs, and with rare exceptions, Scott's requirements for electricity exceed the electrical generating capacity of the Energy Complex. As a customer of Mobile Energy, Scott's requirements for steam, electricity and liquor processing services will continue to control the dispatch of the Energy Complex. However, this is not incompatible with the requirements of Section 2(a)(29)(A). On the contrary, there is no requirement in the Act that approval under Section 10 must be conditioned on a showing that a generating unit that is to be added to a system must be available to supply the needs of any existing customers. As the Commission 19 has stated: "when a generating plant is added to existing plants in a traditional integrated electric system, the electricity produced by the new plant need not be dedicated in full or even in part for distribution to existing retail or wholesale customers." Sierra Pacific Resources, supra, note 8. Further, although central economic dispatch of all of the generating units of utility systems may be dispositive of operational integration, it is not per se a requirement of Section 2(a)(29(A). In this case, the Energy Complex is integrated into Scott's industrial operation, and the amount of electric energy produced is a function of Scott's demand for process steam, liquor processing, and other related products. Further, the economics of the plant are heavily dependent upon a supply of by-products from its pulp and paper manufacturing process, which, in turn, consume the electricity and steam produced. It would not be economical to dispatch the Energy Complex generators for any sustained period using conventional fuels rather than the waste streams made available from the Mill and without a customer for the steam produced. This Commission has recognized that dedicated, on-site (or "inside the fence") cogeneration operations are an appropriate component of an integrated system. In fact, the Energy Complex will not be the first stand-alone cogenerating facility dedicated to a single customer in the Southern system. Mississippi Power Company, an operating utility subsidiary of Southern, has owned and operated such dedicated facilities at Chevron Oil Company's 20 Pascagoula refinery since 1967. (See Mississippi Power Company, HCAR No. 16791 (July 19, 1970), approving acquisition and leasing of certain assets.)18 Like the Energy Complex, steam and electrical production at that facility is dictated by Chevron's requirements for steam and electricity. Third, the acquisition of the Energy Complex will not enlarge the area or region served by Southern's operating subsidiaries. The Energy Complex is located in Alabama, inside the retail electric service territory served by Alabama Power. In fact, until the early 1960s, Alabama Power supplied all of the Mill's electrical needs. Fourth, the system is not so large as to impair the advantages of localized management, efficient operations, and the effectiveness of regulation. The Energy Complex is now a "qualifying facility" under PURPA that is exempt from state laws respecting the rates and service of public utilities and from most provisions of the Federal Power Act. Following its acquisition, Mobile Energy will not be a public utility under the Federal Power Act, because it will not be engaged in making sales of power for resale, and will not be a public utility under 18 The Pascagoula plant was recently expanded with the addition by Mississippi Power of a new 78 MW cogeneration unit at the refinery, which increased Mississippi Power's total generation inside the refinery to 150 MW and steam production to 952,000 lbs./hour. As in the case of the Energy Complex, Mississippi Power receives the fuel supply (process gas) needed to operate these facilities from the refinery. On-site controls are designed to balance, or match, the output of the facility with Chevron's demand for electricity and steam. 21 Alabama law. Thus, the transactions described herein will have no impact at all on the effectiveness of regulation." 5. The following items listed in Item 6 - Exhibits and Financial Statements, are included with this amendment. a. Exhibits. A-1 - Articles of Incorporation of Mobile Energy. B-2 - Form of Interim Note evidencing interim loan by Southern to Mobile Energy. B-3 - Tax Exempt Bond Documents (a) Lease and Agreement between the Industrial Development Board of the City of Mobile, Alabama and Scott, dated as of December 1, 1984. ("P") (b) Trust Indenture between the Industrial Development Board and Chemical Bank, as Trustee, dated as of December 1, 1984, and First Supplement thereto, dated as of January 1, 1985. ("P") (c) Letters of Credit issued by Morgan Guaranty Trust Company of New York and Swiss Bank Corporation in favor of the Industrial Development Board, including amendments thereto. ("P") (d) Reimbursement Agreements between Scott Paper Company and each of Morgan Guaranty Trust Company of New York and Swiss Bank Corporation, as issuing banks under the Letters of Credit, including amendments thereto. ("P") B-6 - Operating Contracts. (a) Pulp Mill Energy Services Agreement between Mobile Energy and Scott. (Filed separately pursuant to Rule 104). ("P") 22 (d) Master Operating Agreement between Mobile Energy and Scott in its capacity as the Pulp Mill owner, the Paper Mill owner, and the Tissue Mill owner. (Filed separately pursuant to Rule 104). ("P") E-2 - Schematic diagram depicting bus bar interconnections between Alabama Power and Energy Complex and Mill facilities. ("P") b. Financial Statements. (i) Balance sheets of The Southern Company and subsidiary companies at June 30, 1994. (Designated in The Southern Company's Form 10-Q for the quarter ended June 30, 1994, File No. 1-3526). (ii) Journal entry reflecting pro forma effect of proposed transactions on The Southern Company and subsidiaries consolidated at June 30, 1994. (iii) Statement of initial sources and uses of funds. (iv) Mobile Energy Services Company, Inc. - Financial Projections. (Filed separately pursuant to Rule 104). ("P") SIGNATURE Pursuant to the requirements of the Public Utility Holding Company Act of 1935, the undersigned company has duly caused this Amendment No. 1 to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 9, 1994 THE SOUTHERN COMPANY By: /s/ Tommy Chisholm Tommy Chisholm Secretary 23 EX-99 2 EXHIBIT A-1 Exhibit A-1 ARTICLES OF INCORPORATION OF MOBILE ENERGY SERVICES COMPANY, INC. I. The name of the corporation is MOBILE ENERGY SERVICES COMPANY, INC. (the "Corporation"). II. The Corporation shall have perpetual duration. III. The nature of the business of the Corporation and its objects, purposes and powers are: (a) To own and operate electric generation facilities, steam processing facilities and such ancillary facilities as the Corporation may determine necessary or beneficial from time to time; (b) To manage, purchase or acquire by assignment, transfer or otherwise, and hold, mortgage or otherwise pledge, and to sell, exchange, transfer, deal in and in any manner dispose of, real or personal property of any kind, class, interest, or type, wheresoever situated, and to exercise, carry out and enjoy any licenses, power, authority, concession, right or privilege which any corporation may make or grant in connection therewith; (c) To subscribe for, acquire, hold, sell, assign, transfer, mortgage, pledge, or in any manner dispose of shares of stock, bonds or other evidences of indebtedness or securities issued or created by any other corporation of Alabama or any other state or any foreign country and, while the owner thereof, to exercise the rights, privileges and powers of ownership, including the rights to vote thereon, to the same extent as a natural person may do, subject to the limitations, if any, on such rights now or hereafter provided by the laws of Alabama; (d) To acquire the goodwill, rights, assets and properties, and to undertake the whole or any part of the liabilities, of any person, firm, association or corporation; to pay for the same in cash, the stock or other securities of the Corporation, or otherwise, to hold, or in any manner, dispose of, the whole or any part of the property so acquired; to conduct in any lawful manner the whole or any part of the business so acquired; and to exercise all the powers necessary or convenient in and about the conduct and management of such business; and (e) In general, to carry on any other lawful business whatsoever in connection with the foregoing or which is calculated, directly or indirectly, to promote the interest of the Corporation or to enhance the value of its properties. The enumeration herein of the powers, objects and purposes of the Corporation shall not be deemed to exclude or in any way limit by inference any powers, objects or purposes which the Corporation is empowered to exercise, whether expressly by purpose or by any of the laws of the State of Alabama or any reasonable construction of such laws. IV. The Corporation shall be authorized to issue One Thousand (1,000) shares of One Dollar ($1.00) par value capital stock, all of which shall be designated "Common Stock." The shares of Common Stock shall have unlimited voting rights and shall be entitled to receive all of the net assets of the Corporation upon dissolution or liquidation. V. The Board of Directors of the Corporation shall have the power to adopt, amend and repeal the By-Laws of the Corporation. VI. To the fullest extent that the General Corporation Law of Alabama, as it exists on the date hereof or as it may hereafter be amended, permits the limitation or elimination of the liability of directors, no director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of duty of care or other duty as a director. No amendment to or repeal of this Article shall apply to or have any effect on the liability or alleged liability of any director of the Corporation for or with respect to any acts or omissions of such director occurring prior to such amendment or repeal. -2- VII. The initial registered office of the Corporation in the State of Alabama shall be located at 60 Commerce Street, Montgomery, Montgomery Co., Alabama 36104. The initial registered agent of the Corporation at such address shall be The Corporation Company. VIII. The affairs of the Corporation shall be managed by a Board of Directors and as otherwise provided in the By-Laws of the Corporation. The initial Board of Directors of the corporation shall consist of one (1) member, whose name and corresponding mailing address is: Raymond D. Hill c/o Southern Electric International, Inc. 900 Ashwood Parkway Suite 500 Atlanta, Georgia 30338 IX. The name and address of the Incorporator of the Corporation are Elizabeth B. Chandler, NationsBank Plaza, 600 Peachtree Street, N.E., Suite 5200, Atlanta, Georgia 30308-2216. __________________________________________ Elizabeth B. Chandler, Incorporator -3- EX-99 3 EXHIBIT B-2 Exhibit B-2 INTERIM NOTE $[___________] Dated: [_________] FOR VALUE RECEIVED, the undersigned, MOBILE ENERGY SERVICES COMPANY, INC., an Alabama corporation ("Maker"), promises to pay to THE SOUTHERN COMPANY, a Delaware corporation (hereinafter referred to, together with any subsequent holder or transferee hereof, as "Holder"), the principal sum of [____________________] and No/100 Dollars ($[___________]) (the "Principal") together with interest on so much thereof as from time to time shall be outstanding and unpaid, accruing on and after the date hereof at the prime lending rate as in effect at [_______________________], expressed in simple interest terms and computed on a three hundred sixty-five (365) day year. Principal and interest accrued thereon shall be due and payable on June 30, 1995. Maker shall be entitled, at any time and from time to time, without the consent of Holder and without paying any penalty or premium therefor, to prepay all or any portion or portions of the outstanding Principal and accrued interest thereon. No delay or omission on the part of Holder in exercising any right hereunder shall operate as a waiver of such right or any other right under this Note. A waiver of any right or remedy on any one occasion shall not be construed as a bar to or waiver of any right or remedy on any future occasion. Maker hereby waives presentment, demand for payment, notice or dishonor and all other notices or demands in connection with the delivery, acceptance, performance, default or endorsement of this Note. IN WITNESS WHEREOF, the undersigned has caused its duly authorized representative to execute this Note to be effective as of the day and year first above written. "Maker" MOBILE ENERGY SERVICES COMPANY, INC. By: ____________________________________ Vice President EX-99 4 FINANCIAL 6BII Journal Entry Reflecting Proforma Effect on SOCO Item 6(b)(ii) Selected Statistical Disclosures SOCO SOCO Consolidated Mill Proforma At 6-30-94 Transaction 6-30-94 Common Stock 41.44% 3,241,733 3,241,733 40.90% Paid In Capital 20.39% 1,595,140 105,000 1,700,140 21.45% Premium on Preferred Stock 0.01% 1,012 1,012 0.01% Retained Earnings 38.15% 2,983,973 2,983,973 37.64% Common Equity 46.83% 100.00% 7,821,858 105,000 7,926,858 100.00% 46.30% Preferred Stock 7.98% 1,332,203 1,332,203 7.78% Preferred Stock - Red 0.00% 500 500 0.00% Long Term Debt 45.19% 7,546,946 315,000 7,861,946 45.92% Total Capitalization 100.00% 16,701,507 420,000 17,121,507 100.00%
EX-99 5 FINANCIAL 6BIII Item 6(b)(iii) ******************************************************** Southern Electric International Mill Project Base Case *********09:22 AM ******************************************************** INITIAL SOURCES & USES ($000's) 1994$ % of Capital SOURCES 144A Bond - First Tranche 231,127 55.0% 144A Bond - Second Tranche 0 0.0% 144A Bond - Third Tranche 0 0.0% Optional Bank Tranche 0 0.0% Tax Exempt Bonds 85,000 20.2% Equity 103,975 24.8% Total 420,102 USES Cash Paid to Scott 350,000 Financing Costs 9,478 Development Costs 3,675 Start-Up Costs 625 Capital Expenditures 10,324 Reserves 46,000 Other 0 Total 420,102 -----END PRIVACY-ENHANCED MESSAGE-----