[Federal Register Volume 67, Number 91 (Friday, May 10, 2002)]
[Notices]
[Pages 31849-31855]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-11702]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 35-27526]
Filings Under the Public Utility Holding Company Act of 1935, as
amended (``Act'')
May 3, 2002.
Notice is hereby given that the following filing(s) has/have been
made with the Commission pursuant to provisions of the Act and rules
promulgated under the Act. All interested persons are referred to the
application(s) and/or declaration(s) for complete statements of the
proposed transaction(s) summarized below. The application(s) and/or
declaration(s) and any amendment(s) is/are available for public
inspection through the Commission's Branch of Public Reference.
Interested persons wishing to comment or request a hearing on the
application(s) and/or declaration(s) should submit their views in
writing by May 28, 2002, to the Secretary, Securities and Exchange
Commission, Washington, DC 20549-0609, and serve a copy on the relevant
applicant(s) and/or declarant(s) at the address(es) specified below.
Proof of service (by affidavit or, in the case of an attorney at law,
by certificate) should be filed with the request. Any request for
hearing should identify specifically the issues of facts or law that
are disputed. A person who so requests will be notified of any hearing,
if ordered, and will receive a copy of any notice or order issued in
the matter. After May 28, 2002, the application(s) and/or
declaration(s), as filed or as amended, may be granted and/or permitted
to become effective.
Reliant Energy, Inc., et al. (70-9895)
Reliant Energy, Incorporated (``REI''), a Texas public-utility
holding company exempt by order under section 3(a)(2) of the Act,\1\
and its wholly owned Texas subsidiary company formed for purposes of
the transactions described in this filing, CenterPoint Energy, Inc.
(``New REI'') (together, ``Applicants''), 1111 Louisiana, Houston, TX
77002, have filed an amended and restated application-declaration under
sections 3(a)(1), 6, 7, 9(a), 10, 12(b), 12(c), 12(f) and 13 and rules
43, 44, 45, 46, 52, 54, 90 and 91 of the Act in connection with a
corporate restructuring (``Restructuring'') of REI. On November 2,
2001, the Commission issued a notice of the proposed Restructuring.\2\
The nature of the requested authority has now changed because New REI
proposes to register as a holding company under section 5 of the Act.
New REI will register following the Electric Restructuring (described
and defined below).
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\1\ Houston Industries, Holding Co. Act Release No. 26744 (July
24, 1997).
\2\ See Holding Co. Act Release No. 27462.
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I. Introduction
A. Background
REI is a Texas electric utility company and a combination electric
and gas public-utility holding company. Through its unincorporated HL&P
division (the ``HL&P Division''), REI generates, purchases, transmits
and distributes electricity to approximately 1.7 million customers in
Texas. REI primarily serves a 5,000-square mile area on the Texas Gulf
Coast, including the Houston metropolitan area. All of REI's electric
generation and operating properties are located in Texas. For the year
ended December 31, 2001, HL&P reported operating income of $1.091
billion on total operating revenues of $5.5 billion.
As an electric utility, the HL&P Division is subject to regulation
by the Public Utility Commission of Texas (the ``Texas Commission'')
and to the provisions of the Texas Act, as that term is defined below.
REI is a member of the Electric Reliability Council of Texas, Inc.
(``ERCOT''), which provides the function of ``Independent System
Operator'' for its member utilities.\3\
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\3\ ERCOT represents a bulk electric system located entirely
within Texas. Because of the intrastate status of their operations,
the primary regulatory authority for the HL&P Division and ERCOT is
the Texas Commission, although the Federal Energy Regulatory
Commission exercises limited authority.
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REI conducts natural gas distribution operations through three
unincorporated divisions of its wholly owned gas utility subsidiary,
Reliant Energy Resources Inc. (``GasCo''): (1) The Entex Division,
which serves approximately 1.5 million customers, located in Texas
(including the Houston metropolitan area), Louisiana and Mississippi;
(2) the Arkla Division, which serves approximately 716,600 customers
located in Texas, Louisiana, Arkansas, and Oklahoma; and (3) the
Minnegasco Division, which serves approximately 711,000 customers in
Minnesota. The largest communities served by Arkla are the metropolitan
areas of Little Rock, Arkansas and Shreveport, Louisiana. Minnegasco
serves the Minneapolis metropolitan area.
The Entex Division is subject to regulation by the Texas Railroad
Commission, the Louisiana Public Service Commission (the ``Louisiana
[[Page 31850]]
Commission'') and the Mississippi Public Service Commission. The Arkla
Division is subject to regulation by the Texas Railroad Commission, the
Louisiana Commission, the Arkansas Public Service Commission and the
Corporation Commission of the State of Oklahoma. The Minnegasco
Division is subject to regulation by the Minnesota Public Utilities
Commission.
For the year ended December 31, 2001, the Entex, Arkla, and
Minnegasco Divisions reported combined net operating income of $158
million. At December 31, 2001, reported net property, plant and
equipment were $1.6 billion.
REI conducts its nonutility operations, including merchant power
generation and energy trading and marketing, largely through its
partially owned nonutility subsidiary company, Reliant Resources, Inc.
(``Reliant Resources''), and its subsidiary companies. These nonutility
subsidiaries include wholesale power, trading and communications
operations and, since the beginning of retail electric competition in
Texas in January 2002, the sale of electricity to retail customers
formerly served by REI's integrated electric-utility operations. As
discussed below, New REI plans to spin off Reliant Resources soon after
completion of the restructuring of the electric system (``Electric
Restructuring'').
REI's existing structure resulted from the acquisition by Houston
Industries Incorporated (``Houston Industries'') of NorAm Energy Corp.
(``NorAm'') in August 1997.\4\ Prior to the acquisition, Houston
Industries` principal utility operations were conducted through its
electric utility subsidiary, Houston Light & Power Company (``HL&P'').
NorAm engaged in gas distribution operations. In the merger, Houston
Industries merged into HL&P (which then adopted the name Houston
Industries Incorporated). HL&P became a division of the holding
company, Houston Industries, and NorAm become a first tier, wholly
owned subsidiary of the holding company.
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\4\ See Houston Industries, supra note 1.
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In 1999, the name of the holding company was changed from Houston
Industries to Reliant Energy, Incorporated, referred to in the
application as REI, and the electric utility company became Reliant
Energy HL&P, a division of REI referred to in the application as the
HL&P Division. NorAm became Reliant Energy Resources Corp., referred to
in the application as GasCo.
In June 1999, S.B. 7, known as the Texas Electric Choice Plan (the
``Texas Act''), substantially amended the regulatory structure
governing electric utilities in Texas to provide for full retail
competition. Under the Texas Act, traditional vertically integrated
electric utility companies are required to separate their generation,
transmission and distribution, and retail activities.
On March 15, 2001, the Texas Commission approved a business
separation plan (the ``Business Separation Plan'') under which REI's
existing electric utility operations would be separated into three
businesses: a power generation company, a transmission and distribution
utility (``T&D Utility'') and a retail electric provider (``REP'').
Under the Business Separation Plan, Reliant Resources became the
successor to REI as the REP to customers in the Houston metropolitan
area when the Texas market opened to competition in January 2002.
Reliant Resources became the REP for all of REI's customers in the
Houston metropolitan area that did not take action to select another
retail electric provider.\5\
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\5\ Reliant Resources provides these services through subsidiary
REPs. Applicants state that the REPs are not electric utility
companies for purposes of the Act because they do not own or operate
physical facilities used for the generation, transmission or
distribution of electric energy for sale. Applicants state that the
REPs are power marketers under rule 58(b)(1)(v) of the Act.
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As a preliminary step toward the Restructuring, REI formed Reliant
Resources as a subsidiary and transferred to it, or its subsidiaries,
substantially all of REI's nonutility operations, including merchant
power generation, energy trading and marketing, and communications
operations. On May 4, 2001, Reliant Resources completed an initial
public offering (``IPO'') of approximately 20% of its common stock. REI
expects that the IPO will be followed by a tax-free distribution of the
remaining Reliant Resources common stock to the shareholders of REI or
its successor (``Distribution''). As a result of the Distribution,
Reliant Resources will cease to be an affiliate of New REI for purposes
of the Act and will become a separate publicly traded corporation.
B. The Restructuring
The Restructuring itself will proceed in the following stages (more
fully described below): the Electric Restructuring, the Distribution,
the Texas Genco IPO, and the GasCo Separation.
1. The Electric Restructuring
In the first stage, New REI will form Texas Genco Holdings, Inc.
(``Texas Genco Holdings''), as a Texas indirect wholly owned limited
partnership. REI will contribute its regulated assets used to generate
electric power and energy for sale within Texas and the liabilities
associated with those assets (``Texas Genco Assets'') to Texas Genco
Holdings. Texas Genco Holdings, in turn, will contribute the Texas
Genco Assets to two newly formed limited liability companies, which, in
turn, will contribute the assets to a Texas limited partnership, Texas
Genco LP. Texas Genco LP will be an electric utility company within the
meaning of the Act. Applicants state that Texas Genco Holdings will be
a Texas holding company that will qualify for exemption under section
3(a)(1) of the Act.\6\
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\6\ Applicants state that the limited liability companies, GP
LLC and LP LLC, are conduit entities that will exist solely to
minimize certain Texas franchise tax liability. LP LLC, a Delaware
limited liability company, will acquire a 99% limited partnership
interest with no voting rights in Texas Genco LP. Applicants state
that, because LP LLC will not acquire 10% or more of the voting
securities of Texas Genco LP, LP LLC will not be a holding company
for purposes of the Act. GP LLC, a Texas limited liability company,
will be a holding company because it will acquire the 1% general
partnership interest in Texas Genco LP. Applicants state that GP LLC
will qualify for exemption under section 3(a)(1) of the Act.
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The next steps relate to the formation of New REI as a holding
company for the regulated operations. REI formed New REI as a wholly
owned subsidiary.\7\ New REI, in turn, will form a special purpose
wholly owned subsidiary, Utility Holding LLC, a Delaware limited
liability company. Utility Holding LLC will form a special purpose
wholly owned subsidiary company, MergerCo, which will merge with and
into REI, with REI as the surviving entity. REI common stock will be
exchanged for New REI common stock in the merger, and New REI will
become the holding company for Utility Holding LLC, REI and its
subsidiaries.
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\7\ New REI was incorporated in Delaware on December 13, 2000.
As part of the Restructuring, on October 9, 2001, REI reincorporated
New REI as a Texas corporation.
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REI then plans to convert to a Texas limited liability company,
Reliant Energy, LLC (``REI LLC'' or the ``T&D Utility''). The T&D
Utility will retain REI's existing transmission and distribution
businesses, which will remain subject to traditional utility rate
regulation. The T&D Utility will distribute the stock of all its
subsidiaries to New REI, including the stock of GasCo, Texas Genco
Holdings and
[[Page 31851]]
certain financing and other subsidiaries.\8\
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\8\ The distribution of the stock of REI's subsidiaries,
including GasCo and Texas Genco Holdings, will be currently taxable
under Texas law. To minimize tax inefficiencies, New REI will hold
its utility interests through Utility Holding LLC. Because Utility
Holding LLC will be a Delaware company, it will not qualify for
exemption under section 3(a)(1) of the Act. Applicants request the
Commission to ``look through'' Utility Holding LLC for purposes of
analysis under section 3(a)(1). Compare National Grid Group plc,
Holding Co. Act Release No. 27154 (Mar. 15, 2000) (Commission
disregarded intermediate holding companies for purposes of section
11(b)(2) analysis).
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Following the Electric Restructuring, New REI will register as a
holding company under section 5 of the Act.
2. The Distribution
As noted above, on May 4, 2001, Reliant Resources completed an IPO
of approximately 20% of its common stock. Upon completion of the
Electric Restructuring and subject to board approval, market and other
conditions, New REI will effect the Distribution by distributing all of
the shares it owns in Reliant Resources to New REI's shareholders,
effecting the separation of operations into two unaffiliated publicly
traded corporations.\9\ As a result of the Distribution, Reliant
Resources will cease to be an affiliate of New REI for the purposes of
the Act.
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\9\ As of December 31, 2001, REI owns approximately 83% of
Reliant Resources, due to treasury stock repurchases of $189 million
by Reliant Resources.
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Prior to the IPO of Reliant Resources' common stock, REI entered
into a Master Separation Agreement and associated ancillary agreements
with Reliant Resources, providing for the separation of their
businesses and assets. The Master Separation Agreement also provides
for cross-indemnities that are intended to place sole financial
responsibility on Reliant Resources and its subsidiaries for all
liabilities associated with the current and historical businesses and
operations they conduct, and to place sole financial responsibility for
liabilities associated with REI's other businesses with REI and its
other subsidiaries. REI and Reliant Resources also agreed to assume,
and be responsible for, specified liabilities associated with
activities and operations of the other party and its subsidiaries, to
the extent performed for, or on behalf of, their respective current or
historical businesses. The Master Separation Agreement also contains
indemnification provisions under which REI and Reliant Resources will
each indemnify the other with respect to breaches by the indemnifying
party of the Master Separation Agreement or any ancillary agreements.
The Master Separation Agreement contains provisions relating to
certain nuclear decommissioning assets, the exchange of information,
provision of information for financial reporting purposes, dispute
resolution, and provisions limiting competition between the parties in
certain business activities and provisions allocating responsibility
for the conduct of regulatory proceedings and limiting positions that
may be taken in legislative, regulatory or court proceedings in which
the interests of both parties may be affected.
The Distribution will significantly reduce the New REI system's
common equity.\10\ Applicants believe, however, that the Distribution
is both necessary and appropriate because it will have the effect of
reducing the business risk profile of the regulated business. Further,
Applicants state that New REI's capital structure will be improved
significantly with the sale of Texas Genco and securitization of any
stranded investment that is anticipated to occur in 2004. Accordingly,
Applicants seek authority for the Distribution.
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\10\ New REI projects its common equity as a percentage of total
capitalization (``Common Equity Percentage'') to be approximately
37.1% following the Electric Restructuring but prior to the
Distribution. Following the Distribution, New REI projects its
Common Equity Percentage to drop to approximately 16.1% (17.2% if
calculated without the effect of securitization debt). New REI
projects its Common Equity Percentage for the year 2005 to be 15.9%
including securitization debt and 27.0% excluding securitization
debt.
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3. Texas Genco IPO
On or before December 31, 2002, New REI expects to conduct an
initial public offering of or distribute to shareholders approximately
20% of the common stock of Texas Genco Holdings, the holding company
for the Texas Genco Assets or to distribute the stock to New REI's
shareholders. The creation of a minority public interest in Texas Genco
Holdings will permit the use of the ``partial stock valuation method''
under the Texas Act for purposes of determining the stranded costs
associated with REI's regulated generation assets.
Reliant Resources will hold an option to purchase all of New REI's
remaining equity interest in Texas Genco LP after the Texas Genco IPO
(``Texas Genco Option'').\11\ The Texas Genco Option is exercisable in
January 2004; therefore, Reliant Resources does not seek authority at
this time to exercise the option. The exercise price will be determined
by a market-based formula based on the formula employed by the Texas
Commission for determining stranded costs under the partial stock
valuation method referenced above.
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\11\ The retained equity interest will be at least 80%. The
Texas Genco Option agreement provides that if Reliant Resources
purchases the Texas Genco LP shares, it must also purchase all notes
and other receivables from Texas Genco LP then held by New REI at
their principal amounts plus accrued interest.
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4. The GasCo Separation
The final stage of the restructuring entails the reorganization of
GasCo into three separate corporations (``GasCo Separation''). Upon
receipt of necessary regulatory approvals, GasCo plans to form two new
subsidiary companies, Arkla, Inc. and Minnegasco, Inc., and to
contribute to them the Arkla and Minnegasco assets, respectively. GasCo
will then dividend the stock of Arkla, Inc. and Minnegasco, Inc. to
Utility Holding LLC. GasCo, which will be renamed Entex, Inc. and
reincorporated in Texas, will own the Entex assets as well as, through
subsidiary companies, the natural gas pipelines and gathering business.
Applicants request the Commission to reserve jurisdiction over the
acquisition by New REI of the securities of the to-be-formed gas
utility subsidiaries, Entex, Inc., Arkla, Inc. and Minnegasco, Inc.,
pending completion of the record.\12\
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\12\ New REI plans to make the acquisition through an
intermediate holding company, Utility Holding LLC. Applicants
request the Commission to reserve jurisdiction over the request for
Utility Holding LLC to acquire the securities of Entex, Arkla and
Minnegasco as part of the GasCo separation.
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New REI will not qualify for an intrastate exemption immediately
after the Electric Restructuring. Pending the GasCo Separation, New REI
will not satisfy the standards for exemption under section 3(a)(1) of
the Act because GasCo, a material subsidiary with significant out-of-
state operations, will not be ``predominantly intrastate in character''
and carry on its business ``substantially in a single state.'' Upon
completion of the GasCo Separation, however, Applicants anticipate that
New REI and each of its material utility subsidiaries will be
incorporated in Texas and will be ``predominantly intrastate in
character and carry on their business substantially'' in Texas.
Applicants contemplate that, upon completion of the GasCo separation,
New REI will file a claim of exemption under rule 2 or apply for an
order under section 3(a)(1) of the Act.
C. Affiliate Transactions
Because Applicants contemplate that New REI will qualify for
exemption upon completion of the GasCo Separation and, further, that
the
[[Page 31852]]
approvals necessary for that separation will be obtained within a year
of the initial order, Applicants do not intend to form a service
company. New REI requests authority to provide a variety of services to
the New REI system companies, in areas such as accounting, rates and
regulation, internal auditing, strategic planning, external relations,
legal services, risk management, marketing, financial services and
information systems and technology. Charges for all services will be on
an at-cost basis, as determined under rules 90 and 91 of the Act.
II. Requested Authority
Applicants request an initial order: (1) Authorizing New REI to
acquire the securities of the T&D Utility, Texas Genco, L.P., GasCo,
Utility Holding LLC, Texas Genco Holdings, GP LLC and LP LLC; (2)
granting Texas Genco Holdings and GP LLC an exemption under section
3(a)(1); (3) authorizing the Distribution of the voting securities of
Reliant Resources by New REI to the common stock stockholders of New
REI; (4) authorizing the sale or distribution of Texas Genco Holdings
stock in connection with the Texas Genco IPO; (5) authorizing New REI
to retain all nonutility subsidiaries of REI; (6) authorizing REI to
provide goods and services to New REI system companies for a period not
to exceed one year; and (7) approving the requested financings as
outlined below. Applicants also request that they be exempt from the
requirement to file Form U-6B-2 because the information contained in
that form will be set forth in quarterly Rule 24 Certificates.
A. Financing Request
New REI, on behalf of itself and the Subsidiaries, requests
authorization to engage in the following financing transactions for a
period of one year from the date of the Commission's initial order
(``Authorization Period'').\13\
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\13\ For purposes of this request, the term ``Subsidiary'' shall
mean each directly and indirectly owned subsidiary of New REI as
well as other direct or indirect subsidiaries that New REI may form
after the Electric Restructuring with the approval of the Commission
or in reliance on rules or statutory exemptions. The term
``Intermediate Holding Company'' shall mean Utility Holding, LLC,
Texas Genco Holdings, Inc. and GP LLC. The term ``Utility
Subsidiaries'' shall mean Texas Genco LP, the T&D Utility and GasCo.
The term ``Nonutility Subsidiary'' shall mean any subsidiary company
other than an Intermediate Holding Company or a Utility Subsidiary.
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1. Parameters for Financing Authorization
The effective cost of money on debt financings will not exceed the
greater of 500 basis points over the comparable term London Interbank
Offered Rate (``LIBOR'') or market rates available at the time of
issuance to similarly situated companies with comparable credit ratings
for debt with similar maturities and terms.
The dividend rate on any series of preferred securities will not
exceed the greater of 500 basis points over LIBOR or a rate that is
consistent with similar securities of comparable credit quality and
maturities issued by other companies.
Financings will be subject to the following conditions: (1) The
maturity of long-term debt will not exceed 50 years and all preferred
securities will be redeemed no later than 50 years after issuance; (2)
the underwriting fees, commissions or other similar remuneration paid
in connection with the non-competitive issue, sale or distribution of a
security (not including any original issue discount) will not exceed 5%
of the principal or total amount of the securities being issued; (3)
all ratable long-term debt, preferred securities and preferred stock
that is issued to third parties will, when issued, be rated investment
grade by a nationally recognized statistical ratings organization
(``NRSRO'');\14\ and (4) each of the Utility Subsidiaries will maintain
common stock equity as a percentage of capitalization of at least 30%.
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\14\ New REI requests the Commission reserve jurisdiction over
its issuance of any security that is rated below investment grade.
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2. Use of Proceeds
The proceeds from the sale of securities in external financing
transactions will be used for general corporate purposes, including:
the financing, in part, of the capital expenditures of the New REI
system; the refinancing of existing obligations; the financing of
working capital requirements of the New REI system; the acquisition,
retirement or redemption of securities previously assumed or issued by
New REI or its Subsidiaries without the need for prior Commission
approval; and other lawful purposes.
3. Proposed Financing Program
The aggregate amount of financing under the authority requested by
New REI, exclusive of guarantees and obligations assumed by New REI at
the time of the Electric Restructuring, shall not exceed $8 billion at
any one time outstanding during the Authorization Period. The types of
securities that New REI may issue are described more fully below.
The aggregate amount of external financing under the authority
requested by the Subsidiaries, exclusive of guarantees and exempt
financings, shall not exceed $4 billion at any one time outstanding
during the Authorization Period. The types of securities that the
Subsidiaries may issue are described more fully below.
The aggregate amount of nonexempt guarantees shall not exceed $2
billion for the New REI system at any one time outstanding during the
Authorization Period.\15\
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\15\ This limit applies to guarantees of financial obligations
but not to performance guarantees entered into in the normal course
of a system company's duly authorized business.
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4. Description of Specific Types of Financing
a. New REI External Financing
Upon completion of the Electric Restructuring, New REI will have
outstanding long-term debt, obligations relating to tax-exempt debt
issued by governmental authorities (such as pollution control bonds)
and obligations relating to trust preferred securities issued by
subsidiaries. In addition, New REI will have executed bank facilities
that may be utilized in the form of direct borrowings, commercial paper
support or letters of credit.
New REI requests authorization to assume the debt and obligations
described in the previous paragraph and to replace the bank facilities
of REI subsidiaries with bank facilities of New REI at the time of the
Electric Restructuring. In addition, New REI requests authority to
assume obligations under certain hedging transactions to manage its
risk and for other lawful purposes.
New REI also requests authority to issue and sell securities,
including common stock, preferred securities (either directly or
through a subsidiary), long-term and short-term debt securities and
convertible securities and derivative instruments with respect to any
of these securities. New REI also requests authorization to enter into
obligations with respect to tax-exempt debt issued on behalf of New REI
by governmental authorities. These obligations may relate to the
refunding of outstanding tax-exempt debt or to the remarketing of tax-
exempt debt. New REI seeks authorization to enter into lease
arrangements, and certain hedging transactions in connection with
issuances of taxable or tax-exempt securities.
(i) New REI External Financing: Common Stock
New REI is authorized under its restated articles of incorporation
to
[[Page 31853]]
issue 1 billion shares of common stock, par value $.01 per share, and
related preferred stock purchase rights. Common stock issued by New REI
after completion of the Electric Restructuring will be valued, for
purposes of determining compliance with the aggregate financing
limitation of $8 billion, at its market value as of the date of
issuance (or, if appropriate, at the date of a binding contract
providing for the issuance).
New REI proposes, from time to time during the Authorization
Period, to issue and/or acquire in open market transactions or
negotiated block purchases, up to 7.5 million shares of New REI common
stock for allocation under certain incentive compensation plans and
certain other employee benefit plans. These acquisitions would comply
with applicable law and Commission interpretations then in effect.
New REI proposes, from time to time during the Authorization
Period, to issue and/or acquire in open market transactions or
negotiated block purchases, up to 4 million shares of New REI common
stock under the New REI Investors' Choice Program (or any similar or
successor program).
New REI has established a Stockholder Rights Plan under which each
share of its common stock will include one right to purchase from New
REI a fraction of a share of New REI preferred stock. The rights will
be issued under a rights agreement between New REI and a nationally
recognized bank that will serve as the rights agent. As currently
contemplated, the rights will become exercisable shortly after (i) any
public announcement that a person or group of associated persons has
acquired, or obtained the right to acquire, beneficial ownership of 15%
or more of the outstanding shares of New REI common stock; or (ii) the
start of a tender or exchange offer that would result in a person or
group of associated persons becoming a 15% owner. New REI expects that
the Stockholder Rights Plan will also provide for the rights to be
exercisable for shares of (i) New REI common stock in the event of
certain tender or exchange offers not approved by the New REI board;
and (ii) the common stock of an acquiring company in the event of
certain mergers, business combinations, or substantial sales or
transfers of assets or earning power. The rights will attach to all
certificates representing the outstanding shares of common stock and
will be transferable only with these certificates. The Stockholder
Rights Plan will provide for the rights to be redeemable at New REI's
option prior to their becoming exercisable and for the rights to expire
at a date certain.
(ii) New REI External Financing: Preferred Securities
New REI seeks to have the flexibility to issue its authorized
preferred stock or other types of preferred securities (including trust
preferred securities) directly or indirectly through one or more
subsidiaries, including special-purpose financing subsidiaries
organized for this purpose. The proceeds of preferred securities would
provide an important source of future financing for the operations of,
and investments in, businesses in which New REI or its Subsidiaries are
authorized to invest. Preferred stock or other types of preferred
securities may be issued in one or more series with rights,
preferences, and priorities as may be designated in the instrument
creating each series, as determined by New REI's board of directors, or
a pricing committee or other committee of the board performing similar
functions. Preferred securities may be redeemable and may be perpetual
in duration. Dividends or distributions on preferred securities will be
made periodically and to the extent funds are legally available for
this purpose, but may be made subject to terms which allow New REI to
defer dividend payments for specified periods. Preferred securities may
be convertible or exchangeable into shares of New REI common stock,
other forms of equity or indebtedness, or into other securities or
assets.
Preferred securities may be sold directly through underwriters or
dealers in any manner and for purposes similar to those described for
common stock above.
(iii) New REI External Financing: Long-Term Debt
Long-term debt securities could include notes or debentures under
one or more indentures (each, the ``New REI Indenture'') or long-term
indebtedness under agreements with banks or other institutional lenders
directly or indirectly. Long-term debt will be unsecured. Long-term
securities could also include obligations relating to the refunding or
remarketing of tax-exempt debt issued on behalf of New REI by
governmental authorities. Specific terms of any borrowings will be
determined by New REI at the time of issuance and will comply in all
regards with the parameters on financing authorization set forth above.
(iv) New REI External Financing: Short-Term Debt
New REI seeks authority to issue short-term debt securities,
including, but not limited to, institutional borrowings, commercial
paper and privately placed notes.
New REI may sell commercial paper or privately placed notes
(``commercial paper'') from time to time, in established domestic or
European commercial paper markets. Commercial paper may be sold at a
discount or bear interest at a rate per annum prevailing at the date of
issuance for commercial paper of a similarly situated company.
New REI may, without counting against the limit on parent financing
set forth above, maintain back-up lines of credit in connection with
one or more commercial paper programs in an aggregate amount not to
exceed the amount of authorized commercial paper.
New REI may also set up credit lines for use in general corporate
purposes. Credit lines may support commercial paper, may be utilized to
obtain letters of credit or may be borrowed against, from time to time,
as it is deemed appropriate or necessary.
(v) New REI External Financing: Risk Management Devices
New REI requests authority to assume and to enter into hedging
arrangements intended to reduce or manage the volatility of financial
or other business risks to which New REI is subject, including, but not
limited to, interest rate swaps, caps, floors, collars and forward
agreements or any other agreements or derivative instruments intended
to reduce or manage risks to which New REI is or may become exposed
(``Hedging Instruments''). The transactions would be for fixed periods
and stated notional amounts. New REI may employ interest rate hedges
and other derivatives as a means of prudently managing the risk
associated with any of its outstanding debt issued under this
authorization or an applicable exemption by, in effect, synthetically
(i) converting variable rate debt to fixed-rate debt; (ii) converting
fixed-rate debt to variable rate debt; (iii) limiting the economic or
accounting impact of changes in interest rates resulting from variable
rate debt; and (iv) managing other risks that may attend outstanding
securities. Transactions will be entered into for fixed or determinable
periods. Thus, New REI will not engage in speculative transactions. New
REI will only enter into agreements with counterparties having a senior
debt rating at the time
[[Page 31854]]
the transaction is executed of at least investment grade as published
by a NRSRO (``Approved Counterparties'').
In addition, New REI requests authorization to assume and to enter
into hedging transactions with respect to anticipated debt offerings
(``Anticipatory Hedges''), subject to certain limitations and
restrictions. Anticipatory Hedges will only be entered into with
Approved Counterparties, and will be used to fix and/or limit the risk
associated with any issuance of securities through appropriate means,
including (i) forwards and futures (a ``Forward Sale''); (ii) the
purchase of put options (a ``Put Options Purchase''); (iii) a purchase
of put options in combination with the sale of call options (a
``Collar''); (iv) some combination of a Forward Sale, Put Options
Purchase, Collar and/or other derivative or cash transactions,
including, but not limited to structured notes, caps and collars,
appropriate for the Anticipatory Hedges; or (v) other financial
derivatives or other products including Treasury rate locks, swaps,
forward starting swaps, and options on the foregoing. 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 (``CBOT''), ``off-exchange'' through the
execution of agreements with one or more counterparties (``Off-Exchange
Trades''), or a combination of On-Exchange Trades and Off-Exchange
Trades. New REI or a Subsidiary will determine the optimal structure of
each Anticipatory Hedge transaction at the time of execution. New REI
or a Subsidiary may decide to lock in interest rates and/or limit its
exposure to interest rate increases. New REI and its Subsidiaries seek
authority to modify the terms and conditions of any Hedging Instruments
or Anticipatory Hedges that are put in place prior to the Electric
Restructuring.
New REI and its Subsidiaries will comply with Statement of
Financial Accounting Standards (``SFAS'') 133 (``Accounting for
Derivatives Instruments and Hedging Activities'') and SFAS 138
(``Accounting for Certain Derivative Instruments and Certain Hedging
Activities'') or other standards relating to accounting for derivative
transactions as are adopted and implemented by the Financial Accounting
Standards Board.
b. Subsidiary External Financings
The Utility Subsidiaries will have outstanding long-term debt and
trust preferred securities upon completion of the Electric
Restructuring. In addition, the Utility Subsidiaries will have a
receivables facility and bank facilities that may be utilized in the
form of direct borrowings, commercial paper support or letters of
credit.
To the extent not otherwise exempted, the Subsidiaries request
authority to issue and sell securities, including common equity,
preferred securities (either directly or through a subsidiary), long-
term and short-term debt securities and derivative instruments with
respect to any of the foregoing on the same terms and conditions as
discussed above for New REI, except that Subsidiary debt may be secured
or unsecured. The Subsidiaries also request authorization to enter into
obligations with respect to tax-exempt debt issued on behalf of a
Subsidiary by governmental authorities in connection with the refunding
of outstanding tax-exempt debt assumed by New REI at the time of the
Electric Restructuring. The Subsidiaries also request authority to
enter into hedging transactions to manage their risk in connection with
the issuance of securities.
c. Guarantees, Intra-System Advances and Intra-System Money Pool
New REI requests authorization to enter into guarantees, obtain
letters of credit, enter into expense agreements or otherwise provide
credit support with respect to the obligations of its Subsidiaries and
to enter into guarantees of non-affiliated third party obligations in
the ordinary course of New REI's business (``New REI Guarantees'') in
an amount, together with the Subsidiary Guarantees (defined below), not
to exceed $2 billion outstanding at any one time (not taking into
account obligations exempt under rule 45). Any guarantees shall also be
subject to the limitations of rule 53(a)(1) or rule 58(a)(1), as
applicable.
Certain of the guarantees referred to above may be in support of
obligations that are not capable of exact quantification. In these
cases, New REI will determine the exposure under the guarantee by
appropriate means, including estimation of exposure based on loss
experience or projected potential payment amounts. As appropriate,
these estimates will be made in accordance with generally accepted
accounting principles and/or sound financial practices.
The Utility Subsidiaries request authority to provide to other
Subsidiaries guarantees and other forms of credit support, subject to
the terms and conditions outlined above.\16\
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\16\ New REI states that it is contemplated that the Nonutility
Subsidiaries will rely on the exemptions provided by rules 45 and
52.
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Each of the Intermediate Holding Companies also seeks authority to
issue guarantees and other forms of credit support to direct and
indirect subsidiary companies, subject to the terms and conditions
outlined above.
New REI will establish and manage a centralized system of
intercompany borrowings and investments (``Money Pool'') which will be
used as a short-term cash management system by New REI and its
Subsidiaries. Participants in the Money Pool will include New REI and
certain subsidiaries of New REI. New REI will not borrow from the Money
Pool.
The Utility Subsidiaries may also finance their capital needs
through borrowings from New REI, directly or indirectly through one or
more Intermediate Holding Companies
Each of the Intermediate Holding Companies requests authority to
issue and sell securities to its respective parent companies and to
acquire securities from its subsidiary companies.
d. Changes in Capital Stock of Majority Owned Subsidiaries
Request is made for authority to change the terms of any 50% or
more owned Subsidiary's authorized capital stock capitalization or
other equity interests by an amount deemed appropriate by New REI or
other intermediate parent company. A Subsidiary would be able to change
the par value, or change between par value and no-par stock, without
additional Commission approval.
e. Payment of Dividends Out of Capital or Unearned Surplus
As a result of the accounting treatment for the Restructuring, New
REI and the Subsidiaries are requesting authority to declare and pay
dividends out of capital or unearned surplus. The dividends paid by
these entities will not exceed 75% of net income, based on a rolling
five-year average. Although the dividend policy of New REI has not been
finally determined, it is contemplated that New REI will seek to
maintain a pay-out ratio comparable to the current ration.
f. Financing Subsidiaries
New REI proposes to organize and acquire, directly or indirectly,
the common stock or other equity interests of one or more subsidiaries
(collectively,
[[Page 31855]]
the ``Financing Subsidiary'') for the purpose of effecting various
financing transactions from time to time through the Authorization
Period involving the issuance and sale of up to an aggregate of $1
billion (cash proceeds to New REI or the respective subsidiary company)
in any combination of common stock, preferred securities, debt
securities, stock purchase contracts and stock purchase units, as well
as common stock issuable under stock purchase contracts and stock
purchase units, all as defined below. Any security issued under the
requested authority will be appropriately disclosed in the system's
financial statements. No Finance Subsidiary shall acquire or dispose
of, directly or indirectly, any interest in any utility asset, as that
term is defined under the Act, without first obtaining any necessary
approval.
The business of the Financing Subsidiary will be limited to
effecting financing transactions for New REI and its associates. In
connection with these transactions, New REI or the Subsidiaries may
enter into one or more guarantees or other credit support agreements in
favor of the Financing Subsidiary.
Any Financing Subsidiary shall be organized only if, in
management's opinion, the creation and utilization of the Financing
Subsidiary will likely result in tax savings, increased access to
capital markets and/or lower cost of capital for New REI or the
Subsidiaries.
Each of New REI and the Subsidiaries also requests authorization to
enter into an expense agreement with its respective financing entity,
under which it would agree to pay all expenses of the entity. Any
amounts issued by the financing entities to third parties will be
included in the additional external financing limitation for the
immediate parent of the financing entity. However, the underlying
intra-system mirror debt and parent guarantee will not be included.
REI currently has two financing subsidiaries (``FinanceCos''). The
FinanceCos are Delaware limited partnerships whose limited partnership
interests are wholly owned, directly or indirectly, by REI. Each of the
FinanceCos has issued a series of debt, the proceeds of which have been
used to purchase separate series of cumulative preference stock of REI.
Dividends on the preference stock accrue based on the net interest
requirements on the debt, subject to reduction of any payments
previously made by REI under REI support agreements relating to each
series of debt. After giving effect to this credit, REI must pay
aggregate cash dividends on the preference stock equal to the lesser of
the aggregate amount of interest then payable on the debt or its excess
cash flow (excess funds of REI remaining after taking into account its
cash requirements and other expenditures required by sound utility
financial and management practices).
g. Authority To Reorganize Nonutility Interests
New REI proposes to restructure its nonutility interests from time
to time as may be necessary or appropriate. New REI will engage,
directly or indirectly, only in businesses that are duly authorized,
whether by order or rule under the Act.
For the Commission, by the Division of Investment Management,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-11702 Filed 5-9-02; 8:45 am]
BILLING CODE 8010-01-P