[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]


=======================================================================
-----------------------------------------------------------------------

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).
---------------------------------------------------------------------------

    \1\ Houston Industries, Holding Co. Act Release No. 26744 (July 
24, 1997).
    \2\ See Holding Co. Act Release No. 27462.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \4\ See Houston Industries, supra note 1.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \9\ As of December 31, 2001, REI owns approximately 83% of 
Reliant Resources, due to treasury stock repurchases of $189 million 
by Reliant Resources.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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%.
---------------------------------------------------------------------------

    \14\ New REI requests the Commission reserve jurisdiction over 
its issuance of any security that is rated below investment grade.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \16\ New REI states that it is contemplated that the Nonutility 
Subsidiaries will rely on the exemptions provided by rules 45 and 
52.
---------------------------------------------------------------------------

    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