[Federal Register Volume 68, Number 41 (Monday, March 3, 2003)]
[Notices]
[Pages 10004-10007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-4835]


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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Docket No. ES02-51-000]


Before Commissioners: Pat Wood, III, Chairman; William L. Massey, 
and Nora Mead Brownell, Westar Energy, Inc.; Order Conditionally 
Granting Authorization To Issue Long-Term Unsecured Debt and Announcing 
New Policy on Conditioning Securities Authorizations

Issued: February 21, 2003.
    1. In this order, the Commission will grant Westar Energy, Inc.'s 
(Westar, formerly Western Resources, Inc.) request to issue long-term, 
unsecured debt, but will do so conditionally with restrictions on this 
authorization. In addition, the Commission intends that all future 
issuances of secured and unsecured debt authorized by the Commission 
will be similarly conditioned. This order benefits customers by 
ensuring that the authorization of a public utility to issue securities 
accords with the requirements of section 204 of the Federal Power Act 
(FPA).\1\
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    \1\ 16 U.S.C. 824c (2000).
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Background

    2. On September 6, 2002, Westar submitted an application pursuant 
to section 204(a) of the FPA \2\ seeking authorization to issue long-
term, unsecured debt in an amount not to exceed $650 million at any one 
time. Westar also requests a waiver of the Commission's competitive 
bidding and negotiated placement requirements at 18 CFR 34.2 (2002).
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    \2\ 16 U.S.C. 824c(a) (2000).
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    3. On November 1, 2002, the Director of the Office of Markets, 
Tariffs, and Rates' Division of Tariffs and Market Development-Central 
requested additional information from Westar. Westar filed its response 
on November 15, 2002 (Westar Response). Westar, among other things, 
provided details related to its existing soon-to-mature debt 
securities,\3\ its proposed debt issuance and why it believes the 
proposed issuance of the long-term, unsecured debt is in the public 
interest.
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    \3\ Westar's pre-existing debt issuances were authorized by 
either this Commission or the Kansas Corporation Commission (Kansas 
Commission) with no conditions imposed on how much of the borrowings 
could be used for non-utility businesses or the amount of Westar's 
assets that could be used to secure the debt.
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Notice, Interventions and Motions

    4. Notices of the application and the data request response were 
published in the Federal Register, 67 FR 59058 (2002) and 67 FR 70725 
(2002), respectively. The Kansas Commission filed a notice of 
intervention and comments on October 2, 2002. MBIA Insurance Company 
(MBIA) submitted timely motions to intervene and comments on October 3, 
2002, and December 11, 2002.
    5. The Kansas Commission states that the Commission should view 
Westar's application in the context of concerns about the capital 
structure and debt obligations of Westar and its affiliates.\4\ The 
Kansas Commission also states that the Commission should not construe 
its filing as a request to deny Westar financing. However, the Kansas 
Commission emphasizes that its decision not to protest is based and 
conditioned upon Westar's declarations that the proceeds will be used 
solely to retire existing debt and that any debt issued will be 
``unsecured.''\5\
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    \4\ See Kansas Commission Notice of Intervention at 2.
    \5\ Id. at 3-4.
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    6. MBIA insures approximately $500 million of bonds secured by the 
first mortgage pledge of Westar and its subsidiary, Kansas Gas and 
Electric Company, and closely tracks Westar's financial health. MBIA 
states that it has become alarmed at what it views as recent 
indications regarding troubling financial and management issues with 
Westar,\6\ and that Westar's application contains scant information on 
how Westar's proposed issuance will relate to Westar's strained 
financial status. MBIA encourages the Commission to exercise 
appropriate due diligence to ensure that the standards of section 204 
are met and that the issuance of the securities will not lead to 
further deterioration.\7\
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    \6\ MBIA notes: (1) An anticipated Kansas Commission order 
requiring a comprehensive restructuring, (2) reports of grand jury 
investigations of company executives and (3) Westar's efforts in 
seeking an exemption from limitations imposed by the Investment 
Company Act of 1940.
    \7\ See Motion to Intervene at 1-2.
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    7. On October 18, 2002, Westar submitted an answer in response to 
the Kansas Commission's and MBIA's comments.
    8. On November 26, 2002, the Kansas Commission filed a motion to 
lodge its Order No. 51, requiring financial and corporate restructuring 
by Westar. This order requires Westar to obtain Kansas Commission 
approval before the issuance of any debt, to structurally separate its 
utility subsidiaries from its non-utility businesses and to reverse 
certain accounting transactions among its affiliates. Order No. 51 also 
provides

[[Page 10005]]

that Westar should take steps to reduce its debt, utilizing available 
cash flow from electric operations to reduce non-utility debt secured 
by utility assets. The Kansas Commission states that Westar should 
consider the sale of subsidiaries Protection One, Inc. and ONEOK, Inc. 
stock, and a reduction of dividends.\8\
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    \8\ See Motion to Lodge Order No. 51 at 1-2.
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    9. On January 6, 2003, the Kansas Commission filed a motion to 
lodge its Order
    No. 55, clarifying Order No. 51. Among other things, Order No. 55 
clarifies Westar's financial and corporate restructuring requirements; 
establishes an August 1, 2003, restructuring deadline; requires monthly 
progress reports on Westar's debt reduction; affirms that Westar must 
reduce secured utility debt by $100 million per year from cash flow; 
affirms that the appropriate amount of debt after the restructuring is 
$1.47 billion; and affirms the Kansas Commission's authority to require 
Kansas Commission approval before the issuance of any additional 
debt.\9\
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    \9\ See Motion to Lodge Order No. 55 at 2-3.
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Discussion

 Procedural Matters

    10. Pursuant to Rule 214 of the Commission's Rules of Practice and 
Procedure, 18 CFR 385.214 (2002), the notice of intervention and 
timely, unopposed motion to intervene serve to make the parties that 
filed them parties to this proceeding. Rule 213(a)(2) of the 
Commission's Rules of Practice and Procedure, 18 CFR 385.213, prohibits 
answers to protests unless otherwise permitted by the decisional 
authority. We do not find that good cause exists to allow Westar's 
answer, as it does not provide additional information assisting us in 
the decision-making process.
    11. Rule 212(a)(2) of the Commission's Rules of Practice and 
Procedure allows motions to be filed by participants who have filed 
timely, interventions that have not been denied.\10\ Accordingly, the 
Commission accepts, and the Commission will grant, the Kansas 
Commission's motions to lodge Order Nos. 51 and 55.
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    \10\ See 18 CFR 385.212 (2002).
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 Westar's Conditional Securities Authorization

    12. Section 204(a) of the FPA provides that requests for authority 
to issue securities or to assume liabilities shall be granted if the 
Commission finds that the issuance:
    (a) is for some lawful object, within the corporate purposes of the 
applicant, and compatible with the public interest, which is necessary 
or appropriate for or consistent with the proper performance by the 
applicant of service as a public utility and which will not impair its 
ability to perform that service, and (b) is reasonably necessary or 
appropriate for such purposes.\11\
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    \11\ 16 U.S.C. 824c(a) (2000).
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    13. The Commission concludes that Westar's requested authorization, 
as conditioned below, meets the standards of section 204.
    14. The Commission finds that the proposed issuance of long-term, 
unsecured debt is for a lawful object within Westar's corporate 
purposes and is necessary, appropriate and consistent with Westar's 
performance as a public utility. Westar states it will issue the 
proposed debt in the second quarter of 2003 and use the proceeds to 
refinance debt that effectively matures in August 2003 by virtue of a 
put/call agreement.\12\ Westar also states it is refinancing the 
unsecured debt in order to meet the requirements of a bank credit 
agreement requiring the debt to be retired 60 days prior to maturity 
and that without the ability to refinance Westar could potentially face 
a liquidity crisis.\13\ Refinancing or retiring debt is a lawful object 
and is routinely practiced in the electric industry. The Commission 
further finds that the authorization, as conditioned below, is 
necessary and appropriate, giving Westar, a non-investment grade 
issuer,\14\ the flexibility necessary to refinance its debt securities 
with the most favorable terms.
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    \12\ See Application at 2-3; Westar Response 7.
    \13\ See Westar Response 7.
    \14\ See Westar Response 7. Independent credit agencies, such as 
Standard and Poor's and Moody's Investors Services, rated Westar's 
unsecured debt securities as BB- and Ba2, respectively, with 
negative outlooks. See Application at 2.
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    15. In reviewing filings under section 204, the Commission 
evaluates a utility's financial viability based on a review of the 
financial statements submitted in the application and the utility's 
interest coverage ratio. An interest coverage ratio is a measure of the 
utility's ability to meet future debt and interest payments.\15\ 
Westar's pro forma interest coverage ratio is less than what the 
Commission would typically prefer due in large part to approximately 
$657 million of non-cash charges from its non-utility subsidiaries that 
negatively impacted Westar's financial statements. However, Westar has 
a bank covenant requirement in place, similar to the Commission's 
interest coverage ratio, whereby Westar must attain a minimum ratio of 
consolidated earnings before interest, taxes, depreciation, and 
amortization to consolidated interest expense of 2.0 to 1.0. Westar's 
ratios on an actual and pro forma basis are 2.7 to 1.0 and 2.5 to 1.0, 
respectively, and as these ratios show, Westar meets the bank covenant 
requirement both before and after the proposed financing.\16\
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    \15\ The interest coverage ratio is a calculation of income 
before interest and taxes divided by total interest expense.
    \16\ See Westar Response 6.
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    16. In evaluating Westar's financial viability, the Commission also 
reviewed Westar's debt maturities and cash flow projections over the 
next five years. While Westar's debt maturities between October 2002 
and December 2007 total more than $2.7 billion, Westar projects it will 
be able to meet these obligations as they come due.\17\ Westar also 
projected a free cash flow remaining after the payment of interest and 
dividends in excess of $115 million for each of the next four years 
\18\ and states it will be used to further reduce company debt.\19\
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    \17\ See Westar Response 12.
    \18\ Westar calculates free cash flow by adding depreciation and 
amortization to net income, then subtracting capital expenditures 
and stock dividends.
    \19\ See Westar Response 12.
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    17. The Commission has considered all the above information 
concerning Westar's financial viability.\20\ While we recognize that 
Westar's financial condition has deteriorated, in large part due to its 
non-utility business activities, without the proposed authorization to 
refinance soon-to-mature debt Westar could face a liquidity crisis, 
ultimately harming the public interest.
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    \20\ The Division of Regulatory Audits in the Commission's 
Office of the Executive Director performed an audit and found that 
since 1995 Westar has issued substantial amounts of new debt and 
used the proceeds to finance non-utility business ventures and to 
cover operating losses incurred by non-utility businesses. The audit 
report identifies the following adverse consequences: The credit 
rating for Westar securities is ``junk status;'' Westar debt is more 
costly and more difficult to obtain on economically favorable terms; 
Westar's ratepayers are at risk for paying the increased cost of 
debt if Westar cannot generate enough cash flow from utility 
operations to cover the increased debt costs; and Westar will be 
left with a disproportionate amount of debt if it ``spins off'' some 
or all of its non-utility businesses.
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    18. We also note that authorization can be granted only if doing so 
will be consistent with Westar providing public utility service and 
will not impair its ability to provide such service. We believe that 
with the conditions ordered below we can make this finding.
    19. Therefore, the Commission will conditionally authorize Westar's 
request to issue long-term, unsecured debt in an amount not to exceed 
$650 million, subject to the following conditions.\21\

[[Page 10006]]

First, the proceeds of the debt must be used solely for the purpose of 
retiring outstanding indebtedness, including accrued and unpaid 
interest due at maturity. Second, Westar is required to file quarterly 
informational status reports detailing its financial condition and 
debt-reduction efforts within 30 days of the end of each calendar 
quarter. Third, Westar must file a Report of Securities Issued within 
30 days after the sale or placement of the long-term, unsecured debt, 
as stated in the Commission's regulations.\22\ Finally, Westar must 
also abide by the following restrictions on secured and unsecured debt.
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    \21\ The scope of the Commission's jurisdiction over securities 
issuances is limited. For example, section 204 of the FPA does not 
apply to a public utility organized and operating in a state where 
its securities issuances are regulated by a state commission. See, 
16 U.S.C. 824c(f) (2000). The Kansas Commission follows a similar 
statute whereby it must authorize the issuance of long-term 
securities unless the issuance requires a registration statement to 
be filed with the Securities and Exchange Commission or the public 
utility obtains authorization from another state or federal agency. 
See K.S.A. Sec.  66-125 (2001). As directed in Order Nos. 51 and 55, 
for all future securities authorizations Westar must receive Kansas 
Commission approval before the issuance of any future debt. Thus, as 
long as Westar complies with this requirement it will not need our 
approval prior to such issuance. Westar should, however, file with 
us an informational copy of any future securities issuance 
applications that are subject to approval by the Kansas Commission.
    \22\ See 18 CFR 34.10, 131.43 (2002).
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    20. The Commission will impose four additional restrictions and it 
is the Commission's intention that these restrictions will be applied 
to all future public utility issuances of secured and unsecured debt 
authorized by this Commission.\23\ First, public utilities seeking 
authorization to issue debt that is secured (i.e., backed) by utility 
assets must use the proceeds of the debt for utility purposes only. 
Second, with respect to such utility asset-secured debt issuances, if 
any utility assets that secure such debt issuances are divested or 
``spun off,'' the debt must ``follow'' the asset and be divested or 
``spun off'' as well.
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    \23\ MBIA recently testified at the Commission's January 16, 
2003, technical conference on capital availability for energy 
markets, citing concerns that holding companies use assets of 
regulated utilities to keep shaky unregulated ventures afloat. MBIA 
requested that the Commission take a more active role in analyzing 
proposed securities issuances and use its section 204 authority to 
rigorously evaluate how debt will be used. See 16 U.S.C. 824c(a) 
(2000).
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    21. Third, if assets financed with unsecured debt are divested or 
``spun off,'' the associated unsecured debt must follow those assets. 
Specifically, if any of the proceeds from unsecured debt are used for 
non-utility purposes, the debt likewise must ``follow'' the non-utility 
assets and if the non-utility assets are divested or ``spun off'' then 
a proportionate share of debt must ``follow'' the associated non-
utility assets by being divested or ``spun off'' as well. Last, with 
respect to unsecured debt used for utility purposes, if utility assets 
financed by unsecured debt are divested or ``spun off'' to another 
entity, then a proportionate share of the debt also must be divested or 
``spun off''.
    22. These restrictions should prevent public utilities from 
borrowing substantial amounts of monies and using the proceeds to 
finance non-utility businesses. These restrictions thus should ensure 
that future issuances of debt are compatible with the public interest, 
will not impair a public utility's ability to perform in the future and 
provide appropriate ratepayer protection.\24\
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    \24\ These restrictions are also consistent with the audit 
report discussed above. See supra note 20.
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 Information To Be filed in Future Section 204 Applications

    23. Part 34 of the Commission's regulations sets out the filing 
requirements for public utilities seeking Commission authorization of 
the issuance of securities or the assumption of liabilities.\25\ In 
order for the Commission to determine if a security issuance is in the 
public interest, an application for authority to issue securities must 
contain, among other things, certain corporate information, a statement 
as to whether or not any state regulatory body requires an application 
for authorization to issue the securities, a summary of any rate 
changes that may apply during or after the period of the issuances, 
along with accompanying exhibits.\26\
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    \25\ See 18 CFR part 34 (2002).
    \26\ Id. at Sec. Sec.  34.3 through 34.9.
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    24. The Commission takes this opportunity to remind public 
utilities that they must include in their applications all information 
required in part 34 of the Commission's regulations. Specifically, 
public utilities must include information on the amount, type, maturity 
date and whether any of the proposed debt issuances will be secured or 
unsecured. Public utilities also must provide a detailed explanation of 
the purpose for the requested securities and state if the issuance will 
be used for utility or non-utility purposes. Public utilities must 
explain how the proposed issuance meets the standards of section 
204(a), rather than merely making a declaration that it does so. 
Finally, the board of directors' resolutions must include a discussion 
of the type, amount, and purpose of the proposed issuance and the 
financial statements should be calculated on both an actual and pro 
forma basis.
    25. We also remind public utilities that section 204 gives the 
Commission the authority to issue supplemental orders, and modify the 
provisions of any previous order as to the particular purposes, uses, 
and extent to which, or the conditions under which, any security or the 
associated proceeds may be applied.\27\ Westar as well as other public 
utilities are hereby put on notice that the Commission plans to review 
the required filings and reports, and may issue supplemental orders as 
necessary.
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    \27\ See 16 U.S.C. 824c(b) (2000).
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    26. Finally, while state regulatory authorities may not have 
approval over a public utility's request for authority to issue 
securities or assume liabilities filed with the Commission pursuant to 
section 204 of the FPA, we recognize such matters can have a 
significant impact on the applicant's ability to perform its public 
utility obligations at the retail level. Thus, the Commission would 
find the views of the state commissions with retail rate jurisdiction 
over section 204 applicants helpful and we encourage those commissions 
to file comments in section 204 proceedings.
    The Commission orders:
    (A) Westar is hereby conditionally authorized to issue long-term, 
unsecured debt in an amount not to exceed $650 million at any one time, 
under the terms and conditions and for the purposes specified in the 
application and this order, subject to the conditions discussed in the 
body of this order.
    (B) Westar's requested waiver of the Commission's competitive 
bidding and negotiated placement requirements at 18 CFR 34.2 is hereby 
granted.
    (C) This authorization is effective as of the date of this order 
and terminates two years thereafter.
    (D) The authorization granted in Ordering Paragraph (A) above is 
without prejudice to the authority of the Commission with respect to 
rates, services, accounts, valuation, estimates, or determinations of 
cost, or any other matter whatsoever now pending or which may come 
before the Commission.
    (E) Nothing in this order shall be construed to imply any guarantee 
or obligation on the part of the United States with respect to any 
security to which this order relates.
    (F) The Secretary is hereby directed to publish this order in the 
Federal Register.


[[Page 10007]]


    By the Commission.
Magalie R. Salas,
Secretary.
[FR Doc. 03-4835 Filed 2-28-03; 8:45 am]
BILLING CODE 6717-01-P