File No. 70-9353
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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POST-EFFECTIVE AMENDMENT NO. 11
TO
FORM U-1
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APPLICATION OR DECLARATION
under the
PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP RESOURCES, INC.
AEP ENERGY SERVICES, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of company or companies filing this statement
and addresses of principal executive offices)
* * *
AMERICAN ELECTRIC POWER COMPANY, INC.
1 Riverside Plaza, Columbus, Ohio 43215
(Name of top registered holding company
parent of each applicant or declarant)
Stephen P. Smith, Senior Vice President and Treasurer
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
* * *
Jeffrey D. Cross, General Counsel
AMERICAN ELECTRIC POWER SERVICE CORPORATION
1 Riverside Plaza, Columbus, Ohio 43215
(Names and addresses of agents for service)
American Electric Power Company, Inc. ("AEP"), a holding company
registered under the Public Utility Holding Company Act of 1935, as amended
("1935 Act"), AEP Energy Services, Inc., a wholly-owned non-utility subsidiary
of AEP ("AEPES"), and AEP Resources, Inc., a wholly-owned non-utility subsidiary
of AEP and an intermediate holding company of non-utility subsidiaries
(collectively, with any new or successor intermediate holding company of
non-utility subsidiaries, "Resources"), hereinafter sometimes collectively
referred to as "Applicants", hereby amend the Application-Declaration in File
No. 70-9353 as follows:
1. By amending and restating Item 1 of the Application-Declaration:
ITEM 1. DESCRIPTION OF PROPOSED TRANSACTIONS
A. Background
By orders issued in connection with File No. 70-8779 dated September 13,
1996 (HCAR No. 26572), September 27, 1996 (HCAR No. 26583), May 2, 1997 (HCAR
No. 26713), November 30, 1998 (HCAR No. 26947) and April 7, 1999 (HCAR No.
26998), the Commission authorized AEP to form direct or indirect nonutility
subsidiaries to broker and market energy commodities, including electric power,
natural and manufactured gas, emission allowances, coal, oil, refined petroleum
products and natural gas liquids in the United States ("Commodities Business").
By order issued in connection with File No. 70-8779 dated August 19, 1999 (HCAR
No. 27062), the Commission authorized AEP to engage in the Commodities Business
in Canada.
Pursuant to an order of the Commission issued in connection with File No.
70-7622 dated June 6, 1989 (HCAR No. 24898) and supplemental orders issued in
connection with File No. 70-7622 dated October 8, 1993 (HCAR No. 25905) and
February 4, 1994 (HCAR No. 25984), AEP obtained authorization to invest in
Resources, whose primary business is development of, and investments in, exempt
wholesale generators, foreign utility companies, qualifying cogeneration
facilities and other energy-related domestic and international investment
opportunities and projects.
Pursuant to previous orders of the Commission issued in connection with
this File No. 70-9353 (HCAR Nos. 26933, 27120, 27313 and 27432 dated November 2,
1998, December 22, 1999, December 21, 2000 and August 13, 2001, respectively,
which orders are referred to collectively herein as the "Previous Orders"),
Applicants were authorized to acquire in one or more transactions from time to
time through December 31, 2003, non-utility energy assets in the United States,
including, without limitation, natural gas production, gathering, processing,
storage and transportation facilities and equipment, liquid oil reserves and
storage facilities, and associated facilities, that would be incidental to and
would assist Applicants and their subsidiaries (or any other energy trading,
marketing or brokering subsidiary hereafter acquired by Applicants) in
connection with their duly authorized marketing, brokering and trading
activities as more fully explained below. Applicants are authorized pursuant to
the Previous Orders to invest up to $2.0 billion in such non-utility energy
assets or in the equity securities of companies substantially all of whose
physical properties consist of such non-utility energy assets.
Pursuant to the authority granted by the Commission in the Previous
Orders, Applicants have, among other things, acquired midstream gas assets,
including intrastate pipeline systems in Louisiana and Texas, natural gas
processing plants and storage facilities.
B. Summary of Proposed Transaction
Applicants are now seeking approval to acquire in one or more transactions
from time to time through June 30, 2004 (the "Authorization Period"), additional
energy assets in Canada (which is a new request) as well as the United States,
including, without limitation, oil (which is added here as a further descriptive
term of the types of assets that were previously authorized) and natural gas
exploration, development, production, gathering, processing, storage and
transportation facilities and equipment, liquid oil reserves and storage
facilities, and associated facilities (collectively, "Energy Assets"), that
would be incidental to and would assist Applicants and their subsidiaries (or
any other energy trading, marketing or brokering subsidiary hereafter acquired
by Applicants) in connection with the Commodities Business.1
Applicants request that the Commission reserve jurisdiction over the
proposed transactions solely in respect of any proposed acquisition of Energy
Assets or Energy Assets Subsidiaries ("State-Jurisdiction Acquisition"), pending
in each case the receipt of the required state commission authorization and
filing of a copy as a supplement to the record in this proceeding and the
issuance of a supplemental order of the Commission authorizing the
State-Jurisdictional Acquisition.
Pursuant to the Previous Orders, Applicants were authorized to organize
direct or indirect special purpose financing subsidiaries organized specifically
for the purpose of financing any such acquisition ("Finance Subsidiaries"),
which authority Applicants request continue throughout the Authorization Period.
Applicants further request approval to invest up to an additional $2.0 billion,
which, together with existing authority, would increase the aggregate amount
that could be invested to $4.0 billion ("Investment Limitation") during the
Authorization Period in such Energy Assets or in the securities of companies
substantially all of whose physical properties consist of such Energy Assets
("Energy Assets Subs").2 This $4.0 billion amount is in addition to any amount
that may be authorized under SEC File No. 70-10166.
Applicants request that this Commission reserve jurisdiction over every
request in this File other than to issue securities, including guarantees,
necessary to refinance or support indebtedness or obligations (which obligations
and corresponding guarantees are further described herein) incurred in
connection with Energy Assets or Energy Assets Subs previously acquired pursuant
to this File in an amount of up to $550 million3.
Consistent with the Previous Orders, such Energy Assets or Energy Assets
Subs may be acquired for cash or in exchange for common stock of AEP or other
securities of Applicants or may include the assumption of debt of the seller of
such Energy Assets or Energy Assets Subs, or any combination of the foregoing.
Consistent with the Previous Orders, if common stock of AEP is used as
consideration in connection with any such acquisition, the market value thereof
on the date of issuance will be counted against the proposed Investment
Limitation. Consistent with the Previous Orders, under no circumstances will
Applicants acquire, directly or indirectly, any assets or properties the
ownership or operation of which would cause such companies to be considered an
"electric utility company" or "gas utility company" as defined under the 1935
Act.
Any Finance Subsidiary organized pursuant to this File shall be organized
only if, in management's opinion, the creation and utilization of such Finance
Subsidiary will likely result in tax savings, increased access to capital
markets and/or lower cost of capital for AEP.
The ability to use finance subsidiaries or special purpose subsidiaries in
financing transactions can sometimes offer increased state and/or federal tax
efficiency. Increased tax efficiency can result if a finance subsidiary or
special purpose subsidiary is located in a state or country that has tax laws
that make the proposed financing transaction more tax efficient relative to the
sponsor's existing taxing jurisdiction. For example, foreign finance
subsidiaries, depending upon the identity of the borrowers, can often earn
income that is not subject to current U.S. federal income taxation. However,
decreasing tax exposure is usually not the primary goal when establishing a
finance subsidiary or special purpose subsidiary. Because of the potential
significant non-tax benefits of such transactions, discussed below, use of a
financing subsidiary can benefit an issuer even without a net improvement in its
tax position.
Financing subsidiaries and/or special purpose subsidiaries can increase a
company's ability to access new sources of capital by enabling it to undertake
financing transactions with features and terms attractive to a wider investor
base. Financing subsidiaries and/or special purpose subsidiaries can be
established in jurisdictions and/or in forms that have terms favorable to its
sponsor and that at the same time provide targeted investors with attractive
incentives to provide financing. Many of these investors would not be
participants in the sponsor's bank group, and they typically would not hold
sponsor bonds or commercial paper. Thus they represent potential new sources of
capital.
One aspect of transactions involving finance subsidiaries or special
purpose subsidiaries is that they can enable a more efficient allocation of
risks among investors and the sponsor, resulting in a lower all-in financing
rate. In a simple example, finance subsidiaries or special purpose subsidiaries
can be used to securitize specific assets, or pools of assets, at
reasonable-to-attractive rates. The financing cost could be lower because the
assets may have a unique risk profile that is especially appealing to specific
investors, or because the diversification achieved by pooling assets reduces the
total level of risk.
AEP will file, on a quarterly basis corresponding with the periodic
reporting requirements of the Securities Exchange Act of 1934 ("1934 Act"), the
information required pursuant to Rule 24 with respect to any Finance Subsidiary
organized or otherwise acquired pursuant to this File. Such filings, if any,
will include a representation that (1) the financial statements of AEP shall
account for any Finance Subsidiary in accordance with U.S. generally accepted
accounting principles and (2) it maintains sufficient internal controls to
enable it to monitor the creation and use of any Finance Subsidiary and shall
further disclose with respect to any such subsidiary (i) the name of the
subsidiary; (ii) the value of AEP's investment account in such subsidiary; (iii)
the balance sheet account where the investment and the cost of the investment
are booked; (iv) the amount invested in the subsidiary by AEP; (v) the type of
corporate entity; (vi) the percentage owned by AEP; (vii) the identification of
other owners if not 100% owned by AEP; (viii) the purpose of the investment in
the subsidiaries; (ix) the amounts and types of securities to be issued by the
subsidiaries; and (x) for any securities issued by any entity under the
requested authority and next set forth on the balance sheet of the issuer, the
terms and conditions of the securities. Regardless if any such duty to file is
triggered, AEP maintains sufficient internal controls to enable it to monitor
the creation and use of any such entity. To the extent any securities are issued
by any entity pursuant to this File, which securities are not set forth on the
balance sheet of the issuer, then the terms and conditions of such securities
will be included in the applicable report filed pursuant to Rule 24.
As this Commission has recognized in SEI Holdings, Inc., HCAR No. 26581
(September 26, 1996) and other decisions, a successful marketer of energy
commodities must be able to control some level of physical assets that are
incidental and reasonably necessary in its day-to-day operations. Gas marketers
today must be able to offer their customers a variety of value-added, or
"bundled" services, such as gas storage and processing, which the interstate
pipelines offered prior to FERC Order 636.4 In order to provide such value-added
services, many of the leading gas marketers have invested in production,
gathering, processing, and storage capacity at or near the principal gas
producing areas and hubs and market centers in the United States. Similarly, in
order to compete with both pipelines and local distribution companies for
industrial and electric utility sales, marketers must have the flexibility to
acquire or construct such supply facilities. In fact, most of the large
marketers with which AEP's non-utility subsidiaries compete own substantial
physical assets of the type described herein.
Exploration, development, production, gathering, processing, and storage
capacity would support Applicants' marketing activities by providing the
opportunity to hedge the prices of future supplies of oil and natural gas
against market fluctuations. Price volatility occurs due to fluctuations in
supply and demand over periods as short as one day or seasonally. Storage and
pipeline assets allow energy marketers to "bank" lower cost supplies for use
during periods of high volatility or take advantage of differential price
spreads between different markets. Energy marketers with strong and balanced
physical asset portfolios are able to originate tolling or reverse tolling of
gas and electric commodities. The integration of exploration, development,
production, gathering, and storage assets offers energy marketers the
opportunity to provide oil, gas and/or electric products and services to energy
users, at their discretion, depending on user requirements and needs. Finally,
the physical assets underlying an energy marketer's balance sheet may provide
substantial credit support for the financial transactions undertaken by the
marketer.
Consistent with the Previous Orders, it is the intention of Applicants to
add non-utility, marketing-related assets as and when market conditions warrant,
whether through acquisitions of specific assets or groups of assets that are
offered for sale, or by acquiring existing companies (for example, other gas
marketing companies which own significant physical assets in the areas of gas
production, processing, storage, and transportation). Ultimately, it is the
objective of Applicants to control a portfolio of Energy Assets or Energy Assets
Subs that would provide Applicants with the flexibility and capacity to compete
for sales in all major markets in the United States and, with the authorization
of this Commission, Canada.
With respect to investments and/or acquisitions in Canada, as in the
United States, such Energy Assets or Energy Assets Subs would be incidental to
and would assist Applicants and their subsidiaries (or any other energy
marketing or brokering subsidiary hereafter acquired by Applicants) in
connection with the Commodities Business in Canada. Approval of this portion of
the request would be consistent with (i) the Commission's precedent authorizing
the Commodity Business in Canada; (ii) the Commission's recognition of the
integration of the North American energy market and the competitive benefits of
allowing holding companies to transact the Commodity Business in Canada; and
(iii) recent trends in energy policy as reflected in legislative and
administrative action taken by the United States Congress and U.S. regulatory
authorities.5
C. Summary of Financing Proposals
As indicated, Applicants wish to have the flexibility to acquire Energy
Assets or Energy Assets Subs in cash transactions or in transactions in which
the seller may wish to receive common stock or other securities of Applicants or
may include the assumption of debt of the seller of such Energy Assets or Energy
Assets Subs, or any combination of the foregoing. A seller of Energy Assets or
Energy Assets Subs may, for example, wish to arrange a tax-free transaction in
which it receives common stock of AEP. From the Applicants' perspective, having
the flexibility to arrange a tax-free transaction may lower the seller's overall
sales price. Pursuant to the Previous Orders, AEP was authorized to issue
securities in order to finance the purchase of Energy Assets or Energy Assets
Subs by AEP, Resources, AEPES and any existing or new, direct or indirect
subsidiaries of either company (collectively, "Holding Subs"), in an aggregate
amount not to exceed $2.0 billion, such securities to consist of any combination
of (i) shares of common stock of AEP; (ii) borrowings by AEP from banks or other
financial institutions under credit lines or otherwise; (iii) guarantees of
indebtedness issued by any Holding Subs; or (iv) guarantees of securities issued
by any Finance Subsidiary. Accordingly, in order to provide the maximum
flexibility, AEP requests authorization to issue securities in the manner
described in an aggregate amount, when added to all other outstanding securities
issued to purchase Energy Assets or Energy Assets Subs under this File, would
not exceed the new Investment Limitation.
In turn, pursuant to the Previous Orders, the Holding Subs and any Finance
Subsidiary were authorized to issue debt, equity or preferred securities of any
type, including guarantees as appropriate, from time to time during the
Authorization Period to finance acquisitions of Energy Assets or Energy Assets
Subs. Applicants request that, to the extent not exempt under Rule 52 and/or
Rule 45(b), such financing authority continue through the Authorization Period
in an amount, when added to all other outstanding securities issued to purchase
Energy Assets or Energy Assets Subs under this File, would not exceed the new
Investment Limitation.
The following financing parameters are consistent with the Previous
Orders. The effective cost of money on long-term debt borrowings occurring
pursuant to the authorizations granted under this Application will not exceed
the greater of (i) 500 basis points over the comparable term U.S. Treasury
securities or (ii) a gross spread over U.S. Treasuries that is consistent with
similar securities of comparable credit quality and maturities issued by other
companies.6 The effective cost of money on short-term debt borrowings pursuant
to authorizations granted under this Application will not exceed the greater of
(i) 350 basis points over the comparable term London Interbank Offered Rate
("LIBOR") or (ii) a gross spread over LIBOR that is consistent with similar
securities of comparable credit quality and maturities issued by other
companies. The dividend rate on any series of preferred securities will not
exceed the greater of (a) 700 basis points over the yield to maturity of a U.S.
Treasury security having a remaining term equal to the term of such series of
preferred securities or (b) a rate that is consistent with similar securities of
comparable credit quality and maturities issued by other companies. The maturity
of unsecured indebtedness will not exceed 50 years. All preferred securities
will be redeemed no later than 50 years after the issuance thereof. The total of
(i) any financings for which approval is requested above and (ii) any financings
performed on an exempt basis under Rule 52 will not exceed the Investment
Limitation. Any debt security issued to AEP to evidence loans by AEP will comply
with the requirements of Rule 52(b)(2).
AEP commits that its common equity (as reflected on the balance sheets
contained in its most recent 10-K or 10-Q filed with the Commission pursuant to
the 1934 Act) will be maintained at no less than 30% of its consolidated
capitalization. Applicants further represent that, apart from the securities
issued for the purpose of funding money pool operations, no guarantees or other
securities, other than common stock, may be issued in reliance upon this file,
unless: (i) the security to be issued, if rated, is rated investment grade; (ii)
all outstanding securities of the issuer, that are rated, are rated investment
grade; and (iii) all outstanding securities of all the registered holding
companies that are rated, are rated investment grade. For purposes of this
condition, a security will be deemed to be rated investment grade if it is rated
investment grade by at least one nationally recognized statistical rating
organization, as that term is used in paragraphs(c)(2)(vi)(E), (F) and (H) of
Rule 15c3-1 under the 1934 Act.
AEP and the Holding Subs request authority to guarantee financial
commitments, other than indebtedness, of any entity owning or operating Energy
Assets entered into during the Authorization Period in connection with owning or
operating Energy Assets, e.g., guaranteeing the completion of a construction
contract, in an aggregate principal amount not to exceed the Investment
Limitation outstanding at any one time, exclusive of any guarantees and other
forms of credit support that are exempt pursuant to Rule 45(b) and Rule 52(b)
(collectively, "Performance Guarantees"). Each guarantor proposes to charge each
subsidiary a fee for each Performance Guarantee provided on its behalf that
would not exceed the guarantor's cost of obtaining the liquidity necessary to
perform the Performance Guarantee for the period of time the Performance
Guarantee remains outstanding and the credit risk assumed by the guarantor.
Certain of the Performance Guarantees may be in support of obligations of
subsidiaries which are not capable of exact quantification. In such cases,
Applicants will determine the exposure under such Performance Guarantee for
purposes of measuring compliance with the Investment Limitation by appropriate
means including estimation of exposure based on loss experience or projected
potential payment amounts. Such estimates will be reevaluated periodically and
will be made in accordance with generally accepted accounting principles.
Applicants represent that no Performance Guarantee issued pursuant to the
authority set forth herein will be secured by any Utility Assets as such term is
defined under the 1935 Act.
Dividends Out of Capital.
Rule 46 under the 1935 Act prohibits subsidiaries of registered holding
companies, including the Holding Subs and the Energy Assets Subs, from declaring
or paying dividends out of capital or unearned surplus. It is requested that the
Holding Subs and the Energy Assets Subs be authorized to declare and pay
dividends to their parent companies from time to time out of capital or unearned
surplus to the extent permitted by applicable law.7 Resources and AEPES may then
pay dividends to AEP to the extent that the dividend is based upon a (i)
corresponding dividend paid to them out of capital or unearned surplus by a
Holding Sub or Energy Assets Sub that is a direct subsidiary of Resources or
AEPES, as the case may be, or (ii) Resources' or AEPES' direct or indirect
ownership of an Energy Assets Sub.
It is expected that situations will arise where the Holding Subs and/or
Energy Assets Subs will have unrestricted cash available for distribution in
excess of current and retained earnings, if any. Consequently, in these
situations the declaration and payment of a dividend would have to be charged,
in whole or in part, to capital or unearned surplus.
One such situation could result if a Holding Sub or Energy Assets Sub were
to sell a portion or all of its assets or equity in a subsidiary to a third
party for cash. It then would have substantial unrestricted cash available for
upstream distribution, but (assuming no profit on the sale) would not have
available current earnings and therefore could not, without prior Commission
approval, declare and pay a dividend to the Applicants out of such cash
proceeds. Applicants request the Commission to reserve jurisdiction over its
request to pay dividends from capital or unearned surplus in situations other
than described in this paragraph.
Any dividend actually declared and paid by a Holding Sub or Energy Assets
Sub out of capital or unearned surplus pursuant to the authority requested
herein will conform to applicable law of the respective company's jurisdiction
of organization and applicable covenant restrictions in loan or other financing
agreements.
The ability of the Holding Subs and Energy Assets Subs to use
distributable cash to pay dividends ultimately to Resources or AEPES will
benefit the AEP System by enabling Resources and AEPES to dividend the cash to
AEP or to apply such amounts to the reduction or refinancing of outstanding bank
borrowings and to fund operations of other AEP subsidiaries. In addition, since
Energy Assets Subs will be engaged in activities described in this Application,
the payment of dividends out of capital or unearned surplus by them or the
Holding Subs will not adversely affect the financial integrity of the AEP System
or jeopardize the working capital of AEP's Utility Subsidiaries within the
contemplation of Section 12(c) of the 1935 Act. Similar authority was granted by
the Commission in Entergy Corporation, HCAR No. 27039 (June 22, 1999), GPU
International, Inc., HCAR No. 27023 (May 14, 1999) and Cinergy Corp., HCAR No.
26984 (March 1, 1999).
D. Other Matters
In addition to the Rule 24 reports described herein on page 5, Applicants
propose to report on a quarterly basis the amount of Energy Assets or Energy
Assets Subs purchased or constructed in the preceding period and a brief
description thereof. It is also proposed that the amount, type, and, if a debt
security, the maturity and interest rate, of securities issued by AEP, any
Holding Sub or Financing Subsidiary in connection with the acquisition of Energy
Assets or Energy Assets Subs be made a part of such quarterly report filed
pursuant to Rule 24, and that such reporting also be in lieu of any separate
report on Form U-6B-2 for those financings that are performed on an exempt basis
under Rule 52.
E. Applicable Rules
Rules 45, 46 and 52 apply to this request.
F. Compliance with Rule 54
Rule 54 provides that, in determining whether to approve the issue or sale
of any securities for purposes other than the acquisition of any "exempt
wholesale generator" ("EWG") or "foreign utility company" ("FUCO") or other
transactions unrelated to EWGs or FUCOs, the Commission shall not consider the
effect of the capitalization or earnings of subsidiaries of a registered holding
company that are EWGs or FUCOs if the requirements of Rule 53(a), (b) and (c)
are satisfied. Under Rule 53(a), the Commission shall not make certain specified
findings under Sections 7 and 12 in connection with a proposal by a holding
company to issue securities for the purpose of acquiring the securities of or
other interest in an EWG, or to guarantee the securities of an EWG, if each of
the conditions in paragraphs (a)(1) through (a)(4) thereof are met, provided
that none of the conditions specified in paragraphs (b)(1) through (b)(3) of
Rule 53 exists. Set forth below is a discussion of the compliance with Rule 53
for AEP.
AEP consummated the merger with Central and South West Corporation, now
AEP Utilities, Inc. ("CSW"), on June 15, 2000 pursuant to an order dated June
14, 2000 (HCAR No. 35-27186), which further authorized AEP to invest up to 100%
of its consolidated retained earnings in EWGs and FUCOs, with consolidated
retained earnings to be calculated on the basis of the combined consolidated
retained earnings of AEP and CSW (the "Rule 53(c) Order").
AEP currently meets all of the conditions of Rule 53(a), except for clause
(1). At December 31, 2003, AEP's "aggregate investment", as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $1.723 billion, or about 82.1% of
AEP's "consolidated retained earnings", also as defined in Rule 53(a)(1), for
the four quarters ended December 31, 2003 ($2.099 billion). With respect to Rule
53(a)(1), however, the Commission has determined that AEP's financing of
investments in EWGs and FUCOs in an amount greater than the amount that would
otherwise be allowed by Rule 53(a)(1) would not have either of the adverse
effects set forth in Rule 53(c). See the Rule 53(c) Order.
AEP has complied and will continue to comply with the record-keeping
requirements of Rule 53(a)(2), the limitation under Rule 53(a)(3) on the use of
operating company personnel to render services to EWGs and FUCOs, and the
requirements of Rule 53(a)(4) concerning the submission of copies of certain
filings under the 1935 Act to retail rate regulatory commissions. Further, none
of the circumstances described in Rule 53(b)(1) or (3) has occurred or is
continuing.
The circumstances described in Rule 53(b)(2) have occurred. As a result of
the recording of a loss with respect to impairment charges within the last year,
AEP's consolidated retained earnings declined. The average consolidated retained
earnings of AEP for the four quarterly periods ended December 31, 2003 was
$2.099 billion, or a decrease of approximately 24.6% from the Company's average
consolidated retained earnings for the four quarterly periods ended December 31,
2002 of $2.782 billion. AEP's "aggregate investment" in EWGs and FUCOs as of
December 31, 2003 exceeded 2% of the total capital invested in utility
operations.
In the fourth quarter of 2003 AEP recorded pre-tax impairments of assets
(including goodwill) and investments totaling $1.4 billion that reflected
downturns in energy trading markets, projected long-term decreases in
electricity prices, and other factors. The impairments consisted of $650 million
related to asset impairments, $70 million related to investment value and other
impairment losses, and $711 million related to discontinued operations. Of the
discontinued operations, $577 million was attributable to the impairment of the
fixed-asset carrying value of AEP's two coal-fired generation plants in the
United Kingdom ("U.K. Generation"). AEP recorded a pre-tax impairment of $70
million on certain of its independent power projects ("IPPs") in the third
quarter of 2003.
AEP transferred its equity investments in Vale and Caiua to a co-owner in
October 2003, has selected an advisor for the disposition of the UK Generation
and has entered into agreements to sell (i) AEP's domestic coal business; (ii)
four domestic IPPs; and (iii) certain gas pipelines, and continues to have
periodic discussions with various parties on business alternatives for certain
of its non-core investments. The ultimate timing for a disposition of one or
more of these assets will depend upon market conditions and the value of any
buyer's proposal.
Applicant respectfully submits that AEP meets the requirements of Rule
53(c). If the effect of the capitalization and earnings of EWGs and FUCOs in
which AEP has an ownership interest upon the AEP holding company system were
considered, there would be no basis for the Commission to withhold or deny
approval for the proposal made in this Application-Declaration. The action
requested in the instant filing would not, by itself, or even considered in
conjunction with the effect of the capitalization and earnings of AEP's EWGs and
FUCOs, have a material adverse effect on the financial integrity of the AEP
system, or an adverse impact on AEP's public-utility subsidiaries8, their
customers, or the ability of state commissions to protect such public-utility
customers. The Rule 53(c) Order was predicated, in part, upon an assessment of
AEP's overall financial condition which took into account, among other factors,
AEP's consolidated capitalization ratio and the growth trend in AEP's retained
earnings.
As of December 31, 1999, the most recent period for which financial
statement information was evaluated in the Rule 53(c) Order, AEP's consolidated
capitalization (including CSW on a pro forma basis) consisted of 37.3% common
and preferred equity, 61.3% debt and $335 million principal amount of certain
subsidiary obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures of such subsidiaries
("Trust Preferred Securities") representing 1.4%.
As of December 31, 2003, AEP's consolidated capitalization consisted of
64.3% debt and 35.7% common and preferred equity (consisting of common stock
representing 35.1%, and $137 million principal amount of preferred stock
representing 0.6%).
The ratio of common equity to total capitalization, net of securitization
debt, of each of the AEP Utility Subsidiaries will continue to be maintained at
not less than 30%. In addition, each of the AEP Utility Subsidiaries is subject
to regulation by one or more state commissions that are able to protect utility
customers within their respective states.
Since the date of the Rule 53(c) Order, there has been a decrease in AEP's
consolidated equity capitalization ratio but it remains within acceptable ranges
and limits of rating agencies for strong investment grade corporate credit
ratings. In addition, the AEP Utility Subsidiaries, which will have a
significant influence on the determination of the AEP corporate rating, continue
to show strong financial statistics as measured by the rating agencies.
As of December 31, 1999, Standard and Poor's ("S&P") rating of secured
debt for the AEP Utility Subsidiaries was as follows: Appalachian Power Company
("APCo"), A; Columbus Southern Power Company ("CSPCo"), A-; Indiana Michigan
Power Company ("I&M"), A-; Kentucky Power Company ("KPCo"), A; Ohio Power
Company ("OPCo"), A-; AEP Texas Central Company ("TCC"), A; Public Service
Company of Oklahoma ("PSO"), AA-; Southwestern Electric Power Company
("SWEPCo"), AA-; and AEP Texas North Company ("TNC"), A. Ohio Valley Electric
Company has no debt rating. AEP did not have a long-term debt rating as of
December 31, 1999.
As of December 31, 2003, S&P's rating of unsecured debt for AEP was BBB,
and of secured debt for the AEP Utility Subsidiaries was as follows: APCo, BBB;
CSPCo, BBB; I&M, BBB; KPCo, BBB; OPCo, BBB; TCC, BBB; PSO, BBB; SWEPCo, BBB; and
TNC, BBB.
2. Consolidated balance sheet and statements of income and cash flows of
AEP at December 31, 2003 are incorporated herein by reference to AEP's Form 10-K
for the period ended December 31, 2003, File No. 1-3525.)
SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act of
1935, the undersigned companies have duly caused this statement to be signed on
their behalf by the undersigned thereunto duly authorized.
AMERICAN ELECTRIC POWER COMPANY, INC.
AEP ENERGY SERVICES, INC.
AEP RESOURCES, INC.
By__/s/ Thomas G. Berkemeyer____
Assistant Secretary
Dated: April 30, 2004
__________
1 The requested authority is consistent with Commission precedent. See
Alliant Energy Corporation, HCAR No. 27344 (Feb. 12, 2001) (authorizing
investment in gas and oil exploration, production, gathering, processing,
storage and transportation and facilities and related facilities in the U.S. and
Canada); see also Emera Incorporated, HCAR No. 27445 (Oct. 1, 2001).
2 Companies whose physical properties consist of Energy Assets may also be
currently engaged in energy (gas or electric or both) marketing or trading
activities. To the extent necessary, Applicants request authorization to
continue such activities in the event they acquire such companies.
3 Currently, an Energy Assets Sub is nearing completion of the construction of a
900 megawatt gas-fired generation facility near Plaquemine, Louisiana which is
and will continue to be leased to the Energy Assets Sub. The facility is
accounted for as an owned asset under a lease financing transaction and was
included as indebtedness on the consolidated balance sheets of AEP as of
December 31, 2003, as required by accounting principles generally accepted in
the U.S. It is anticipated that AEP will guarantee the obligations of the Energy
Assets Sub under the lease, i.e., approximately $550 million.
4 See FERC Order 636, "Pipeline Service Obligations and Revisions to Regulations
Governing Self-Implementing Transportation; and Regulation of Natural Gas
Pipelines After Partial Wellhead Decontrol," 57 Fed. Reg. 13270 (April 16,
1992).
5 See the Commission's analysis in HCAR No. 27062 (August 19, 1999) for a
thorough discussion of the integration of North American energy markets.
6 See The Southern Company, HCAR No. 27134 (Feb. 9, 2000).
7 This authorization will not apply if any company becomes a 'public utility' as
defined in the 1935 Act. 8 APCo, CSPCo, I&M, Kentucky Power Company ("KPCo"),
OPCo, TCC, Public Service Company of Oklahoma ("PSO"), Southwestern Electric
Power Company ("SWEPCo"), and AEP Texas North Company (formerly West Texas
Utilities Company) ("TNC", and collectively with APCo, CSPCo, KPCo, OPCo, TCC,
PSO and SWEPCo, the "Utility Subsidiaries").