SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amended
APPLICATION OR DECLARATION
on
AMENDMENT NO. 1 TO FORM U-1
under
The Public Utility Holding Company Act of 1935
(Name of company or companies filing this statement
and addresses of principal executive offices)
THE SOUTHERN COMPANY
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
MOBILE ENERGY SERVICES COMPANY, L.L.C. MOBILE ENERGY SERVICES HOLDINGS, INC.
1155 Perimeter Center West 1155 Perimeter Center West
Atlanta, Georgia 30338 Atlanta, Georgia 30338
(Name of top registered holding company parent of
each applicant or declarant)
The Southern Company
Tommy Chisholm, Secretary
270 Peachtree Street, N.W.
Atlanta, Georgia 30303
(Names and addresses of agents for service)
The Commission is requested to mail signed copies of all orders,
notices and communications to:
W.L. Westbrook Marce Fuller, President
Financial Vice President Mirant Corporation
The Southern Company 1155 Perimeter Center West
270 Peachtree Street, N.W. Atlanta, Georgia 30338
Atlanta, Georgia 30303
John D. McLanahan Mark F. Sundback
Robert P. Edwards, Jr. Andrews & Kurth L.L.P.
Troutman Sanders LLP 1701 Pennsylvania Avenue, N.W.,
600 Peachtree Street, N.E., Suite 5200 Suite 300
Atlanta, Georgia 30308-2216 Washington, D.C. 20006
(35 pages)
Item 1.
Mobile Energy Services Company, L.L.C. ("Mobile Energy"), Mobile Energy
Service Holdings, Inc. ("Holdings"), both of 1155 Perimeter Center West,
Atlanta, Georgia 30338 (collectively "Debtors"), and The Southern Company
("Southern"), 270 Peachtree Street, N.W., Atlanta, Georgia 30303, a holding
company registered pursuant to the Public Utility Holding Company Act of 1935,
as amended (the "Act") (the three of which are the "Applicants") file this
amended and restated application and declaration dated April 11, 2001 (the
"Amended Application") in order for Applicants to obtain that authorization
necessary under the Act to perform those acts and consummate such transactions
contemplated as part of the solicitation and approval process and implementation
of a proposed Second Amended Joint Plan of Reorganization ("Second Plan") filed
by the Debtors in their Chapter 11 bankruptcy cases. Specific provisions of the
Act and facts involving the Applicants are discussed in Item 3, Part B., infra.
The Second Plan will be subject to comment by interested parties, including
creditors, in the course of review by the United States Bankruptcy Court for the
Southern District of Alabama (the "Bankruptcy Court"). The Second Plan and the
First Amended Disclosure Statement accompanying the Second Plan filed with the
Bankruptcy Court (the "First Amended Disclosure Statement"), are attached as
Exhibits hereto. The Second Plan supercedes the First Amended Joint Plan of
Reorganization dated September 15, 2000 ("First Plan") although it contains
numerous similarities.
As was the case for the initial U-1 application and declaration filed
by the Applicants on October 16, 2000 (the "Application"), the purposes of the
transactions described herein are to (1) permit Mobile Energy and Holdings to
reorganize and emerge from bankruptcy; (2) maximize the recovery of Mobile
Energy's bondholders on their capital investment; (3) eliminate the direct and
indirect equity ownership of Southern in Mobile Energy and Holdings; and (4)
allow Mobile Energy to operate a qualifying facility under the Public Utility
Regulatory Policies Act of 1978 ("PURPA") after the effective date of the Second
Plan, which will cause Mobile Energy and Holdings to no longer be subject to the
Act.
The Second Plan has been precipitated by a number of circumstances. The
contemplated reactivation of pulp mill operations by Jubilee Pulp Inc. (the "New
Pulp Mill"), part of the First Plan, has not materialized. The settlement
agreement with Kimberly Clark Corporation (the "KC Settlement"), another part of
the First Plan, has been rendered void ab initio because of the failure of
certain conditions precedent. Additionally, natural gas prices are at extremely
high levels relative to previous forecasts, making it more difficult to proceed
with a planned cogeneration project ("the Cogen Project") than previously
2
contemplated. Therefore, the Second Plan builds upon many of the features
incorporated in the First Plan, while not relying upon the presence of the New
Pulp Mill, the KC Settlement, or the economics of the Cogen Project.
The Second Plan is supported by the Bondholder Steering Committee which
represents more than 70% of the current outstanding bondholders of the Debtors.
The Bondholder Steering Committee includes First Union as the indenture trustees
for each of the two bond issuances as an ex officio member. The indenture
trustees represent all of the bondholders.
Upon implementation of the Second Plan (as was true under the First
Plan), the ownership interests of Southern and its affiliates in the Debtors
will terminate. The effect of Southern's disaffiliation with the Debtors is
beneficial to Southern because Southern has written off its investment in the
Debtors and it removes a drain on Southern's management's time and attention.
Southern and its affiliates will have substantially reduced obligations going
forward with respect to Mobile Energy and Holdings.
Mirant Services L.L.C ("Mirant Services"), previously known as Southern
Energy Resources, Inc. ("Southern Energy Resources"), operated Mobile Energy's
facilities through March 31, 2001. Southern guaranteed certain of Mobile
Energy's obligations to its existing customers in 1995, and such guarantees will
remain in place but Mobile Energy and/or Mirant Corporation ("Mirant") will
indemnify Southern against any liability under those guarantees.
As was the case in the First Plan, Mirant,, previously known as
Southern Energy, Inc. ("SEI"), will assign certain contract rights and
obligations to Mobile Energy related to a combustion turbine ("CT") being
manufactured for it by General Electric Company ("GE"), and under a long term
services agreement related to that turbine with General Electric International
Inc. ("GEII"), provided that Mobile Energy makes certain payments to Mirant at
scheduled project milestones. Mirant will remain liable if Mobile Energy does
not meet those obligations.
Petitioners request authorization necessary for solicitation1 regarding
the Second Plan pursuant to Sections 11(g) and 11(f) of the Act, and
authorization necessary under Section 12(e) to solicit consents and approvals
necessary from the holders of securities of Mobile Energy and Holdings, along
with such other ancillary and related authorizations as are necessary to
implement the Second Plan, as more fully described below in Item 3. Implementing
the Second Plan will not have a negative or positive material impact on the
balance sheet of any entity in the Southern Company system as of the effective
date of the Second Plan.
_________________________
1 The materials that will be forwarded in conjunction with the solicitation
include the Second Plan, the First Amended Disclosure Statement, and exhibits
and appendices thereto, and the ballots and notice of confirmation hearing all
of which are part of the instant filing.
3
A. Overview
1. Timing of the Transactions Under the Second Plan Is
Critical
Successful implementation of the Second Plan depends on the
various transactions that are part of the Second Plan. Mobile Energy and
Holdings cannot continue to operate as Chapter 11 Debtors indefinitely. Their
resources are limited. Expeditious review would be consistent with the sound
policy goals of reducing the period of uncertainty and maximizing recovery for
the creditors. Approval of this Amended Application by May 31, 2001 will provide
the participants with an opportunity to accomplish the foregoing goals within
these constraints. Without the Second Plan, bondholders will not enjoy the level
of recoveries reflected in the Second Plan. Based upon an analysis contained in
the First Amended Disclosure Statement (see pp. 112-14 thereof), proponents of
the Second Plan believe that Creditors will receive as much or more under the
Second Plan than they would have received in Chapter 7 liquidation of the
Debtors.
2. Background And History
a. Identification of Entities
Southern is a public utility holding company registered under the Act
which holds the securities, directly or indirectly, of seven public utility
companies. It also holds, directly or indirectly, the securities of
energy-related companies, Exempt Telecommunications Companies, Exempt Wholesale
Generators and Foreign Utility Companies and authorized intermediate and special
purpose subsidiaries. The integrated Southern electric system provides electric
power in the majority of the states of Alabama and Georgia and portions of
Florida and Mississippi, operating centrally dispatched electric power
generation transmission and distribution assets. As of December 31, 2000,
Southern's consolidated capitalization (excluding current portions) was
approximated $21 billion, comprised of 50.6% common stock equity, 12.3%
preferred stock and preferred securities, and 37.1% debt. Including current
portions, as of December 31, 2000, Southern's consolidated capitalization was
$29.9 billion, comprised of 46.7% common stock equity; 11.4% preferred stock and
preferred securities; and 41.9% debt.2
b. History
i. Through The Creation of Mobile Energy
The facilities at issue are located inside a large pulp, paper and
tissue manufacturing complex in Mobile, Alabama (the "Industrial Complex"). Some
___________________________
2 The foregoing capital structure does not reflect the incurrence of potential
liability pursuant to various guarantees and contingent obligations described in
Item 3.B.2, since the scope and potential exposure ultimately incurred (if any)
is at present unknown (and may never materialize).
4
of the facilities now owned by Mobile Energy were originally constructed by the
Scott Paper Company in the early 1960s; additional generation capacity was added
in the mid-1980s; and a new recovery boiler was added in 1994. Some of the
facilities (e.g., recovery boiler capacity) were financed with Industrial
Revenue Bonds ("IRB") issued by the Industrial Development Board ("IDB") of the
City of Mobile, Alabama, and leased to Scott Paper. In 1985, the Federal Energy
Regulatory Commission determined that then-existing facilities constituted a
qualifying cogeneration facility under PURPA.3
In 1993, Scott announced that it was interested in redeploying the
significant capital invested in the energy infrastructure of its enormous mill
operations in the Industrial Complex. To achieve that goal, Scott offered to
sell the energy facilities, black liquor recovery equipment, and related assets,
permits, and agreements (the "Energy Complex"). Negotiations resulted in a
proposal to sell all right, title and interest of Scott in the Energy Complex to
Holdings. On December 13, 1994, the Commission authorized Southern to organize
Holdings as a new subsidiary and acquire all of its common stock. That new
entity would then enter into an asset purchase agreement with Scott for the
Energy Complex. Upon the acquisition of the Energy Complex, the new entity
became an "electric utility company" within the meaning of Section 2(a)(3) of
the Act.4 Holdings entered into three separate 25 year energy services
agreements with the owners of each of the pulp, paper and tissue mills within
the Industrial Complex, pursuant to which Holdings would provide power and steam
processing services to each of those mills and liquor processing services to the
pulp mill (the "Energy Services Agreements"). The December 13, 1994 Commission
order also recognized that under the terms of the acquisition documents,
Holdings and Scott agreed to indemnify each other with respect to environmental
claims relating to the Energy Complex and each of the three mills to the extent
such claims arose after closing of Holdings' acquisition of the Energy Complex.
Southern proposed to guarantee uninsured claims against the new entity under the
terms of the environmental indemnity agreements in an aggregate amount not to
exceed $15 million, as escalated by a measure of inflation.5
On July 13, 1995, the Commission issued further authorizations relevant
to Mobile Energy and Holdings. Particularly, the Commission authorized Southern
and Holdings to organize Mobile Energy as a limited liability company subsidiary
of Holdings. The Commission also authorized Holdings to transfer ownership of
the Energy Complex and related assets to Mobile Energy, which would assume all
liabilities and obligations of Holdings relating to the Energy Complex.6 The
Commission also authorized issuance by Mobile Energy of First Mortgage Bonds in
_______________________________
3 Scott Paper Co., 32 FERC (CCH)P. 62,175 (1985).
4 SEC Release No. 35-26185 (Dec. 13, 1994).
5 Id.
6 SEC Release No. 35-26330.
5
one or more series on or before December 31, 1995 with final maturities of from
10 to 22 years from financial closing and a weighted average life from 12 to 15
years. The Commission's July 13, 1995 Order also discussed the tax-exempt bonds
and other sources of capital.7
Mobile Energy was formed as a limited liability company in the State of
Alabama on July 13, 1995. Mobile Energy acquired ownership from Holdings of the
Energy Complex on July 14, 1995.
ii. Ownership Structure Upon The Creation of Mobile Energy
At the time of Mobile Energy's formation, Mirant Services' predecessor
Southern Energy Resources became the holder of 1% of the equity interests in
Mobile Energy, which 1% interest has now been transferred to Holdings. Mobile
Energy owns and operates the Energy Complex. Mobile Energy provides power and
steam processing services to the mills located in the Industrial Complex and
processed certain chemicals that were the byproduct of the pulp mill, until the
pulp mill ceased producing pulp in September 1999. Prior to the replacement of
Mirant Services as operator as detailed below, Mobile Energy's facilities were
to be operated by Mirant Services pursuant to the Facility Operations and
Maintenance Agreement between Mobile Energy and Mirant Services' predecessor
Southern Energy Resources dated as of December 12, 1994 (the "Mobile Energy
Operating Agreement"). As stated above, the Mobile Energy Operating Agreement
terminated on March 31, 2001.
iii. Events Precipitating The Bankruptcy Filings
The mill facilities in the Industrial Complex were vast, covering more
than 700 acres, representing Scott's second largest production facility in the
world measured by tonnage. As noted above, the Energy Complex was constructed
specifically to serve the Scott mill operations. Scott in late 1995 was merged
into a subsidiary of Kimberly Clark Corporation, and the resulting entity was
renamed Kimberly Clark Tissue Company ("KCTC"). As a consequence of the merger,
KCTC became Mobile Energy's largest customer, representing approximately 75% of
Mobile Energy's revenues in 1998. Of that amount, KCTC's pulp mill accounted for
approximately 50% of Mobile Energy's revenues. The pulp mill also provided 85%
of the fuel used by the Energy Complex in the form of biomass and black liquor.
However, in 1998 KCTC notified Mobile Energy that KCTC would close its pulp mill
and terminate its contract to purchase energy services from Mobile Energy for
the pulp mill effective September 1, 1999.
In sum, closure of the pulp mill meant that the Debtors' revenues would
be significantly reduced while unit costs of electricity produced in the Energy
________________________
7 Id.
6
Complex would be increased. Obviously, the pulp mill closure meant that Mobile
Energy's largest purchaser would cease buying energy services and Mobile Energy
would lose the related revenue. Further, closure of the Pulp Mill also altered
the demand for steam relative to the demand imposed on the Energy Complex for
electricity, with the result that Mobile Energy's cost of electric power
generation was increased. Closure of the KCTC pulp mill meant that the
by-products of pulping operations which had served as a plentiful and
inexpensive source of fuel for the Energy Complex (i.e., biomass and black
liquor) would no longer be available.
On December 7, 1998, KCTC served on Mobile Energy a Notice of
Arbitration (the "Arbitration") concerning matters related to KCTC's announced
intention to cease pulping operations at the Pulp Mill and to institute a "Pulp
Mill Closure," within the meaning of the Master Operating Agreement, which
Debtors disputed. In response, on December 15, 1998, the Debtors brought an
action in Alabama State court to enjoin the Arbitration. After a hearing on
January 8, 1999, a temporary restraining order against the Arbitration was
issued to stop it from going forward until January 15, 1999.
iv. The Bankruptcy and Its Aftermath
These consequences from the anticipated loss of the KCTC pulp mill
contract and operations triggered the filing by Mobile Energy and Holdings of
cases under Chapter 11 of the United States Bankruptcy Code on January 14, 1999.
Both entities filed as debtors in possession continuing their operations; as a
result, no trustee or receiver has been appointed by the Bankruptcy Court. With
the filing of the Chapter 11 cases, the Arbitration and the Debtors' December
15, 1998 action to enjoin the Arbitration were automatically stayed. On the
Petition Date, the Debtors commenced an adversary proceeding against KCTC in the
Bankruptcy Court seeking money damages and/or rescission of Mobile Energy's
contracts with KCTC.
The Bankruptcy Court ultimately ordered that the issue of whether KCTC
had effected a "Pulp Mill Closure" (as defined in the Master Operating
Agreement) under the contracts between KCTC and Mobile Energy be arbitrated, and
a hearing was held before the arbitrator in July 1999. In August 1999, the
parties requested the arbitrator to postpone the announcement of a decision
pending the outcome of settlement discussions between Mobile Energy and KCTC.
Those negotiations led to the KCTC Settlement Agreement and in the filing with
the Bankruptcy Court of the Motion to Compromise Controversy Involving KCTC on
December 31, 1999, described in Item 1, Part A. 3.a., below.
Building upon the progress represented by the KCTC Settlement
Agreement, the participants, including the Debtors, the Bondholder Steering
Committee, KCTC and Mirant Corp., formerly known as Southern Energy, Inc.,
7
subsequently negotiated the First Plan. The First Plan contemplated resumption,
on a reduced scale, of pulp mill operations under different ownership (thereby
increasing revenues Debtors would have received and providing an important
source of fuel for Mobile Energy's facilities), a more efficient use of
resources (e.g., a recovery boiler) within the Energy Complex (enhancing the
cash stream accessible by Debtors), the possible expansion of electric
generating capacity through the Cogen Project, involving the purchase of a
combustion turbine and development of a 165 megawatt facility (requiring
additional investment but also offering the potential of significantly increased
cash flows), and a revised agreement to provide energy services to the tissue
mill within the Industrial Complex.
Under the First Plan and as part of the KCTC Settlement, MESC would
have been paid approximately $30 million by KCTC, would have received real
property and easements necessary to effectuate the First Plan, while MESC would
have provided KCTC with a warehouse, the No. 6 Power Boiler and a security
interest in certain wires. Additionally, a "New Tissue Mill ESA" between MESC
and KCTC was premised on the KCTC Settlement, which would have superseded the
prior Tissue Mill ESA.
Further, the First Plan contemplated expansion of electric generation
within the Industrial Complex, pursuant to the Cogeneration Development
Agreement, as amended by CDAA No.1, as described more fully in Item 1, Part B,
infra.
Additionally, the First Plan incorporated the development and operation
of a new 800 short ton per day pulp mill to be developed with the Industrial
Complex. Jubilee Pulp and MESC entered into a term sheet concerning such a pulp
mill, and obtained an option from KCTC to acquire certain property necessary to
construct and operate such a pulp mill. Ultimately, development of the pulp mill
did not occur.
v. Procedural Developments Contemporaneous With Or
Subsequent to the Filing of the Initial U-1
The First Plan and Disclosure Statement Accompanying the First Amended
Joint Plan of Reorganization (`the Disclosure Statement") were filed by the
Debtors and the Bondholder Steering Committee on September 15, 2000. A hearing
on the Disclosure Statement was originally set for October 19, 2000. On October
12, 2000, S.D. Warren filed an objection (the "Objection") to the Disclosure
Statement.
Thereafter, the Debtors, the Bondholder Steering Committee and S.D.
Warren engaged in discussions regarding the possible resolution of the
Objection. In order to allow these discussions to proceed, the Debtors requested
on several occasions that the Court continue the hearing on the Disclosure
Statement. However, after negotiations taking place across several weeks, it
became clear that Debtor, the Bondholder Steering Committee and S.D. Warren
could not find common ground. As a result, on February 21, 2001, the Second Plan
and the First Amended Disclosure Statement were filed with the Bankruptcy Court.
8
In the interim, on February 7, 2001, the Debtors filed a motion with
the Bankruptcy Court seeking approval of Operational Energy Corp ("OEC") as
interim operator of the Energy Complex, both in an effort to pursue reduced O&M
costs and consistent with contractual obligations with Mirant, as described
below. The motion to approve OEC as operator was approved by the Bankruptcy
Court on March 16, 2001.
S.D. Warren has appealed, inter alia, the order approving the
Cogeneration Development Agreement. S.D. Warren has also reserved its rights to
dispute Mobile Energy's ability to replace the operator of the Energy Complex
with OEC, although S.D. Warren did not oppose the relief requested in the motion
heard on March 16, 2001. Also, S.D. Warren contends that it has overpaid Mobile
Energy approximately $2.1 million in Demand Charges (as that term is defined in
the underlying agreement) under its contract with the Debtors between March,
2000 through January, 2001. S.D. Warren further contends that it has been
improperly charged fuel cost increases by Mobile Energy subsequent to the
closing of the pulp mill.
Because conditions precedent to the full implementation of the KC
Settlement were not realized, and therefore the KC Settlement is by its terms
void ab initio, the arbitration (described in Item I.A.2.b.iv, second paragraph)
between Mobile Energy and Kimberly Clark Corporation ("KC")8 that had been
suspended in the wake of negotiations has been resumed. The arbitrator's ruling
was unsealed on March 16, 2001. The arbitrator found that there was a Pulp Mill
Closure on September 1, 1999 and that KC had taken actions on site that give the
right for Mobile Energy to reinstate the pulp mill Energy Services Agreement as
of September 1, 1999. Mobile Energy has given notice to KC that the pulp mill
Energy Services Agreement was reinstated as of September 1, 1999. The adversary
proceeding against KC instituted by Debtors (described in Item I.A.b.iii) will
also be reactivated. Further, on January 12, 2001, Mobile Energy filed an
adversary proceeding in the Bankruptcy Court against KC seeking to avoid
approximately $1.7 million in prepetition transfers made to KC by Mobile Energy.
Mobile Energy contends that the transfers are avoidable as preferences under
Section 547 of the Bankruptcy Code. A trial date of May 22, 2001 has been set.
On December 29, 2000, Mirant Services transferred its 1% equity
interest in Mobile Energy to Holdings. This transfer was required under
Amendment No. 1 to the Cogeneration Development Agreement ("CDAA No. 1") and has
the effect of simplifying the Debtors' corporate structure. Holdings now owns
100% of the equity interest in Mobile Energy. The equity ownership of Holdings
was unaffected by the transfer.
__________________________
8 KC is the successor to Kimberly Clark Tissue Company by assignment. All assets
and liabilities of KCTC were assigned to KC on or about December 31, 2000. KCTC
then was dissolved.
9
The Debtors filed this Application on October 16, 2000. Comments and
interventions were due November 10, 2000. No comments or interventions were
filed.
3. Key Elements of the Second Plan
The supporters of the Second Plan believe that the transactions
proposed therein will provide the best chance to maximize recoveries to
creditors and continue operations at the Energy Complex under the very difficult
circumstances that existed after the pulp mill was shut down and which continue
to this day. To better understand how the elements of the Plan function
together, it is helpful to have a general overview of important components of
the Energy Complex within the Industrial Complex. The Energy Complex currently
is comprised of four power boilers, one recovery boiler, four turbine
generators, two black liquor evaporator sets, various related waste treatment
facilities, fuel and "liquor" storage, station control facilities and associated
feedwater systems, air emissions controls, and other auxiliary systems. The
combined facilities of the Energy Complex are currently designed to produce
approximately 140 megawatts (gross) of electricity and approximately 2,200,000
lbs/hr of steam. In addition, the Energy Complex currently is designed to
process approximately 2,750,000 lbs/day of virgin black liquor solids, although
the Energy Complex has not processed any black liquor since the KCTC pulp mill
ceased operations. During 1998, the Energy Complex provided 100% of the steam
processing needs, and 98% of the aggregate power processing needs, of the mills,
and 100% of the black liquor processing needs of the KCTC pulp mill.
The Industrial Complex is comprised of the Energy Complex, KCTC's
tissue mill, the KCTC pulp mill (which is no longer producing pulp), and the
paper mill, owned by S.D. Warren Company Alabama, L.L.C. Prior to KCTC's
shutdown of its pulping operations at its pulp mill, the Industrial Complex
operated as a physically integrated complex that produced tissue and paper
products from timber that was processed into bleached and unbleached pulp by
KCTC's pulp mill. The pulp mill provided 85% of the fuel used by the Energy
Complex in the form of biomass and black liquor. Following the shutdown of the
pulp mill, the paper mill and the tissue mill have obtained the pulp they
require from offsite sources, which is shipped to the site in dried form. Mobile
Energy currently acquires all of the fuel required for the Energy Complex from
offsite sources. Mobile Energy's current fuel sources are natural gas, coal and
biomass.
Under both the First Plan and the Second Plan, Southern's equity
interests in Holdings will be extinguished. Under both plans, the bondholders
end up as the exclusive equity interest holders in reorganized Holdings. The
other claims of creditors aside from the bondholders will be treated essentially
the same under both plans. Under the First Plan, the holders of debt in the
Debtors were obligated to accept a substantial diminution in the face value of
10
their securities, and under the Second Plan, they once again accept a
substantial diminution, this time to an even greater extent than was
contemplated by the First Plan.
Because of the unwinding of the KC Settlement, the absence of the New
Pulp Mill, and the dramatic increase in natural gas prices, the Second Plan
focuses upon maintaining and furthering operating cost reductions in the context
of continuing to provide services to those mills presently operating in the
Industrial Complex (i.e., KC's tissue mill and S.D. Warren's paper mill), under
the two Energy Services Agreements in force prior to the negotiation of the KC
Settlement (more fully described in the First Amended Disclosure Statement
attached as Exhibit A-1 hereto) and the reinstated Pulp Mill ESA. The Debtors
have substantially reduced O&M costs for the Energy Complex during the
Bankruptcy Cases, and believe that further cost reductions are necessary. The
Debtors were required to terminate the former operator of the Energy Complex,
Mirant Services (formerly known as Southern Energy Resources), by March 31,
2001. As a result, following a solicitation process OEC, an affiliate of Enron
Corp., was selected as the new O&M operator to assume operation of the Energy
Complex on an interim basis after March 31, 2001, pending confirmation of the
Second Plan. The new operator has replaced Mirant Services and, it is expected,
will implement further cost reductions.
To help assess the merits of the business strategy incorporated in the
Second Plan, two sets of projections have been filed with the Bankruptcy Court,
attached hereto as Exhibits A-3 and A-4, both of which have been prepared taking
into account existing O&M realities and cost reductions to be achieved by OEC.
Exhibit A-3 presumes the continued operations of the tissue mill and the paper
mill at current levels (the "continued operations projections"). Exhibit A-4
presumes that (i) S.D. Warren terminates the paper mill ESA and closes the paper
mill; and (ii) KC curtails tissue mill operations as suggested to the Debtors by
KC representatives (the "Curtailed Operations Projections"). Both exhibits show
positive cash flows and thus value to the bondholders, who will be the future
owners of equity interests in Holdings under the Second Plan. Both exhibits also
show greater value to the bondholders under the Second Plan than they would
receive in a liquidation. A copy of the Debtors' liquidation scenario is
attached as Exhibit A-8. All of the projections described in this paragraph were
prepared before the Debtors received the arbitration ruling. Accordingly, the
projections do not include any revenue to be received by the Debtors as a
consequence of the arbitration ruling, although the Debtors believe such
revenues will be substantial.
Under the Continued Operations Projections, Mobile Energy estimates
that it will provide approximately 1.73 million MMBtus of steam annually to the
tissue mill, and approximately 3.1 million MMBtus of steam annually to the paper
mill after the Effective Date. It also is anticipated that Mobile Energy will
provide approximately 369,529 megawatt hours of electricity annually to the
11
tissue mill and approximately 201,973 megawatt hours of electricity annually to
the paper mill after the Effective Date. Mobile Energy also intends to continue
to sell electricity in excess of the mill owners' demands during peak periods
into the wholesale market. A schematic of the Debtors' anticipated operating
configuration in this scenario is attached as Exhibit A-5.
Under the Curtailed Operations Projections, Mobile Energy estimates
that it will provide 1.21 million MMBtus of steam annually to the tissue mill
and zero MMBtus of steam to the paper mill after the Effective Date. Mobile
Energy also anticipates that Mobile Energy will provide approximately 379,691
megawatt hours of electricity annually to the tissue mill and zero megawatt
hours of electricity annually to the paper mill after the Effective Date. A
schematic of the Debtors' anticipated operating configuration in this scenario
is attached as Exhibit A-6.
Further, the Second Plan contemplates that after Southern is divested
of its ownership under the Second Plan, reorganized Mobile Energy will qualify
as a qualifying facility under the Public Utility Regulatory Policies Act of
1978 ("PURPA"), thereby rendering it not a public utility under PUHCA, and
Holdings and its owners will not be subject to regulation as public utility
holding companies. Mobile Energy previously filed an application with the
Federal Energy Regulatory Commission seeking certification as a qualifying
facility as of the Effective Date of the First Plan. That application, which is
still pending, will be modified to seek qualification of reorganized Mobile
Energy as a qualifying facility consistent with the business plan that forms the
basis of the Second Plan.
4. The Cogeneration Development Agreement
Various participants entered into the Cogeneration Development
Agreement, as referenced above (the "Cogeneration Development Agreement").
Thereafter, a dramatic rise in long-term (future) natural gas prices negatively
affected the economics of the Cogen Project from both the Debtors' and Mirant's
point of view. Therefore, the Debtors and the Bondholder Steering Committee
decided that Mobile Energy should undertake development of the Cogen Project
rather than attempting to meet the conditions for Mirant to make the SEI Equity
Investment (as defined in the Cogeneration Development Agreement). Toward that
end, and to avoid a payment otherwise due from Mobile Energy to Mirant in the
summer of 2001, the Debtors and the Bondholder Steering Committee decided to
negotiate with Mirant to amend the Cogeneration Development Agreement.
A motion was filed with the Bankruptcy Court on August 11, 2000 seeking
Bankruptcy Court approval of CDAA No. 1, which approval was granted on September
1, 2000. CDAA No. 1 provides, among other things, that: (1) none of Mirant,
Mirant Services, or any Affiliate thereof would make any additional equity
investment in Mobile Energy or the Cogen Project; (2) upon confirmation of a
plan of reorganization, Mirant's 1% ownership interest of Mobile Energy (if not
12
transferred earlier to Holdings) and Southern's ownership of Holdings will
terminate and the bondholders will acquire 100% of the ownership of Holdings
pursuant to the terms of the plan; (3) Mirant Services will waive the $10
million Equity Option Fee; (4) Mobile Energy will terminate the Operating
Agreement no later than March 31, 2001, and Mobile Energy will pay one-half the
actual cost of a retention and severance program implemented by Mirant Services
up to a total of $2 million paid by Mobile Energy; (5) the Cogen Facility Mobile
Energy Operating Agreement will terminate; (6) Mobile Energy will retain an
option to purchase the GE combustion turbine provided by Mirant to the Debtors
under the Cogeneration Development Agreement, including the rights in related
agreements, upon Mobile Energy's satisfaction of the MESC Transfer Obligations
(as defined in the Cogeneration Development Agreement, as amended by CDAA No. 1)
other than the payment of the $10 million Equity Option Fee; (7) Mobile Energy
will pay Mirant $2.9 million upon the earlier of the exercise of such option,
the effective date of a plan, or July 31, 2001; (8) Mobile Energy will be
allowed to use the $2.1 million held by Holdings in its tax sharing account; (9)
Mirant will cause Southern to pay to the Collateral Agent, and release any
claims Southern may have to, the $2.7 million that is subject to dispute under
the Maintenance Plan Funding Subaccount Southern Guaranty Agreement; and (10)
Mobile Energy will agree to indemnify Southern from Southern's obligations under
the Mill Owner Maintenance Reserve Account Agreement, the Environmental
Guaranty, and for certain income taxes on taxable income of Mobile Energy and
Holdings in excess of Southern's excess loss account related to its investment
in Holdings and Mirant and payments under the Long Term Service Agreement for
Combined Cycle Generating Plant at MESC Electric Generating Plant. Southern,
Mirant Services, and Mirant will continue to hold a first priority lien on the
Debtors' assets and those of any affiliate set up to own the Cogen Project to
secure performance of all obligations that may be owed to Southern, Mirant
Services and Mirant under CDAA No. 1.
Under the Cogeneration Development Agreement, Southern, Mirant and
Mirant Services have only limited ongoing obligations to the Debtors. Southern's
existing obligations to the owners of the tissue mill, paper mill, and pulp mill
under the Environmental Guaranty entered into in December 1994 and the Mill
Owner Maintenance Reserve Account Agreement entered into in August 1995 will
continue. As noted in item (10) of the preceding paragraph, Mobile Energy has
agreed in the Cogeneration Development Agreement to compensate Southern for any
costs it incurs under either agreement. That compensation obligation is secured
by a priority lien on Mobile Energy's assets. Furthermore, under the
Indemnification and Insurance Matters Agreement, Mirant has agreed to indemnify
Southern for any future obligations incurred under either agreement.
13
Under the Cogeneration Development Agreement, Southern has agreed to
compensate the Debtors for any income taxes that the Debtors have to pay on
taxable income of the Debtors that is recognized after Southern takes some
action to trigger the tax on its excess loss account related to its investment
in Holdings, with such compensation obligation being limited to the tax owed on
income equal to the amount of the excess loss account prior to its being
triggered. This obligation applies only where such action by Southern causes the
tax on its excess loss account to be triggered earlier than would have occurred
as a result of implementation of a plan of reorganization for the Debtors, and
only with respect to taxable income recognized by Mobile Energy and Holdings
prior to July 31, 2001. The Debtors in turn agreed to compensate Southern for
any income taxes paid by Southern or its affiliates on taxable income generated
by the Debtors in excess of Southern's excess loss account related to its
investment in Holdings or recognized by the Debtors after the tax on such excess
loss account is triggered as a result of implementation of a plan of
reorganization for the Debtors.
Mirant Services has agreed under the Development Agreement to provide
reasonable cooperation and assistance to MESC with respect to MESC's development
of a cogeneration project and the restructuring of MESC and MESH. MESC will
reimburse Mirant Services for the costs it incurs in providing such assistance.
MESC agreed that it would repay Mirant Services for any costs it previously
incurred in developing the cogeneration project for MESC by no later than July
31, 2001. Mirant Services' obligation to operate and maintain MESC's facilities
under the Facility Operations and Maintenance Agreement entered into in December
1994 terminated March 31, 2001.
Mobile Energy has contracted for Deltak to begin construction of a
second major piece of equipment required for construction of the Cogen Project,
a heat recovery steam generator ("HRSG"). That contract required Mobile Energy
to provide, or cause to be provided, to Deltak letters of credit to secure
Mobile Energy's payment to Deltak. Pursuant to the Letter of Credit Procurement
Agreement between Mobile Energy and Mirant executed as of March 15, 2000 (the
"LC Procurement Agreement"), Mirant has caused letters of credit to be posted in
the aggregate amount of $5.5 million to secure the amounts owed by Mobile Energy
to Deltak. Letters of credit of up to an aggregate of $11 million have been
posted under the LC Procurement Agreement. Under the terms of the LC Procurement
Agreement, Mobile Energy must provide Mirant with cash collateral equal to the
letters of credit Mirant Services arranges to be provided to Deltak.
Approximately $10,941,000 has either been paid to Deltak or reserved for payment
as of the filing of the Second Plan. After the HRSG is completed and delivered
to Mobile Energy, Mobile Energy intends to sell the HRSG if the Cogen Project
does not proceed.
14
On December 29, 2000, Mobile Energy exercised the option to purchase
the turbine by notifying Mirant that it intended to purchase the CT. Mobile
Energy must pay the full purchase price of $28 million for the CT within two
days of Mirant's notifying Mobile Energy that Mirant has paid GE for the CT in
order to obtain title to the turbine. If the Debtors do not pay Mirant, they do
not receive the turbine and do not owe the $28 million purchase price but still
owe the $2.9 million payment. If Mobile Energy does pay $28 million, Mirant will
transfer the CT to Mobile Energy and Mirant will assign its remaining rights
under its contract with GE for the CT to Mobile Energy. Also pursuant to CDAA
No. 1, Mirant will assign to Mobile Energy Mirant's rights under the Long Term
Service Agreement for Combined Cycle Generating Plant at MESC Electric
Generating Plant made effective March 26, 1999 (the "LTSA") between Mirant and
GEII. In addition to the $28 million purchase price for the CT, Mobile Energy
will be required to pay GEII under the LTSA $3 million in 2001. Under the LTSA,
Mobile Energy also will be required to pay GEII approximately $4 million per
year for parts and maintenance on the CT beginning once the Cogen Project begins
operations and for a term of twelve (12) years. If the turbine contract and the
LTSA are assigned to Mobile Energy, Mirant will remain liable to GEII and Mobile
Energy will indemnify Mirant for any cost Mirant incurs to GEII under the LTSA.
All of Mobile Energy's obligations under CDAA No. 1 to Mirant will be secured by
a first priority lien in favor of Mirant, Mirant Services, and Southern. Such
lien in favor of Mirant, Mirant Services, and Southern may be junior to the
liens of an entity that provides financing for the Cogen Project.
The failure of Jubilee Pulp to proceed with the development of the New
Pulp Mill coupled with the termination of the KCTC Settlement Agreement and the
increase in natural gas prices have made it more difficult to proceed with the
Cogen Project as previously contemplated. However, the Debtors are exploring the
possibilities regarding the Cogen Project that they believe may maximize values
to the Debtors' estates. The projections attached to the Disclosure Statement
and this Amended Application as Exhibits A-3 and A-4 do not include any revenues
attributable to the development of the Cogen Project; in fact, they assume that
the Debtors do not obtain the CT and that they sell the HRSG. If the Cogen
Project is developed, Mobile Energy expects to sell the power generated by the
Cogen Project into the wholesale market.
The CT that is the subject of the Cogeneration Development Agreement
presently is being manufactured by GE. Its shipment to the Mobile facility is
not anticipated until late April, 2001.
The obligations between the participants are of various vintages, and
maximum potential exposures under some of the obligations are not susceptible of
quantification with a high degree of confidence. However, as to the long-term
service agreement associated with the Cogen Project's development, a contract
termination provision requires payment of up to $8 million upon early
15
termination of the long-term service agreement as a consequence of a default by
Mobile Energy.
Additionally, the maximum Southern obligation concerning the excess
loss account can be estimated as follows, recognizing that the balance
fluctuates periodically, depending upon, inter alia, the results of operations.
As of December 31, 2000 the excess loss account approximated $75 million. The
federal statutory corporate income tax rate is 35%; therefore, under these
circumstances, Southern's maximum potential exposure could approximate $26
million.
The foregoing should be considered in light of Mirant's recent
disaffiliation with Southern. In April 2000, Southern Company announced an
initial public offering of up to 19.9 percent of Mirant Corporation - - formerly
Southern Energy, Inc. - - and its intentions to spin off the remaining ownership
of Mirant to Southern Company stockholders within 12 months of the initial stock
offering. On October 2, 2000, Mirant completed an initial public offering of
66.7 million shares of common stock. On April 2, 2001, Southern Company made a
tax-free distribution of the remaining ownership of 272 million Mirant shares.
5. Treatment of Claims Under the Plan
Generally, the bondholders under the Second Plan will receive shares in
reorganized Holdings ("New Common Stock") in exchange for their claims,
including their outstanding bonds. Otherwise, the treatment of claims under the
Second Plan is comparable to the treatment of claims previously outlined in the
Application.
a. Unsecured Creditors; Others
Under the Second Plan, the claims of the general unsecured creditors
and the claims of all other creditors, except Southern and its affiliates and
the bondholders, will be paid in full. The claims of unsecured creditors are
approximately $431,000, without consideration of proof of claims (some of which
claims have not been quantified by the claimants) from the mill owners against
Debtors. Debtors are contesting the mill owners' proof of claims.
b. First Mortgage Bonds
The First Mortgage Bonds (as defined in the Second Plan) were issued by
Mobile Energy on August 1, 1995, in the original principal amount of
$255,210,000 due January 1, 2017 and bearing annual interest at 8.665%. All of
Mobile Energy's obligations under the first mortgage bonds are secured by liens
and security interests against Mobile Energy's assets and are unconditionally
guaranteed by Holdings.
Under the Second Plan, the First Mortgage Bondholder Claims are deemed
Allowed Claims for purposes of the Second Plan in the aggregate principal amount
outstanding under the terms of the First Mortgage Bonds, plus interest accrued
and unpaid through the day immediately prior to the Effective Date, minus (i)
16
payments made to the Indenture Trustee and/or the Collateral Agent pursuant to
orders of the Bankruptcy Court, and (ii) payments made to the Indenture Trustee
and/or the Collateral Agent on account of the Maintenance Plan Funding
Subaccount and the First Mortgage Debt Service Reserve Account.
Each Holder of a First Mortgage Bondholder Claim shall receive in
complete settlement, satisfaction and discharge of their First Mortgage
Bondholder Claims, a Pro Rata Share of 72.594% of the New Common Stock.
c. Tax-Exempt Bonds
In December, 1983, the IDB issued tax-exempt bonds to finance the
construction of the Number 7 Power Boiler and certain auxiliary systems which
are "solid waste disposal facilities" as such term is defined in the Internal
Revenue Code and the regulations promulgated thereunder (the "Solid Waste
Disposal Facilities"). In December, 1984, the IDB issued tax-exempt bonds to
refund the 1983 tax-exempt bonds.
Refunding of the 1984 tax-exempt bonds occurred in 1995 by means of
tax-exempt bonds in the original principal amount of $85,000,000 scheduled to
mature January 1, 2020 (the "Tax-Exempt Bonds"). Concurrently with the issuance
of the Tax-Exempt Bonds, Mobile Energy entered into an Amended and Restated
Lease and Agreement with respect to the Solid Waste Disposal Facilities, and its
obligations thereunder are secured by liens and security interests against
Mobile Energy's assets and are unconditionally guaranteed by Holdings.
Under the Second Plan, the Tax-Exempt Bondholder Claims are deemed
Allowed Claims for purposes of the Second Plan in the aggregate principal amount
outstanding under the terms of the Tax-Exempt Bonds, plus interest accrued and
unpaid through the day immediately prior to the Effective Date, minus (i)
payments made to the Tax Exempt Trustee and/or the Collateral Agent pursuant to
orders of the Bankruptcy Court, and (ii) payments made to the Tax Exempt Trustee
and/or the Collateral Agent on account of a letter of credit posted with respect
to the Tax-Exempt Debt Service Account and a guaranty of the Maintenance Plan
Funding Subaccount.
Each Holder of a Tax-Exempt Bondholder Claim shall receive in complete
settlement, satisfaction and discharge of their Tax-Exempt Bondholder Claims, a
Pro Rata Share of 27.406% of the New Common Stock.
d. Southern's and its Affiliates' Claims
As was described in the Application, Southern and its affiliates shall
receive the treatment provided in the Cogeneration Development Agreement and
CDAA No. 1 thereto, and in the orders of the Bankruptcy Court, in full
satisfaction of their claims. The Cogeneration Development Agreement is attached
hereto as Exhibit B-1.
Generally, Southern's claims received one of two different types of
treatment. Southern pre-petition claims are classified for prioritization
purposes as Class 8. The estimated recovery on account of such claims is
approximately 0.3%. As a reflection of that level of recovery, Southern recorded
an expense of approximately $69 million in the third quarter of 1999 to write
17
down its equity investment in Mobile Energy Services Holdings, Inc. to zero. An
additional expense of approximately $10 million was recorded in the third
quarter of 2000 to reflect additional liabilities under the Cogeneration
Development Agreement and CDAA No. 1. No further material impact on the
consolidated capitalization is expected as a result of the proposed bankruptcy
settlement.
Southern post-petition claims are assigned to Class 3. Class 3 claims
shall receive 100% payment under the Second Plan.
e. Post Reorganization Ownership Structure
As was the case under the prior Plan summarized in the initial filing,
the pre-petition shares of common stock issued by Holdings and held by Southern
shall not receive any distributions under the Second Plan, and the shares shall
be canceled and extinguished on the effective date of the Second Plan. As a
consequence, Southern's pre-petition shares in Holdings would no longer have any
claim to voting rights, dividends or in fact any rights with respect to
Holdings. The entire equity interest in the reorganized Holdings will then be
held by the existing bondholders. Holdings will continue to own 100% of the
equity ownership of Mobile Energy.
6. Summary of Post-Reorganization Structure
The Debtors' proposed post-reorganization equity ownership structure is
depicted in the following diagram:
Holders of Allowed
First Mortgage Bondholder Claims
and Allowed
Tax-exempt Bondholder Claims on
the Record Date
|
|
|
100%
|
|
|
Reorganized
Holdings
|
|
|
100%
|
|
|
Reorganized
mobile Energy
18
The First Mortgage Bonds and the Tax-Exempt Bonds will be exchanged for
the New Common Stock of Holdings.
7. The Bondholder Steering Committee Supports Approval
of the Second Plan
The ad hoc committee of Holders of Tax-Exempt Bonds and First
Mortgage Bonds has established the Bondholder Steering Committee which is
comprised of certain Holders of Existing Securities as constituted from time to
time and First Union National Bank (ex-officio) as Indenture Trustee and as
Tax-Exempt Trustee. At certain times, the Bondholder Steering Committee has been
comprised of Credit Suisse First Boston Corporation ("CSFB"), Miller Anderson &
Sherrerd, LLP, and Pan American Life Insurance Company (each of which holds
First Mortgage Bonds); Franklin Advisors, Inc. and Van Kampen Investment and
Advisory Corp. (each of which holds Tax-Exempt Bonds); and First Union National
Bank (ex officio), as Trustee for the First Mortgage Bonds and Tax-Exempt Bonds.
CSFB resigned from the Bondholder Steering Committee in December 2000 but
rejoined the Bondholder Steering Committee in March 2001. Franklin Advisors,
Inc. resigned from the Bondholder Steering Committee in February 2001. The
Bondholder Steering Committee has retained Debevoise & Plimpton, McDermott Will
& Emery, and Silver, Voit and Thompson as their counsel and CIBC as their
financial advisor. The Bondholder Steering Committee, which collectively hold in
excess of 70% of each of the First Mortgage Bonds and the Tax-Exempt Bonds,
support confirmation of the Second Plan.
B. Bankruptcy Court Approval Process
1. General
The Second Plan was filed with the Bankruptcy Court on February 21,
2001, along with the First Amended Disclosure Statement. Under Section 1125 of
the Bankruptcy Code, the Debtors may not solicit votes for acceptances of the
Second Plan until the Bankruptcy Court approves the First Amended Disclosure
Statement as containing information of a kind, and in sufficient detail,
adequate to enable creditors to make an informed judgment whether to vote for
acceptance or rejection of the Second Plan. A hearing is scheduled with the
Bankruptcy Court for April 3, 2001, to determine whether the First Amended
Disclosure Statement meets the requirements of Section 1125. It is anticipated
that this initial hearing will be continued pending Commission review of this
Application.
Upon receipt of requisite approval of the First Amended Disclosure
Statement, the Debtors will solicit votes on the Second Plan. The solicitation
process is expected to take approximately 6 weeks. After the votes are cast, a
confirmation hearing will be scheduled and notice of the hearing will be
provided to creditors and parties-in-interest. Creditors and parties-in-interest
will have an opportunity to object to the confirmation of the Second Plan at the
confirmation hearing. At the confirmation hearing, the Bankruptcy Court must
19
determine whether the confirmation of the Second Plan meets the requirements of
Section 1129 of the Bankruptcy Code. Only if the Bankruptcy Court determines
that the Second Plan meets the requirements of Section 1129, may the Bankruptcy
Court confirm the Second Plan.
In this regard, it should be noted that on February 4, 1999, an
official committee of unsecured creditors (the "Committee") was appointed in the
Mobile Energy and Holdings Chapter 11 cases. The Committee has not sought
Bankruptcy Court approval to retain counsel or any other professionals to
represent its interests. The Committee has not been actively involved in these
cases.
2. Feasibility
One of the prerequisites to confirmation under Section 1129 of the
Bankruptcy Code is that the Bankruptcy Court determine that a plan is not likely
to be followed by the liquidation, or the need for further financial
reorganization, of the debtors or any successor to the debtors under the plan.
This is commonly referred to as the requirement that a plan be "feasible."
The Debtors believe that the Second Plan is feasible. See Disclosure
Statement, Section XV.B.2, pages 124-125. The material risks associated with the
Second Plan are described in the Disclosure Statement in detail (see Section X,
pages 104-112). The First Plan relied upon projections that included revenues
derived from the successful completion of the Cogen Project (with significant
anticipated sales of power into the wholesale market) and the New Pulp Mill, and
upon a modified Energy Services Agreement with KC, the owner of the tissue mill,
that placed fuel price risk on the Debtors (the existing Energy Services
Agreements place fuel price risk on the respective mill owners) in order to make
the payments required to service the $70 million of secured debt that the
Debtors would have issued under the First Plan. As a consequence, fuel price
increases, transmission capacity constraints, and Cogen Project financing risks
were all discussed as risk factors in the original Disclosure Statement.
The Second Plan converts all of the claims of the First Mortgage
Bondholders and the Tax-Exempt Bondholders to equity, and the projections
attached to the First Amended Disclosure Statement (i) do not include revenues
from the Cogen Project or the New Pulp Mill; and (ii) assume that the existing
Energy Services Agreements (which place the risk of fuel increases on the Mill
Owners) remain in place. As a consequence, the discussion concerning the above
risk factors has been deleted from the First amended Disclosure Statement.
The Objection filed by S.D. Warren to the First Plan raised challenges
to the feasibility of the First Plan. The revised capital structure contained in
the Second Plan (i.e., the elimination of $70 million of secured debt), the
Debtors' exclusion of any revenues attributable to the Cogen Project or the New
20
Pulp Mill in its projections and the fact that fuel costs are borne by the Mill
Owners as opposed to the Debtors addresses the issues raised in the Objection
and further ensures the feasibility of the Second Plan.
The projections attached hereto as Exhibits A-3 and A-4 assume gas
prices of $4.92 per MMbtu beginning in 2002 and escalating at 3% thereafter.
As noted above, the Debtors have had two sets of projections prepared,
including a set of projections that assume that S.D. Warren elects to
discontinue operations at the Paper Mill without consideration of the
termination payments required under the Paper Mill ESA. These projections show
that the Debtors can continue to operate even if S.D. Warren elects to close its
mill.9
Item 2. Fees, Commissions and Expenses
The fees, commissions and expenses paid or incurred, or to be paid or
incurred, directly or indirectly, in connection with filing of this Amended
Application by Mobile Energy and Holdings are not expected to exceed $150,000
and are expected to be comprised primarily of fees for ordinary legal and
accounting services. None of such fees, commissions or expenses will be paid to
any associate company or affiliate of the Debtors.
There are set forth below the estimated fees and expenses expected to
be incurred by Debtors in connection with the entire bankruptcy cases, including
without limitation the preparation of the First Plan, Second Plan, Disclosure
Statement and First Amended Disclosure Statement; the prosecution of litigation
with KC, and this Amended Application and related transactional documents.
Services of Cabaniss, Johnston, Gardner, et al., counsel
to Debtors......................................................$400,000.00
Services of Andrews & Kurth L.L.P., special counsel
to Debtors....................................................$7,500,000.00
Services of Price Waterhouse Coopers................................$900,000.00
Services of FORCAP International Inc.............................$1,900,000.00
Miscellaneous, including filing and recording fees,
postage, travel, telephone and other incidental expenses..........$9,000.00
Total............................................................$10,209,000.00
The foregoing fees are to be paid by or have been paid by Mobile Energy or
Holdings.
_______________________________
9 As stated earlier, these projections were prepared before the arbitration
award was received. Thus, they do not include the revenues that Mobile Energy
expects to receive under the arbitration award. Mobile Energy believes that such
revenues will be substantial. No inference should be made that the revenues from
the reinstated pulp mill Energy Services Agreement are not substantial because
they were not included in the financial projections that were prepared before
the arbitration award was received.
21
Item 3. Applicable Statutory Provisions
A. Summary
Petitioners seek that authorization necessary under the Act to
disseminate the Second Plan to parties in interest in order to solicit votes to
approve or reject same, including the Commission's report approving the Mobile
Energy Second Plan and First Amended Disclosure Statement under Section 11(g)
and the rules promulgated thereunder, and any related or ancillary
authorizations that may be necessary. Petitioners also seek approval of the
ballots and the notice of confirmation date and objection deadline which will be
sent to creditors entitled to vote on the Second Plan. The ballots and the
notice of confirmation collectively are attached hereto as Exhibit A-1A.
Petitioners, therefore, request that authorization under the Act
necessary to the extent applicable to:
(1) Obtain approval of the Second Plan;
(2) Observe and perform (if necessary), the indemnities identified in
the Second Plan, as described above, for the reasons described in Item 3, Part
B. 2, infra;
(3) Extinguish and void the Southern Company's equity ownership
interests in Holdings;
(4) Take such other actions necessary to consummate the Second Plan;
and
(5) Issue a Commission report under Section 11(g) of the Act.
Petitioners request that the Commission waive the filing of a separate
Form U-R-1, if otherwise applicable, since all the requisite information will be
included in the Disclosure Statement and the Second Plan filed as exhibits
hereto.
Rule 54 Analysis: The proposed transactions are also subject to Rule
54, which provides that, in determining whether to approve an application which
does not relate to any exempt wholesale generator ("EWG") or "foreign utility
company" ("FUCO"), the Commission shall not consider the effect of the
capitalization or earnings of any such EWG or FUCO which is a subsidiary of a
registered holding company if the requirements of Rule 53(a), (b) and (c) are
satisfied.
Southern currently meets all of the conditions of Rule 53(a), except
for clause (1). At December 31, 2000, Southern's "aggregate investment," as
defined in Rule 53(a)(1), in EWGs and FUCOs was approximately $2.420 billion, or
about 53.52% of Southern's "consolidated retained earnings," also as defined in
Rule 53(a)(1), for the four quarters ended December 31, 2000 ($4.522 billion).
With respect to Rule 53(a)(1), however, the Commission has determined that
Southern'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 Southern Company,
Holding Company Act Release No. 26501, dated April 1, 1996 (the "Rule 53(c)
22
Order"); and Holding Company Act Release No. 26646, dated January 15, 1997
(order denying request for reconsideration and motion to stay).
In addition, Southern 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 Act to retail rate regulatory commissions. Further,
none of the circumstances described in Rule 53(b) has occurred.
Moreover, even if the effect of the capitalization and earnings of EWGs
and FUCOs in which Southern has an ownership interest upon the Southern holding
company system were considered, there would be no basis for the Commission to
withhold or deny approval for the proposal made in this Amended Application. 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 Southern's
EWGs and FUCOs, have a material adverse effect on the financial integrity of the
Southern system, or an adverse impact on Southern's public-utility subsidiaries,
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
Southern's overall financial condition which took into account, among other
factors, Southern's consolidated capitalization ratio and the recent growth
trend in Southern's retained earnings. As of December 31, 1995, the most recent
fiscal year preceding the Rule 53(c) Order, Southern's consolidated
capitalization consisted of 49.3% equity (including mandatorily redeemable
preferred securities) and 50.7% debt (including $1.68 billion of long-term,
non-recourse debt and short-term debt related to EWGs and FUCOs). Southern's
consolidated capitalization as of December 31, 2000 was 58.1% equity10, 49.9%
debt, including all non-recourse debt, and 59.2% equity and 40.8% debt,
excluding all non-recourse debt.
Since the date of the Rule 53(c) Order, there has been a reduction in
Southern's consolidated equity capitalization ratio; however, it remains within
acceptable ranges and limits of rating agencies for strong investment grade
corporate credit ratings. In addition, the affiliated operating companies, which
have a significant influence on the Southern corporate rating, continue to show
strong financial statistics as measured by the rating agencies. The following
table presents the senior secured ratings history for each as rated by S&P,
Moody's and Fitch:11
______________________
10 Excluding preferred stock and preferred securities from the equity component
of Southern's consolidated capitalization, the equity component was 46.7% of
total capitalization.
11 Southern's current corporate credit rating is A by S&P.
23
----------- ------- --------- --------- --------- --------- ---------
Company Agency 1996 1997 1998 1999 200012
----------- ------- --------- --------- --------- --------- ---------
----------- ------- --------- --------- --------- --------- ---------
Alabama S&P A+ A+ A+ A+ A
Moody's A1 A1 A1 A1 A1
Fitch AA- AA- AA- AA- AA-
----------- ------- --------- --------- --------- --------- ---------
----------- ------- --------- --------- --------- --------- ---------
Georgia S&P A+ A+ A+ A+ A
Moody's A1 A1 A1 A1 A1
Fitch AA- AA- AA- AA- AA-
----------- ------- --------- --------- --------- --------- ---------
----------- ------- --------- --------- --------- --------- ---------
Gulf S&P A+ AA- AA- AA- A+
Moody's A1 A1 A1 A1 A1
Fitch AA- AA- AA- AA- AA-
----------- ------- --------- --------- --------- --------- ---------
----------- ------- --------- --------- --------- --------- ---------
Mississippi S&P A+ AA- AA- AA- A+
Moody's Aa3 Aa3 Aa3 Aa3 Aa3
Fitch AA- AA- AA- AA- AA-
----------- ------- --------- --------- --------- --------- ---------
----------- ------- --------- --------- --------- --------- ---------
Savannah S&P A+ AA- AA- AA- A+
Moody's A1 A1 A1 A1 A1
Fitch Not rated Not rated Not rated Not rated Not rated
----------- ------- --------- --------- --------- --------- ---------
Southern's consolidated retained earnings grew on average approximately
6.1% per year over the last five years. Excluding the $111 million one-time
windfall profits tax imposed on South Western Electricity plc ("SWEB") in 1997,
the $221 million write down of assets in 1998, the $69 million write down of the
Mobile Energy investment in 1999, the $78 million gain on the sale of the SWEB
supply business in 1999, the $80 million Mirant transaction cost in 2000, the $8
million Western Power Tax settlement in 2000, and the $10 million Mobile Energy
additional write-down in 2000, the average growth would be 7.8%. In 2000,
consolidated retained earnings increased $439 million, or 10.4%. Southern's
interests in EWGs and FUCOs have made a positive contribution to earnings over
the four calendar years ending after the Rule 53(c) Order.
Accordingly, since the date of the Rule 53(c) Order, the capitalization
and earnings attributable to Southern's investments in EWGs and FUCOs has not
had an adverse impact on Southern's financial integrity.
B. Item-Specific Analysis
1. Approval of the Second Plan- Sections 11(g), 11(f), 12(e), 12(f),
6(a), and 7 of the Act.
Support of the Second Plan will be solicited in conjunction with the
Bankruptcy Court proceedings. Interested parties will have an opportunity to
comment, and make their positions known to the Bankruptcy Court prior to that
Court's final approval of the Second Plan (see Section 11(g) of the Act).
Further, the solicitation will involve the securities of a subsidiary
company within the meaning of the Act (see Item 1, Part A.2 and 3, supra). While
______________________________
12 Although the senior secured ratings were downgraded one notch by S&P in 2000,
the unsecured ratings were affirmed at A for each of the affiliated operating
companies.
24
Applicants are not aware of any rules, regulations or orders under Section 12(e)
of the Act which would be contravened by the proposed transaction, nonetheless,
Applicants seek authorization under Section 12(e) as necessary. Similarly,
Applicants are not aware of any rules, regulations, or orders under Section
12(f) of the Act regarding negotiations or transactions contravened by the
course of negotiations between creditors, the Debtors and customers of Debtors
in conjunction with the Second Plan (see supra, Item 1, Part A.2.b, 3-5) but
nonetheless seek authorization under Section 12(f) as necessary. Applicants seek
authorization under Section 7 of the Act necessary to issue such securities.
Moreover, the rights of, priorities, voting power and preferences of
holders of outstanding securities of Holdings will be altered under the Second
Plan - - particularly, Southern's common equity interests in Holdings will be
extinguished (see Item 1, Part A. 3), and new equity interests in reorganized
Holdings will be issued to the holders of First Mortgage Bonds and the
Tax-Exempt Bonds. Particularly, new common stock will be issued to the First
Mortgage Bondholders and the Tax-Exempt Bondholders.
Section 7(d) of the Act requires the Commission, in reviewing the
issuance of new securities, to consider whether the new security is reasonably
adopted to the security structure of the company issuing the security and other
companies in the registered holding company system. Of course, once the Second
Plan has been approved, Holdings will no longer be a member of a registered
holding company system. Moreover, the issuance of the new securities is
reasonably adopted to the security structure of reorganized Holdings. The new
securities and other steps contemplated by the Second Plan greatly reduce the
burden of debt service on the reorganized Debtors arising from the First
Mortgage Bonds and the Tax-Exempt Bonds. Therefore, Debtors will become
de-leveraged under the Second Plan.
2. Indemnities and Act-Sections 12(a) and (b) and Rule 45 of the Act
As part of the effort to develop the Cogen Project, Southern, Mirant or
its predecessors, Mobile Energy and Holdings exchanged agreements to reimburse
one another for certain costs (see Item 1, Part A.4. and Exhibit 1 hereto).
These agreements could create liability for Southern if Southern were to trigger
a deconsolidation of Holdings from the Southern tax group prior to when such a
deconsolidation will occur as a result of implementation of the Second Plan.
Under the Cogeneration Development Agreement, Mirant and Mirant Services
(formerly SEI and Southern Energy Resources) also would be liable to reimburse
Holdings and Mobile Energy for any costs they may incur arising out of their
negligence or willful misconduct.
Under the caption "Borrowing from other companies in the same system,"
Section 12(a) of the Act makes it unlawful for a registered holding company to
"borrow, or receive any extension of credit or indemnity" from one of its
subsidiary companies or a public utility company in the same holding company
25
system. In like fashion, under the heading "Loans to other companies in the same
system," Section 12(b) of the Act makes it unlawful for any registered holding
company or subsidiary company thereof to, "lend or in any manner extend its
credit to or indemnify" any company in the holding company system in
contravention of Commission rules, regulations and orders. Applicants are not
aware of Commission rules, regulations or orders issued under Section 12(b) of
the Act that would be contravened by the Second Plan.
The reciprocal arrangements here at issue do not involve a proposal to
"borrow, or receive any extension of credit or indemnity" within the meaning of
the Act and are consistent with the standards of the Act, including Sections
12(f) of the Act. Section 12 of the Act undertakes to regulate extensions of
credit among subsidiaries and their registered holding company systems. An
indemnification agreement incidental to a lawful transaction between affiliates
would be subject to such conditions as the Commission might prescribe in the
public interest pursuant to Section 12(f) of the Act, but, Applicants
respectfully submit, not Section 12(a). When a party contractually agrees to
bear responsibility for a portion of a transaction, the resulting responsibility
for claims does not constitute an extension of credit and therefore does not
fall within the intended ambit of Section 12(a) of the Act.
In this instance, Mobile Energy and Holdings have little in the way of
credit to confer upon Southern. Such benefit as may exist in the relationship is
not the enhancement of Southern's credit by association with Mobile Energy and
Holdings, nor the "milking" of the assets of Mobile Energy and Holdings by
Southern.
None of the purposes of the Act would be served by construing the
prohibition of extensions of credit by subsidiaries of a registered holding
company in favor of the holding company to prohibit the transactions here at
issue. Section 12(a) was imposed to prohibit "upstream loans" - - loans from an
operating utility to its registered holding company. It was enacted to stop "the
further milking of operating companies in the interest of controlling
holding-company groups." 74th Congressional Commerce Interstate Commerce,
Hearings on S. 1725 at 59 (April 26-29, 1935).
With respect to the construction of Section 12(a), the Commission has
recognized that the creation of bona fide reciprocal obligations does not give
rise to the extensions of credit that the Act was intended to prohibit.
Mississippi Valley Generating Co. v. United States, 175 F. Supp. 505, 520-21
(Ct. Claims 1959), affirming Mississippi Valley Generating Company, HCAR No.
12794 (1955). The legislative history of the Act indicates a concern with public
utility subsidiaries and subsidiary public utility holding companies extending
their credit to a holding company. Section 1(b) of the Act reflects this
legislative history through its findings in subsections 1(b)(2) and 1(b)(3) of
abusive transactions harmful to "subsidiary public-utility companies." Section
1(c) of the Act, in turn directs the Commission to interpret the Act "to meet
the problems and eliminate the evils" as therein enumerated.
26
The provisions of the agreements here at issue are not "upstream
loan[s]" as conceived by the legislative history, and therefore are not the type
of transaction that Section 12(a) was designed to prevent. The Amended
Application does not present the case of the holding company obtaining any type
of financing from a public utility operating company or sub-holding company. It
simply involves the reimbursement of Southern by Mobile Energy of certain
identified forms of liability caused by Mobile Energy, and reciprocal
obligations by Southern in the event its actions trigger liability for Debtors.
Provisions such as those here at issue (e.g., based on environmental claims) are
commonplace in arms' length commercial transactions. Indeed, as noted in the
Application (Item No. I, Part A. 2.b.i.), the Commission in 1994 reviewed
underlying environmental agreements between Scott and Holdings; some of the
contractual obligations here at issue would not exist but for the underlying
environmental agreements discussed in the Commission's 1994 order. Further, as
explained supra, the tax de-consolidation agreement works both ways, making
Mobile Energy one of its beneficiaries, and does not involve a unilateral
conveyance to Southern of the credit stature (such as it is) of an entity filing
for bankruptcy court protection. Moreover, the Cogeneration Development
Agreement under which the obligations arise here has been reviewed and approved
by the Bankruptcy Court following hearings; the Bankruptcy Court by statute has
the obligation to determine whether the arrangement is fair and reasonable to
creditors while affording the Debtors a reasonable chance to go forward.
The Commission considers the substance of a transaction over its
form.13 Southern is not receiving an "extension of credit" or borrowing money
raised on the credit of the Debtors. The statute on its face is focused on
"loans," "borrowing," an "extension of credit" and the like. Southern will
merely receive payment of liability it incurs to a third party from claims
caused by Mobile Energy or Holdings and the latter subsidiaries obtain
comparable rights from Southern. Moreover, the reciprocal agreements here at
issue hasten the day when Debtors will become disaffiliated from Southern, help
untangle the network of obligations and exposure Southern experiences under the
_________________________________
13 See Mississippi Valley Generating Company, supra, HCAR No. 12794, 1955 SEC
LEXIS 450. In the Southern Company, HCAR No. 27134 (February 9, 2000) the
Commission recently applied this principle in order to approve a financing
subsidiary structured to permit Southern to engage in trust preferred and debt
financing. In administering the accounting provisions of the Act, the Commission
adheres to the precept that the substance of a transaction, and not its form,
should control. See Accounting Treatment of Leases, HCAR No. 17772 (November 17,
1979). Similarly, despite the apparently absolute requirement under Section
9(a)(2) of the Act concerning approval of the acquisition of securities of
public utilities, when the substance of the transaction has involved an
acquisition of public-utility assets otherwise authorized under the Act, the
Commission has looked to the substance instead of adhering to the form. See New
England Electric System, HCAR No. 18254, text at n. 11 (January 11, 1974) ("the
acquisition of stock is simply a method of transferring title to the assets").
27
present arrangements, and thus hasten the day when even the theoretical concern
of abusive loans to the holding company will no longer be a concern.
As described in this Amended Application and in the Application,
Southern is in the process of extracting itself from a wide-ranging series of
obligations to the bankrupt entities. These obligations arose from Southern's
various roles, inter alia, as equity interest owner and as party to the
Cogeneration Development Agreement and CDAA No. 1. For instance, under the
Cogeneration Development Agreement (prior to its amendment) Mirant would have
had the obligation to make a significant additional equity investment if called
upon by the bondholders under certain conditions which investment would have had
to be made through Southern. The process of reducing Southern's exposures
arising from its various roles has been a continuous one that has evolved
through negotiations with the bondholders and others. Southern's present
obligations result from bargaining among stakeholders, and is not the product of
a unilateral determination by Southern of what is appropriate. Thus, when viewed
as part of the process of reducing potential claims upon Southern based upon its
roles as, inter alia, equity interest owner, project development participant,
potential financier, facilities operator, etc., the current level of obligations
represents a substantial reduction in the scope of exposures and obligations.
Southern's ability to transition out of its historical roles and exit as an
active participant from day-to-day business operations of bankrupt entities is
conditioned by compliance with the remaining, much-reduced level of obligations
that were negotiated with the bondholders. In this unique historical
environment, the foregoing limited obligations are a reasonable and
commercially-dictated means of transitioning Southern out of its prior, much
more expansive obligations and exposures.
3. Extinguishment and Voiding of Southern's Equity Interest in Holdings
-Sections 12(d) and 2(23) of the Act
The Second Plan specifies that Southern's equity interests in Holdings
will be extinguished. Section 12(d) of the Act makes it unlawful for any
registered holding company to "sell" any security which it owns in any public
utility company, in contravention of Commission rules, regulations or orders.
Authorization would be necessary under the presumption that one will "sell" a
security for jurisdictional purposes by extinguishing its existence and is
requested to that extent.
4. Take such other action as is necessary to consummate the Second
Plan-Commission Rule 64
Rule 64 provides that any application for approval of a plan of
reorganization under Section 11 of the Act shall be deemed to include all
applications and declarations under the Act otherwise required as to any action
necessary to consummate such plan. 17 C.F.R. ss. 250.64 (2000). As is evident
28
from the foregoing, the Second Plan involves multiple aspects. The discussion of
Sections 11, et al. of the Act, in Item 3.B.2, supra, describes important
aspects of the Second Plan.
5. Issuance of a Commission Report Under Section 11(g) of the Act.
Section 11(g) of the Act provides the circumstances under which a plan
of reorganization is to be accompanied by a report on the plan made by the
Commission. As noted supra in the discussion of Section 11 of the Act, the
Applicants will be soliciting the votes of interested parties entitled to vote
on the Second Plan. Applicants respectfully request that any report issued by
the Commission concerning the Second Plan determine that the Second Plan does
not contravene portions of the Act or regulations issued thereunder, and is fair
to investors, as summarized in the following section.
C. Macro Analysis
The Second Plan and related transactions are reasonable - indeed the
best option available - under the difficult circumstances surrounding the
interested parties. In summary, the Second Plan provides benefits to diverse, in
some circumstances adverse, economic interests with a stake in Debtors' future
viability. For example, the Second Plan is fair to investors in Southern and to
Southern itself, will simplify Southern's holding company structure, free
Southern's management from significant commitments of time to the Debtors'
affairs, and eliminate or minimize the burden upon Southern of a number of
significant contingent liabilities. The Debtors will be permitted to go forward
with a business plan that presents the opportunity for continued operations,
eliminating the debt burden associated with the First Mortgage Bonds and
Tax-Exempt Bonds as described above and without regulatory obligations
occasioned by Southern's ownership of equity interests in Holdings. Bondholders,
over 70% of which support the Second Plan, can potentially experience
significantly better recovery under the Second Plan than under liquidation, and
will obtain the entire equity ownership of Holdings, thus enhancing their
ability to affect management of Holdings and Mobile Energy. Customers at the
facility will have a supplier of electric and steam processing services with a
lower level of indebtedness to service.
Additionally, once the disaffiliation of Southern and Holdings occurs,
Holdings and Mobile Energy will no longer be able to use Southern Company
Services ("SCS"). Like certain other holding company structures, Southern
utilizes a service company to capture efficiencies by performing tasks common to
multiple operating affiliates. Holdings and Mobile Energy have not utilized SCS
to any material extent, and terminating their access is both consistent with
their anticipated non-affiliated status and reduces potential claims upon, and
distractions to the central mission of, SCS.
29
Southern as an investor in Holdings has devoted significant resources
and time to the enterprise during the course of its investment, which level of
commitment can be radically reduced upon successful implementation of the Second
Plan. The Second Plan also allows Southern to obtain reimbursement from Mobile
Energy secured by a first priority lien on Mobile Energy's assets for
approximately $19 million of contingent obligations related to guarantees
Southern has previously provided of Mobile Energy's obligations. Particularly,
Southern at present is obligated to guarantee Mobile Energy's separate
bi-lateral agreements with mill owners entered into during 1994 whereby Mobile
Energy will indemnify the mill owners for environmental damage under certain
circumstances with such guarantee capped at $15 million in 1994 dollars. See,
Item 1, Part A. 2. b. supra. At present, that contingent exposure can
approximate $17 million, reflecting adjustments to update the figure for the
effects of inflation. Additionally, under a separate agreement with Mobile
Energy and the owners of these mills, Southern guarantees Mobile Energy's
obligation to provide $2 million to a maintenance fund in the event Mobile
Energy's failure to perform results in the exercise by the mill owners of
certain rights they hold to step in and operate the Energy Complex. Under the
Cogeneration Development Agreement, Southern is indemnified by Mobile Energy
against costs it incurs under these contingent obligations with such indemnity
secured by a first priority lien on Mobile Energy's assets. Furthermore, under
the Indemnification and Insurance Matters Agreement, Mirant has agreed to
indemnify Southern for any future obligations incurred under such guarantees.
The same conclusion applies if the Second Plan is analyzed from the
perspective of Southern's investors. Southern's contingent risk exposure is
reduced under the Second Plan, as described above. Southern previously has
written off the cost (i.e., $75 million) of its Holdings common equity. No
further write-off by Southern for its Holdings equity interests is necessary.
Consequently, implementation of the Second Plan produces no additional change in
Southern's balance sheets. Moreover, the Second Plan, and the Cogeneration
Development Agreement and CDAA No. 1, allow Mirant to be reimbursed for
liability under a contract between Mirant and GE involving the fabrication of
the new combustion turbine and a long term service agreement between Mirant and
GEII related to that turbine, which agreements will be assigned to Mobile Energy
if it exercises its option under the Cogeneration Development Agreement to
purchase that turbine. Mirant will remain liable under the contracts with GE and
GEII for the non-performance by Mobile Energy of the assigned contract
obligations. Potential obligations for Mirant under the GEII contract could
amount to $8 million.
Bondholders have good reason to support the Second Plan as well. Prior
to the closing of the pulp mill, the Debtors generated sufficient cash to make
the annual payments totaling approximately $36 million that were required to
service the pre-petition bondholder debt (which had an outstanding balance of
approximately $300 million as of the petition date). However, now that the pulp
30
mill has ceased operations, revenues attributable to pulp mill operations (which
accounted for approximately one-half of the Debtors' revenues) no longer are
being received. Moreover, as noted above, the inexpensive source of fuel for
Mobile Energy in the form of biomass and black liquor also was lost when the
pulp mill shut down, increasing Mobile Energy's variable operating costs on a
unit basis, and commensurately reducing the portion of the cash stream that
would remain available to service debt costs. The Debtors are unable to make the
payments required under the existing bonds and, absent reconfiguring their
operations and reducing operating costs, are unable to operate at a profit.
Under the Second Plan and related transactions, by virtue of reducing costs,
reconfiguring operations and converting the existing bonds into equity, the
Debtors have a better opportunity to generate cash available for distributions
to equity. In addition, this capital structure enables the Debtors to continue
operations without being in default even if S.D. Warren chooses to close its
paper mill, which would not be the case absent this restructure. In other words,
the Second Plan presents the bondholders with the potential for continued
operations and a greater recovery compared to the scenario without the Second
Plan. Based upon an analysis contained in the First Amended Disclosure Statement
(see pp. 112-114 thereof), proponents of the Second Plan believe that creditors
will receive as much or more under the Second Plan as they would have received
in a Chapter 7 liquidation.
Finally, Debtors' long-term debt obligations and the cost of servicing
that debt will be greatly reduced; entities whose prior ownership of Mobile
Energy consisted solely of fixed rate debt now will accept equity interests in
Mobile Energy's parent, Holdings, reducing inflexible financial payment
obligations to them by Mobile Energy. The Debtors' business also will benefit
from reduced regulatory burdens associated with the Second Plan (e.g., the
cessation of Southern's ownership interest; qualifying facility status).
Consequently, the Second Plan and related transactions represent the
best opportunity, given the facts, for the participants to go forward and obtain
value, or minimize exposure, in admittedly challenging circumstances.
Item 4. Regulatory Approval
a. Authorization for a change in the indirect ownership of Mobile
Energy (via the receipt by the bondholders of equity ownership interests in
Holdings) has been received from the Federal Energy Regulatory Commission under
Federal Power Act ("FPA") Section 203. Aside from FPA Section 203 authorization,
to Applicants' knowledge, consistent with the opinions expressed in Exhibit F
hereto, no other state or federal regulatory authorization is necessary in order
to implement the transactions contemplated by the Second Plan.
b. See (a). Approval of the Bankruptcy Court is being sought for the
Second Plan; further, obtaining a determination that existing electric
generation facilities constitute qualifying facilities for purposes of PURPA, as
31
well as determinations concerning the Cogen Project, may involve regulatory
determinations from or filings with FERC.
Item 5. Procedure
(a) It is respectfully requested that the Commission issue its notice
with respect to the transactions proposed herein no later than April 12, 2001
and its order as soon as practicable thereafter.
Debtors hereby (i) waive a recommended decision by a hearing officer,
(ii) waive a recommended decision by any other responsible officer or the
Commission, (iii) specify that the Division of Investment Management may assist
in the preparation of the Commission's order and the date on which it is to
become effective.
The Debtors hereby request that the Commission publish a notice under
Rule 23 with respect to the filing of this Application as soon as practicable
and that the Commission's orders be issued as soon as possible. A form of
amended notice suitable for publication in the Federal Register is attached
hereto as Exhibit H.
To the extent required, the Debtors respectfully request the
Commission's approval, pursuant to this Amended Application, of all transactions
described herein, whether under the sections of the Act and Rules thereunder
enumerated in Item 3 above or otherwise. It is further requested that the
Commission issue an order authorizing the transactions proposed herein at the
earliest practicable date but in any event not later than May 31, 2001.
Additionally, the Debtors (i) request that there not be any recommended decision
by a hearing officer or by any responsible officer of the Commission, (ii)
consent to the Office of Public Utility Regulation within the Division of
Investment Management assisting in the preparation of the Commission's decision,
and (iii) waive the 30-day waiting period between the issuance of the
Commission's order and the date on which it is to become effective, since it is
desired that the Commission's order, when issued, become effective immediately.
Applicants also respectfully request that with respect to 17 C.F.R. ss.
250.24(c)(1)(2000), instead of requiring that transactions authorized by the
Commission be consummated within 60 days, the Commission exercise the discretion
vested in it by that provision and authorize consummation within such time as is
necessary therefor. As the foregoing Amended Application attests, the factual
pattern and the bankruptcy process renders consummation of the Second Plan
cumbersome and time-consuming. Rather than further burdening the Commission with
another review process in the event that consummation of the Second Plan is not
completed within the precise 60 day limit, Applicants respectfully request that
the Commission authorize the transactions contemplated by the Second Plan to be
completed in such time frame as is necessary to successfully complete the
transactions.
32
Item 6. Exhibits and Financial Statements
Asterisked (*) items are to be filed by subsequent amendment.
a. EXHIBITS
A-1 First Amended Disclosure Statement (without
exhibits)
A-1A Ballots and Notice of Confirmation
A-2 Second Plan
A-3 Continued Operations Projections
A-4 Curtailed Operations Projections
A-5 Plant Schematic (with S.D. Warren)
A-6 Plant Schematic (KC only)
A-7 Common Services chart
A-8 Liquidation Analysis
B-1 MESC Cogeneration Development Agreement
B-2 CDAA No. 1
E-1 Site Map (paper copy)
E-2 Map of Energy Complex (paper copy)
F Opinions of Counsel*
H Form of Notice Suitable for Publication in
the Federal Register
I. Summary of Pertinent Indemnities
J. '99 /'00 Income Statement and Budget for
2001
b. FINANCIAL STATEMENTS
(1) Mobile Energy and Holdings
a. Balance Sheets of Mobile Energy Services
Company, L.L.C. and Mobile Energy Services Holdings
Inc. as of January 31, 2001, and pro forma as of July
31, 2001.
b. Income Statements of Mobile Energy
Services Company, L.L.C. and Mobile Energy Services
Holdings Inc. as of January 31, 2001, and pro forma
as of July 31, 2001.
(2) Southern Company
Consolidated balance sheet of The Southern
Company and its subsidiaries at December 31,
2000. (Designated in Southern's Form 10-K for the
year ended December 31, 2000, File No. 1-3526.)
33
Consolidated statements of income and cash flows
for The Southern Company and its subsidiaries for
the year ended December 31, 2000. (Designated in
Southern's Form 10-K for the year ended December
31, 2000, File No. 1-3526.)
Since December 31, 2000, there have been no
material adverse changes, not in the
ordinary course of business, in the
financial condition of the Subsidiaries or
of The Southern Company and its subsidiaries
consolidated from that set forth in or
contemplated by the foregoing financial
statements.
Item 7. Information as to Environmental Effects
a. The issuance of an order by the Commission with respect to the
proposed transactions will not constitute a major federal action significantly
affecting the quality of the human environment.
b. No other federal agency has prepared or is preparing an
environmental impact statement with regard to the proposed transactions.
[THIS PAGE LEFT INTENTIONALLY BLANK]
34
Signatures
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the undersigned companies have duly caused this statement
to be signed on their behalf by the undersigned who are duly authorized.
MOBILE ENERGY SERVICES COMPANY, L.L.C.
1155 Perimeter Center West
Atlanta, GA 30338
By: MOBILE ENERGY SERVICES HOLDINGS, INC.
Its: MANAGING MEMBER
By: /s/David Rozier
Its: Vice President
MOBILE ENERGY SERVICES HOLDINGS, INC.
1155 Perimeter Center West
Atlanta, GA 30338
By: /s/David Rozier
Its: Vice President
THE SOUTHERN COMPANY
270 Peachtree Street
Atlanta, GA 30303
By:
/s/Tommy Chisholm
Its: Secretary