File No. 70-9771
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 3
to
APPLICATION OR DECLARATION
on
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.
50 Bay Bridge Road 50 Bay Bridge Road
Mobile, Alabama 36610 Mobile, Alabama 36610
(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:
Thomas A. Fanning Mark F. Sundback
Executive Vice President Andrews & Kurth L.L.P.
The Southern Company 1701 Pennsylvania Avenue, N.W., Suite 300
270 Peachtree Street, N.W. Washington, D.C. 20006
Atlanta, Georgia 30303
John D. McLanahan
Robert P. Edwards, Jr.
Troutman Sanders LLP
600 Peachtree Street, N.E., Suite 5200
Atlanta, Georgia 30308-2216
Item 1.
Mobile Energy Services Company, L.L.C. ("Mobile Energy"), Mobile Energy
Service Holdings, Inc. ("Holdings"), both of 50 Bay Bridge Road, Mobile, Alabama
36610 (collectively the "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 second amended and
restated application and declaration dated July 17, 2003 (the "Second 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 Third Joint Plan of Reorganization, as Modified, Proposed by
Mobile Energy Services Company, L.L.C. and Mobile Energy Services Holdings, Inc.
( the "Third Plan, as Modified") to be 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 Third Plan as Modified
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 Third Plan as Modified and the Second
Amended Disclosure Statement as Modified, Accompanying the Third Plan as
Modified (the "Second Amended Disclosure Statement as Modified"), are attached
as exhibits hereto. The Third Plan as Modified supercedes the First Amended
Joint Plan of Reorganization dated September 15, 2000 ("First Plan"), the Second
Plan of Reorganization filed on February 21, 2001 and the Second Plan of
Reorganization, as Modified, filed on April 25, 2001, although it is very
similar to those prior plans.
As was the case for the initial U-1 application and declaration filed
by the Applicants on October 16, 2000 (the "Application") and the amended
application and declaration filed on April 11, 2001 (the "First Amended
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 as a
qualifying facility under the Public Utility Regulatory Policies Act of 1978
("PURPA") after the effective date of the Third Plan as Modified, which will
cause Mobile Energy and Holdings to no longer be subject to the Act.
The Third Plan as Modified 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 conditional settlement agreement with Kimberly-Clark Corporation (the "KC
Settlement"), another part of the First Plan, has been rendered void ab initio
2
because of the failure of certain conditions precedent. Additionally, increased
natural gas prices relative to previous forecasts and forecasters significantly
increased their price estimates for future periods, which made it more difficult
to proceed with a planned 165 megawatt cogeneration project (the "Cogen
Project") than previously contemplated. Therefore, the Second Plan built upon
many of the features incorporated in the First Plan, while eliminating the
presence of the New Pulp Mill, the KC Settlement, or the development and
operation of the Cogen Project.1
The Third Plan as Modified is supported by the Bondholder Steering
Committee, whose members collectively hold in excess of 70% of the taxable bonds
and in excess of 64% of the tax-exempt bonds of Mobile Energy. The Bondholder
Steering Committee includes Wachovia Bank, National Association, formerly known
as First Union National Bank, the indenture trustee for each of the two bond
issuances, as an ex officio member. The indenture trustees represent all of the
bondholders.
Upon implementation of the Third Plan as Modified (as was true under
the prior plans), the ownership interests of Southern and its affiliates in the
Debtors will be terminated. The effect of Southern's disaffiliation with the
Debtors is beneficial to Southern because Southern has written off its
investment in the Debtors for financial accounting purposes 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 will indemnify Southern against any liability
under those guarantees.
Petitioners request authorization necessary for solicitation2 regarding
the Third Plan as Modified 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
____________________
1 The Third Plan as Modified as filed on December 14, 2001, contained an
election for the bondholders to receive either shares of stock of Holdings,
or member interests in Mobile Energy. Which election to make depended on a
variety of factors, including whether the Internal Revenue Service would
issue a private letter ruling on certain income tax matters. The Internal
Revenue Service declined to issue any ruling on the matter so the Debtors
and the bondholders have decided not to pursue a plan with the election to
receive member interests in Mobile Energy. Consequently, the Third Plan as
Modified as reflected in Exhibit A-2 provides that the bondholders will
receive shares of stock of Holdings without an election otherwise. As such,
the Third Plan as Modified is very similar to the Second Plan of
Reorganization, as Modified, filed on April 25, 2001.
2 The materials that will be forwarded in conjunction with the solicitation
include the Third Plan as Modified, the Second Disclosure Statement, and
exhibits thereto, and the ballots and notice of confirmation hearing. All
of these materials (except certain of the exhibits to the Second Disclosure
Statement) are attached as exhibits to this filing.
3
with such other ancillary and related authorizations as are necessary to
implement the Third Plan as Modified, as more fully described below in Item 3.
The Debtors expect that implementing the Third Plan as Modified 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 Third Plan as Modified.
A. Overview
1. Timing of the Transactions under the Third Plan as Modified
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. Without the Third Plan as Modified,
bondholders will not enjoy the level of recoveries reflected in the Third Plan
as Modified. Based upon an analysis contained in the Second Amended Disclosure
Statement as Modified (see Article XI thereof), the Debtors believe that parties
in interest will receive more under the Third Plan as Modified than they would
receive in a 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 six operating public
utility companies.3 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, 2002,
Southern's consolidated capitalization (excluding current portions) was
approximated $20 billion, comprised of 43.4% common stock equity, 13.5%
preferred stock and preferred securities, and 43.1% debt. Including current
portions, as of December 31, 2002, Southern's consolidated capitalization was
$23 billion, comprised of 38.3% common stock equity, 12.0% preferred stock and
preferred securities, and 49.7% debt.4
__________________________
3 These companies are Alabama Power Company, Georgia Power Company, Gulf
Power Company, Mississippi Power Company, Savannah Electric and Power
Company, and Southern Power Company. Alabama Power Company and George Power
Company each own 50% of Southern Electric Generating Company.
4 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
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
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 the then-existing facilities constituted a
qualifying cogeneration facility under PURPA.5
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.6 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.7
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
_________________
5 Scott Paper Co., 32 FERC (CCH)P. 62,175 (1985).
6 SEC Release No. 35-26185 (Dec. 13, 1994).
5
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.8 The
Commission also authorized issuance by Mobile Energy of First Mortgage Bonds in
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.9
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 by-product 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 dated as of
December 12, 1994 (the "Mobile Energy Operating Agreement"). As stated above,
the Mobile Energy Operating Agreement terminated on March 31, 2001. Although the
Mobile Energy Operating Agreement has terminated, Mobile Energy is obligated to
reimburse Mirant Services for certain amounts incurred by Mirant Services in
connection with it's operation of the Energy Complex through March 31, 2001.
iii. Events Precipitating the Bankruptcy Filings
The mill facilities in the Industrial Complex are 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
________________________
7 Id.
8 SEC Release No. 35-26330.
9 Id.
6
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
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
The consequences anticipated from the loss of the KCTC pulp mill
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, among other things, money damages and/or rescission of
Mobile Energy's contracts with KCTC.
The Bankruptcy Court ultimately ordered that the issues of whether KCTC
had effected a "Pulp Mill Closure" (as defined in the Master Operating
Agreement), and if so, whether Mobile Energy could reinstate the energy services
agreement, under the contracts between KCTC and Mobile Energy be arbitrated, and
7
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 KC 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., infra. The KC Settlement
Agreement was approved by the Bankruptcy Court; however, it contained several
conditions and provided that if these conditions were not satisfied that it
would become void ab initio, i.e. it would be treated as if it were never
entered. As discussed below, the KC Settlement Agreement ultimately was unwound
due to a failure of conditions.
Building upon the progress represented by the KC Settlement Agreement,
the participants, including the Debtors, the Bondholder Steering Committee, KCTC
and Mirant Corp., formerly known as Southern Energy, Inc., 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 KC Settlement, Mobile Energy
would have been paid approximately $30 million by KCTC, would have received real
property and easements necessary to effectuate the First Plan, while Mobile
Energy 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 Mobile Energy and KCTC was premised on the KC 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 MESC Cogeneration Development
Agreement (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 Mobile Energy 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, the KC Settlement Agreement failed because of a
failure of conditions, and the First Plan had to be abandoned.
8
v. Procedural Developments Contemporaneous With Or Subsequent to the
Filing of the Application
The First Plan and Disclosure Statement Accompanying the First Amended
Joint Plan of Reorganization (as amended and modified, the "Disclosure
Statement") were filed by the Debtors and the Bondholder Steering Committee on
September 15, 2000. As noted above, the First Plan incorporated the terms of the
conditional KC Settlement Agreement. The Application relating to the First Plan
and the Disclosure Statement were filed on October 16, 2000.
A hearing on the Disclosure Statement was originally set for October
19, 2000. On October 12, 2000, S.D. Warren Company Alabama, L.L.C ("S.D.
Warren") filed an objection to the Disclosure Statement.10
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. In addition, it also become clear that certain
conditions to the KC Settlement Agreement could not be satisfied, with the
result that the KC Settlement Agreement, which formed the basis of the First
Plan, could not be finalized.
As a result, on February 21, 2001, the Second Plan and the First
Amended Disclosure Statement were filed with the Bankruptcy Court. The Second
Plan contemplated the continued operations by the Debtors of the Energy Complex
and the assumption of the Debtors' prepetition energy services agreements with
S.D. Warren and Kimberly-Clark Corporation (as successor to KCTC)
("Kimberly-Clark"). It did not contemplate any settlement with S.D. Warren or
Kimberly-Clark, nor did it envision a renewal of operations of the New Pulp
Mill.
S.D. Warren and Kimberly-Clark filed objections to the First Amended
Disclosure Statement. The Debtors subsequently filed modifications to the Second
Plan and the First Amended Disclosure Statement on April 25, 2001, in part to
address certain of the objections raised by S.D. Warren and Kimberly-Clark.
On May 21, 2001, the Bankruptcy Court held a hearing on the objections
to the First Amended Disclosure Statement. At that hearing, S.D. Warren withdrew
its objection and the Bankruptcy Court overruled the objections of
_____________________
10 In the bankruptcy cases, S.D. Warren contended 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 contended
that it has been improperly charged fuel cost increases by Mobile Energy
subsequent to the closing of the pulp mill. S.D. Warren and the Debtors
have settled these matters and the Bankruptcy Court approved the settlement
agreement on September 24, 2001. The settlement with S.D. Warren is more
fully described below on pp. 11-12.
9
Kimberly-Clark, conditioned on the Debtors making further modifications to the
First Amended Disclosure Statement as announced in court. The Bankruptcy Court
further conditionally approved the First Amended Disclosure Statement, subject
to the review and comment of the Commission and continued the hearing on the
First Amended Disclosure Statement until July 17, 2001.
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 in place of Mirant Services, 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 and KC have reserved their 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.
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-Clark11 that had been suspended in the wake
of negotiations was 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.
Consistent with its discussions with Kimberly-Clark in 1998 that Mobile Energy
intended to reinstate the Pulp Mill ESA and the MOA because of Kimberly-Clark's
activities on the Real Property, on March 28, 2001, Mobile Energy sent a notice
to Kimberly-Clark that the Pulp Mill ESA and the MOA were reinstated as of
September 1, 1999. Despite the fact that the Pulp Mill ESA has been reinstated,
the chemical pulp mill is no longer operating and has been demolished.
On April 23, 2001, Mobile Energy initiated an arbitration proceeding
against Kimberly-Clark seeking an award of the approximately $93 million
(through December 2001 and inclusive of interest) of Demand Charges Mobile
Energy believes is owed by Kimberly-Clark by virtue of the reinstatement of the
Pulp Mill ESA. The hearing on this matter was concluded in October 2001, and a
decision was rendered in January 2002. The arbitrator determined that
Kimberly-Clark was liable for an additional approximately $940,000 per month in
Demand Charges beginning in March 2000 and continuing through December 2001.
Kimberly-Clark has paid the disputed Demand Charges awarded by the arbitrator.
____________________
11 Kimberly-Clark is the successor to Kimberly-Clark Tissue Company by
assignment. All assets and liabilities of KCTC were assigned to
Kimberly-Clark on or about December 31, 2000. KCTC then was dissolved.
10
On April 24, 2001, Mobile Energy filed another arbitration proceeding
(the "Energy Charge Arbitration") to include a declaratory request that certain
modifications made to the Energy Complex postpetition were proper, that certain
processing charges collected from S.D. Warren were proper and a claim against
Kimberly-Clark for increased demand and processing charges as a result of these
modifications. On June 12, 2001, Mobile Energy amended this second arbitration
against Kimberly-Clark and S.D. Warren and added a claim seeking to recover the
capital costs for these modifications (approximately $18 million) pursuant to
the provisions of the underlying agreements. After a settlement was reached with
S.D. Warren, as described in more detail below, the hearing on the Energy Charge
Arbitration was held in October 2001, and the arbitrator found that
Kimberly-Clark should pay the disputed processing charges and the disputed
capital costs for the modifications to the Energy Complex. Kimberly-Clark has
paid the amounts determined by the arbitrator in the Energy Charge Arbitration
to be due and owing.
The adversary proceeding against Kimberly-Clark instituted by Debtors
in the Bankruptcy Court (described in Item I.A.b.iii) has also been reactivated
and on June 6, 2002, all remaining claims against Kimberly-Clark were dismissed
by the Bankruptcy Court.
Additionally, 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 Kimberly-Clark Corporation by
Mobile Energy. Mobile Energy contends that the transfers are avoidable as
preferences under Section 547 of the Bankruptcy Code. Mobile Energy and
Kimberly-Clark Corporation have agreed to abate the proceeding pending outcome
of the assumption of the MOA.
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.
As described below, on May 16, 2001, the Bankruptcy Court approved
Amendment No. 2 to the Cogeneration Development Agreement ("CDAA No. 2"). As a
result of CDAA No. 2, the Debtors received a net amount of $5.0 million in cash
in exchange for the relinquishment to certain contract rights.
On August 27, 2001, the Debtors filed a motion with the Bankruptcy
Court to approve an agreement between Mobile Energy and S.D. Warren to settle
all disputes between them. The settlement allowed Mobile Energy to retain 100%
of the approximately $13 million in disputed processing charges paid by S. D.
Warren, and provides that S. D. Warren will pay all future processing charges to
Mobile Energy according to the same method as previously billed to S. D. Warren.
It also allowed the Debtors to immediately receive the discounted value of the 6
11
months of post-termination demand charges payable by S. D. Warren to Mobile
Energy under the Master Operating Agreement, after crediting S. D. Warren for
the disputed demand charges which would not have been billed but for the
existence of the KC Settlement Agreement. Finally, it resolved other wind-down
and potentially disputed business matters between the parties. The settlement
with S.D. Warren also resolved all disputes with S.D. Warren over the
disclosures made in the Second Amended Disclosure Statement as Modified and the
Third Plan as Modified. The Bankruptcy Court approved the settlement with S.D.
Warren on September 24, 2001.
On May 7, 2002, Mobile Energy filed an arbitration proceeding against
Kimberly-Clark seeking to recover demand charges relating to Kimberly-Clark's
tissue mill. Mobile Energy seeks to recover $2.1 million from Kimberly-Clark.
Kimberly-Clark denies Mobile Energy's claims and it has filed a counterclaim in
the arbitration case against Mobile Energy for approximately $7 million in
amounts it claims it overpaid Mobile Energy. Mobile Energy disputes the
counterclaim filed Kimberly-Clark. On November 4, 2002, the arbitrator ruled in
favor of Mobile Energy on all claims except for a relatively small claim
involving how air compressor charges are divided among the Mill Owners and
Mobile Energy. Importantly, the arbitration ruling resolved in Mobile Energy's
favor the method for calculating demand charges owed by the Mill Owners under
the Master Operating Agreement and the Energy Services Agreements.
Comments and interventions with respect to the Application were due
November 10, 2000. No comments or interventions were filed. On April 11, 2001,
the Debtors filed the First Amended Application relating to the Second Plan and
First Amended Disclosure Statement as filed on February 21, 2001. Comments and
interventions were due May 7, 2001. No comments or interventions were filed.
3. Key Elements of the Third Plan as Modified
The supporters of the Third Plan as Modified 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 Third
Plan as Modified 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
12
liquor solids, although the Energy Complex has not processed any black liquor
since the 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 pulp
mill.
The Industrial Complex is comprised of the Energy Complex, KC's tissue
mill, the pulp mill (which is no longer producing pulp)12 and the paper mill
owned by S.D. Warren.13 As discussed further in this section below, on December
14, 2001, S.D. Warren closed its paper mill. Prior to KCTC's shutdown of pulping
operations at the 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 (until it
closed on December 14, 2001) 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 coal, biomass, and
natural gas.
Under the Third Plan as Modified, Southern's equity interests in Mobile
Energy will be extinguished and the bondholders will end up as the exclusive
equity interest holders in reorganized Mobile Energy. The allowed claims of
non-insider creditors aside from the bondholders will be paid in full or
reinstated. The claims of insiders of the Debtors are treated by agreement as
set forth in the Third Plan as Modified.
Because of the unwinding of the KC Settlement, the absence of the New
Pulp Mill and the Cogen Project, the Third Plan as Modified 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., Kimberly-Clark's tissue mill), under the Energy
Services Agreement in force prior to the negotiation of the KC Settlement (more
fully described in the Second Amended Disclosure Statement as Modified attached
as Exhibit A-1 hereto) and the reinstated Pulp Mill ESA. The Debtors have
substantially reduced operating costs for the Energy Complex during their
bankruptcy cases. The Debtors were required to terminate the former operator of
_________________
12 The pulp mill no longer operates as a chemical pulp mill. The chemical pulp
mill itself has been demolished by Kimberly-Clark. However, Kimberly-Clark
continues to operate components of the Pulp Mill (as defined in the MOA)
and these pulp mill legacy assets continue to use the services provided by
Mobile Energy under the Pulp Mill Energy Services Agreement.
13 See also Item 4, Part C for additional discussion of the impact of the
closure of the paper mill.
13
the Energy Complex, Mirant Services (formerly known as Southern Energy
Resources), by March 31, 2001 pursuant to the terms of the Cogeneration
Development Agreement as amended. 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 Third Plan as Modified. The new operator has
replaced Mirant Services and has implemented cost reductions.14
To help assess the merits of the business strategy incorporated in the
Third Plan as Modified, projections to be attached to the Second Amended
Disclosure Statement as Modified, attached hereto as Exhibit A-3, take into
account existing operations realities and cost reductions which have been
achieved by OEC. Exhibit A-3 reflects S.D. Warren's closure of its Paper Mill
and presumes that Kimberly-Clark continues to operate its remaining facilities
at Site at a level consistent with the period beginning in mid-2002 and
continuing through the present (the "Projections"). The Projections show
positive cash flows and thus value to the bondholders, who will be the future
owners of equity interests in Holdings under the Third Plan as Modified. The
Projections also show greater value to the bondholders (and to unsecured
creditors) under the Third Plan as Modified than they would receive in a
liquidation. A copy of the Debtors' liquidation scenario is attached as Exhibit
A-8.
Under the Projections, Mobile Energy estimates that it will provide
approximately 925,000 MMBtus of steam to the tissue mill each year through 2019.
It also is anticipated that Mobile Energy will provide approximately 354,000
megawatt hours of electricity each year through 2019. The estimated usage for
steam and power for 2003 and later years is approximately 55% and 110%,
respectively, of the amount of steam and power provided to the tissue mill
during 1998. Mobile Energy also intends to continue to sell electricity in
excess of the mill owners' demands during peak periods into the wholesale
market, but no additional revenues are included in the Projections on account of
such sales. A schematic of the Debtors' anticipated operating configuration in
this scenario is attached as Exhibit A-4.
Further, the Third Plan as Modified contemplates that after Southern is
divested of its ownership of Mobile Energy, reorganized Mobile Energy will
qualify as a qualifying facility under the Public Utility Regulatory Policies
Act of 1978 ("PURPA"), such that Mobile Energy will not be a public utility
under PUHCA, and its owners will not be subject to regulation as public utility
____________________
14 OEC filed for bankruptcy in December 2001, as did Enron Corp. and other
affiliates of OEC. OEC continues to operate the Energy Complex pursuant to
the operating agreement between it and Mobile Energy. As a debtor under
Chapter 11 of the Bankruptcy Code, OEC could elect to reject the operating
between it and Mobile Energy. Management of Mobile Energy understands that
risk and believes that in such event it could replace OEC with a new
operator that would perform the same functions as OEC, and that there would
be no interruption in services to Mobile Energy's customers.
14
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; however, the configuration
presumed in the original application has been superceded by the configuration
that serves as the basis for the Third Plan as Modified. An appropriate
application will be made to seek qualification of assets of reorganized Mobile
Energy that satisfy pertinent regulatory tests as a qualifying facility
consistent with the business plan that forms the basis of the Third Plan as
Modified. Mobile Energy anticipates filing the "self certification" application
contemporaneously with its emerging from Chapter 11, which is anticipated to be
in mid to late July 2003, depending on the timing of the Commission's decision
on this Application. The certification will be effective immediately upon its
filing with the Federal Energy Regulatory Commission.
4. The Cogeneration Development Agreement
In February 2000, the Debtors, Mirant Services and Mirant entered into
the Cogeneration Development Agreement, as referenced above. For several
reasons, including a dramatic rise in long-term (future) natural gas prices that
negatively affected the economics of the Cogen Project from both the Debtors'
and Mirant's point of view, the Cogeneration Development Agreement was amended
twice, with the second amendment, CDAA No. 2, allowing the Debtors to realize
$7.9 million in value by releasing the Debtors' rights to a GE combustion
turbine that was to be contributed by Mirant. The practical effect of CDAA No. 2
is that the Cogen Project will not be developed by Mobile Energy under the Third
Plan as Modified. Because the Cogen Project will not go forward, the projections
attached hereto as Exhibit A-3 do not assume any revenues to be received from
the Cogen Project.
Under the Cogeneration Development Agreement, Southern, Mirant and
Mirant Services had 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 were to
continue. Mobile Energy agreed in the Cogeneration Development Agreement to
compensate and indemnify Southern for any costs it incurred under either
agreement. That compensation obligation is secured by a priority lien on Mobile
Energy's assets. The indemnities in favor of Southern, Mirant and Mirant
Services are described in Exhibit 1 and they continue in effect under CDAA No.
2. The amounts, if any, that may be owed to Southern, Mirant or Mirant Services
under the surviving indemnities are not capable of being quantified at this
time. The Debtors' management is unaware of any current obligations under the
underlying agreements, and in any event, does not believe the Debtors' future
obligations under the indemnities will have a materially adverse effect on the
Debtors' future business operations.
15
Under the Cogeneration Development Agreement, Mobile Energy and
Holdings agreed to indemnify Southern from any taxes imposed on Southern which
taxes are attributable to any net taxable income recognized by Mobile Energy or
Holdings which exceed Southern's excess loss account balance with respect to its
stock investment in Holdings as of the beginning of the tax period in which the
excess loss account is triggered. Prior to the time that the excess loss account
is triggered, Southern will remain responsible to pay the taxes which are
attributable to any net taxable income recognized by Mobile Energy or Holdings.
The maximum Southern obligation concerning the excess loss account can be
estimated, recognizing that the balance fluctuates periodically, depending upon,
inter alia, the results of operations of Mobile Energy and Holdings. As of
December 31, 2002 the excess loss account is estimated at approximately $54.9
million. The federal statutory corporate income tax rate is 35%; therefore,
under these circumstances, Southern's maximum potential exposure could
approximate $19.2 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% 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
The bondholders under the Third Plan as Modified will receive shares in
reorganized Holdings ("New
Common Stock").
a. Unsecured Creditors; Others
Under the Third Plan as Modified, the claims of the general unsecured
creditors and the claims of all other creditors, except Southern, Mirant and
Mirant Services, and the bondholders, will be paid in full. The claims of
unsecured creditors are approximately $511,000, 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 Third Plan as Modified)
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
16
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 Third Plan as Modified, the First Mortgage Bondholder Claims
are deemed Allowed Claims for purposes of the Third Plan as Modified 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) 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 72.967% of the New Common Stock of
Holdings.
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 Third Plan as Modified, the Tax-Exempt Bondholder Claims are
deemed Allowed Claims for purposes of the Third Plan as Modified 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.
Holders of Tax-Exempt Bondholder Claims shall receive in complete
settlement, satisfaction and discharge of their Tax-Exempt Bondholder Claims,
(1) a Pro Rata Share of 27.003% of the New Common Stock of Holdings, and (2)
such Holders shall retain a Pro Rata Share of $1,000,000 of their outstanding
Tax-Exempt Bonds.
17
d. Southern's, Mirant's and Mirant Services' Claims
As was described in the Application, Southern, Mirant, and Mirant
Services 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
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 Third Plan as Modified.
e. Post Reorganization Ownership Structure
On the effective date of the Third Plan as Modified, Southern's
interest in Holdings shall be canceled and extinguished. 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. Neither
Southern nor any of its affiliates will hold any interest of any kind in either
Holdings or Mobile Energy. The existing bondholders will hold the New Common
Stock which will constitute the entire equity interest in the reorganized
Holdings. Holdings will continue to own 100% of the equity ownership of Mobile
Energy. Some of the existing bondholders may end up owning more than 10% of the
equity ownership of Holdings, and unless otherwise exempted (see, e.g., the
discussion of the qualifying facility exemption under PURPA supra at pp. 14-15),
such ownership may give rise to such holders being subject to regulation under
PUHCA.
6. Summary of Post-Reorganization Structure
The First Mortgage Bonds and the Tax-Exempt Bonds will be exchanged for
the New Common Stock of Holdings. The Debtors' proposed post-reorganization
equity ownership structure is depicted in the following diagram:
18
-----------------------------------------------
| Holders of Allowed |
| First Mortgage Bondholder Clarims |
|and Allowed Tax-Exemept Bondholder Claims on |
| The Record Date |
-----------------------------------------------
|
|
100%
|
|
---------------
| Reorganized |
| Holdings |
---------------
|
|
100%
|
|
-----------------
| Reorganized |
| Mobile Energy |
-----------------
7. The Bondholder Steering Committee Supports Approval of the
Third Plan as Modified
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"), Morgan Stanley, 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 currently is comprised of CSFB and Morgan Stanley, and Wachovia Bank,
National Association, formerly known as First Union National Bank (ex officio).
The Bondholder Steering Committee previously has retained Debevoise & Plimpton,
McDermott Will & Emery, and Silver, Voit and Thompson as their counsel and CIBC
as their financial advisor. As of March 31, 2001, CIBC is no longer the
financial advisor to the Bondholder Steering Committee. Greenburg Traurig is
currently retained as local counsel to Silver, Voit and Thompson. The Bondholder
Steering Committee, which collectively hold in excess of 70% of the First
Mortgage Bonds and in excess of 64% of the Tax-Exempt Bonds, support
confirmation of the Third Plan as Modified.
19
B. Bankruptcy Court Approval Process
1. General
The Third Plan as Modified was filed with the Bankruptcy Court on
December 14, 2001, along with the Second Amended Disclosure Statement as
Modified. Under Section 1125 of the Bankruptcy Code, the Debtors may not solicit
votes for acceptances of the Third Plan as Modified until the Bankruptcy Court
approves the Second Amended Disclosure Statement as Modified 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
Third Plan as Modified. A hearing was held with the Bankruptcy Court on December
14, 2001, to determine whether the Second Amended Disclosure Statement as
Modified meets the requirements of Section 1125. Subject to Commission review of
this Application, the Bankruptcy Court approved the Second Amended Disclosure
Statement as Modified on January 4, 2002.15
Upon receipt of requisite approval of the Second Amended Disclosure
Statement as Modified (together with any immaterial modifications thereof), the
Debtors will solicit votes on the Third Plan as Modified. The solicitation
process is expected to take approximately three 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 Third Plan as
Modified at the confirmation hearing. At the confirmation hearing, the
Bankruptcy Court must determine whether the confirmation of the Third Plan as
Modified meets the requirements of Section 1129 of the Bankruptcy Code. Only if
the Bankruptcy Court determines that the Third Plan as Modified meets the
requirements of Section 1129, may the Bankruptcy Court confirm the Third Plan as
Modified.
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.
_______________________________
15 The Second Amended Disclosure as Modified which is attached hereto as
Exhibit A-1, contains modifications to the disclosure statement which was
approved by the Bankruptcy Court on January 4, 2002. Such modifications (1)
reflect the removal of the election to receive member interests in Mobile
Energy, and (2) update the disclosure statement for events occurring since
December 14, 2001. Mobile Energy and Holdings will seek Bankruptcy Court
approval of the modifications upon approval of this Application.
20
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 Third Plan as Modified is feasible. See
Second Amended Disclosure Statement as Modified, Section XV.B.2. The material
risks associated with the Third Plan as Modified are described in the Second
Amended Disclosure Statement as Modified in detail (see Article XI thereof). 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 Kimberly-Clark, 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 Third Plan as Modified converts all of the claims of the First
Mortgage Bondholders and the Tax-Exempt Bondholders to equity (except for the
$1,000,000 of Tax-Exempt Bonds which will remain outstanding), and the
projections attached to the Second Amended Disclosure Statement as Modified (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 Second
Amended Disclosure Statement as Modified.
The revised capital structure contained in the Third Plan as Modified
(i.e., the elimination of $70 million of secured debt), the Debtors' exclusion
of any revenues attributable to the Cogen Project or the New Pulp Mill in its
projections and the fact that fuel costs are borne by the Mill Owners as opposed
to the Debtors further ensures the feasibility of the Third Plan as Modified.
The projections attached hereto as Exhibits A-3 and A-4 assume gas
prices of $4.15 per MMbtu beginning in 2003 and escalating at 1.5% thereafter.
These projections show that the Debtors can continue to operate even though S.D.
Warren has elected to close its mill.
21
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, the Second Plan, the Third
Plan as Modified, the Disclosure Statement, the First Amended Disclosure
Statement and the Second Amended Disclosure Statement as Modified; 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..................................................$9,500,000.00
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..........................................................$12,209,000.00
The foregoing fees are to be paid by or have been paid by Mobile Energy or
Holdings.
Item 3 Applicable Statutory Provisions
A Summary
Petitioners seek that authorization necessary under the Act to
disseminate the Third Plan as Modified to parties in interest in order to
solicit votes to approve or reject same, including the Commission's report
approving the Third Plan as Modified and Second Amended Disclosure Statement as
Modified 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 Third Plan as
Modified. 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 Amended Disclosure Statement as Modified
and the Third Plan as Modified;
22
(2) Observe and perform (if necessary), the indemnities identified in the
Third Plan as Modified, 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 either Holdings and Mobile Energy or in Mobile Energy;
(4) Take such other actions necessary to consummate the Third Plan as
Modified; 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 Second Amended Disclosure Statement as Modified and the Third
Plan as Modified 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). At
December 31, 2002, Southern's "aggregate investment," as defined in Rule
53(a)(1), in EWGs and FUCOs was approximately $321.9 million, or 6.81% of
Southern's "consolidated retained earnings," also as defined in Rule 53(a)(1),
as of December 31, 2002 ($4.730 billion).16
_______________________
16 As discussed in Southern's Application on Form U-1 (File No. 70-9727)
relating to the spin-off of Mirant Corporation ("Mirant"), Southern and
Mirant reorganized certain energy-related and FUCO activities and Mirant
completed a tax-free distribution to Southern of these activities on March
5, 2001 (the "Mini-Spin"). On April 2, 2001, Southern completed the
spin-off of its remaining ownership interest in Mirant to Southern's
shareholders. Therefore, the four indirect subsidiaries (EPZ Lease, Inc.,
Dutch Gas Lease, Inc., GAMOG Lease, Inc. and NUON Lease, Inc.) obtained
through the Mini-Spin are the only remaining FUCO investments held by
Southern. Although Southern now owns all of the equity in these companies
as a result of the Mini-Spin, Southern has no direct or indirect investment
or any aggregate investment within the meaning of Rule 53 in these FUCOs,
including any direct or indirect guarantees or credit positions related to
any capital or financing leases. Southern has executed limited keep-well
commitments whereby Southern would be required to make capital
contributions to Southern Energy Finance Capital Corp. II, Southern Energy
Finance Capital Corp. or to Southern Energy Finance Company, Inc. in the
event of a shortfall in the scheduled debt service resulting from certain
changes in the payments due from Southern under the Southern Company Income
Tax Allocation Agreement. The maximum potential capital contribution
required under these commitments is the unamortized balance of the related
loans, which totaled approximately $416 million as of December 31, 2002.
23
B. Item-Specific Analysis
1. Approval of the Third Plan as Modified- Sections 11(g),
11(f), 12(e), 12(f), 6(a), and 7 of the Act.
Support of the Third Plan as Modified 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 Third Plan as Modified (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
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 Third Plan as Modified (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 may be altered under the Third
Plan as Modified, and Southern's indirect ownership of Mobile Energy will be
extinguished (see Item 1, Part A. 3).
Section 7(d) of the Act requires the Commission, in reviewing the
issuance of new securities, to consider whether the new security is reasonably
adapted to the security structure of the company issuing the security and other
companies in the registered holding company system. Of course, once the Third
Plan as Modified has been approved, Holdings will no longer be a member of a
registered holding company system, nor will it have to devote time and resources
to managing or resolving conflicts and business operations associated with
Mobile Energy and the Mill Owners. Moreover, the issuance of the new securities
is reasonably adapted to the security structure of reorganized Mobile Energy.
The new securities and other steps contemplated by the Third Plan as Modified
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 Third Plan as Modified which will increase cash
flow, and allowing Debtors additional flexibility in their business planning. In
light of the increasingly volatile nature of power prices in the wholesale
electricity markets, thickening the equity component of the capital structure is
appropriate to provide some measure of financial protection from such
volatility.
24
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,
Mirant Services 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 have created liability for Southern if
Southern had triggered a deconsolidation of Holdings from the Southern tax group
prior to July 31, 2001. Under the Cogeneration Development Agreement together
with its amendments, 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
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 Third Plan as Modified.
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
25
further milking of operating companies in the interest of controlling
holding-company groups." 74th Congressional Committee on 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.
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 Second 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
prior to July 31, 2001. 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, as amended, 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.
26
The Commission considers the substance of a transaction over its
form.17 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 obtained
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
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 Second Amended Application, the Amended
Application and 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 and those of its former
subsidiary Mirant, 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, potential 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.
_________________________
17 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
3. Extinguishment and Voiding of Southern's Equity Interest in
Holdings - Sections 12(d) and 2(a)(23) of the Act
The Third Plan as Modified 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. To the extent that Commission rules, regulations or orders apply to the
extinguishment of equity interests as contemplated by the Third Plan as
Modified, authorization would be necessary. While Applicants do not believe that
Commission rules, regulations and orders reach the fact pattern presented under
either alternative (e.g., extinguishment of the existing equity either in
Holdings or in Mobile Energy), if the Commission reaches a contrary conclusion,
Applicants request such authorization as would be necessary to effectuate either
alternative.
4. Take such other action as is necessary to consummate the Third
Plan as Modified-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
from the foregoing, the Third Plan as Modified involves multiple aspects. The
discussion of Sections 11, et al. of the Act, in Item 3, Part B.2, supra,
describes important aspects of the Third Plan as Modified.
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 Third Plan as Modified. Applicants respectfully request that any report
issued by the Commission concerning the Third Plan as Modified determine that
the Third Plan as Modified 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 Third Plan as Modified and related transactions are reasonable -
indeed the best option available - under the difficult circumstances surrounding
the interested parties. In summary, the Third Plan as Modified provides benefits
to diverse, in some circumstances adverse, economic interests with a stake in
Debtors' future viability. For example, the Third Plan as Modified is fair to
investors in Southern and to Southern itself, will simplify Southern's holding
28
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 most of 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 indirect equity interests in
Mobile Energy. Bondholders, more than 64% of which are already known to support
the Third Plan as Modified, can potentially experience significantly better
recovery under the Third Plan as Modified than under liquidation, and will
obtain the entire indirect equity ownership of Mobile Energy, thus enhancing
their ability to affect management Mobile Energy. The remaining customer at the
facility will have a supplier of electric and steam processing services with a
much lower level of indebtedness to service.
Once the Third Plan as Modified is confirmed and the disaffiliation of
Southern and Mobile Energy occurs, 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 Mobile
Energy's access is both consistent with its anticipated non-affiliated status
and reduces potential claims upon, and distractions to the central mission of,
SCS.
Southern as an investor in Mobile Energy 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 Third Plan as Modified. The Third Plan as Modified 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 $18 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
29
against costs it incurs under these contingent obligations with such indemnity
secured by a first priority lien on Mobile Energy's assets.
The same conclusion applies if the Third Plan as Modified is analyzed
from the perspective of Southern's investors. Southern's contingent risk
exposure is reduced under the Third Plan as Modified, as described above.
Southern previously has written off the cost of its Holdings common equity. No
further write-off by Southern for its Holdings equity interests is necessary.
Consequently, implementation of the Third Plan as Modified produces no
additional change in Southern's balance sheets.
Bondholders have good reason to support the Third Plan as Modified 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 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. Moreover, S.D. Warren, the owner of the paper mill at the facility,
closed its facility on December 14, 2001. Under the Third Plan as Modified 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 owners given these
circumstances. In addition, this capital structure enables the Debtors to
continue operations without being in default after S.D. Warren closes its paper
mill, which would not be the case absent this restructure. In other words, the
Third Plan as Modified presents the bondholders with the potential for continued
operations and a greater recovery compared to the scenario without the Third
Plan as Modified. Based upon an analysis contained in the Second Amended
Disclosure Statement as Modified (see Article XI thereof), proponents of the
Third Plan as Modified believe that creditors will receive as much or more under
the Third Plan as Modified as they would receive 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
Holdings, reducing inflexible financial payment obligations to them by Mobile
Energy. The Debtors' business also will benefit from reduced regulatory burdens
30
associated with the Third Plan as Modified (e.g., the cessation of Southern's
ownership interest; qualifying facility status).
Consequently, the Third Plan as Modified 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) was received from the Federal Energy Regulatory Commission under
Federal Power Act ("FPA") Section 203. Mobile Energy anticipates that shortly it
will file an amended application for authorization under FPA Section 203 to
change the ownership of Mobile Energy. Aside from FPA Section 203 authorization,
to Applicants' knowledge, consistent with the opinions expressed in Exhibit F
attached hereto, no other state or federal regulatory authorization is necessary
in order to implement the transactions contemplated by the Third Plan as
Modified.
b. See (a). Approval of the Bankruptcy Court is being sought for the
Second Amended Disclosure Statement as Modified and Third Plan as Modified;
further, obtaining a determination that existing electric generation facilities
constitute qualifying facilities for purposes of PURPA, may involve regulatory
determinations from or filings with FERC.
Item 5. Procedure
(a) Debtors hereby (i) waive a recommended decision by a hearing
officer, (ii) waive a recommended decision by any other responsible officer or
the Commission, and (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 any notice under
Rule 23 the Commission deems necessary 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 Second 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, 2003.
31
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 Second Amended Application attests, the
factual pattern and the bankruptcy process renders consummation of the Third
Plan as Modified cumbersome and time-consuming. Rather than further burdening
the Commission with another review process in the event that consummation of the
Third Plan as Modified is not completed within the precise 60 day limit,
Applicants respectfully request that the Commission authorize the transactions
contemplated by the Third Plan as Modified to be completed in such time frame as
is necessary to successfully complete the transactions.
Item 6. Exhibits and Financial Statements
a. EXHIBITS
A-1 Second Amended Disclosure Statement as Modified (without
exhibits)*
A-1A Ballots and Notice of Confirmation*
A-2 Third Plan as Modified*
A-3 Projections*
A-4 Plant Schematic (KC only)*
A-5 Common Services chart*
A-6 Liquidation Analysis*
B-1 Mobile Energy Cogeneration Development Agreement*
B-2 CDAA No. 1*
B-3 CDAA No. 2*
E-1 Site Map (paper copy)*
E-2 Map of Energy Complex (paper copy)*
F-1 Opinion of Counsel
F-2 Opinion of Counsel
H Form of Notice Suitable for Publication in the Federal Register*
I. Summary of Pertinent Indemnities*
J. '99 /'00 Income Statement and Cash Budget*
* Previously Filed
32
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 March
31, 2003, and pro forma as of June 30, 2003.
b. Income Statements of Mobile Energy Services Company,
L.L.C. and Mobile Energy Services Holdings Inc. as of March
31, 2003, and pro forma as of June 30, 2003.
(2) Southern Company
Consolidated balance sheet of The Southern Company and its
subsidiaries at December 31, 2002. (Designated in Southern's
Form 10-K for the year ended December 31, 2002, File No.
1-3526.)
Consolidated statements of income and cash flows for The
Southern Company and its subsidiaries for the year ended
December 31, 2002. (Designated in Southern's Form 10-K for
the year ended December 31, 2002, File No. 1-3526.)
Since December 31, 2002, 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.
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33
Signatures
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, as amended, the undersigned companies have duly caused this amendment
to be signed on their behalf by the undersigned who are duly authorized.
Dated: July 18, 2002
MOBILE ENERGY SERVICES COMPANY, L.L.C.
50 Bay Bridge Road
Mobile, Alabama 36610
By: MOBILE ENERGY SERVICES HOLDINGS, INC.
Its: MANAGING MEMBER
By: /s/James T. Stewart
Its: President
MOBILE ENERGY SERVICES HOLDINGS, INC.
50 Bay Bridge Road
Mobile, Alabama 36610
By: /s/James T. Stewart
Its: President
THE SOUTHERN COMPANY
270 Peachtree Street
Atlanta, GA 30303
By: /s/Tommy Chisholm
Tommy Chisolm
Its: Secretary