Energy companies that seek FERC clearance to issue debt backed by public utility assets must use the debt proceeds strictly for utility purposes, according to an order issued by the Federal Energy Regulatory Commission last Thursday.

The Commission order would require the secured debt to follow the utility assets, and in the event the assets are divested or spun off, the debt or at least a portion of it would follow the utility assets [ES02-51]. Similarly, if utility assets financed by unsecured debt are spun off, then a proportionate share of the debt would have to be spun off as well, the agency said. As for unsecured debt used for non-utility purposes, that debt or a share of it also would have to follow the non-utility assets if spun off or divested.

At a press briefing following Thursday’s meeting, FERC Chairman Pat Wood said that this action “is a little different” than the cash management notice of proposed rulemaking (NOPR) pending at the agency.

“But it is, broadly, part of a family of issues relating to what responsibilities we do have over the public utilities that we regulated with regard to their financial disclosure type issues,” he said. “I would call it a cousin of that issue, i.e., it’s related, but it’s not the same exact issue which we’ve teed up in that cash management NOPR.”

FERC’s NOPR, issued in last August, would require FERC-regulated companies to maintain a minimum proprietary capital balance (stockholders’ equity) of 30%, and subsidiaries and their parent firms to possess an investment grade credit rating, as a precondition to a regulated company’s involvement in a cash-management or money pool arrangement [RM02-14]. In addition, FERC proposed that all cash-management transactions be well documented in the future, including deposits, withdrawals, and interest income from and interest expenses related to the arrangements (See NGI, Aug. 5, 2002).

FERC voted out the restrictions on public utility issuances of secured and unsecured debt at last Thursday’s regular agency meeting, in response to financially troubled Westar Energy’s request to issue up to $650 million of long-term unsecured debt. The debt restrictions would apply generically to all utilities, and would be imposed on future Section 204 requests related to issuances of debt, Commission staff said.

“These conditions and restrictions are intended to prevent Westar and other public utilities from borrowing substantial amounts of money and using the proceeds to finance non-utility businesses,” staff said.

The agency granted the Topeka, KS-based company’s request subject to the condition that the funds will be used solely to retire its outstanding indebtedness, according to the order.

It further directed Westar Energy, the largest electric utility in Kansas, to file informational status reports on the financial condition and debt-reduction efforts of the company within 30 days of the end of each quarter. In addition, the company was ordered to file a “Report of Securities Issued” within 30 days after the sale or placement of long-term unsecured debt.

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