[Federal Register Volume 65, Number 203 (Thursday, October 19, 2000)]
[Notices]
[Pages 62770-62772]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26798]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 24687; 812-12158]


American Water Capital Corp.; Notice of Application

October 12, 2000.
AGENCY: Securities and Exchange Commission (``SEC or Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') granting an exemption from all 
provisions of the Act.

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SUMMARY OF THE APPLICATION: Applicant seeks an order exempting it from 
all provisions of the Act in connection with the offer and sale of 
applicant's securities to raise funds for the business operations of 
its parent and certain subsidiaries thereof.
    Filing Dates: The application was filed on June 30, 2000 and 
amended on October 5, 2000.
    Hearing or Notification of Hearing: An order granting the 
application will be

[[Page 62771]]

issued unless the SEC orders a hearing. Interested persons may request 
a hearing by writing to the SEC's Secretary and serving applicant with 
a copy of the request, personally or by mail. Hearing requests should 
be received by the SEC by 5:30 p.m. on November 6, 2000, and should be 
accompanied by proof of service on applicant, in the form of an 
affidavit or, for lawyers, a certificate of service. Hearing requests 
should state the nature of the writer's interest, the reason for the 
request, and the issues contested. Persons who wish to be notified of a 
hearing may request notification by writing to the SEC's Secretary.

ADDRESS: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0609. Applicant, 1025 Laurel Oak Road, Voorhees, NJ 08043.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
942-0582, or Nadya B. Roytblat, Assistant Director, at (202) 942-0564, 
(Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549-0102 (tel. 202-942-8090).

Applicant's Representations

    1. Applicant is a Delaware corporation and a wholly-owned finance 
subsidiary of American Water Works Company, Inc. (``AWW''). AWW, a 
Delaware corporation, is a public utility holding company exempt from 
the Public Utility Holding Company Act of 1940. The core business of 
AWW is the ownership of common stock of utility companies providing 
water service. AWW's 25 utility subsidiaries provide water and/or 
wastewater service to approximately nine million people in 22 states. 
With the exception of the Michigan-American Water Company, the utility 
companies function under economic regulations prescribed by state 
regulatory commissions. In addition to its regulated utility 
subsidiaries, some subsidiaries of AWW engage in non-regulated 
businesses. However, only AWW, the regulated utility subsidiaries and 
entities wholly-controlled by these regulated utility subsidiaries 
borrow from Applicant. The term ``Subsidiaries'' as used in the 
application means the water and wastewater utility subsidiaries and 
entities wholly-owned directly or indirectly by such utilities.
    2. Applicant's primary function will be to lend funds to AWW and 
its Subsidiaries and provide cash management through cash sweeps and 
management of excess cash. Applicant will obtain its funds primarily by 
borrowing from two sources: (i) it will arrange for a syndicated bank 
credit line to provide short-term loans with a maturity of one year or 
less; and (ii) it will register its own debt securities for sale to the 
public by filing a shelf registration of these securities with the 
Commission. Applicant is also considering instituting a commercial 
paper program in combination with the syndicated bank credit line. 
Applicant will invest in or lend at least 85% of the cash or cash 
equivalents raised by it through offerings of debt securities to AWW 
and the Subsidiaries as soon as practicable, and in no event later than 
six months, after its receipt of such cash or cash equivalents.
    3. Applicant will comply with all of the provisions of rule 3a-5 
under the Act, discussed below, except that AWW will not directly 
guarantee the debt securities issued by Applicant. Instead of an 
unconditional guarantee, AWW will use a support agreement (``Support 
Agreement'') that will be the functional equivalent of an unconditional 
guarantee.
    4. Because applicant's securities are not beneficially owned by 
more than 100 persons and applicant is not making and does not propose 
to make a public offering of its securities, applicant is not an 
``investment company'' by virtue of the exemption contained in section 
3(c)(1) of the Act. Applicant is applying for an exemption because it 
may in the future engage in a public offering or an offering exempt 
from the registration requirements of the Securities Act of 1933 
(``1933 Act'') which may result in applicant's securities being 
beneficially held by more than 100 persons. Applicant, therefore, 
requests an order under section 6(c) of the Act exempting it from all 
provisions of the Act.

Applicant's Legal Analysis

    1. Section 6(c) of the Act permits the Commission to grant an 
exemption from the provisions of the Act if, and to the extent that, 
such exemption is necessary and appropriate in the public interest, 
consistent with the protection of investors, and consistent with the 
purposes fairly intended by the policy and provisions of the Act.
    2. Rule 3a-5 under the Act provides an exemption from the 
definition of an investment company for certain companies organized 
primarily to finance the business operations of their parent companies 
or companies controlled by their parent companies. Rule 3a-5 requires, 
among other things, that any debt securities issued to the public be 
unconditionally guaranteed by the parent company as to the payment of 
principal, interest, and premium. Applicant states that it meets all 
the requirements of rule 3a-5 except that AWW will not directly 
guarantee the debt securities issued by Applicant.
    3. Applicant states that a state's public utility commission 
usually determines a Subsidiary's return on capital by considering the 
capital structure of the Subsidiary without regard to the capital 
structure of AWW. AWW has avoided interdependent financial 
relationships such as loans and guarantees that tend to make 
interdependent the capital structure of AWW and the Subsidiaries in 
order to maintain a capital structure that is consistent with this 
regulatory approach. Applicant states that AWW determined to enter into 
the Support Agreement in lieu of an unconditional guarantee in order to 
maintain this separation in capital structure between it and its 
Subsidiaries. Applicant believes that the Support Agreement provides a 
functional equivalent of an unconditional guarantee of Applicant's 
securities because it grants holders of Applicant's securities the 
right to proceed directly against AWW in the event Applicant fails to 
pay when due principal, interest, and premium, if any, owed by it on 
such securities.

Applicant's Conditions

    Applicant agrees that any order granting the requested relief will 
be subject to the following conditions:
    1. Applicant will meet all of the requirements of rule 3a-5 except 
for the unconditional guarantee requirement. In lieu of an 
unconditional guarantee, Applicant has entered into, and will keep in 
force (except as contemplated below), the Support Agreement, which is 
and shall continue to be the functional equivalent of an unconditional 
guarantee. The Support Agreement provides, and will continue to 
provide, as follows:
    a. AWW owns and shall continue to own all of the outstanding voting 
stock of Applicant;
    b. AWW will provide to Applicant funds (as capital, or if AWW and 
Applicant agree, as a subordinated loan) as required if Applicant is 
unable to make timely payment of interest, principal or premium, if 
any, on any debt issued by Applicant;
    c. AWW will cause Applicant to have at all times a positive 
tangible net worth (net assets less intangible assets, if any), as 
determined in accordance with

[[Page 62772]]

generally accepted accounting principles; and
    d. If Applicant fails or refuses to take timely action to enforce 
its rights under the Support Agreement or if Applicant defaults in the 
timely payment of interest, principal or premium, any lender may 
proceed directly against AWW to enforce Applicant's rights under the 
Support Agreement or to obtain payment of such defaulted interest, 
principal or premium.
    2. The Support Agreement may be modified or amended in a manner 
that adversely affects the rights of creditors of Applicant only if 
such modification or amendment occurs after all debt securities 
theretofore issued by Applicant are irrevocably paid in full and all 
commitments to acquire Applicant's debt securities are terminated, 
unless all creditors consent in advance and in writing to such 
modification or amendment. No modification of or amendment to the 
Support Agreement relating to the four provisions set forth in 
condition 1, above, (other than to increase the required level of 
Applicant's positive tangible net worth) shall be made unless: (i) All 
creditors consent in advance and in writing to such modification or 
amendment and (ii) Applicant applies to the Commission for an amended 
order relating to such modification or amendment, and the Commission 
grants such amended order. The Support Agreement may be terminated only 
after (1) all debt securities issued by Applicant are irrevocably paid 
in full and all commitments to acquire Applicant's debt securities are 
terminated and (2) Applicant applies to the Commission for an amended 
order relating to such termination, and the Commission grants such 
amended order.
    3. If Applicant initiates a non-public or public offering of 
securities, it will consist of short-term, intermediate-term or long-
term debt securities to be offered and sold either in transactions 
exempt from the registration requirements of the 1933 Act or in public 
offerings of securities registered under the 1933 Act. No future public 
offering will involve voting securities of Applicant.
    4. In the case of an offering of debt securities not requiring 
registration under the 1933 Act, Applicant will provide each offeree 
with disclosure materials that will include a description of the 
business of AWW and its subsidiaries and other data of the character 
customarily supplied in such offerings, or will otherwise comply with 
the disclosure requirements of Regulation D under the 1933 Act. In the 
event of a subsequent offering, these materials will be updated at the 
time thereof (by supplementing the disclosure materials or by 
incorporating by reference filings under the Securities Exchange Act of 
1934) to reflect material changes in the financial condition of AWW and 
its subsidiaries, taken as a whole.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 00-26798 Filed 10-18-00; 8:45 am]
BILLING CODE 8010-01-M