As filed with the Securities and Exchange Commission on November 26, 1997
File No. 070-_______
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM U-1 APPLICATION-DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
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Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
(Name of company filing this statement
and address of principal executive offices)
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None
(Name of top registered holding company parent of applicant)
Thomas K. Henderson
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
(Name and address of agent for service)
The Commission is requested to send copies of all notices, orders and
communications in connection with this Application-Declaration to:
Thomas K. Henderson Robert E. Buckholz, Jr.
Allegheny Energy, Inc. Sullivan & Cromwell
10435 Downsville Pike 125 Broad Street
Hagerstown, Maryland 21740 New York, New York 10004
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TABLE OF CONTENTS
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Item 1. DESCRIPTION OF PROPOSED MERGER.......................................1
A. Introduction....................................................1
1. Overview of Requested Approvals.............................2
2. Overview of the Merger......................................3
B. Description of the Parties to the Merger........................4
1. General Description.........................................4
(a) Allegheny Energy, Inc.................................4
(b) DQE, Inc..............................................8
(c) AYP Sub, Inc.........................................11
2. Description of Energy Sales and Facilities.................11
(a) AYE..................................................11
(i) Energy Sales....................................11
(ii) Electric Generating Facilities..................12
(iii)Electric Transmission and Other Facilities......14
(iv) Fuel Sources....................................14
(b) DQE..................................................14
(i) Energy Sales....................................14
(ii) Electric Generating Facilities..................15
(iii)Electric Transmission and Other Facilities......15
(iv) Fuel Sources....................................16
3. Electric Coordination......................................16
4. Nonutility Interests of AYE and DQE........................17
(a) AYE..................................................17
(b) DQE..................................................18
C. Description of Merger and Statement as to Consideration........19
1. Background.................................................19
2. Merger Agreement...........................................22
3. Management of AYE Following the Merger.....................23
Item 2. FEES, COMMISSIONS AND EXPENSES.....................................23
Item 3. APPLICABLE STATUTORY PROVISIONS...................................24
A. Merger.........................................................25
1. Section 10(b)..............................................26
(a) Section 10(b)(1).....................................26
(i) Interlocking Relationships......................26
(ii) Concentration of Control........................27
(b) Section 10(b)(2).....................................30
(i) Reasonableness of Consideration.................30
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(ii) Reasonableness of Fees..........................32
(c) Section 10(b)(3).....................................33
2. Section 10(c)..............................................35
(a) Section 10(c)(1).....................................35
(i) Acquisition of Certain Businesses...............36
(ii) Integrated Public Utility System................52
(iii)Section 11(b)(2)................................54
(b) Section 10 (c)(2)....................................55
(i) Efficiencies and Economies......................55
3. Section 10(f)..............................................58
B. Intra-System Financing.........................................58
C. Service Agreements between APSC and Subsidiaries of DQE........60
D. Other Services.................................................61
Item 4. REGULATORY APPROVALS................................................61
A. Antitrust......................................................61
B. Federal Power Act..............................................62
C. Atomic Energy Act..............................................62
D. State Public Utility Regulation................................62
Item 5. PROCEDURE...........................................................63
Item 6. EXHIBITS AND FINANCIAL STATEMENTS...................................63
A. Exhibits.......................................................63
B. Financial Statements...........................................65
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS.............................65
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Item 1. DESCRIPTION OF PROPOSED MERGER
A. INTRODUCTION
This Application-Declaration seeks approvals relating to the proposed
combination, by means of the Merger (as defined under Item 1.A.2 below) of
Allegheny Energy, Inc. (formerly Allegheny Power System, Inc.), a Maryland
corporation ("AYE" or "Applicant," which terms, as used herein, shall sometimes
refer to AYE and/or its subsidiaries, jointly or separately), and DQE, Inc., a
Pennsylvania corporation ("DQE," which term, as used herein, shall sometimes
refer to DQE and/or its subsidiaries, jointly or separately), by which AYE will
acquire all of the issued and outstanding shares of common stock, no par value,
of DQE (the "DQE Common Stock"). AYE is registered with the Securities and
Exchange Commission (the "Commission") as a holding company under the Public
Utility Holding Company Act of 1935, as amended (the "PUHCA"). Monongahela Power
Company ("Monongahela"), The Potomac Edison Company ("Potomac Edison") and West
Penn Power Company ("West Penn") are direct wholly owned public utility
subsidiaries of AYE. Allegheny Generating Company ("AGC"), which owns a 40%
undivided interest in a pumped-storage hydroelectric generating facility located
in Bath County, Virginia (and related transmission facilities), is jointly owned
by West Penn, Potomac Edison and Monongahela. DQE, a holding company, claims
exemption from registration pursuant to Rule 2 under Section 3(a)(1) of the
PUHCA. Duquesne Light Company ("Duquesne Light"), Allegheny Development
Corporation ("ADC"), DH Energy, Inc. ("DH Energy") and MT Energy, Inc. ("MT")
are direct and indirect wholly owned public utility subsidiaries of DQE. In
addition, two direct subsidiaries of DQE, Duquesne Enterprises ("DE") and DQE
Energy Services ("DES"), are holding companies for purposes of the PUHCA. Both
DE and DES claim exemption from registration pursuant to Rule 2 under Section
3(a)(1) of the PUHCA.
The Merger is expected to produce substantial benefits to the public,
investors and consumers and will meet all applicable standards of the PUHCA.
Among other things, AYE believes that the Merger offers significant strategic
and financial benefits to each of AYE and DQE and to their respective
shareholders, as well as to their employees, customers and the communities in
which they do business. These benefits include, among others:
(i) Maintenance of competitive rates, or achievement of rates that
will be lower than they would be in the absence of the Merger, which will
improve AYE's ability to meet the challenges of the increasingly competitive
environment in the utility industry;
(ii) Integration of corporate and administrative functions,
including eliminating duplicate activities, limiting duplicative capital
expenditures for administrative facilities and information systems, and savings
in areas such as legal, auditing and consulting fees;
(iii) Expanded management resources and ability to select
leadership from a larger and more diverse management pool;
(iv) Greater purchasing power for items such as fuel and
transportation services, and streamlining of inventories;
(v) More efficient pursuit of authorized diversification into
nonutility areas;
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(vi) Increased geographic diversity of service territories,
reducing exposure to local changes in economic, competitive, or climatic
conditions;
(vii) Continued ability to play a strong role in the economic
development efforts of the communities Duquesne Light, Monongahela, Potomac
Edison and West Penn now serve; and
(viii) Increased electric load diversity, by combining AYE's
winter-peaking operation and suburban, rural and heavy industrial customer base,
with DQE's summer-peaking operation and urban, commercial and residential
customer base.
In this regard, AYE believes that the synergies created by the Merger
will generate substantial cost savings that would not be available absent the
Merger. AYE has estimated the dollar value of the synergies from the Merger to
be approximately $1.0 billion, the large majority of which it is estimated will
be realized in the first 10 years after the Merger. The expected Merger benefits
are discussed in further detail in Item 3.A.2.b.i below.
The Merger has been approved by the shareholders of DQE and AYE at
their Annual Meeting of Stockholders and Special Meeting of Stockholders,
respectively, both held on August 7, 1997. Apart from the approval of the
Commission under the PUHCA, various aspects of the Merger are subject to the
approval of: (i) the Federal Energy Regulatory Commission (the "FERC"), (ii) the
Nuclear Energy Regulatory Commission (the "NRC") and (iii) the Pennsylvania
Public Utility Commission (the "PAPUC"). Further, the Merger may not be
consummated until the expiration of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). AYE has also requested the Maryland Public Service Commission (the
"MDPSC") to approve the issuance of shares of common stock, par value $1.25 per
share, of AYE (the "AYE Common Stock") to effect the Merger. In order to permit
timely consummation of the Merger and the realization of the substantial
benefits it is expected to produce, the Applicant requests that the Commission's
review of this Application-Declaration commence and proceed as expeditiously as
practicable.
1. Overview of Requested Approvals
As set forth in greater detail below, Applicant hereby requests that
the Commission approve the following in connection with the Merger:
(i) the acquisition by AYE of all of the issued and outstanding
DQE Common Stock;
(ii) the formation and capitalization of a special purpose
subsidiary, Merger Sub (as defined under Item 1.A.2 below);
(iii) the issuance of AYE Common Stock to effect the Merger;
(iv) such additional financing transactions, not otherwise
exempted, as may be necessary for DQE and its subsidiaries to continue their
authorized operations following the Merger, including the addition of DQE and
its subsidiaries to the Allegheny Energy Money Pool (the "Money Pool"), and the
amendment of AYE's existing financing authority to authorize AYE to provide
loans and guarantees to DQE's nonutility
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subsidiaries on the same terms and conditions as the existing nonutility
subsidiaries of AYE (as discussed in Item 3.B below);
(v) the retention by AYE of the nonutility businesses of DQE and
of the nonutility affiliates of DQE (as discussed in Item 3.A.2 below); and
(vi) service agreements to permit, under Section 13 of the PUHCA
and the Commission's rules thereunder, Allegheny Power Service Corporation
("APSC") to render services to DQE's utility and nonutility subsidiaries (as
discussed in Item 3.C below).
The Applicant further requests that the Commission grant such other
authorizations as may be necessary in connection with the proposed Merger.
2. Overview of the Merger
The Agreement and Plan of Merger, dated as of April 5, 1997 (the
"Merger Agreement"), among DQE, AYE and AYP Sub, Inc., a corporation to be
formed under the laws of the Commonwealth of Pennsylvania as a wholly owned
subsidiary of AYE ("Merger Sub"), provides for a business combination of AYE and
DQE in which Merger Sub will be merged with and into DQE (the "Merger"). DQE
will be the surviving corporation in the Merger and will become a wholly owned
subsidiary of AYE. Upon the Merger becoming effective, each share of DQE Common
Stock (other than shares of DQE Common Stock owned by AYE, Merger Sub or any
other direct or indirect subsidiary of AYE and shares of DQE Common Stock that
are owned by DQE or any direct or indirect subsidiary of DQE, in each case not
held on behalf of third parties, and which are not shares of DQE Common Stock
held by Duquesne Light to provide for redemption of such subsidiary's preference
shares pursuant to the terms of such subsidiary's 401(k) plan or to provide
benefits under another employee benefit plan of Duquesne Light (collectively,
the "Excluded Shares")) issued and outstanding immediately prior to such time
will be converted into the right to receive, and become exchangeable for, 1.12
shares of AYE Common Stock (the "Exchange Ratio"). Upon consummation of the
Merger, holders of DQE Common Stock immediately prior to the Merger will own
approximately 42% of the outstanding shares of AYE Common Stock after the Merger
(based on the number of shares of AYE Common Stock and DQE Common Stock
outstanding as of September 30, 1997).
After the Merger, AYE's utility and nonutility subsidiaries will remain
subsidiaries of AYE and DQE's utility and nonutility subsidiaries will become
indirect subsidiaries of AYE. After the Merger, the only voting securities of
AYE that will be publicly held will be the AYE Common Stock; the Merger will
have no effect on the issued and outstanding preferred stock of DQE, and the
issued and outstanding common stock, public debt securities, preferred stock and
preference stock of the respective subsidiaries of AYE and DQE.
A copy of the Merger Agreement is hereby incorporated by reference as
Exhibit B-1.
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B. DESCRIPTION OF THE PARTIES TO THE MERGER
1. General Description
(a) Allegheny Energy, Inc.
AYE was incorporated under the laws of the State of Maryland in 1925.
It is a registered public utility holding company under the PUHCA.
AYE owns, directly or indirectly, various regulated and unregulated
subsidiaries. AYE's primary subsidiaries are engaged principally in the
generation, transmission, distribution and sale of electricity throughout a
29,000 square mile service area covering parts of Maryland, Ohio, Pennsylvania,
Virginia and West Virginia. A map showing the electric service area of AYE
(including transmission lines) is filed as Exhibit E-1. AYE provides electric
utility service to approximately 1.4 million customers.
AYE directly owns all of the outstanding common stock of three electric
utility companies as defined under the PUHCA: Monongahela Power Company, The
Potomac Edison Company and West Penn Power Company. AGC, which owns a 40%
undivided interest in a hydroelectric pumped-storage facility which generates
electric energy, is owned jointly by Monongahela, Potomac Edison and West Penn.
AYE also owns all the issued and outstanding stock of two nonutility companies:
(i) AYP Capital, Inc. ("AYP Capital"), a nonutility subsidiary primarily
engaged, directly or indirectly, in wholesale generation, marketing retail
energy, energy services and communications; and (ii) APSC, a service company
approved by the Commission under Section 13 of the PUHCA and Rule 88 thereunder,
which provides various technical, administrative, managerial, operational and
other services to AYE's subsidiaries.
Monongahela was incorporated in Ohio in 1924. It is engaged in the
generation, transmission, and distribution of electricity to 350,062 retail
customers and to 8 wholesale customers in an area of approximately 11,900 square
miles with a population of approximately 710,000 in northern West Virginia and
an adjacent portion of Ohio. Monongahela also owns generating capacity in
Pennsylvania. In the fiscal year ended December 31, 1996, Monongahela provided
approximately 24% of AYE's consolidated revenues.
Potomac Edison was incorporated in Maryland in 1923 and in Virginia in
1974. It is engaged in the generation, transmission, and distribution of
electricity to 375,432 retail customers and to 10 wholesale customers in an area
of approximately 7,300 square miles with a population of approximately 782,000
in portions of Maryland, Virginia and West Virginia. Potomac Edison also owns
generating capacity in Pennsylvania. In the fiscal year ended December 31, 1996,
Potomac Edison provided approximately 31% of AYE's consolidated revenues.
West Penn was incorporated in Pennsylvania in 1916. It is engaged in
the generation, transmission, and distribution of electricity to 662,881 retail
customers and to 15 wholesale customers in an area of approximately 9,900 square
miles with a population of approximately 1,399,000 in southwestern and north and
south central Pennsylvania. West Penn also owns generating capacity in West
Virginia. In the fiscal year ended December 31, 1996, West Penn provided
approximately 45% of AYE's consolidated revenues.
AGC was organized under the laws of Virginia in 1981 and is jointly
owned by Monongahela (27%), Potomac Edison (28%) and West Penn (45%). AGC's only
asset is a 40% undivided interest in the
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Bath County pumped-storage hydroelectric station located in Virginia, and its
connecting transmission facilities. AGC's 840-megawatt (MW) share of the
capacity of the station is sold to its three parents.
State regulatory bodies in Maryland, Pennsylvania, Ohio, Virginia and
West Virginia have general authority to supervise and regulate AYE's public
utility operations within their respective states.
Monongahela is subject to regulation by the Public Utilities Commission
of Ohio (the "PUCO") as to rates charged, services provided, the issuance of
stock, bonds, and notes, the declaration of stock or bond dividends or
distributions, capitalization levels, and various other matters. Monongahela is
also subject to regulation by the Public Service Commission for West Virginia
("WVPSC") as to rates charged, services provided, mergers with West Virginia
public utilities, the issuance of stock, and various other matters.
Potomac Edison is subject to regulation by the State Corporation
Commission of Virginia (the "VASCC") as to rates charged, services provided, the
issuance of stock or debt securities (with maturities of twelve months or more),
the acquisition or disposition of control of any public utility (defined as 25%
or more of the voting stock or the actual exercise of any substantial influence
over the policies and actions of any public utility), the acquisition or
disposition of utility assets or utility securities, and various other matters.
Potomac Edison is also subject to regulation by the WVPSC as to rates charged,
services provided, mergers with public utilities, the issuance of stock, and
various other matters. Additionally, Potomac Edison is subject to regulation by
the MDPSC as to rates charged, services provided, the issuance of stock, bonds,
securities, or notes (with maturities of twelve months or more), the acquisition
of capital stock of a Maryland public service company, and various other
matters.
West Penn is subject to regulation by the PAPUC as to rates charged,
services provided, the issuance of securities (excluding evidences of
indebtedness with maturities of less than one year), the acquisition of five
percent or more of the capital voting stock of a nonutility corporation, and
various other matters.
Wholesale rates for electric energy sold in interstate commerce,
wheeling rates for energy transmission in interstate commerce, and certain other
activities of AYE (including the operation of hydroelectric facilities) are
subject to the jurisdiction of the FERC pursuant to the Federal Power Act of
1920, as amended (the "Power Act").
AYE conducts its nonutility business through AYP Capital, which was
incorporated under the laws of the State of Delaware in 1994. AYP Capital has
three wholly owned subsidiaries, AYP Energy, Inc. ("AYP Energy"), Allegheny
Communications Connect, Inc. ("ACC") and Allegheny Energy Solutions, Inc.
("AES"), each of which was incorporated under the laws of the State of Delaware
in 1996, 1996 and 1997, respectively. AYP Energy is an exempt wholesale
generator and a power marketer. ACC is an exempt telecommunications company. AES
was formed as an unregulated subsidiary to provide electric energy and related
services to retail customers as retail energy and service markets are opened to
competition.
APSC, incorporated in Maryland in 1963, is a wholly owned service
company subsidiary of AYE which provides various technical, engineering,
accounting, administrative, financial, purchasing, computing, managerial,
operational, and legal services to AYE's subsidiaries, including AYP Capital and
its subsidiaries, at cost.
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AYE Common Stock is listed on the New York Stock Exchange, Inc. (the
"NYSE"), the Chicago Stock Exchange and the Pacific Exchange, Inc., under the
trading symbol "AYE." AYE Common Stock is also listed on the Amsterdam Stock
Exchange, under the trading symbol "AYPC.AS." As of September 30, 1997, there
were 122,436,317 shares of AYE Common Stock issued and outstanding. All shares
of the common stock of Monongahela, Potomac Edison, West Penn, APSC and AYP
Capital are held by AYE. All shares of AGC common stock are held by its parents,
Monongahela, Potomac Edison and West Penn.
Monongahela has five series of cumulative preferred stock issued and
outstanding. Two series, 4.40% Cumulative Preferred Stock and 4.50% Cumulative
Preferred Stock Series C, are listed on the American Stock Exchange under the
trading symbols "MPN.Pr.A" and "MPN.Pr.C," respectively. The other three series,
4.80% Cumulative Preferred Stock Series B, $6.28 Cumulative Preferred Stock
Series D, and $7.73 Cumulative Preferred Stock Series L, are not listed on any
exchange. As of August 1, 1997, there were 90,000 shares of 4.40% Cumulative
Preferred Stock outstanding, 40,000 shares of 4.80% Cumulative Preferred Stock
Series B outstanding, 60,000 shares of 4.50% Cumulative Preferred Stock Series C
outstanding, 50,000 shares of $6.28 Cumulative Preferred Stock Series D
outstanding and 500,000 shares of $7.73 Cumulative Preferred Stock Series L
outstanding.
Monongahela has also issued $40,000,000 aggregate principal amount of
8% Quarterly Income Debt Securities, Junior Subordinated Deferrable Interest
Debentures, Series A, which are listed on the NYSE under the trading symbol
"WVQ." As of September 30, 1997, Monongahela had approximately $340 million
principal amount of first mortgage bonds outstanding, $75.2 million principal
amount of pollution control notes outstanding and $24.5 million principal amount
of solid waste disposal notes outstanding.
Potomac Edison has two series of preferred stock issued and
outstanding, 3.60% Cumulative Preferred Stock and $5.88 Cumulative Preferred
Stock Series C, both of which are listed on the Philadelphia Stock Exchange,
Inc. under the trading symbols "PEDS" and "PTED," respectively. As of August 1,
1997, there were 63,784 shares of 3.60% Cumulative Preferred Stock outstanding
and 100,000 shares of $5.88 Cumulative Preferred Stock Series C outstanding.
Potomac Edison has also issued $45,456,500 aggregate principal amount
of 8% Quarterly Income Debt Securities, Junior Subordinated Deferrable Interest
Debentures, Series A, which are listed on the NYSE under the trading symbol
"PEQ." As of September 30, 1997, Potomac Edison had approximately $495 million
principal amount of first mortgage bonds outstanding, $63.6 million principal
amount of pollution control notes outstanding and $32.1 million principal amount
of solid waste disposal notes outstanding.
West Penn has four series of cumulative preferred stock issued and
outstanding: 4 1/2% Cumulative Preferred Stock; 4.20% Cumulative Preferred Stock
Series B; 4.10% Cumulative Preferred Stock Series C; and Market Auction
Preferred Stock ("MAPS"). The 4 1/2% Cumulative Preferred Stock is listed on the
NYSE under the trading symbol "WSP+." The other series of cumulative preferred
stock are not listed on any exchange. As of August 1, 1997, there were 297,077
shares of 4 1/2% Cumulative Preferred Stock outstanding, 50,000 shares of 4.20%
Cumulative Preferred Stock Series B outstanding, 50,000 shares of 4.10%
Cumulative Preferred Stock Series C outstanding and 400,000 shares of MAPS
outstanding.
West Penn has also issued $70,000,000 aggregate principal amount of 8%
Quarterly Income Debt Securities, Junior Subordinated Deferrable Interest
Debentures, Series A, which are listed on the NYSE under the trading symbol
"WQP." As of September 30, 1997, West Penn had approximately $627 million
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principal amount of first mortgage bonds outstanding, $175.6 million principal
amount of pollution control notes outstanding and $41.4 million principal amount
of solid waste disposal notes outstanding.
AGC has issued $50,000,000 aggregate principal amount of 5.625%
Debentures, $100,000,000 aggregate principal amount of 6.875% Debentures, and
$70,000,000 aggregate principal amount of 5.75% to 7.93% Medium Term Notes,
Series A, none of which are listed on any exchange.
Each of Monongahela's, West Penn's, Potomac Edison's and AGC's
outstanding preferred stock and public debt securities will be unaffected by the
Merger.
AYE, Monongahela, Potomac Edison and West Penn are each parties to
fourteen separate bank line of credit facilities with an aggregate committed
amount of $295 million; AGC is a party to five of those facilities. The
committed amounts under such line of credit facilities serve as a back-up for
each of such companies' commercial paper programs. AYP Capital is a party to a
$5 million line of credit facility. AYP Energy is a party to a $15 million
letter of credit and a $160 million term loan facility. As of October 1, 1997,
AYE had $85.0 million outstanding under its commercial paper program and West
Penn had $27.0 million outstanding under one of its line of credit facilities.
AYE's principal executive office is located at 10435 Downsville Pike,
Hagerstown, Maryland 21740. A copy of the Restated Charter of AYE (the "AYE
Charter") is hereby incorporated by reference as Exhibit A-1. A copy of the
amendment to the AYE Charter, which was filed with the Maryland State Department
of Assessments and Taxation on September 16, 1997, is filed as Exhibit A-2.
For the twelve months ended September 30, 1997, AYE's total revenue on
a consolidated basis was $2.3 billion, consisting of the following (before
intercompany eliminations):/1
($ in thousands)
Company Electric Utility Nonutility Total
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Monongahela $ 617,682 -- $ 617,682
Potomac Edison 715,073 -- 715,073
West Penn 1,072,573 -- 1,072,573
Nonutility Subsidiaries -- $54,954 54,954
--------------- ---------- ----------
Total AYE $2,405,328 $54,954 $2,460,282/2
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/1 In the table, Electric Utility revenues are the revenues derived by AYE from
its operations as an "electric utility company" as defined in Section
2(a)(3) under the PUHCA; nonutility revenues include all other revenues of
consolidated subsidiaries of AYE. These amounts do not conform to AYE's 1996
consolidated financial reports, as, in 1996, AYE reported in its
consolidated financial statements the revenues of its other consolidated
subsidiaries as part of "Other Income (Deductions)."
/2 This total includes $131,608,000 of intercompany transactions. AYE's net
electric operating revenue for the twelve months ended September 30, 1997,
is $2,328,674,000 after intercompany eliminations.
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Consolidated assets of AYE and its subsidiaries as of September 30,
1997, were approximately $6.5 billion, consisting of $5.2 billion in net
electric utility property, plant and equipment and $1.3 billion in other
corporate assets.
More detailed information concerning AYE and its subsidiaries is
contained in AYE's Annual Report on Form 10-K for the year ended December 31,
1996, which is hereby incorporated by reference as Exhibit I-1.
(b) DQE, Inc.
DQE, incorporated under the laws of the Commonwealth of Pennsylvania in
1989, is an energy services holding company which claims exemption, pursuant to
Section 3(a)(1) of the PUHCA, from regulation by the Commission under the PUHCA
(except for Section 9(a)(2) of the PUHCA) pursuant to annual filings on Form
U-3A-2. DQE is not engaged in any business independent of that conducted through
its six direct, wholly owned subsidiaries: Duquesne Light, DE, DES, DQEnergy
Partners, Inc. ("DQEnergy Partners"), Montauk, Inc. ("Montauk") and Brighter
Light Corporation ("Brighter Light"). Brighter Light has no active operations.
DQE has one direct electric utility subsidiary, Duquesne Light, and
three indirect electric utility subsidiaries, ADC, DH Energy and MT.
Duquesne Light is a public utility company as defined by the
Pennsylvania Public Utility Code and the PUHCA. Duquesne Light is engaged in the
production, transmission, distribution and sale of electric energy and serves an
area of approximately 800 square miles, which includes the City of Pittsburgh
and municipalities in Allegheny, Beaver and, to a limited extent, Westmoreland
counties, Pennsylvania. A map of Duquesne Light's electric service area
(including major transmission lines) is filed as Exhibit E-2. The population of
the area served by Duquesne Light, based on 1990 census data, is approximately
1,510,000, of which 370,000 reside in the City of Pittsburgh. Duquesne Light
also sells electricity to other utilities.
Duquesne Light owns undivided interests as tenant-in-common in two
nuclear facilities and leases an undivided interest in a third nuclear facility.
Duquesne Light owns a 13.74% interest in Perry Power Station Unit 1 ("Perry Unit
1") and a 47.50% interest in Beaver Valley Power Station Unit 1 ("Beaver Valley
1"), and leases a 13.74% interest in Beaver Valley Power Station Unit 2 ("Beaver
Valley 2" and, together with Beaver Valley 1 and Perry Unit 1, the "Nuclear
Facilities").
DE makes strategic investments related to DQE's core energy business.
These investments are intended to enhance DQE's capabilities as an energy
provider, increase asset utilization, and act as a hedge against changing
business conditions. DES is a diversified energy services company offering a
wide range of energy solutions for industrial, utility and consumer markets
worldwide. DES initiatives include energy facility development and operation,
domestic and international independent power production, and the production and
supply of innovative fuels. DQEnergy was formed in December 1996 to align DQE
with strategic partners to capitalize on opportunities in the energy services
industry. These alliances are intended to enhance the utilization and value of
DQE's strategic investments and capabilities while establishing DQE as a total
energy provider. Montauk is a financial services company that makes long term
investments and was established to provide financing for DQE's market-driven
businesses and their customers.
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ADC was formed to provide energy services, including hot water, chilled
water and electricity to the Midfield Terminal Complex at the Greater Pittsburgh
International Airport. See DQE, Inc., Holding Co. Act Release No. 26257 (Mar.
24, 1995). In connection with these services, ADC owns four boilers and seven
chillers to provide hot and cold water to the complex and three capacitors
connecting Duquesne Light's generating facilities to the airport facilities.
On January 22, 1997, ADC entered into an agreement with Heinz USA (the
"Heinz Agreement"), which, as noted below, was subsequently assigned to DH
Energy pursuant to Commission order, under which DH Energy will lease, operate
and maintain an inside-the-fence facility (the "Heinz Facility") that will
provide energy in the form of steam, electricity and compressed air for Heinz's
operations at its Pittsburgh, Pennsylvania manufacturing plant. The Heinz
Facility consists of two 3 MW steam turbine generators capable of generating 40
million kWh of electricity per year and coal/gas fired boilers capable of
generating one billion pounds of steam per year. DH Energy will sell Heinz
electricity and steam produced by the Heinz Facility for use in Heinz's
manufacturing processes. DH Energy may also enter into an agreement to supply
steam to Pittsburgh Thermal, L.P., a nonaffiliated district heating and cooling
system located approximately one mile from the Heinz Facility.
Pursuant to an order of the Commission dated June 10, 1997, ADC
assigned its rights and obligations under the Heinz Agreement to DH Energy. ADC
also entered into an agreement with MT under which MT will serve as the operator
of ADC's electrical and thermal facility at the Pittsburgh airport. DQE, Inc.,
Holding Co. Act Release No. 26728 (June 10, 1997).
Duquesne Light is subject to regulation by the PAPUC as to rates
charged, services provided, the issuance of securities (excluding evidences of
indebtedness with maturities of less than one year), the acquisition of five
percent or more of the capital voting stock of a nonutility corporation, and
various other matters.
Wholesale rates for electric energy sold in interstate commerce,
wheeling rates for energy transmission in interstate commerce, and certain other
activities of Duquesne Light are subject to the jurisdiction of the FERC
pursuant to the Power Act. DQE's electric utility operations are also subject to
regulation by the NRC pursuant to the Atomic Energy Act with respect to the
operation of its jointly owned/leased Nuclear Facilities.
DQE Common Stock is listed on the NYSE under the symbol "DQE." As of
September 30, 1997, there were 77,670,083 shares of DQE Common Stock
outstanding. On October 2, 1997, DQE issued 11,720 shares of 4.3% Preferred
Stock, Series A (convertible), no par value, which is not listed on any exchange
(the "DQE Preferred Stock"). The DQE Preferred Stock has an aggregate
liquidation preference of $100 per share and a mandatory conversion ratio into
$1,172,000 of DQE (or, after consummation of the Merger, AYE) Common Stock on
November 1, 2003.
Duquesne Light has six series of preferred stock, 3.75% preferred
stock, 4.00% preferred stock, 4.10% preferred stock, 4.15% preferred stock,
4.20% preferred stock and $2.10 preferred stock, all of which are listed on the
NYSE under the trading symbols "DQU PR B," "DQU PR C," "DQU PR D," "DQU PR E,"
"DQU PR G" and "DQU PR A," respectively. As of August 22, 1997, there were
148,000 shares of 3.75% preferred stock outstanding, 549,709 shares of 4.00%
preferred stock outstanding, 119,860 shares of 4.10% preferred stock
outstanding, 132,450 shares of 4.15% preferred stock outstanding, 100,000 shares
of 4.20% preferred stock outstanding, and 159,400 shares of $2.10 preferred
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<PAGE>
stock outstanding. Duquesne Light also has one series of preference stock, the
Plan Series A preference stock, which is issued only in connection with Duquesne
Light's Employee Stock Ownership Plan and its 401(k) retirement plan for
employees. As of August 22, 1997, there were 816,803 shares of preference stock
outstanding. Duquesne Light is the general partner of Duquesne Capital L.P., a
special purpose limited partnership formed to issue 8 3/8% Cumulative Monthly
Income Preferred Securities, Series A ("Series A MIPS"), which are listed on the
NYSE under the trading symbol "DQ PR A." As of August 22, 1997, there were
6,000,000 Series A MIPS outstanding.
Duquesne Light also has issued public debt securities. As of August 22,
1997, there were approximately $903 million principal amount of first mortgage
bonds outstanding, $418 million principal amount of pollution control notes
outstanding and $2.8 million principal amount of sinking fund debentures
outstanding. Duquesne Light is also a party to a revolving credit facility with
an aggregate committed amount of $150 million, which facility's borrowing period
ends October, 1998. As of the date of this filing, there is no amount
outstanding under such revolving credit facility.
Duquesne Light has reimbursement obligations of approximately $444.4
million under letters of credit issued in connection with the outstanding
pollution control notes. The reimbursement obligations cover the principal
amount of such notes plus 185 days of interest at 12%; the notes come due
between 2009 and 2030. Duquesne Light also has reimbursement obligations of
approximately $194.4 million under a standby letter of credit issued in
connection with the sale/leaseback of Beaver Valley 2, which obligations
continue until 2016. Duquesne Light and Montauk also have reimbursement
obligations of approximately $9.7 million and $1.4 million, respectively, under
letters of credit issued in lieu of performance bonds in connection with
construction projects and workers' compensation requirements on certain
projects.
Each of DQE's and Duquesne Light's outstanding preferred stock,
preference stock and public debt securities will be unaffected by the Merger.
Montauk is a party to a $125 million revolving credit facility and five
term loan facilities with an aggregate committed amount of $150 million.
Amagansett, Inc. ("Amagansett"), an indirect wholly owned subsidiary of Montauk,
has guaranteed the repayment of a $2 million revolving credit facility provided
to GSF Energy LLC by Union Bank of California. Ventures (as defined in Item
1.B.4.b below) has guaranteed the repayment of a 500 million Dutch Guilder term
loan facility to EnviroGas Recovery, Inc. ("EnviroGas") and a third party by
Utrecht American Finance Corp. For more information regarding DQE's intra-system
debt arrangements, see Item 3.B below.
DQE's principal executive office is located at 500 Cherrington Parkway,
Coraopolis, Pennsylvania 15108. A copy of the Restated Articles of Incorporation
of DQE (the "DQE Articles") is hereby incorporated by reference as Exhibit A-3.
A copy of the amendment to the DQE Articles, which was filed with the
Pennsylvania Department of State on August 29, 1997, is hereby incorporated by
reference as Exhibit A-4.
For the twelve months ended September 30, 1997, DQE's total revenue on
a consolidated basis was approximately $1.22 billion, consisting of the
following (before intercompany eliminations):/3
- --------
/3 In the table, Electric Utility revenues are the revenues derived by DQE from
its operations as an "electric utility company" as defined in Section
2(a)(3) under the PUHCA; nonutility revenues include all other revenues of
consolidated subsidiaries of DQE.
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($ in thousands)
Company Electric Utility Nonutility Total
- ------- --------------- --------- -----
Duquesne Light $1,159,294 -- $1,159,294
Nonutility Subsidiaries -- $58,244 58,244
---------- --------- ----------
Total DQE $1,159,294 $58,244 $1,217,538
========== ========= ==========
Consolidated assets of DQE and its subsidiaries as of September 30,
1997, were approximately $4.7 billion, consisting of $3.7 billion in net
electric utility assets and $1.0 billion in nonutility assets.
More detailed information concerning DQE and its subsidiaries is
contained in the Annual Report of each of DQE and Duquesne Light on Form 10-K
for the year ended December 31, 1996, which are hereby incorporated by reference
as Exhibits I-2 and I-3, respectively.
(c) AYP Sub, Inc.
Merger Sub will be incorporated under the laws of the Commonwealth of
Pennsylvania as a wholly owned subsidiary of AYE, and will be incorporated
solely for the purpose of effecting the Merger of Merger Sub with and into DQE.
Prior to the consummation of the Merger, Merger Sub will have no operations
other than those contemplated by the Merger Agreement to accomplish the Merger.
AYE will own all the outstanding common stock, par value $.01 per share, of
Merger Sub. A copy of the proposed Articles of Incorporation and By-laws of
Merger Sub are filed as Exhibits A-5 and A-6, respectively. The principal
executive office of Merger Sub will be located at 10435 Downsville Pike,
Hagerstown, Maryland 21740.
2. Description of Energy Sales and Facilities
(a) AYE
(i) Energy Sales
For the twelve months ended September 30, 1997, AYE sold the following
amounts of electric energy (retail, wholesale and bulk power transactions):
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Twelve Months ended September 30, 1997
Company kWh of Electric Energy Sold
------- ---------------------------
Monongahela 15,313,918,000
Potomac Edison 18,370,906,000
West Penn 26,862,481,000
AYP Energy 2,454,355,000
AGC/4 --
Intercompany Eliminations (4,107,655,000)
---------------------------
Total AYE 58,894,005,000
(ii) Electric Generating Facilities
As of December 31, 1996, AYE had a total net generating capability of
8,346 MW, available primarily from the following units:/5
Albright: AYE owns three coal-fired generating units at its Albright
station in West Virginia with a combined net capacity of 292 MW.
Armstrong: AYE owns two coal-fired generating units at its Armstrong
station in Pennsylvania with a combined net capacity of 352 MW.
Fort Martin: AYE owns two coal-fired generating units at its Fort
Martin station in West Virginia with a combined net capacity of 1,107 MW./6
Harrison: AYE owns three coal-fired generating units at its Harrison
station in West Virginia with a combined net capacity of 1,920 MW.
Hatfield's Ferry: AYE owns three coal-fired generating units at its
Hatfield's Ferry station in Pennsylvania with a combined net capacity of 1,660
MW.
Mitchell: AYE owns one coal-fired generating unit at its Mitchell
station in Pennsylvania with a net capacity of 284 MW. AYE also owns one
oil-fired generating unit at its Mitchell station with a net capacity of 82 MW.
Pleasants: AYE owns two coal-fired generating units at its Pleasants
station in West Virginia with a combined net capacity of 1,252 MW.
- --------
/4 All of AGC's generation is sold to either Monongahela, Potomac Edison or
West Penn.
/5 AYE also owns one 77 MW oil-fired generating unit at its Mitchell station in
Pennsylvania and 2 oil-fired generating units at its Springdale Power
Station in Pennsylvania, with a net capacity of 207 MW. These three
generating units have been in cold reserve status since June 1, 1983.
/6 276 MW of this total is an exempt wholesale generator owned by AYP Energy,
Inc.
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Rivesville: AYE owns two coal-fired generating units at its Rivesville
station in West Virginia with a combined net capacity of 142 MW.
R. Paul Smith: AYE owns two coal-fired generating units at its R. Paul
Smith station in Maryland with a combined net capacity of 114 MW.
Willow Island: AYE owns two coal-fired generating units at its Willow
Island station in West Virginia with a combined net capacity of 243 MW.
Bath County: AYE owns a 40% undivided interest in a pumped-storage
hydroelectric facility in Bath County, Virginia, with a total generating
capacity of 2,100 MW, of which AYE's ownership share is 840 MW.
Lake Lynn: AYE owns one hydroelectric generating unit at its Lake Lynn
station in Pennsylvania, with a net capacity of 52 MW.
Other hydroelectric generating units: AYE owns certain other
hydroelectric facilities in various locations, with a total net generating
capacity of 6 MW.
In order to meet the energy needs of its customers, AYE also purchases
energy from Ohio Valley Electric Corporation (which is a "subsidiary company" of
AYE as that term is defined under the PUHCA) ("OVEC"), other utilities and
Qualifying Facilities ("QF"), as that term is defined in the Public Utility
Regulatory Policies Act of 1978 ("PURPA"). In 1996, AYE purchased approximately
20,523,607 MWh of energy (approximately 90% of its total off-system electric
system energy purchases) from OVEC and other utilities, and 2,396,428 MWh of
energy (approximately 10% of its total off-system electric system energy
purchases) from QFs.
Pursuant to the Diversity Power and Energy Exchange Schedule (the
"Energy Exchange Schedule"), which is part of an Interchange Agreement, dated as
of February 1, 1968, as amended through the date hereof (the "Interchange
Agreement"), between West Penn and Duquesne Light, which is scheduled to
terminate in February 2000, West Penn, Potomac Edison and Monongahela supply
Duquesne Light with up to 200 MW for a specified number of weeks, generally
during each March, April, May, September, October and November. In return,
Duquesne Light supplies West Penn, Potomac Edison and Monongahela with up to 100
MW, generally during each December, January and February. The total number of
MWh to be delivered by each utility to the other over the term of the
arrangement is expected to be the same. The Energy Exchange Schedule will be
terminated upon approval of the Merger and the commencement of activities under
the Joint Dispatch and Power Sale Agreement between Monongahela, West Penn,
Potomac Edison and Duquesne Light discussed in Item 3.A.2.a.ii below.
Further, two ancillary agreements, each dated as of October 7, 1997,
and signed pursuant to Schedule B, "Interchange Power and Energy," Part B
(Non-Displacement Operating Capacity and Energy) of the Interchange Agreement,
provide that Duquesne Light, subject to exceptions for periods when certain
Duquesne Light generating units are scheduled for maintenance outages, will sell
to West Penn 100 MW of electricity per hour during on-peak hours for the period
from January 5, 1998 through February 27, 1998, and will sell 200 MW per hour
during off-peak hours for the period from January 5, 1998 through January 3,
1999.
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The 1996 electric system peak load for AYE was 7,500 MW and occurred on
February 5, 1996.
(iii) Electric Transmission and Other Facilities
As of December 31, 1996, AYE's electric transmission system included
756 circuit miles of 401 to 600 kV line, 17 circuit miles of 254 to 400 kV line,
263 circuit miles of 189 to 253 kV line, 3,605 circuit miles of 132 to 143 kV
line, 19 circuit miles of 71 to 131 kV line and 359 circuit miles of
transmission line under 71 kV. As of December 31, 1996, AYE's transmission
substations had a combined capacity of approximately 31,040 thousand KVA and the
distribution substations totaled approximately 24,336 thousand KVA. A map
showing AYE's major electric transmission lines is filed as Exhibit E-1.
Other assets owned by AYE include electric distribution systems located
throughout its service area, and property, plant and equipment owned or leased
supporting its electric utility functions. AYE also owns or leases other
physical properties, including real property, and other facilities necessary to
conduct its operations. See Item 1.B.3 below for information on present electric
coordination between AYE and other electric utility systems.
(iv) Fuel Sources
For the year ended December 31, 1996, approximately 88% of AYE's owned
capacity was obtained from coal-fired generation, approximately 10% from
pumped-storage generation, approximately 1% from oil-fired generation and
approximately 1% from hydroelectric generation. The average cost to AYE of
coal-fired generation and oil-fired generation per million BTUs is set forth on
the chart below./7
Year-to-Date December 31, 1996
Total Cost Per Million BTU (cents)
----------------------------------
Coal 129.15
Oil 385.90
(b) DQE
(i) Energy Sales
For the twelve months ended September 30, 1997, DQE, through Duquesne
Light, sold 14,482,818,000 kWh (retail, wholesale and bulk power transactions)
of electric energy.
- --------
/7 The term "BTU" means British Thermal Unit, which refers to the quantity of
heat required to raise the temperature of one pound of water one degree
Fahrenheit. This measurement is not applicable to pumped-storage and
hydroelectric generation.
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<PAGE>
(ii) Electric Generating Facilities
As of December 31, 1996, DQE had a total net generating capability of
2,670 MW from the following units:
Cheswick: DQE owns one coal-fired generating unit at its Cheswick
station in Pennsylvania with a net capacity of 570 MW.
Elrama: DQE owns four coal-fired generating units at its Elrama station
in Pennsylvania with a combined net capacity of 487 MW.
Eastlake: DQE owns a 31.2% undivided interest in one coal-fired
generating unit at its Eastlake Unit 5 station in Ohio with a total generating
capacity of 596 MW, of which DQE's ownership share is 186 MW.
Sammis: DQE owns a 31.2% undivided interest in one coal-fired
generating unit at its Sammis Unit 7 station in Ohio with a total generating
capacity of 600 MW, of which DQE's ownership share is 187 MW.
Bruce Mansfield: DQE owns undivided interests in three coal-fired
generating units at its Bruce Mansfield station (29.3% of Unit 1, 8.0% of Unit 2
and 13.74% of Unit 3) in Pennsylvania with a combined total generating capacity
of 2,360 MW, of which DQE's combined ownership share is 400 MW.
Beaver Valley: DQE owns a 47.50% undivided interest in Beaver Valley
Unit 1 and leases a 13.74% undivided interest in Beaver Valley 2, both of which
are nuclear-fired generating units, at its Beaver Valley station in Pennsylvania
with a combined total generating capacity of 1,643 MW, of which DQE's combined
ownership share is 498 MW.
Perry: DQE owns a 13.74% undivided interest in one nuclear-fired
generating unit at its Perry station in Ohio with a total generating capacity of
1,205 MW, of which DQE's ownership share is 164 MW.
Brunot Island: DQE owns five fuel oil-fired generating units at its
Brunot Island station in Pennsylvania with a combined net capacity of 178 MW.
The 1996 electric system peak load for DQE was 2,463 MW and occurred on
August 7, 1996.
(iii) Electric Transmission and Other Facilities
As of December 31, 1996, DQE's electric transmission system included
407 circuit miles of 138 kV line, 161 circuit miles of 345 kV line and 146
circuit miles of 69 kV line. As of December 31, 1996, DQE's transmission
substations had a combined capacity of approximately 9,045 thousand KVA and the
distribution substations totaled approximately 4,443 thousand KVA. A map showing
DQE's major electric transmission lines is filed as Exhibit E-2.
Other assets owned by DQE include electric distribution systems located
throughout its service area, and property, plant and equipment owned or leased
supporting its electric utility functions. DQE also
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<PAGE>
owns or leases other physical properties, including real property, and other
facilities necessary to conduct its operations. See Item 1.B.3 below for
information on present electric coordination between Duquesne Light and other
electric utility systems.
(iv) Fuel Sources
For the calendar years ended December 31, 1996, 1995 and 1994,
approximately 71%, 69% and 73% of DQE's electric power generation was produced
by its coal-fired generating capacity, and approximately 29%, 31% and 27% was
produced by its nuclear generating capacity, respectively. DQE's average cost of
fuel per million BTUs for the calendar years ended December 31, 1996, 1995 and
1994 was 130.21 cents, 131.37 cents and 137.23 cents, respectively.
3. Electric Coordination
The following table sets forth certain information with respect to the
electric operations of AYE pro forma for the twelve months ended September 30,
1997, adjusted to give effect to the Merger (before intercompany eliminations
between DQE and AYE).
Electric Operating Revenues
($ in millions) kWh of Electric Energy Sales
----------------- ----------------------------
AYE $2,329/8 58,894,005,000/9
DQE 1,111 14,482,818,000
------ --------------
Total $3,440 73,376,823,000
====== ==============
Two interconnection tie lines link the AYE and DQE systems. In
addition, a point of interconnection linking the AYE and DQE systems exists at
an AYE substation served by a DQE transmission line. Each line and point of
interconnection is 138 kV. AYE's electric utility subsidiaries and Duquesne
Light are physically interconnected on the Elrama (Duquesne Light)-Mitchell
(AYE) 138 kV line and the Cheswick (Duquesne Light)-Springdale (AYE) 138 kV
line. AYE's electric utility subsidiaries and Duquesne Light are also physically
interconnected with other neighboring utilities. AYE is physically
interconnected with American Electric Power Company, Inc. ("AEP") at one 765/500
kV line, one 500 kV line, one 345 kV line and eight 138 kV lines. AYE is
physically interconnected at one 345 kV line with Ohio Edison Company. AYE is
physically interconnected with Pennsylvania Power Company, a wholly owned
subsidiary of Ohio Edison Company, at one 138/115 kV line and one 69 kV line.
AYE is physically interconnected with the Potomac Electric Power Company at one
500 kV line and two 230 kV lines. AYE is physically interconnected with the
Pennsylvania Electric Company at two 500 kV lines, six 230 kV lines, two 138 kV
lines, four 138/115 kV lines and one 115 kV line. AYE is physically
interconnected at one 138/115 kV line with Metropolitan Edison Company. AYE is
physically interconnected with the Virginia Electric and Power Company at five
500 kV lines, one 138 kV line and two 138/115 kV lines. Duquesne Light is
physically interconnected at one 345 kV line with Ohio Power Company, two 345 kV
lines with Ohio Edison Company,
- --------
/8 Electric Operating Revenue for AYE is shown after intercompany eliminations
between Monongahela, West Penn and Potomac Edison.
/9 Includes retail, wholesale and bulk power transactions (after AYE
intercompany eliminations).
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<PAGE>
three 345 kV lines with Pennsylvania Power Company, and one 69 kV line with
Pennsylvania Power Company.
All of the above interconnections are depicted on the maps filed as
Exhibits E-1 and E-2.
4. Nonutility Interests of AYE and DQE
(a) AYE
AYP Capital is a direct wholly owned operating nonutility subsidiary of
AYE. Allegheny Power System, Holding Co. Act Release No. 35-26085 (Jul. 14,
1994). APSC, which is also a direct wholly owned operating nonutility subsidiary
of AYE, is a service company that provides services to AYE's subsidiaries at
cost and is organized and approved pursuant to Section 13 of the PUHCA and Rule
88 thereunder. Allegheny Power Service Corporation, et al., Holding Co. Act
Release No. 35-15469 (May 13, 1966).
AYE also indirectly owns, through its utility subsidiaries, three other
small nonutility companies. Allegheny Pittsburgh Coal Company, a Pennsylvania
corporation which is jointly owned by Monongahela (25%), Potomac Edison (25%)
and West Penn (50%), owns coal rights in a tract of land located in
Pennsylvania. West Virginia Power and Transmission Company ("WVP&T"), a West
Virginia corporation, is a wholly owned subsidiary of West Penn. West Penn West
Virginia Water Power Company ("WPWVWPC"), a Pennsylvania corporation, is a
wholly owned subsidiary of WVP&T. WVP&T and WPWVWPC each owns tracts of land in
West Virginia and Pennsylvania, respectively, generally along the Cheat River.
A corporate chart of AYE and its subsidiaries, showing their nonutility
interests, is filed as Exhibit E-3.
The consolidated revenues, consolidated net income and consolidated
assets for the twelve months ended September 30, 1997, of AYP Capital was as
follows:
($ in thousands)
Revenue Net Income Assets
------- ---------- ------
AYP Capital 54,954 (13,171) 201,204
AYP Capital constituted approximately 3% of AYE's consolidated assets as of
September 30, 1997. AYP Capital provided approximately 2% of AYE's total
revenues and had a loss equal to approximately 5% of AYE's consolidated net
income for the twelve months ended September 30, 1997.
AYP Capital is a nonutility subsidiary of AYE incorporated in Delaware
in 1994. Pursuant to Commission orders dated July 14, 1994 (Holding Co. Act
Release No. 26085), February 3, 1995 (Holding Co. Act Release No. 26229),
October 27, 1995 (Holding Co. Act Release No. 26401), and October 9, 1996
(Holding Co. Act Release No. 26590), AYP Capital has been authorized to engage
in the development, acquisition, construction, ownership and operation of exempt
wholesale generators ("EWGs") and in development activities with respect to (i)
qualifying cogeneration facilities and small power production facilities
("SPPs"); (ii) nonqualifying cogeneration facilities, nonqualifying SPPs and
independent power production facilities ("IPPs") located within the service
territories of AYE's public utility subsidiary
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companies; (iii) EWGs; (iv) companies involved in new technologies related to
the core business of AYE; and (v) foreign utility companies ("FUCOs"). AYP
Capital has also been authorized, among other things, through December 31, 1999,
to form and finance special purpose subsidiary companies ("NEWCOs") to acquire
interests in EWGs and FUCOs, to provide energy management services and demand
side management services, to factor accounts receivable, and to manage the real
estate portfolio of the AYE system (all of the above together, the "Approved
Activities"). AYP Capital and the NEWCOs have been further authorized to obtain
loans or to issue other recourse obligations, and AYE and AYP Capital have been
authorized to guarantee such obligations, subject to a $300 million cap. AYP
Capital has also been authorized to provide consulting services to nonaffiliate
companies.
AYP Capital is a part owner of APS Cogenex, a limited liability company
formed with EUA Cogenex. In 1996, APS Cogenex ceased its marketing activities
and is presently in the process of winding up its corporate existence.
AYP Capital owns AYP Energy, which owns an undivided 50% interest (276
MW) in Unit No. 1 of the Fort Martin Power Station and markets the power from
this and other generation facilities in the wholesale market. AYP Energy is an
EWG under PUHCA and a FERC-licensed power marketer.
AYP Capital also owns ACC, which is an exempt telecommunications
company under Section 34 of PUHCA. ACC's purpose is to develop opportunities in
the unregulated communications market by providing telecommunications services
and investing in telecommunications systems directly and through joint ventures
with non-associate companies and associate companies. ACC currently provides
engineering and facilities management services to telecommunications companies
and is leasing dark fiber to a telecommunications provider in Pennsylvania and
to Allegheny Hyperion Telecommunications L.L.C., a limited liability company of
which ACC is a member, which operates in Pennsylvania. In addition, AYP Capital
formed AES in 1997 as an unregulated retail subsidiary. AES intends to provide
unregulated energy and related services to retail customers as retail energy and
service markets are opened to competition.
AYE's other nonutility subsidiary, APSC, which is a service company
under the PUHCA, provides various technical, engineering, accounting,
administrative, purchasing, computing, managerial, operational, and legal
services to AYE's subsidiaries at cost. Allegheny Power Service Corporation, et
al. (Holding Co. Act Release No. 35-15469) (May 13, 1966). As of August 1, 1997,
APSC had 1,160 employees.
(b) DQE
DQE has four active, direct, wholly owned subsidiaries that are engaged
directly and indirectly in nonutility activities: (i) DE, (ii) DES, (iii)
DQEnergy Partners and (iv) Montauk. Duquesne Light has one direct, wholly owned
nonutility subsidiary, Monongahela Light & Power Co., which is registered to do
business as Duquesne Ventures ("Ventures").
A corporate chart of DQE, including its nonutility subsidiaries, is
filed as Exhibit E-4.
The consolidated revenues, net income and consolidated assets for the
twelve months ended September 30, 1997, of DQE's nonutility subsidiaries (before
intercompany eliminations) were as follows:
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($ in thousands)
Company Revenue Other Income Net Income Assets
- ------- ------- ------------ ---------- ------
DE $42,516 $19,287 $ 14,082 $115,510
DES 3,296 1,032 (1,804) 8,754
DQEnergy Partners -- -- (170) 6,554
Montauk 21,690 49,300 41,223 621,328
------- ------- -------- --------
Total Nonutility $67,502 $69,619 $53,331 $752,146
======= ======= ======= ========
DQE's nonutility subsidiaries and investments constituted approximately 16% of
DQE's consolidated assets as of September 30, 1997. DQE's nonutility
subsidiaries and investments also provided approximately 5% of DQE's total
revenues and approximately 28% of DQE's consolidated net income for the twelve
months ended September 30, 1997.
DQE's nonutility subsidiaries are discussed in more detail in Item
3.A.2(a)(i) below.
C. DESCRIPTION OF MERGER AND STATEMENT AS TO CONSIDERATION
1. Background
AYE believes that the electric utility industry throughout the United
States is in the early stages of dramatic changes that will bring competition to
what has been, since the industry's inception, a collection of regional
monopolies. Recently enacted federal and state laws and recent actions by
federal and state regulatory commissions are facilitating the changes to bring
more competition to various segments of the industry.
The Energy Policy Act of 1992 (the "1992 Act") granted the FERC
authority to order electric utilities to provide transmission service to certain
other utilities and to other buyers and sellers of electricity in the wholesale
market. The 1992 Act also created a new class of power producers, EWGs, which
are exempt from regulation under the PUHCA. The exemption from regulation under
the PUHCA of EWGs has increased the number of entrants into the wholesale
electric generation market, thus increasing competition in the wholesale segment
of the electric utility industry. Further, several members of Congress
introduced legislation in 1996, and again in 1997, to restructure the industry.
Commencing in December 1993, pursuant to its authority under the 1992
Act, FERC issued a number of orders in specific cases directing utilities to
provide transmission services. Then, in April of 1996, the FERC issued its
Orders 888 and 889 (the "Orders"), which will lead to a fundamental
restructuring of the business of transmitting wholesale electric power and could
potentially influence the future of retail electric sales as well. The stated
objective of the Orders is to stimulate wholesale (sale for resale) generation
service competition among electric utilities and nonregulated electricity
generators while preventing anti-competitive or discriminatory transmission
practices. The Orders encourage wholesale competition by requiring utilities
that own transmission systems and are under the FERC's jurisdiction to file
nondiscriminatory, open access transmission tariffs available to all wholesale
buyers and sellers of electricity and apply those open access tariffs to their
own wholesale purchases and sales of electricity. Utilities must allow their
transmission facilities to be used by sellers or buyers of wholesale power
without undue discrimination, as long as sufficient transmission capacity is
available to provide service without impairing
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reliability. FERC's actions and its transmission Orders have increased the
availability of transmission services, thus creating greater competition in the
wholesale power supply market.
In addition, state regulatory authorities in over 45 states have begun
to re-evaluate the basic competitive structure of the electric utility industry.
These authorities are considering, or may soon consider, proposals to require
some measure of competition in the retail portion of the industry. Each of the
public regulatory authorities of Maryland, Ohio, Virginia and West Virginia has
begun to examine the difficult questions of stranded cost recovery,
responsibility for service and service reliability, the obligation to serve,
recovery of environmental and other social costs, tax issues and the effect of
competition on all classes of customers through a series of approaches,
including: (i) requesting comments and information regarding the effects of
restructuring the electric utility industry, (ii) requiring certain electric
utilities to file competition information with the regulatory authority, and
(iii) initiating pilot programs.
In Pennsylvania, AYE's largest service territory, the Electric
Generation Customer Choice and Competition Act, 66 Pa. Cons. Stat. ss. 2801 et
seq. (the "Pennsylvania Restructuring Legislation"), was enacted in 1996 to
create retail access to a competitive market for the generation of electricity.
This legislation reflects many of the recommendations made in a July 1996 PAPUC
order which resulted from the PAPUC's investigation into electric power
competition. This legislation, which became effective on January 1, 1997,
provides, among other things, for all electric utilities in Pennsylvania to
file, no later than September 30, 1997, a restructuring plan to implement direct
access to a competitive market for electric generation, a three year phase-in of
competition for retail electric customers in Pennsylvania and an opportunity for
recovery of certain capital costs (stranded costs) incurred by utilities in a
regulated environment that are not likely to be recoverable through prices
charged in a competitive environment.
On August 1, 1997, West Penn submitted to the PAPUC a comprehensive
restructuring plan that, if implemented, will enable all of its customers to
choose their electric generation supplier by January 1, 2001. The filing
includes an implementation schedule for customer choice, customer options,
unbundled rates, a market-based approach to value stranded costs and the basis
for West Penn's request to recover them, including mitigation efforts, and a
discussion of the effect of the restructuring legislation on utility planning,
service obligations and utility organizational structure. The West Penn
restructuring plan does not provide for corporate disaggregation. West Penn's
plan is a stand-alone plan that will be implemented only in the event that the
Merger is not consummated. It is anticipated that implementation of the plan
will require Commission approval. A decision from the PAPUC is presently
scheduled on or before May 29, 1998.
On August 1, 1997, Duquesne Light submitted to the PAPUC a
comprehensive restructuring plan that, if implemented, will enable all of its
customers to choose their electric generation supplier by January 1, 2001. The
filing includes an implementation schedule for customer choice, customer
options, unbundled rates designed to mitigate stranded costs, a market-based
approach to value stranded costs and the basis for Duquesne Light's request to
recover them, and a discussion of the effect of the restructuring legislation on
utility planning, service obligations and utility organizational structure. The
Duquesne Light restructuring plan does not provide for corporate disaggregation.
Like West Penn's plan, Duquesne Light's plan is a stand-alone plan which will be
implemented only in the event that the Merger is not consummated. Accordingly,
it is not anticipated that implementation of the plan will require Commission
approval. A decision from the PAPUC is presently scheduled on or before May 29,
1998.
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Separately from such restructuring applications, on August 1, 1997, AYE
and DQE, on behalf of West Penn and Duquesne Light, respectively, filed a joint
application with the PAPUC for its approval of the Merger. The application
included a discussion of the benefits of the Merger, as well as evidence
concerning market power issues and AYE's and DQE's commitments to market power
mitigation measures. A decision from the PAPUC is presently scheduled on or
before May 29, 1998.
The changes to the electric industry that have occurred and that are
occurring are bringing increased competition to various sectors of the industry
and are putting pressure on utilities to lower their costs. AYE recognized that
a combination with another financially strong utility would enable the combined
entity to generate and deliver energy more cheaply and efficiently and thereby
enable such combined entity to remain a premier supplier of energy in an
increasingly competitive industry.
In late 1996, the chief executive officers of AYE and DQE met on
several occasions and had several phone conversations to discuss a possible
combination between AYE and DQE. As a result of these contacts, AYE and DQE
agreed in December of 1996 to commence a process of due diligence and to
determine if a mutually desirable transaction could be agreed upon. These early
contacts concluded with understandings that AYE was open to the idea of
negotiating an exchange ratio that would give holders of DQE Common Stock a
premium to its market trading price, that the board of directors of the combined
company could include representation from the board of directors of DQE (the
"DQE Board") approximately equivalent to the percentage ownership of DQE
stockholders in the combined company after the Merger and that AYE saw a good
fit for DQE management in AYE after the Merger.
An initial meeting of AYE and DQE managements and their respective
legal and financial advisors was held in late December 1996, at which time
important areas of due diligence were identified and a subsequent mutual due
diligence presentation was scheduled. After this December meeting, AYE and DQE
began the organization of due diligence information regarding their respective
companies for review by the other. In mid-January 1997, the senior managements
of AYE and DQE met and each gave a business overview presentation to the other
party and its legal and financial advisors and responded to questions.
Thereafter, representatives of AYE and DQE performed financial, operating and
legal due diligence investigations on the other party and, throughout January
through April 1997, negotiated the legal and financial terms of the Merger. In
addition, AYE retained legal counsel experienced in nuclear-related matters, a
firm of consulting nuclear engineers and a retired nuclear utility executive to
assist AYE in its due diligence investigation of the Nuclear Facilities.
The negotiations of the terms of the Merger Agreement focused most
intensely upon the number of shares of AYE Common Stock into which each share of
DQE Common Stock would be converted in the Merger, the status of events
concerning the Nuclear Facilities, whether contractual language relating to an
adverse regulatory or operating event at the Nuclear Facilities that does not
give rise to a material adverse effect on DQE should give AYE a right not to
consummate the Merger or result in a reduction in the Exchange Ratio, the
circumstances under which the terms of regulatory approvals could give AYE, or
AYE and DQE, a right not to consummate the Merger, the circumstances under which
termination fees would be payable and the amount of those fees, and the
circumstances under which either party could negotiate with a third party
regarding an alternative merger proposal or terminate the Merger Agreement to
accept such a proposal. During the week of March 31, 1997, an understanding with
respect to potentially mutually agreeable positions on the principal issues was
reached, and thereafter documentation was finalized, due diligence was completed
and the board of directors of AYE (the "AYE Board") and the DQE Board each
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approved the Merger and related matters at respective meetings held late in the
day on April 4, 1997, following presentations from their respective senior
managements and their legal and financial advisors (including descriptions of
the Merger Agreement by their respective legal advisors) and after having
received the fairness opinions of their respective financial advisors.
Additional information regarding the background of the Merger is set
forth in the Registration Statement on Form S-4 of AYE, which is hereby
incorporated by reference as Exhibit C-1 (the "Registration Statement").
2. Merger Agreement
The following is not a complete description of the Merger Agreement and
is qualified in its entirety by reference to the Merger Agreement, which is
hereby incorporated by reference as Exhibit B-1.
The Merger Agreement provides for a business combination of AYE and DQE
in which Merger Sub will be merged with and into DQE. DQE will be the surviving
corporation in the Merger and will become a wholly owned subsidiary of AYE. Upon
the consummation of the Merger, each share of DQE Common Stock issued and
outstanding immediately prior to such time (other than the Excluded Shares) will
be converted into the right to receive, and become exchangeable for, 1.12 shares
of AYE Common Stock. Each issued and outstanding share of AYE Common Stock will
be unchanged as a result of the Merger and will remain issued and outstanding
after the Merger.
The Merger is expected to be tax-free to AYE and DQE stockholders
(except with respect to fractional shares). Based on the number of shares
outstanding for each of AYE and DQE as of September 30, 1997, stockholders of
DQE will own approximately 42% of the issued and outstanding AYE Common Stock
after the Merger.
Except as set forth below, if any holder of DQE Common Stock would be
entitled to receive a number of shares of AYE Common Stock that includes a
fraction, then in lieu of a fractional share, such holder will be entitled to
receive a cash payment equal to such holder's proportionate interest in a share
of AYE Common Stock, based on the closing price of such shares as reported in
The Wall Street Journal, New York City edition, on the trading day immediately
prior to the Effective Time (as such term is defined in the Merger Agreement).
All shares of DQE Common Stock credited to participants' accounts under the
Dividend Reinvestment and Stock Purchase Plan of DQE ("DQE DRSPP") will be
converted into a number of shares of AYE Common Stock determined by multiplying
the number of such shares by the Exchange Ratio. All such shares of AYE Common
Stock will be held in the participants' accounts, with individual participants'
accounts in the DQE DRSPP being credited with fractional shares of AYE Common
Stock.
The Merger is subject to customary closing conditions, including the
receipt of all necessary governmental approvals, including the approval of the
Commission.
The Merger is designed to qualify as a tax-free reorganization under
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code").
AYE and DQE believe that the Merger will be treated as a "pooling of interests"
for accounting purposes.
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<PAGE>
The Merger Agreement contains customary covenants relating to the
conduct of business by AYE and DQE, respectively, pending the consummation of
the Merger. As a general matter, unless approved in writing by the other party,
or unless expressly contemplated by the Merger Agreement, the Stock Option
Agreement, dated as of April 5, 1997, between DQE and AYE, which is hereby
incorporated by reference as Exhibit B-2, the respective budgets of DQE and AYE,
or as required by applicable law, the parties must, among other things, conduct
their and their subsidiaries' business in the ordinary and usual course, may not
pay dividends in excess of certain prescribed amounts, and may not take any
action or fail to take any action that would prevent the Merger from qualifying
for "pooling of interests" accounting treatment or as a reorganization within
the meaning of Section 368(a) of the Code. The Merger Agreement also contains
restrictions on, among other things, charter and bylaw amendments, capital
expenditures, acquisitions, dispositions, incurrence of indebtedness, certain
increases in employee compensation and benefits, and affiliate transactions.
3. Management of AYE Following the Merger
The Merger Agreement provides that, from and after the Effective Time,
the AYE Board will be composed of 15 directors and that, immediately prior to
the Effective Time, DQE will designate six of such directors, and AYE will
designate nine of such directors, and that all such designated directors will be
the directors of AYE from and after the Effective Time until their successors
have been duly elected or appointed and qualified or until their earlier death,
resignation or removal in accordance with the AYE Charter and the Bylaws of AYE
(the "AYE Bylaws"). Although as of the date hereof neither DQE nor AYE has
determined whom it will designate to be directors of AYE following the Effective
Time, each of DQE and AYE currently intends to nominate persons from among the
members of its board of directors at the Effective Time. In addition, the Merger
Agreement provides that following the Effective Time, four of the six directors
of AYE designated by DQE pursuant to the Merger Agreement will be the chairmen
of the following committees of the AYE Board: Nuclear Review, New Business,
Finance, and Employee and Community Relations, and that four of the nine
directors of AYE designated by AYE pursuant to the Merger Agreement will be the
chairmen of the following committees of the AYE Board: Audit, Management Review,
Nominating, and Benefits.
The Merger Agreement further provides that, from and after the
Effective Time, Alan J. Noia will be the Chairman and Chief Executive Officer of
AYE and David D. Marshall will be the President and Chief Operating Officer of
AYE.
The Merger Agreement also provides that, from and after the Effective
Time, AYE's corporate headquarters will remain in Maryland and substantial
operations of AYE's subsidiaries, including DQE, will remain in the Pittsburgh,
Pennsylvania area.
Item 2. FEES, COMMISSIONS AND EXPENSES
The fees, commissions and expenses to be paid or incurred, directly or
indirectly, in connection with the Merger, including the solicitation of
proxies, registration of shares of AYE Common Stock under the Securities Act of
1933, and other related matters, are estimated as follows:
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Commission filing fee for the
Registration Statement on Form S-4................................$656,886.21
Accountants' fees........................................................./10
Legal fees and expenses relating to the PUHCA............................./10
Other legal fees and expenses............................................./10
Other...................................................................../10
Shareholder communication and proxy solicitation........................../10
NYSE listing fee........................................................../10
Exchanging, printing, and engraving
of stock certificates.................................................../10
Financial Advisors' fees and expenses
Merrill Lynch......................................................../10
Credit Suisse First Boston.........................................../10
Consulting fees related to human resource
issues, public relations, regulatory support,
and other matters relating to the Merger................................/10
Expenses related to integrating the operations of the
merged company and miscellaneous......................................../10
TOTAL...................................................................../10
Item 3. APPLICABLE STATUTORY PROVISIONS
The following sections of the PUHCA and the Commission's rules
thereunder are or may be directly or indirectly applicable to the Merger:
Transactions to which section or rule is or
Section of the PUHCA may be applicable
- -------------------- -------------------------------------------------------
6, 7, 12 Issuance of AYE Common Stock; addition of DQE and its
subsidiaries to the Money Pool; amendment of AYE's
existing financing authority to provide loans and
guarantees to DQE's subsidiaries.
9, 10, 11 and rules Acquisition by AYE of DQE Common Stock and Merger Sub
thereunder common stock; indirect acquisition of securities of,
and interests in the business of, DQE's subsidiary
companies.
13 and rules thereunder Intra-system service, sales and construction contracts.
Rule 54 All transactions that do not involve a financing for
the purposes of acquiring an EWG.
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/10 To be filed by Amendment.
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To the extent that other sections of the PUHCA or the Commission's rules
thereunder are deemed to be applicable to the Merger, such sections and rules
should be considered to be set forth in this Item 3.
A. MERGER
Section 9(a)(1) provides that unless the acquisition has been approved
by the Commission under Section 10, it shall be unlawful for any registered
holding company or any subsidiary company thereof "to acquire, directly or
indirectly, any securities or utility assets or any other interest in any
business."
As set forth more fully below, the Merger complies with all of the
applicable provisions of Section 10 of the PUHCA and should be approved by the
Commission. Thus:
- The Merger will not create detrimental interlocking relations or
concentration of control;
- The consideration to be paid in the Merger is fair and reasonable;
- The Merger will not result in an unduly complicated capital
structure for the AYE system;
- The Merger is consistent with Section 11 of the PUHCA;
- The Merger is in the public interest and the interests of investors
and consumers;
- The Merger tends toward the economical and efficient development of
an integrated electric utility system; and
- The Merger will comply with all applicable state laws.
Furthermore, the Merger also provides an opportunity for the Commission
to follow certain of the interpretive recommendations made by the Division of
Investment Management (the "Division") in the report issued by the Division in
June 1995 entitled "The Regulation of Public Utility Holding Companies" (the
"1995 Report"). While the Merger and the requests contained in this
Application-Declaration are well within the precedent of transactions approved
by the Commission as consistent with the PUHCA prior to the 1995 Report and thus
could be approved without any reference to the 1995 Report, a number of the
recommendations contained therein support the Applicant's analysis, and
Commission approval of the Merger in accordance with the recommendation of the
1995 Report would facilitate the creation of a new holding company better able
to compete in the rapidly evolving electric utility industry. The Division's
overall recommendation that the Commission "act administratively to modernize
and simplify holding company regulation . . . and minimize regulatory overlap,
while protecting the interests of consumers and investors,"/11 should be
followed in reviewing this Application-Declaration since, as demonstrated below,
the Merger will benefit both consumers and shareholders of AYE and since the
other federal and state regulatory authorities with jurisdiction over this
Merger will have approved it as in the public interest. In addition, although
discussed in more detail in each applicable item below, the specific
recommendations of the
- --------
/11 Letter of the Division of Investment Management to the Securities and
Exchange Commission, 1995 Report.
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<PAGE>
Division with regard to financing transactions,/12 utility ownership/13 and
diversification/14 are applicable to the Merger.
1. Section 10(b)
Section 10(b) provides that, if the requirements of Section 10(f) are
satisfied, the Commission shall approve an acquisition under Section 9(a)
unless:
(1) such acquisition will tend towards interlocking relations or
the concentration of control of public-utility companies, of a
kind or to an extent detrimental to the public interest or the
interest of investors or consumers;
(2) in case of the acquisition of securities or utility assets,
the consideration, including all fees, commissions, and other
remuneration, to whomsoever paid, to be given, directly or
indirectly, in connection with such acquisition is not reasonable
or does not bear a fair relation to the sums invested in or the
earning capacity of the utility assets to be acquired or the
utility assets underlying the securities to be acquired; or
(3) such acquisition will unduly complicate the capital structure
of the holding-company system of the applicant or will be
detrimental to the public interest or the interest of investors or
consumers or the proper functioning of such holding-company
system.
(a) Section 10(b)(1)
(i) Interlocking Relationships
By its nature, any merger results in new links between previously
unrelated companies. However, new links alone are not the "interlocking
relations" targeted by Section 10(b)(1), which was designed to further the
Congressional policy of preventing interlocking directorships among competitors
in interstate commerce and was primarily aimed at preventing restrictions that
inhibit "free and independent competition." North American Light & Power
Company, et al., Holding Co. Act Release No. 6153 (Oct. 25, 1945). The Merger
Agreement provides for the AYE Board to consist of 15 members, six designated by
DQE and nine
- --------
12 E.g., the reduced regulatory burdens associated with routine financings.
1995 Report at 50.
13 E.g., the Commission should apply a more flexible interpretation of the
integration requirements under the PUHCA; the Commission's analysis should
focus on whether the resulting system will be subject to effective
regulation; and the Commission should "watchfully defer" to the work of
other regulators. 1995 Report at 71- 77.
14 E.g., the Commission should promulgate rules to reduce the regulatory
burdens associated with energy-related diversification and the Commission
should adopt a more flexible approach in considering all other requests to
enter into diversified activities. 1995 Report at 88-90. Applicant notes
that the Commission has implemented this recommendation in adopting Rule 58
under the PUHCA, which exempts the acquisition of securities of energy and
gas related companies by a registered holding company, subject to certain
limitations.
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designated by AYE./15 It does not contemplate creating relationships with other
utilities, or with competitors of either constituent company. The relationships
created by the Merger will not restrict competition and will be beneficial to
the protected interests under the PUHCA and thus are not prohibited by Section
10(b)(1). Moreover, the benefits that will accrue to the public, investors and
consumers from the combination of DQE and AYE make clear that any other
interlocking relationships that might arise from the Merger are not detrimental.
(ii) Concentration of Control
Section 10(b)(1) is intended to prevent utility acquisitions that would
result in "huge, complex, and irrational holding company systems at which the
[PUHCA] was primarily aimed." American Electric Power Company, Inc., 46 SEC
1299, 1307 (1978). In applying Section 10(b)(1) to utility acquisitions, the
Commission must determine whether the acquisition will create "the type of
structures and combinations at which the [PUHCA] was specifically directed."
Vermont Yankee Nuclear Power Corp. et al., 43 SEC 693, 700 (1968). The DQE and
AYE strategic alliance will not create a "huge, complex and irrational system,"
but rather will afford the opportunity to achieve economies of scale and
efficiencies which are expected to benefit investors and consumers.
Size: While the combination of DQE and AYE will result in a larger
utility system, it certainly will not be one that exceeds the economies of scale
of current electric generation and transmission technology. If approved, the AYE
system will serve approximately 2.0 million electric customers in a 29,800
square mile area in five states. As of September 30, 1997, the combined assets
of DQE and AYE totaled approximately $11.3 billion and, for the twelve months
ended September 30, 1997, combined operating revenues totaled approximately $3.5
billion. As of December 31, 1996, the combined generating capacity of Duquesne
Light, Monongahela, Potomac Edison, West Penn, AYP Energy and AGC (including
PURPA projects) totaled 11,315 MW.
The Commission has approved several acquisitions involving similarly
sized operating utilities and two acquisitions in which the value of the
combined assets of the parties were nearly double the value of the assets of the
parties to the Merger. See, e.g., Entergy Corporation, Holding Co. Act Release
No. 25952 (Dec. 17, 1993) (acquisition of Gulf States Utilities; combined assets
at time of acquisition in excess of $22 billion); The Southern Company; SV
Ventures, Inc., Holding Co. Act Release No. 24579 (Feb. 12, 1988) (acquisition
of Savannah Electric and Power Company; combined assets at time of acquisition
approximately $20 billion); Centerior Energy Corp., Holding Co. Act Release No.
24073 (Apr. 29, 1986) (combination of Cleveland Electric Illuminating and Toledo
Edison; combined assets at time of acquisition of approximately $9.1 billion);
Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990)
(acquisition of Public Service Company of New Hampshire; combined assets at time
of acquisition of approximately $9 billion); American
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/15 AYE acknowledges the requirements of Section 17(c) of the PUHCA and Rule 70
thereunder with respect to limitations upon directors and officers of
registered holding companies and subsidiary companies thereof having
affiliations with commercial banking institutions and investment bankers,
and undertake that, upon completion of the Merger, it will be in compliance
with the applicable provisions thereof.
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Electric Power Company, Inc., 46 SEC 1299 (1978) (acquisition of Columbus and
Southern Ohio Electric; combined assets at time of acquisition close to $9
billion)./16
The size of AYE after the Merger will also be significantly smaller
than a recently approved combination in the electric utility industry, the
merger of Ohio Edison and Centerior, which produced an entity with approximately
$17.8 billion in combined assets. ("FirstEnergy") FirstEnergy Corp., Holding Co.
Act Release No. 26722 (Nov. 5, 1997).
Several neighboring public utilities to the AYE system service
territories are larger than or approximately the same size as the AYE system
will be after the Merger. AEP, with total assets of $15.8 billion, is
substantially larger than AYE will be after consummation of the Merger, as is
Dominion, with total assets of $14.9 billion. GPU, with total assets of $10.9
billion, is only slightly smaller than AYE will be after consummation of the
Merger.
As the following table demonstrates, after the consummation of the
Merger, AYE will not be an unusually large holding company. Four of the twelve
registered electric utility holding company systems--The Southern Company
("Southern"), Entergy Corporation ("Entergy"), AEP and Central and Southwest
Corp. ("CSW")--generally will be appreciably larger than AYE in terms of assets,
operating revenues, customers and/or sales of electricity, and two others --
GPU, Inc. ("GPU") and Northeast Utilities ("Northeast") -- will be of roughly
equal size in terms of these same factors:/17
Total Operating Electric Sales in
Assets Revenues Customers kWh
System ($ millions) ($ millions) (thousands) (millions)
------ ------------ ------------ ----------- ----------
Southern $ 30,292 $10,358 3,643 155,531
Entergy 22,966 7,163 2,426 106,909
AEP 15,886 5,849 2,943 132,573
CSW 13,332 5,155 1,704 62,425
AYE 11,290 3,546 1,969 73,377/18
GPU 10,941 3,918 1,997 44,448
Northeast 10,741 3,792 1,701 39,530
Such comparisons demonstrate that after the Merger, AYE will be a mid-sized
registered holding company, and its operations will not exceed the economies of
scale of current electric generation and transmission technology or provide
undue power or control to AYE in the region in which it will provide service.
- --------
/16 These numbers are unadjusted for inflation. The AEP-Columbus number in
particular would be considerably higher in current dollars.
/17 All amounts are for the financial year ended December 31, 1996, as reported
in each company's respective Annual Report on Form 10-K, except for the
number of electric customers serviced by each of Southern and AEP, which
numbers were provided in telephone conversations with employees of the
respective companies.
/18 Includes bulk power transactions.
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Efficiencies and Economies: As noted above, the Commission has rejected
a mechanical size analysis under Section 10(b)(1) in favor of assessing the size
of the resulting system with reference to the efficiencies and economies that
can be achieved through the integration and coordination of utility operations.
As the Commission stated in American Electric Power Company, although the
framers of the PUHCA were concerned about "the evils of bigness, they were also
aware that the combination of isolated local utilities into an integrated system
afforded opportunities for economies of scale, the elimination of duplicate
facilities and activities, the sharing of production capacity and reserves and
generally more efficient operations . . . [and] [t]hey wished to preserve these
opportunities. . . ." 46 SEC at 1309.
More recent pronouncements of the Commission confirm that size is not
determinative. Thus, in Centerior Energy Corp., Holding Co. Act Release No.
24073 (Apr. 29, 1986), the Commission stated flatly that a "determination of
whether to prohibit enlargement of a system by acquisition is to be made on the
basis of all the circumstances, not on the basis of size alone." See also
Entergy Corporation, et al., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
In addition, in the 1995 Report, the Division recommended that the Commission
approach its analysis of merger and acquisition transactions in a flexible
manner with emphasis on whether the transaction creates an entity subject to
effective regulation and is beneficial for shareholders and customers as opposed
to focusing on rigid, mechanical tests./19
By virtue of the Merger, AYE will be in a position to realize the
opportunities "for economies of scale, the elimination of duplicate facilities
and activities, the sharing of production capacity and reserves and generally
more efficient operations" described by the Commission in American Electric
Power Company, 46 SEC 1299, 1309. Among other things, the Merger is expected to
yield labor cost savings, corporate and administrative and purchasing savings,
and production dispatch savings. These expected economies and efficiencies from
the combined utility operations are described in greater detail in Item
3.A.2.b.i below and are projected to result in savings of approximately $1.0
billion, the large majority of which it is estimated will be realized in the
first 10 years after the Merger. Over the long term, AYE's customers will
benefit from lower rates as a result of Merger-related efficiencies and
synergies.
Competitive Effects: Section 10(b)(1) also requires the Commission to
consider possible anticompetitive effects of a proposed combination. See Entergy
Corporation, supra at 2041, citing Municipal Electric Ass'n of Massachusetts, et
al. v. SEC, 413 F.2d 1052, 1056-1058 (D.C. Cir. 1969). As the Commission noted
in Northeast Utilities, Holding Co. Act Release No. 25221 (Dec. 21, 1990), the
"antitrust ramifications of an acquisition must be considered in light of the
fact that the public utilities are regulated monopolies and that federal and
state administrative agencies regulate the rates charged customers." DQE and AYE
will file Notification and Report Forms with the Department of Justice (the
"DOJ") and the Federal Trade Commission (the "FTC") pursuant to the HSR Act,
describing the effects of the Merger on competition in the relevant market, and
it is a condition to the consummation of the Merger that the applicable waiting
period under the HSR Act shall have expired.
In addition, the competitive impact of the Merger will be fully
considered by the FERC. Testimony filed with the FERC by Dr. Howard Pifer on
behalf of AYE and DQE, a copy of which is filed as Exhibit D-2, demonstrates the
following with respect to the Merger. First, in current wholesale markets, the
Merger will not cause an increase in Herfendahl-Hirschman Index ("HHI")
concentration statistics that
- --------
/19 1995 Report at 73-75.
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should be of any concern. Second, although the Merger could potentially cause
HHI concentration statistics to increase beyond acceptable HHI thresholds in
discrete time periods, this potential is limited to specific destination markets
and specific products, and could be avoided if pancaked transmission rates
(i.e., separate transmission rates charged by each utility as electric energy is
transferred from a source to a destination) are eliminated in the Midwest
region. Third, DQE and AYE cannot exercise any market power during the
transition to competition in Pennsylvania because of the cost-based rate caps
established under the Pennsylvania Restructuring Legislation. Finally, AYE and
DQE have made commitments to mitigate any potential market power they may
acquire as a result of the Merger. AYE believes that it will be able to
demonstrate to the FERC that the Merger will not have an adverse competitive
impact. The Commission may appropriately rely upon the FERC with respect to such
matters. Entergy Corporation, supra at 2,042, citing City of Holyoke Gas &
Electric Department, et al. v. SEC, 972 F.2d 358, 363-64 quoting, Wisconsin's
Environmental Decade, Inc. v. SEC, 882 F.2d 523, 527 (D.C. Cir. 1989).
For these reasons, the Merger will not "tend toward interlocking
relations or the concentration of control" of public utility companies, of a
kind or to an extent detrimental to the public interest or the interests of
investors or customers within the meaning of Section 10(b)(1).
(b) Section 10(b)(2)
As noted above, the Commission may not approve the proposed combination
of DQE and AYE under Section 10(b)(2) if it finds that the consideration to be
paid in connection with the combination, including all fees, commissions and
other remuneration, is "not reasonable or does not bear a fair relation to the
sums invested in or the earning capacity of . . . the utility assets underlying
the securities to be acquired . . . ."
(i) Reasonableness of Consideration
AYE believes that standards of Section 10(b)(2) regarding consideration
are satisfied in the present case.
First, the Merger is a pure stock-for-stock exchange and is intended to
qualify for treatment as a "pooling of interests."/20 As set forth more fully
above, each share of DQE Common Stock will be converted
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/20 Twelve specific conditions must be met in order to qualify for pooling of
interests. The Merger should satisfy those criteria as follows: (1) Both DQE
and AYE were autonomous and were not a subsidiary or division of another
corporation within two years before the Merger Agreement was initiated; (2)
At the date of both the merger initiation and consummation, DQE and AYE are,
and will be, respectively, independent of each other; (3) DQE and AYE will
undertake a course of action which will attempt to complete the transaction
within one year in accordance with a specific plan, or completed in a single
transaction. Litigation or proceedings of a governmental authority that
delay the completion of a plan are excepted from the one-year rule, provided
they are beyond the control of the combining companies; (4) At the
consummation date of the Merger Agreement, AYE will offer and issue its
majority class of stock (voting rights) for no less than 90% of the voting
common stock interests of DQE. The 90% or more of the voting common stock
interests being acquired is determined at the date the Merger is
consummated; (5) No changes in the equity interests of the voting common
stock of DQE or AYE has been or will be made in contemplation of a pooling
of interests. This restriction is for a period beginning two years prior to
the initiation date of the plan of combination and for the period between
the initiation date and the consummation date; (6) Neither DQE nor AYE will
reacquire any of its voting common stock in substance or form to effect a
business combination. Any reacquisition must be a normal amount as evidenced
by both companies' patterns of reacquisition prior to the Merger; (7) Each
DQE and AYE common stockholder will receive a voting common stock interest
exactly in proportion to his or her voting common stock interest prior to
the combination; (8) The DQE and AYE common stockholders will receive the
rights they are entitled to and will not be deprived or restricted in any
way from exercising those rights; (9) The entire Merger Agreement will be
effected on the date of consummation; (10) Subsequent to consummation, the
combined corporation, AYE, will agree not to reacquire or retire any of the
stock which was issued to effect the transaction; (11) AYE will not enter
into any agreements to the benefit of the former stockholders of DQE or AYE,
such as loan guarantees; and (12) AYE will not plan to dispose of
substantial amounts of the assets of DQE or AYE within two years of the date
of the combination other than routine transactions in the ordinary course of
business or to eliminate excess capacity.
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into the right to receive, and become exchangeable for, 1.12 shares of AYE
Common Stock. Each share of AYE Common Stock issued and outstanding prior to the
Merger will be unaffected by the Merger. The Merger will therefore involve no
"acquisition adjustment" or other write-up of the assets of AYE or DQE. The
difference for holders of DQE Common Stock is that, after the Merger, they will
own shares in a Maryland corporation (i.e., AYE), rather than a Pennsylvania
corporation (i.e., DQE). The differences between the rights of the stockholders
of DQE under the Pennsylvania Business Corporation Law, the DQE Articles and the
Bylaws of DQE, and rights of the stockholders of AYE under the Maryland General
Corporation Law, the AYE Charter and the AYE Bylaws are set forth at pages 77-90
of the Registration Statement.
Second, the Merger was submitted to, and approved by, the affected
public stockholders, i.e., the holders of AYE Common Stock and the holders of
DQE Common Stock, respectively. Holders of approximately 95% of AYE Common Stock
represented at the Special Meeting of Stockholders of AYE held on August 7,
1997, approved the Merger and holders of approximately 98% of DQE Common Stock
represented at the Annual Meeting of Stockholders of DQE held on August 7, 1997,
approved the Merger.
Third, the Exchange Ratio is the product of extensive and vigorous
arm's-length negotiations between AYE and DQE. These negotiations were preceded
by extensive due diligence, analysis and evaluation of the assets, liabilities
and business prospects of each of the respective companies. See "Background of
the Merger" at pages 25-26 of the Registration Statement. As recognized by the
Commission in Ohio Power Co., 44 SEC 340, 346 (1970), prices arrived at through
arm's-length negotiations are particularly persuasive evidence that Section
10(b)(2) is satisfied.
Finally, nationally-recognized investment bankers for AYE and DQE have
reviewed extensive information concerning the companies, have analyzed the
Exchange Ratio employing a variety of valuation methodologies and have opined
that the Exchange Ratio is fair to the respective holders of AYE Common Stock
and DQE Common Stock from a financial point of view. The investment bankers'
analyses and opinions are described in detail on pages 28-36 of the Registration
Statement. The assistance of independent consultants in setting considerations
has been recognized by the Commission as evidence that the requirements of
Section 10(b)(2) have been met. The Southern Company; SV Ventures, Inc., Holding
Co. Act Release No. 24579 (Feb. 12, 1988).
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In rendering their fairness opinions, DQE's investment banker, Credit
Suisse First Boston Corporation ("CSFB") and AYE's investment banker, Merrill
Lynch & Co. ("Merrill Lynch"), performed a number of analyses relevant to the
fairness of the Exchange Ratio from a financial point of view and analyses
relevant to the investment in, and earning capacity of, the utility assets of
DQE and AYE. These analyses considered, among other things, the pro forma effect
of the Merger on AYE's earnings, dividends and cash flow, and the respective
contributions of DQE and AYE to AYE in terms of assets, earnings, dividends,
cash flow and businesses. Both Merrill Lynch and CSFB considered both public and
non-public historical and projected financial information and forecasts related
to the earnings, assets, business, dividends, cash flow, and prospects of DQE
and AYE; historical market prices and trading activities of DQE Common Stock and
AYE Common Stock and certain publicly traded companies deemed similar; and other
information, as more fully described on pages 28-36 of the Registration
Statement.
In light of these opinions and an analysis of all relevant factors,
including the benefits that may be realized as a result of the Merger, the
Exchange Ratio falls within the range of reasonableness, and the consideration
for the Merger bears a fair relation to the sums invested in, and the earning
capacity of, the utility assets of DQE.
(ii) Reasonableness of Fees
AYE believes that the overall fees, commissions and expenses incurred
and to be incurred in connection with the Merger are reasonable and fair in
light of the size and complexity of the Merger relative to other transactions
and the anticipated benefits of the Merger to the public, investors and
consumers are consistent with Commission precedent, and meet the standards of
Section 10(b)(2).
DQE and AYE together expect to incur a combined total of approximately
$24 million in fees, commissions and expenses in connection with the Merger, a
sum that is significantly less than the fees deemed reasonable by the Commission
in other transactions; specifically, The Cincinnati Gas and Electric Company and
PSI Resources, Inc. together incurred $47.1 million in fees, commissions and
expenses in connection with their combination into CINergy Corp., Northeast
alone incurred $46.5 million in fees and expenses in connection with its
acquisition of the Public Service Company of New Hampshire, and Entergy alone
incurred $38.0 million in fees in connection with its acquisition of Gulf States
Utilities. See CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994);
Northeast Utilities, et al., Holding Co. Act Release No. 25548 (June 3, 1992);
Entergy Corporation, et al., Holding Co. Act Release No. 25952 (Dec. 17, 1993).
The sum of the fees paid in connection with the Merger is also substantially
similar to that paid in other recent mergers, including FirstEnergy, in which
the parties paid approximately $32 million in fees. FirstEnergy Corp., Holding
Co. Act Release No. 26722 (Nov. 5, 1997).
With respect to financial advisory fees, AYE believes that the fees
payable to the financial advisors are fair and reasonable for similar reasons.
In connection with AYE's engagement of Merrill Lynch, AYE and Merrill
Lynch entered into a letter agreement (the "Merrill Lynch Engagement Letter"),
(1) pursuant to which Merrill Lynch was paid a fee of $250,000 on the date of
such letter agreement and (2) which provides that if, during the period Merrill
Lynch is retained by AYE or within 18 months thereafter, (a) a Merger
Transaction (as defined in the Merrill Lynch Engagement Letter) is consummated
or (b) AYE or its affiliates enters into an agreement with DQE which
subsequently results in a Merger Transaction, an additional fee of $8,650,000
will be payable. Any
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fee previously paid to Merrill Lynch in accordance with clause (1) of this
paragraph will be deducted from the fee to which Merrill Lynch is entitled in
accordance with clause (2). Pursuant to the Merrill Lynch Engagement Letter, if
AYE receives any bust-up fee, break-up fee, termination fee, expense
reimbursement or any similar type of payment from DQE in connection with a
proposed Merger Transaction, then AYE has agreed to pay Merrill Lynch 10% of
such payment received (excluding any payment to AYE related to the reimbursement
of actual out-of-pocket expenses incurred by AYE; provided, however, that
Merrill Lynch's fee pursuant to this sentence will not be considered as an
out-of-pocket expense for purposes of this sentence), up to a maximum of
$6,250,000. In addition, pursuant to the Merrill Lynch Engagement Letter, AYE
has agreed to pay certain other expenses of, and has granted certain rights of
indemnification to, Merrill Lynch.
Pursuant to the terms of CSFB's engagement as financial advisor to DQE,
DQE has agreed to pay CSFB for its services in connection with the Merger an
aggregate financial advisory fee of $8.65 million. DQE also has agreed to
reimburse CSFB for reasonable out-of-pocket expenses incurred by CSFB in
performing its services, including the fees and expenses of legal counsel and
any other advisor retained by CSFB, and to indemnify CSFB and certain related
persons and entities against certain liabilities, including liabilities under
the federal securities laws, arising out of CSFB's engagement.
Under the terms of the above referenced engagements with Merrill Lynch
and CSFB, if the Merger is consummated, AYE and DQE will expend together
approximately $17.3 million on financial advisor fees, or about 0.27% of the
combined market value/21 of the parties to the Merger. The amount of these
financial advisor fees is substantially less than the 0.96% approved by the
Commission in The Southern Company transaction and approximately the same as the
0.275%, 0.35%, 0.36% and 0.31% paid and approved by the Commission in the
Centerior, Northeast Utilities, Entergy and CINergy transactions, respectively.
See The Southern Company; SV Ventures, Inc., Holding Co. Act Release No. 24579
(Dec. 12, 1988); Centerior Energy Corp., Holding Co. Act Release No. 24073 (Apr.
29, 1986); Northeast Utilities, et al., Holding Co. Act Release No. 25548 (June
3, 1992); Entergy Corporation et al., Holding Co. Act Release No. 25952 (Dec.
17, 1993); CINergy Corp., Holding Co. Act Release No. 26146 (Oct. 21, 1994).
Finally, the financial advisor fees of DQE and AYE reflect competition
in the marketplace, in which investment banking firms actively compete with each
other to act as financial advisors to merger partners.
(c) Section 10(b)(3)
Section 10(b)(3) requires the Commission to determine whether the
Merger will "unduly complicate the capital structure" of the AYE system or will
be "detrimental to the public interest or the interest of investors or consumers
or the proper functioning" of the AYE system.
Capital Structure: The corporate capital structure of AYE after
consummation of the Merger will not be unduly complicated. Pursuant to the terms
of the Merger Agreement, holders of DQE Common Stock
- --------
/21 Market value calculated based on number of shares of AYE Common Stock and
DQE Common Stock outstanding as of September 30, 1997, and their respective
52-week trading highs as of that date. See Application/Declaration of
CINergy Corp., File No. 70-8427, n.10.
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will receive AYE Common Stock at the Exchange Ratio. Upon consummation of the
Merger, AYE will own all of the issued and outstanding DQE Common Stock. Each
outstanding share of AYE Common Stock and the outstanding common, preferred
stock, preference stock and public debt securities of each of DQE, DQE's
subsidiaries and AYE's subsidiaries will remain unchanged./22 The only voting
securities of AYE that will be publicly held after the consummation of the
Merger will be the AYE Common Stock. Such capital structure of AYE will not be
unduly complicated and will be substantially similar to capital structure
approved by the Commission in other orders. See, e.g., CINergy, Holding Co. Act
Release No. 26146 (Oct. 21, 1994); Centerior Energy Corp., Holding Co. Act
Release No. 24073 (Apr. 29, 1986); Midwest Resources, et al., Holding Co. Act
Release No. 25159 (Sept. 26, 1990).
Set forth below are summaries of the historical capital structures of
DQE and AYE as of September 30, 1997, and the pro forma consolidated capital
structure of AYE (assuming the Merger occurred on September 30, 1997):
AYE and DQE Historical Capital Structures
(dollars in millions)
AYE DQE
------ ---------
Common Stock Equity $2,232 $ 1,480
Preferred/Preference Stock 170 225
Long-Term Debt 2,206 1,358
------ ---------
Total $4,608 $ 3,063
====== =========
AYE Pro Forma Consolidated Capital Structure
(dollars in millions) (unaudited)
Common Stock Equity $3,684 48.2%
Preferred /Preference Stock 395 5.2%
Long-Term Debt 3,564 46.6%
----------- ---------
Total $7,643 100.0%
=========== =========
AYE's pro forma consolidated common equity to total capitalization
ratio of 48.2% is significantly higher than both CINergy's 39.9% and Northeast
Utilities' 27.6% ratios, both of which were approved by the Commission. It is
well above the "traditionally acceptable 30% level," to which the Commission
referred in approving the Northeast Utilities transaction. Northeast Utilities,
Holding Co. Act Release No. 25221 (Dec. 21, 1990); see also CINergy Corp.,
Holding Co. Act Release No. 26146 (Oct. 21, 1994).
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/22 The continued existence of the DQE Preferred Stock after consummation of the
Merger will not constitute an undue complication of the AYE capital
structure. First, although not applicable in the instant matter because DQE
will remain a holding company after consummation of the Merger, Rule 52
under the PUHCA expressly permits, subject to certain limitations, the
issuance of preferred stock by certain subsidiaries of a registered holding
company. Second and more importantly, in its recent determination in New
Century Energies, Inc., the Commission explicitly noted that the preferred
stock of a holding company which would become an intermediate holding
company after consummation of the subject transactions, would remain
outstanding and unaffected by the subject merger. Holding Co. Release Act
No. 26748 (Aug. 1, 1997) n.19.
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The pro forma ratio reflects the adjustments described on pages 65-76
of the Registration Statement. The assets, liabilities and equity of AYE and DQE
were reclassified where appropriate to conform to the presentation expected to
be used by AYE after consummation of the Merger.
Protected Interests: Section 10(b)(3) also requires the Commission to
determine whether the proposed combination will be detrimental to the public
interest, the interests of investors or consumers or the proper functioning of
the AYE system. The combination of DQE and AYE is entirely consistent with the
proper functioning of a registered holding company system. Duquesne Light's,
Monongahela's, Potomac Edison's, West Penn's and AGC's utility operations will
be fully integrated. Furthermore, the combination will result in substantial,
otherwise unavailable, savings and benefits to the public and to consumers and
investors of both AYE and DQE, and the integration of Duquesne Light,
Monongahela, Potomac Edison, West Penn and AGC will improve the efficiency of
their respective systems. This integration is described in Item 3.A.2.a.ii below
and the benefits and savings are described in Item 3.A.2.b.i below. Moreover, as
noted by the Commission in Entergy Corporation, Holding Co. Act Release No.
25952 (Dec. 17, 1993), "concerns with respect to investors' interests have been
largely addressed by developments in the federal securities laws and the
securities market themselves." The utilities of the system will be reporting
companies subject to the continuous disclosure requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") following the completion of the
Merger. The various reports previously filed by DQE and AYE under the Exchange
Act contain readily available information concerning the Merger. For these
reasons, the Applicant believes that the Merger will be in the public interest
and the interest of investors and consumers, and will not be detrimental to the
proper functioning of the resulting holding company system.
2. Section 10(c)
Section 10(c) of the PUHCA provides that, notwithstanding the
provisions of Section 10(b), the Commission shall not approve:
(1) an acquisition of securities or utility assets, or of any other
interest, which . . . is detrimental to the carrying out of the
provisions of Section 11; or
(2) the acquisition of securities or utility assets of a
public-utility or holding company unless the Commission finds that
such acquisition will serve the public interest by tending towards
the economical and the efficient development of an integrated
public utility system . . . .
(a) Section 10(c)(1)
Section 10(c)(1) requires that transactions not be detrimental to
carrying out the provisions of Section 11. Section 11(a) of the PUHCA requires
the Commission to examine the corporate structure of registered holding
companies to ensure that unnecessary complexities are eliminated and that voting
powers are fairly and equitably distributed. As described in Item 3.A.1.c above,
the Merger will not result in unnecessary complexities or unfair voting powers;
indeed, because AYE will have only one authorized class of voting stock
outstanding, AYE Common Stock, which will be owned by both the holders of AYE
Common Stock before and after the Merger and the holders of DQE Common Stock
after the Merger, all stockholders will have equal and identical rights.
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Section 11(b)(1) generally requires a registered holding company system
to limit its operations "to a single integrated public-utility system, and to
such other businesses as are reasonably incidental, or economically necessary or
appropriate to the operations of such integrated public-utility system." Section
11(b)(2) directs the Commission "to ensure that the corporate structure or
continued existence of any company in the holding company system does not unduly
or unnecessarily complicate the structure, or unfairly or inequitably distribute
voting power among security holders, of such holding-company system." As
detailed below, the Merger will not be detrimental to, or inconsistent with, the
carrying out of the provisions of Section 11(b).
(i) Acquisition of Certain Businesses
As a result of the Merger, the nonutility businesses and interests of
DQE and AYE described in Item 1.B.4 above will become businesses and interests
of AYE. In addition, the subsidiaries, affiliates and associates of the
foregoing companies will become indirect subsidiaries, affiliates and
associates, respectively, of AYE.
Corporate charts showing the subsidiaries, including nonutility
subsidiaries, of AYE and DQE are filed as Exhibits E-3 and E-4. A corporate
chart showing the projected arrangement of AYE after the Merger is filed as
Exhibit E-5.
Standard for Permissible Non-Utility Businesses: Section 11(b)(1)
generally limits a registered holding company to "such other businesses as are
reasonably incidental, or economically necessary or appropriate, to the
operations of [an] integrated public utility system." Under the cases
interpreting Section 11, the Commission has generally required an operating or
functional relationship between the operations of the utility system and the
system's nonutility business. See, e.g., Michigan Consolidated Gas Co., 44 SEC
361, 365 (1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971) (quoting General Public
Utilities Corp., 32 SEC 807, 839 (1951)); United Light and Railways Co., 35 SEC
516, 519 (1954). The Commission has also approved nonutility businesses that
evolved out of the system's utility business, where the investment was not
significant in relation to the system's total financial resources, and the
investment has the potential to produce benefits for investors and/or consumers.
CSW Credit, Inc., Holding Co. Act Release No. 25995 (Mar. 2, 1994); Jersey
Central Power & Light Co., Holding Co. Act Release No. 24348 (Mar. 18, 1987).
In addition, Section 9(c)(3) authorizes the Commission to approve the
acquisition by a registered holding company of securities "in the ordinary
course of business." Rule 58, which was adopted pursuant to Section 9(c)(3),
expanded the ability of public utility holding companies to invest in
energy-related businesses. In adopting Rule 58, the Commission acknowledged that
the gas and electric utility industries were in the midst of substantial
deregulation at both the state and federal level, and, in light of this,
explicitly recognized that "the contemporary gas and electric industries no
longer focus solely upon the traditional production and distribution functions
of a regulated utility, but . . . instead [are] evolving toward a broadly based,
competitive, energy services business." Exemption of Acquisitions by Registered
Public-Utility Holding Companies of Securities of Nonutility Companies Engaged
in Certain Energy-Related and Gas-Related Activities; Exemption of Capital
Contributions and Advances to Such Companies, 62 Fed. Reg. 7900, 7902 (Feb. 20,
1997) ("Rule 58 Release").
Under Rule 58, a registered holding company or a subsidiary company
thereof may acquire the securities of an "energy-related company," subject to
certain limitations and reporting requirements. An
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energy-related company is a company that derives or will derive substantially
all of its revenues (exclusive of revenues from temporary investments) from one
or more of the ten businesses specifically enumerated in the Rule. Acquisitions
made pursuant to Rule 58 are considered to be "appropriate in the ordinary
course of business" within the meaning of Section 9(c)(3) and are exempt from
the requirement of Commission approval under Sections 9(a)(1) and 10. The
exemption provided by Rule 58 is available only if the aggregate investment by
the registered holding company and its subsidiaries in energy-related companies
does not exceed the greater of $50 million or 15% of the consolidated
capitalization of the registered holding company.
In the Rule 58 Release, the Commission reflected on the increasing
pressure on utility companies to move away from traditional, regulated utility
functions and towards more broadly-based energy-related businesses:
[R]egistered holding companies have filed numerous applications
in recent years seeking authorization to engage in nonutility
activities that the companies contend complement, or are
natural extensions of, the evolving gas and electric
industries. In considering these applications, the Commission
has attempted to balance the need for regulatory change due to
industry developments with the need for continued protection
under the Act of the public interest and the interest of
investors and consumers. The concept of a functional
relationship has been expanded in some cases, in a manner
consistent with the purposes and limitations of the Act, and
the Commission has permitted some activities that would benefit
the registered system in ways less tangible and direct than
those considered and approved in orders of previous years. In
some cases the Commission approved as part of this development
extensive transactions with nonassociate companies and declined
to limit the transactions to the particular service territory
of the registered system utilities. To this extent, the
Commission implicitly correlated the functional relationship
test with changes in the industry.
Rule 58 Release at 7901. (Footnotes omitted.)
In the same release, the Commission further observed that "various
considerations, including developments in the industry, the Commission's
familiarity with the particular nonutility activities at issue, the absence of
significant risks inherent in the particular venture, the specific protections
provided for consumers and the absence of objections by the relevant state
regulators, made it unnecessary to adhere rigidly to the types of administrative
measures" used in the past. Rule 58 Release at 7902.
The Commission will note from the discussion below that most of the
nonutility businesses Applicant is seeking to acquire are substantially similar
to businesses that the Commission has previously approved with respect to other
registered holding company systems. For those businesses that have not been
approved in prior orders, most are either exempt from the PUHCA or qualify as
energy-related companies under Rule 58./23 With respect to these nonutility
businesses that do not come within established Commission
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/23 The aggregate amount of AYE's investment in these energy-related companies
will not exceed the limits established by the Commission in Rule 58.
Further, following the Commission's recent decision in New Century Energies,
Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997), Applicant requests
that, after consummation of the Merger, DQE's investments in
"energy-related" businesses, as that term is used in Rule 58, in existence
prior to the Merger be disregarded for purposes of calculating AYE's total
investment in energy-related companies. This request is based on the fact
that DQE was not subject to the restrictions of Section 11(b)(1) and the
Commission's precedent thereunder at the time it acquired interests in such
energy-related businesses.
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precedent, and that are not otherwise exempt from the PUHCA, Applicant believes
that the Commission should nonetheless authorize the acquisition of the
securities of such businesses under Section 9(c)(3) of the PUHCA, as the size of
such investments are minimal and therefore "not detrimental to the public
interest or the interest of investors or consumers."
(A) Description of DQE Businesses
(1) Duquesne Light, whose origin dates to 1880, is engaged in the
production, transmission, distribution and sale of electric energy in
southwestern Pennsylvania. Through its direct and indirect subsidiaries,
Duquesne Light is engaged in other businesses discussed below. Through its
wholly owned subsidiary Ventures, Duquesne Light owns three indirect
subsidiaries: Diemen-Flevo Co. ("Diemen-Flevo"), Oakridge Resources and
EnviroGas.
Diemen-Flevo is engaged in making investments to accumulate funds for
the decommissioning of fossil-fueled power stations. Diemen-Flevo is the
beneficial owner of the Diemen-Flevo Trust, which is a party to financial
transactions involving certain commercial equipment leases, including the sale
and lease-back of non-voting, non-controlling interests in two generating
facilities in the Netherlands. Diemen-Flevo is not involved in the technical,
marketing or administrative details of the leasing of the subject property. The
subject lease transactions, like those of Montauk and its subsidiaries discussed
below, are passive investments which generate certain tax benefits, an activity
which the Commission has accepted as "in the ordinary course of business" of a
registered holding company provided (as is true here) that the acquisition of
securities in connection with such transactions is not an acquisition that
involves ownership and management of a nonutility business. Central and South
West Corp., Holding Co. Act Release No. 23578 (Jan. 22, 1985).
Oakridge Resources owns a 50% joint venture interest in Laurel
Ventures, which interest was acquired as consideration for contributing certain
coal properties owned by DQE. Through its interest in Laurel Ventures, Oakridge
Resources is engaged in the sale and marketing of coal and the leasing of coal
properties to an unaffiliated construction and mining company. The sale and
marketing of coal is clearly "energy-related" within the meaning of Rule
58(b)(1)(v). See Rule 58 Release at 7906, n.62. These activities are also
consistent with Commission precedent which has approved companies in a
registered holding company system to market coal and other energy commodities
and to lease coal properties. See, e.g., Northeast Utilities, Holding Co. Act
Release No. 26592 (Oct. 11, 1996); American Electric Power Co., Holding Co. Act
Release No. 26583 (Sep. 27, 1996); see also Central Ohio Coal Co., Holding Co.
Act Release No. 26369 (Sep. 7, 1995) (authorizing the sale to third parties of
coal produced by subsidiaries of a registered holding company); Consolidated
Natural Gas Company, Holding Co. Act Release No. 19792 (Dec. 3, 1976)
(authorizing transactions with respect to a subsidiary of a registered holding
company that was to engage "in the business of owning and leasing coal
properties").
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EnviroGas is engaged in gathering, processing and selling coal bed
methane gas. EnviroGas obtains the methane from coal seams on real property
which is owned by other persons. EnviroGas owns title to the methane gas and has
entered into agreements with the owners of the real property to collect such
gas, but does not own title to the real property. EnviroGas is thus engaged in
"the production, conversion, sale and distribution . . . of alternative fuels"
within the meaning of Rule 58(b)(1)(vi). Further, the Commission has previously
authorized registered holding companies to engage in coal gasification
activities. See, e.g., Columbia Gas System, Inc., Holding Co. Act Release No.
16968 (Jan. 18, 1971); The Southern Company, Holding Co. Act Release No. 26221
(Jan. 25, 1995) (authorizing preliminary development of coal gasification
projects). See also New England Electric System, Holding Co. Act Release No.
26277 (Apr. 26, 1995) (approving investments in facilities for the production or
recovery of alternative fuels). EnviroGas, through its 100% membership interest
in LFG Capital, L.L.C., is also engaged in landfill gas recovery projects in
Pennsylvania. As set forth below in the discussion of Montauk's alternative
energy investments, substantially similar investments by a subsidiary of a
registered holding company have been previously authorized by Commission order.
In addition, Ventures owns approximately 9% of the outstanding voting
securities of Maglev, Inc., which was formed to develop an elevated railway
system for the Pittsburgh area. To date, Ventures has invested $120,000 in the
project. It is unclear at this point whether the project will, in fact, proceed.
To the extent that the project does proceed, the Maglev interest should be
retainable by analogy to Rule 40(a)(5) under the PUHCA, which provides a limited
exemption for acquisition of securities of industrial and nonutility enterprises
located within the service territory of the registered holding company, where
the acquisition does not result in an affiliation with, that is, ownership by
the registered holding company, directly or indirectly, of 5% or more of the
voting securities of, the nonutility company. Further, the Commission has also
issued orders authorizing the acquisition of securities of local nonutility
enterprises outside the strictures of Rule 40(a)(5) as "in the ordinary course
of business" pursuant to Section 9(c)(3). See, e.g., Hope Gas, Inc., Holding Co.
Act Release No. 25739 (Jan. 26, 1993); Georgia Power Co., Holding Co. Act
Release No. 25949 (Dec. 15, 1993).
Duquesne Light is also the general partner of Duquesne Capital L.P., a
special purpose limited partnership formed to issue its limited partnership
interests in the form of Series A MIPS. See Item 1.B.1.b above for a further
discussion of such securities. The Commission has previously authorized
registered holding companies to organize and acquire limited partnerships and
special-purpose subsidiaries in connection with the issuance of monthly income
preferred securities. See, e.g., Jersey Central Power & Light Co., Holding Co.
Act Release No. 26246 (Mar. 6, 1995); Metropolitan Edison Co., Holding Co. Act
Release No. 26102 (Aug. 11, 1994).
(2) DE, a wholly owned subsidiary of DQE, makes strategic investments that
are intended to be beneficial to DQE's core energy business. These investments
are intended to enhance DQE's capabilities as an energy provider, increase asset
utilization and act as a hedge against changing business conditions. DE has six
wholly owned subsidiaries: ADC; Property Ventures, Ltd. ("Property Ventures");
JLK Technology Inc. ("JLK"); DQE Communications, Inc. ("Communications");
On-Demand Energy, Inc. ("On-Demand"); and Keystone Power Services, Inc.
ADC owns the energy facilities for the Pittsburgh International
Airport. ADC is not a public utility company for purposes of the Pennsylvania
Public Utility Code. DQE has, however, elected to treat ADC as an electric
utility company for purposes of the PUHCA. See DQE, Inc., Holding Co. Act
Release No. 26257
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(Mar. 24, 1995) (authorizing the acquisition of ADC under Sections 9(a)(2) and
10 of the Act). ADC's utility operations, which are located within the service
territory of Duquesne Light, are currently integrated with those of Duquesne
Light and, following the Merger, will be integrated with those of the other AYE
public utility subsidiary companies as well.
Property Ventures owns and develops real estate in southwestern
Pennsylvania. Property Ventures also owns a 50% joint-venture interest in
Hopewell Partnership, which is similarly engaged in investing in real estate in
the Pittsburgh area. DQE's net investment in Property Ventures and Hopewell
Partnership is $63.5 million, approximately $55.5 million (87%) of which is
comprised of office buildings used in DQE's operations, including the respective
corporate headquarter buildings of DQE, Duquesne Light, DE, DES and DQEnergy
Partners. Applicant does not currently intend to expand DQE's present $8.0
million investment in unrelated real estate activities. AYE thus seeks only to
retain DQE's relatively small existing interests as "in the ordinary course of
business" pursuant to Section 9(c)(3) of the PUHCA.
JLK was formed to hold a 50% limited partnership interest in Kommco,
L.P., a joint venture formed with ITRON, Inc. to offer wireless communications
for regional monitoring and control services. JLK and possibly Kommco will seek
a determination of status as "exempt telecommunications companies" pursuant to
Section 34 of the PUHCA.
DE formed Communications to enter into a joint venture ("Pittsburgh
Fiber") with a telecommunications company to establish a fiber optic
telecommunications network in the Pittsburgh area. To do this, it is currently
contemplated that Duquesne Light will sell all of its fiber optic network to
Communications which, in turn, will enter into the joint venture and lease the
fiber optic network back to Duquesne Light and to Pittsburgh Fiber. Pittsburgh
Fiber will be structured as a general partnership with Communications and its
joint venture partner owning 49% and 51% interests, respectively. It is
contemplated that Communications and Pittsburgh Fiber will seek a determination
of status as "exempt telecommunications companies" under Section 34 of the
PUHCA.
On-Demand markets energy-related products such as demand controls and
energy-efficient lighting. The marketing of energy services is clearly an
energy-related activity within the meaning of Rule 58(b)(1)(i). In fact, in its
commentary to Rule 58(b)(1)(i) in the Rule 58 Release, the Commission
specifically referred to its order in New England Electric System, which
authorized a subsidiary of a registered holding company to engage in a number of
the activities performed by On-Demand, including the marketing of energy
management services such as the replacement of inefficient equipment, and the
monitoring of energy consumption. See New England Electric System, Holding Co.
Act Release No. 22719 (Nov. 19, 1982).
Keystone Power Services, Inc. is a wholly owned inactive subsidiary of
DE.
DE owns approximately 9.2% of the outstanding common stock of SatCon
Technology Corporation ("SatCon"). DE acquired its interest in SatCon as part of
a strategic partnership to commercialize SatCon's flywheel energy storage system
technology for stationary power applications. SatCon used the $5 million
proceeds from the sale of the shares to form and capitalize a new subsidiary,
Beacon Power Corporation, which will manufacture and distribute the flywheel
energy storage systems. DE will participate in marketing the systems and will
distribute the systems in seven mid-Atlantic states and the District of
Columbia. So long as DE continues to own at least 5% of SatCon's outstanding
common stock,
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it will have the power to nominate one member of SatCon's seven-member board of
directors. Flywheel energy storage system technology is an electrotechnology
related to energy storage within the meaning of Rule 58(b)(1)(ii). Further, AYP
Capital has already been authorized to engage in the development of electric
power conversion and storage technologies pursuant to Commission order.
Allegheny Power System, Holding Co. Release Act No. 26085 (July 14, 1994).
Indeed, the Commission cited the Allegheny Power System order in its commentary
to Rule 58(b)(1)(ii). Rule 58 Release at 7905, n.51. In any event, although the
Commission has not previously authorized a registered holding company to engage
in the development and commercialization of the precise technology at issue
(i.e., flywheel energy storage system technology), it has authorized registered
holding companies to invest in the development of other electric energy and
power storage technologies. See, e.g., The Southern Company, Holding Co. Act
Release No. 23888 (Oct. 31, 1985) (authorizing investment in a joint venture to
construct, own and operate facilities for the manufacture and sale of
photovoltaic cells, which convert sunlight directly to electric energy); GPU
International, Inc., Holding Co. Act Release No. 26631 (Dec. 17, 1996)
(authorizing investment in enterprise to develop, manufacture and market
stationary fuel cell power systems).
DE owns approximately 10.5% of the voting securities of Exide
Electronics Group, Inc. ("Exide Electronics"), an integrated provider of
non-interruptible power quality products, systems and services, in both the
domestic and international markets. The activities of Exide Electronics all
qualify as energy-related within various subsections of Rule 58. Specifically,
such activities qualify under Rule 58(b)(1)(i), which permits rendering of
energy management services, Rule 58(b)(1)(ii), which permits the development and
commercialization of electrotechnologies and Rule 58(b)(1)(iv), which permits
the sale of electric appliances. Further, the Commission has previously approved
the rendering of services designed to prevent, control and mitigate the adverse
effects of power disturbances on a customer's electrical system and to ensure
the proper level of power quality required by the customer, particularly with
respect to sensitive electronic equipment. CINergy Corp., Holding Co. Act
Release No. 26662 (Feb. 7, 1997) (authorizing, among other things, technical and
consulting services involving "power factor correction and harmonics mitigation
analysis"). On October 16, 1997, Exide and BTR plc ("BTR") announced a
definitive merger agreement, pursuant to which BTR intends to acquire Exide
through a tender offer for $29 per share in cash. If the merger is approved and
completed, DE will no longer hold any interest in Exide.
DE owns 40% of the outstanding voting securities of Lab Cor. Inc.,
which provides inorganic air analytical laboratory services. DE also owns 25% of
the voting securities of Recra Environmental ("Recra") which provides
environmental testing and measurement services. Recra has one inactive
subsidiary, Electro-Pure Systems, Inc. The provision of such services by each of
Lab Cor. Inc. and Recra is energy-related within the meaning of Rule 58(b)(vii),
which permits "environmental testing" as an energy-related activity. Further,
the Commission has previously approved environmental testing, see New England
Electric System, Holding Co. Release Act No. 26681 (Mar. 7, 1997), and the
rendering of environmental services. See Central and South West Corporation,
Holding Co. Act Release No. 26367 (Sept. 1, 1995); CINergy Corp., Holding Co.
Act Release No. 26662 (Feb. 7, 1997).
DE owns 3% of the voting securities of H Power Corporation, a leading
fuel cell development company. The activities of H Power Corporation are
energy-related within the meaning of Rule 58(b)(1)(ii), which permits the
development and commercialization of electrotechnologies, and are consistent
with the activities approved in the Commission's order in The Southern Company,
Holding Co. Act Release No. 23888 (Oct. 31, 1985), which was cited in the
Commission's proposing release for Rule 58(b)(1)(ii). Exemption of Acquisition
by Registered Public-Utility Holding Companies of Securities of Nonutility
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Companies Engaged in Certain Energy-Related and Gas-Related Businesses,
Exemption of Capital Contributions and Advances to Such Companies, 60 Fed. Reg.
33642 (June 20, 1995). The Commission also previously has approved investments
in fuel cell development by companies in a registered holding company system.
GPU International, Inc., Holding Co. Act Release No. 26631 (Dec. 17, 1996)
(authorizing investment in enterprise to develop, manufacture and market
stationary fuel cell power systems).
(3) DES is a diversified energy services company that provides energy and
fuel management, energy facility development, co-generation and independent
power production services to customers in domestic and international markets.
DES has, through its wholly owned subsidiary DQE Power International,
Inc. ("Power International"), formed ElectroGen International L.L.C., a joint
venture with Marathon Oil Company, to develop, own and operate power generation
projects in selected international markets. Power International owns a 50%
interest in ElectroGen International, L.L.C., which in turn has one wholly owned
subsidiary, ElectroGen International Limited, formed to identify and develop
project opportunities for the joint venture. In addition, Power International
has six wholly owned subsidiaries: ElectroGen International-DQE Power Limited,
ElectroGen International-DQE Power Alpha Limited, ElectroGen International-DQE
Power Beta Limited, ElectroGen International-DQE Power Gamma Limited, ElectroGen
International-DQE Power Delta Limited and EGI-DQE Power Quang Ninh Limited.
ElectroGen International-DQE Power Limited owns a 50% joint-venture interest in
ElectroGen Maveli Limited, which was formed to develop power projects in
Pakistan and India. ElectroGen International-DQE Power Alpha Limited and
ElectroGen International-DQE Power Beta Limited own 50% joint-venture interests
in ElectroGen Alpha Limited and ElectroGen Beta Limited, respectively, which
were formed to develop power projects outside the United States. EGI-DQE Power
Quang Ninh Limited owns a 50% joint-venture interest in ElectroGen Quang Ning
Sdn. Bhd., which was formed to develop power projects in Vietnam. The Commission
has previously authorized registered holding companies to engage in preliminary
development activities with respect to independent power projects. See, e.g.,
Southern Company, Holding Co. Act Release No. 26212 (Dec. 30, 1994) (authorizing
Southern Electric International, Inc. "to render project development,
engineering, design, construction and construction management, operating, fuel
management, maintenance and power plant overhaul, and other similar kinds of
managerial and technical services to . . . nonaffiliated developers, operators
and owners of independent power projects and foreign and domestic utility
systems and industrial concerns"). Applicant requests authority to engage in
such activities on an ongoing basis. Before a project becomes fully operational,
Applicant will qualify it for exemption from the PUHCA, either as an EWG
pursuant to Section 32 of the PUHCA or as a FUCO pursuant to Section 33 of the
PUHCA.
DES has, through its wholly owned subsidiary Duquesne Energy, Inc.,
developed a strategic alliance with CQ, Inc. to market E-Fuel(TM), a new,
alternative fuel that replaces industrial coal with an environmentally sound
synthetic substitute. Duquesne Energy, Inc. is otherwise engaged in developing
fuel and fuel-related technologies. The development and marketing of alternative
fuels is an energy-related activity within the meaning of Rule 58(b)(1)(iv) and
Rule 58(b)(1)(vi). See The Southern Company, Holding Co. Act Release No. 26221
(Jan. 25, 1995) (authorizing preliminary development activities, such as market,
technical and financial tests and studies, with respect to alternative fuels).
DES has, through its wholly owned subsidiary DH Energy, agreed with
Heinz U.S.A. to provide energy services to the Heinz factory complex in
Pittsburgh, Pennsylvania. DH Energy is a single purpose
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entity formed to lease, operate and maintain the Pittsburgh complex's
inside-the-fence energy facilities for the production of electricity, steam and
compressed air. DQE has elected to treat DH Energy as an electric utility
company for purposes of the PUHCA. See DQE, Inc., Holding Co. Act Release No.
26728 (June 10, 1997) (authorizing the acquisition of DH Energy). The utility
operations of DH Energy are currently integrated with those of Duquesne Light
and, following the Merger, will be integrated with those of the other AYE public
utility subsidiary companies as well.
DES has, through its wholly owned subsidiary MT Energy, agreed to
operate the Pittsburgh Airport facilities pursuant to an operating and
maintenance agreement with ADC. This arrangement was approved in DQE, Inc.,
Holding Co. Act Release No. 26728 (June 10, 1997). The utility operations of MT
Energy are currently integrated with those of Duquesne Light and, following the
Merger, will be integrated with those of the other AYE public utility subsidiary
companies as well.
DES intends to form a new wholly owned subsidiary ("Monmouth") that
will own and operate assets in Monmouth, New Jersey at a gas landfill site.
Construction has begun, but no facilities are in operation as of the date of
this filing. To the extent that Monmouth were deemed a public utility company
under the PUHCA upon commencement of commercial operations, it is contemplated
that the entity could be exempted either as an EWG under Section 32 of the PUHCA
or as a QF under PURPA. To the extent that Monmouth is deemed to be engaged in
nonutility activities, such activities nonetheless would be "energy-related"
within the meaning of Rule 58(b)(1)(ii), which permits development and
commercialization of electrotechnologies related to waste treatment.
(4) DQEnergy Partners was formed to participate in energy service ventures.
Alliances with strategic partners are intended to enhance the utilization and
value of DQE's strategic investments and capabilities.
DQEnergy Partners' wholly owned subsidiary, Secure Energy, Inc.
("Secure Energy"), conducts marketing initiatives on behalf of DQEnergy Partners
and its affiliate companies. The activities of Secure Energy are intended to
ensure that DQE's investments are fully utilized and presented to customers as a
single branded package on a regional basis and, with strategic partners, on a
national basis. Secure Energy works with commercial customers to ascertain their
energy management needs and determine the appropriate mix of products offered by
DQE's nonutility affiliates (e.g., demand controls, energy-efficient lighting,
and the "WeatherProof Bill(sm)") to meet those needs, combining them into a
single product package for such customers. Secure Energy's marketing of energy
services is clearly an energy-related activity within the meaning of Rule
58(b)(1)(i). As set forth above in the discussion of On-Demand, the Commission
has previously authorized substantially similar activities by a subsidiary of a
registered holding company. See New England Electric System, Holding Co. Act
Release No. 22719 (Nov. 19, 1982) (authorizing marketing of energy management
services by subsidiary of a registered holding company).
DQEnergy Partners owns a 40% interest in WeatherWise USA LLC
("WeatherWise(sm)"), a joint venture with KN Services, which markets
weather-related services throughout the country. Such weather-related services
include, for example, the "WeatherProof Energy Bill(sm)", which permits
customers to pay a fixed amount for their energy consumption during a specified
period of time, regardless of the actual amount of energy consumed during such
period. The Commission has previously approved a similar program in Columbia Gas
System, Holding Co. Act Release No. 26498 (Mar. 25, 1996) (approving "Bill Risk
Management Products," which were described as programs designed to permit
customers to "hedg[e] energy
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price or consumption fluctuations."). As noted above with respect to Secure
Energy's activities, the rendering of energy management services is
energy-related within the meaning of Rule 58(b)(1)(i).
DQEnergy Partners also owns 100% of the Class A stock of AquaSource,
Inc. ("AquaSource"), which was formed to acquire small to mid-sized water and
wastewater companies, with its initial focus in Texas. To date, DQE has invested
approximately $6 million to acquire Woodcreek Utilities, Inc. ("Woodcreek"), a
water utility company, AquaSource Cypress Creek, Inc. ("Cypress Creek"), a water
services company, and the assets of two other small Texas water companies.
Cypress Creek is a wholly owned subsidiary of DQEnergy Partners. Woodcreek and
AquaSource Acquisition, Inc. (which holds nonutility assets acquired in the
above-described water company purchases) are wholly owned subsidiaries of
AquaSource. AYE seeks authority to continue these acquisitions through one or
more special purpose subsidiaries. Literally hundreds of these small water and
wastewater companies exist in the southern states of the United States, in many
instances formed by developers to service a particular real estate project. The
consolidation of these small companies under a common management is expected to
result in economies of scale similar to those experienced in a gas or electric
utility merger. In this regard, the collective expertise that has been developed
by AYE and DQE in their respective utility operations may be applied to improve
the service and operational efficiency of AquaSource. This functional
application of acquired knowledge is analogous to that expressly permitted under
Rule 58(b)(1)(vii), namely the sale of certain technical, operational,
management, and other types of expertise that have been developed in the course
of utility operations.
Although the Commission has traditionally required divestiture by
registered holding companies of ownership of water operations, the Commission's
position has never been predicated on the conclusion that investments in water
operations represented speculative investments or were otherwise inimical to the
policies that underlie the PUHCA. Rather, the Commission's historic position,
and its determinations in several early cases, was based on the Commission's
then-current restrictive reading of Section 11, which interpretation precluded a
registered holding company from owning or operating any business that did not
directly serve the system's utility operations. See, e.g., General Public
Utilities Corporation, Holding Co. Act Release No. 10982 (Dec. 28, 1951); North
American Company, Holding Co. Act Release No. 10320 (Dec. 28, 1950); People's
Light and Power Co., Holding Co. Act Release No. 6000 (Aug. 23, 1945).
In other contexts, and in recognition of the dramatic changes occurring
in the electric utility industry, the Commission has discarded its historic
restrictive interpretations in favor of more liberal standards. Rule 58, which
was adopted under Section 9(c)(3) of the PUHCA, for example, permits a
registered holding company to acquire the securities of companies which are
engaged in a wide range of energy-related activities anywhere in the United
States, regardless of whether the subject activity directly serves the needs of
the system's utility business. The broad grant of authority under Rule 58 for
fuel procurement activities, for example, contrasts sharply with the more
circumscribed analysis common to the Commission's early determinations, such as
that in North American Company, Holding Co. Act Release No. 3405 (Apr. 15,
1942), which required divestiture of a coal mine that did not directly serve the
system's core utility business.
The Commission itself has stated that it is not bound "to apply
concepts such as res judicata or stare decisis to the essentially regulatory and
policy determinations called for in a Holding Company Act case . . . ." American
Electric Power Co., Holding Co. Act Release No. 20633 (July 21, 1978), citing
Union Electric Co., Holding Co. Act Release No. 18368 (Apr. 10, 1974), aff'd
without opinion sub nom., City of Cape Girardeau v. SEC, 521 F. 2d 324 (C.A.D.C.
1975) (noting that the PUHCA "creates a system of pervasive and continuing
economic regulation that must in some measure at least be refashioned from time
to time to keep pace with changing economic and regulatory climates").
Historically, the Commission has revisited its prior determinations and
interpretations of the PUHCA when appropriate to respond to developments and
changes in the electric and gas industries. In the American Electric Power
Company
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determination, for example, the Commission reversed an earlier order and
approved a merger that it had previously rejected as too large. See American Gas
and Electric Co., 22 S.E.C. 808 (1946). The Commission has similarly modulated
its position with respect to combination gas and electric registered holding
companies. See New Century Energies, Inc., Holding Co. Act Release No. 26748
(Aug. 1, 1997); see also 1995 Report at 74-76 (examining the changes in the
structure and functioning of the gas and electric industries). This process is
appropriate, indeed necessary, for the effective implementation of the PUHCA,
and, as noted in the 1995 Report, "[t]he SEC must continue to respond flexibly
to change in the utility industry . . . ." 1995 Report at 87.
In its 1995 Report, the Division of Investment Management flatly stated
that "registered holding companies should be permitted to invest in diversified
activities without unnecessary regulatory obstacles . . . ." 1995 Report at 87.
Section 11 of the PUHCA clearly gives the Commission discretion to authorize
AYE's retention of Aquasource. That section, by its terms, requires only that
the nonutility businesses of a registered holding company be "reasonably
incidental, or economically necessary or appropriate" to the operations of the
registered holding company's integrated public utility system, a standard that
is readily met on the facts of the instant matter. See The Southern Company,
Holding Co. Act Release No. 26211 (Dec. 30, 1994) (citing the plain meaning of
Section 11 as an alternative basis for a nonutility acquisition). The question
for the Commission, ultimately, is whether AYE's retention of AquaSource will
lead to a recurrence of the evils that the Act was intended to address. The
answer, Applicant submits, is clearly not. Rather, the proposed activities
represent a reasonable application of the expertise that has been developed in
the course of AYE's and DQE's respective utility operations.
(5) Montauk, a wholly owned subsidiary of DQE, is a financial services
company that makes long-term investments and was established to provide
financing to DQE's market-driven businesses and their customers. Generally
speaking, Montauk and its subsidiaries engage in a variety of tax-related
investments and transactions -- affordable housing projects, sale/leasebacks,
lease/leasebacks, and investments in alternative energy -- which are designed to
generate certain tax benefits for the DQE system. It is established Commission
precedent that engaging in transactions that reduce income tax liability is in
the "ordinary course of business" of a registered holding company so long as
such transactions and acquisitions of securities are done as investments and not
as acquisitions that involve ownership and management of nonutility businesses,
Central and South West Corporation, Holding Co. Act Release No. 23578 (Jan. 22,
1985), a restriction which is intended to ensure that Section 9(c)(3) is not
used to evade the proscription of Section 11 (b)(1) by permitting entry by a
registered holding company into an unrelated business. Michigan Consolidated Gas
Co., 44 SEC 361 (June 22, 1970), aff'd, 444 F.2d 913 (D.C. Cir. 1971). Further,
lack of involvement in the technical, marketing and administrative details of
the subject tax-related transactions is an important indicator that the
transactions are not in fact an attempt to avoid Section 11(b)(1). In the
instant matter, the standards of the Central and South West order are amply met
with respect to the transactions in which Montauk and its subsidiaries engage.
Montauk owns title to two coil carriers, two forklifts and two trucks
that are leased to Weirton Steel Corporation. Montauk also holds an 18% limited
partner interest in AG&J Power Fund, L.P., which invests in utility stocks.
Because the interest in the fund is nonvoting and noncontrolling, the subject
limited partnership is not a subsidiary of DQE within the meaning of the PUHCA.
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Montauk also has two wholly owned subsidiaries: (i) Bushton Company
("Bushton"), which holds various investments and acts as general partner in
certain limited partnerships, and (ii) Monticello Corporation. Monticello
Corporation is the 1% general partner of Monticello Leasing L.P. ("Monticello
L.P.") which is the beneficial owner of an unnamed trust (the "Monticello L.P.
Trust") with Fleet National Bank of Connecticut as Trustee. The Monticello L.P.
Trust holds legal title to a bucket wheel excavator and cross-pit spreader in a
transaction involving a sale and leaseback to Texas Utilities Mining Company
("Texas Utilities").
In 1994, Bushton invested $33.5 million to acquire remarketing rights
and residual rights in certain leased equipment (primarily large mainframe
computers and municipal equipment), the net book value of which at September 30,
1997, was approximately $12 million, which rights are recorded as leasehold
interests on the consolidated balance sheet of DQE. Upon the sale or remarketing
of these rights, amounts will be recognized as a return of the leasehold
interests.
Bushton also has the following wholly owned subsidiaries:
- Monticello Two Corporation ("Monticello Two"), which is the 99%
limited partner of Monticello L.P. Monticello Corporation, a direct
subsidiary of Montauk as discussed above, is the general partner of
Monticello L.P.
- Carthage Field Corporation ("Carthage"), which holds approximately
42% of the beneficial interest in Seagull Series 1995 Trust, a
Delaware business trust which owns certain interests in oil and gas
investments. These interests are nonvoting and noncontrolling.
- Utrecht Company ("Utrecht"), which holds the sole beneficial
interest in UNA Facility Trust No. 2, with the Wilmington Trust
Company as Trustee. The UNA Facility Trust No. 2 is a party to a
financial transaction involving the lease and leaseback of
nonvoting, noncontrolling interests in a generating facility in the
Netherlands known as Hemwegcentrale Unit 8.
- Schiphol Corporation ("Schiphol"), which holds the sole beneficial
interest in the UNA Facility Trust No. 5, with the Wilmington Trust
Company as Trustee. The UNA Facility Trust No. 5 is a party to a
financial transaction involving the lease and leaseback of
nonvoting, noncontrolling interests in Hemwegcentrale Unit 8.
- Alkmaar, Inc. ("Alkmaar"), which is the sole beneficiary of the HVC
Facility Trust No. 3 ("HVC Trust"), with the Wilmington Trust
Company as Trustee. The HVC Trust is a party to certain financial
transactions involving the lease and leaseback of nonvoting,
noncontrolling interests in a waste-to-energy facility located in
the Netherlands.
- Amagansett, which, through its 96% membership interest in Monteco
Gas, L.L.C., owns interests in Dallas Landfill Gas Production,
L.L.C., GSF Energy, L.L.C., Landfill Gas Production, L.L.C., San
Antonio LGP, L.L.C., and Dade County LGP, L.L.C., all of which are
engaged in landfill gas recovery projects.
- Maasvlakte Corporation ("Maasvlakte"), which holds the beneficial
interest in EZH Facility Trust No. 1997 A-3 and EZH Facility Trust
No. 1997 A-6 (together, the "EZH Trusts"), with the Wilmington
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Trust Company as Trustee. The EZH Trusts are party to certain
financial transactions involving the lease and leaseback of
nonvoting, noncontrolling interest in a power facility in the
Netherlands.
- Holyhead Corporation ("Holyhead"), which holds the beneficial
interest in Stena Explorer Trust 1997-A ("Explorer Trust") with the
Wilmington Trust Company as Trustee. The Explorer Trust is party to
certain financial transactions involving the lease and leaseback of
nonvoting, noncontrolling interests in HSS Stena Explorer, a
high-speed ferry that runs across the Irish Sea. Holyhead
Corporation also holds a beneficial interest in Stena Voyager Trust
1997-A ("Voyager Trust") with the Wilmington Trust Company as
Trustee. The Voyager Trust is party to certain financial
transactions involving the lease and leaseback of nonvoting,
noncontrolling interests in HSS Stena Voyager, another high-speed
ferry that runs across the Irish Sea.
- Diemen No. 33 Corporation ("Diemen No. 33"), which holds the
beneficial interest in UNA Diemen 33 Trusts Nos. 1 and 2, with the
Wilmington Trust Company as Trustee. The trusts are party to certain
financial transactions involving the lease and leaseback of
nonvoting, noncontrolling interests in a power facility in the
Netherlands.
Bushton is also the general partner of several limited partnerships
which, in turn, are limited partners in the following limited partnerships that
invest in affordable housing: Bushton BCP Investment Partnerships I-VI, L.P.
(collectively, "Bushton BCP L.P."); Bushton BFG Investment Partnerships I-IV,
L.P. (collectively, "Bushton BFG L.P."); and Bushton TRG Investment Partnerships
I-V, L.P. (collectively, "Bushton TRG L.P.").
Bushton is also the sole beneficiary under a business trust that was
formed to facilitate certain financial transactions, the Bushton Equipment Trust
1991-D, with First Chicago National Bank as Trustee. The Bushton Equipment Trust
1991-D holds an undivided interest with four other trusts in a natural gas plant
in Kansas that is leased to KN Energy, Inc.
Bushton is also a limited partner in limited partnerships that invest
in affordable housing, oil and gas, and waste-to-energy facilities. Bushton
holds the following limited partner interests:
- 99% interest in SunAmerica Affordable Housing XV, a limited
partnership that invests in affordable housing.
- 99% interest in SunAmerica Affordable Housing XXII, a limited
partnership that invests in affordable housing.
- 99% interest in SunAmerica Affordable Housing XXIII, a limited
partnership that invests in affordable housing.
- 99% interest in SunAmerica Affordable Housing XLV, a limited
partnership that invests in affordable housing.
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- 99% interest in SunAmerica Affordable Housing 55, a limited
partnership that invests in affordable housing.
- 12% interest in Related Corporate Partners II, L.P., which invests
in affordable housing.
- 5% interest in Related Corporate Partners III, L.P. Series One,
which invests in affordable housing.
- 5% interest in Related Corporate Partners III, L.P. Series Two,
which invests in affordable housing.
- 19% interest in USA Metropolitan Tax Credit Fund, L.P., which
invests in affordable housing.
- 10% interest in NHG Institutional Fund, L.P., a limited partnership,
which invests in affordable housing.
- 20% interest in Corporations for Affordable Housing Limited
Partnership, which invests in affordable housing.
- 25% interest in National Housing Trust III Tax Credit Fund L.P.,
which invests in affordable housing.
- 30% interest in Corporations for Affordable Housing II Limited
Partnership, which invests in affordable housing.
- 3% interest in Boston Financial Institutional Tax Credit VIII, L.P.,
which invests in affordable housing.
- 8% interest in Boston Financial Institutional Tax Credit IX, L.P.,
which invests in affordable housing.
- 14% interest in Columbia Housing Partners Corporate Tax Credit III
Limited Partnership, which invests in affordable housing.
- 17% interest in Corporations for Affordable Housing Limited
Partnership III, which invests in affordable housing.
- 38% interest in Appalachian Basin Partners, L.P., which holds
interests in oil and gas wells.
- 26% interest in Ogden Martin Systems of Onondaga Limited
Partnership, which owns a waste-to-energy facility in New York.
Because these limited partnership interests in affordable housing, oil and gas,
and waste-to-energy facilities are nonvoting and noncontrolling, the subject
limited partnerships are not subsidiaries of DQE within the meaning of the
PUHCA. In addition, Bushton has title to certain railroad cars that are leased
to Occidental Petroleum, and a dragline that is leased to Central Ohio Coal
Company.
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As noted above, Montauk's activities fall broadly into four categories
of tax-related transactions, namely, (i) affordable housing, (ii) domestic
sale/leasebacks, (iii) offshore lease/leasebacks and (iv) alternative energy,
the specifics of which are discussed below.
Affordable Housing. As of September 30, 1997, Montauk had invested
approximately $125 million,/24 or approximately 1.1% of the combined assets of
DQE and AYE, in affordable housing projects. Montauk has used one of two
structures for such investments. Under the first, Bushton is the 1% general
partner in a limited partnership that is itself a limited partner in a private
placement fund that invests as a limited partner in other limited partnerships
that invest in affordable housing projects. These third-tier limited
partnerships are as follows: (i) Bushton BCP L.P.; (ii) Bushton TRG L.P.; and
(iii) Bushton BFG L.P. Although Bushton has committed to make loans to the
third-tier limited partnerships to enable the investors in such partnerships to
realize a certain return from the partnerships, and receives a corresponding
fee, it has no management, voting or controlling interest in the affordable
housing projects./25
Under the second structure, Bushton is a limited partner in a limited
partnership that invests, through other limited partnerships, in affordable
housing projects. These limited partnerships are as follows: (i) USA
Metropolitan Tax Credit Fund, L.P.; (ii) SunAmerica Affordable Housing Partners,
Limited Partnerships XV, XXII, XXIII, XLV and 55; (iii) Related Corporate
Partners II, III Series One and III Series Two, L.P.; (iv) NHG Institutional
Fund, L.P.; (v) Corporations for Affordable Housing Limited Partnership and
Corporations for Affordable Housing Limited Partnerships II and III; (vi)
National Housing Trust III Tax Credit Fund, L.P.; (vii) Boston Financial
Institutional Tax Credit VIII and IX, L.P.s; and (viii) Columbia Housing
Partners Corporate Tax Credit III, L.P.
In each of the above described structures, the ultimate investment in
the affordable housing project is made in the form of a limited partnership
interest. By law, limited partners are precluded from exercising any control
over the operations of the limited partnership and from participating in the
management of the limited partnership. In addition, the limited partnership
agreements governing the above-described limited partnerships explicitly
restrict the exercise of control and participation in management by the limited
partners. Although such agreements grant the limited partners voting rights in
connection with the removal of the general partner and in connection with
extraordinary transactions, for example, the merger or consolidation of the
limited partnership, the agreements specifically prohibit limited partners from
taking any part in the day-to-day control or management of the limited
partnerships.
The Commission has previously authorized non-controlling investments in
affordable housing, see, e.g., Georgia Power Co., Holding Co. Act Release No.
26220 (Jan. 24, 1995) and East Ohio Gas Co., Holding Co. Act Release No. 25046
(Feb. 27, 1990), and although most of the investments in the instant matter will
be outside the service territory of AYE after the Merger, this fact should not
affect the Commission's conclusion that these types of interests are consistent
with Section 11 of the PUHCA. As explained above, because Montauk is acquiring
these nonvoting, noncontrolling interests as tax-related
- --------
/24 In addition, Duquesne Light has invested, through September 30, 1997, $14
million in affordable housing projects; such investments are made by
Duquesne Light as a 99% limited partner in a limited partnership that
invests in affordable housing projects.
/25 Footnote J to financial statements included in DQE's Form 10-K for the year
ended December 31, 1996, explains that:
the Company has received fees in exchange for guaranteeing a
minimum defined yield to third-party investors. A portion of
the fees received has been deferred to absorb any required
payments with respect to these transactions. Based on an
evaluation of the underlying housing projects, the Company
believes that such deferrals are ample for this purpose.
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investments and not in order to enter into the business of affordable housing,
such acquisitions are well within the rule of Central and South West, which
order did not contain any geographic limitation. See also
Application-Declaration of Interstate Power Company, File No. 70-8891 (seeking
authority to retain affordable housing interests where the subsidiary provides
"construction and permanent financing and acquires tax credit multi-family
housing developments through relationships with developers as well as through
direct development activities").
Sale/Leasebacks. With respect to domestic sale/leaseback transactions,
Montauk, either directly, through its subsidiaries, or through its subsidiaries'
ownership of a beneficial interest in a trust, is involved in the purchase of a
fee interest in various properties. The subject property is then leased back to
the original owner, who operates the asset and pays rental payments. This
arrangement permits Montauk to claim depreciation on the subject property for
tax purposes. The subject domestic leasing transactions are conducted through
the following entities:
- Monticello, L.P., which is involved in the lease of a cross-pit
spreader to Texas Utilities. The asset is owned by a trust, with the
Fleet National Bank of Connecticut as Trustee.
- Bushton Equipment Trust 1991-D, which holds an undivided interest in
a natural gas plant that is leased to Enron Corporation.
- Bushton, which has title to certain railroad cars that are leased to
Occidental Petroleum.
- Bushton, which has title to a dragline that is leased to Central
Ohio Coal Company.
- Montauk, which has title to certain coil carriers, forklifts and
trucks that are leased to Weirton Steel Corporation.
With respect to the offshore lease/leaseback transactions, in order to
qualify for favorable tax treatment under Section 467 of the Code, Montauk,
through subsidiaries of Bushton, acquires leased interests, prepays rent for a
specified period of time and subleases the interest back to the lessor.
Montauk's foreign leasing transactions are conducted through the following
entities:
- Utrecht and Schiphol, which own beneficial interests in UNA Facility
Trust Nos. 2 and 5, respectively, which are each involved in the
lease of the Hemwegcentrale Unit 8 generating facility located in
the Netherlands.
- Alkmaar, which owns the beneficial interest in the HVC Trust, which
is involved in the lease of a waste-to-energy facility in the
Netherlands.
- Maasvlakte, which owns the beneficial interest in the EZH Trusts,
which are involved in the lease of a power facility in the
Netherlands.
- Holyhead, which owns the beneficial interest in each of the Explorer
Trust and the Voyager Trust, which are each involved in the lease of
high-speed ferries that run across the Irish Sea.
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- Diemen No. 33, which owns the beneficial interest in UNA Diemen 33
Trusts Nos. 1 and 2, which are each involved in the lease of a power
facility in the Netherlands.
As of September 30, 1997, Montauk had invested approximately $337
million, or 3.0% of the combined assets of DQE and AYE, in such structured lease
transactions. Montauk's aggregate investment represents 16% of the original cost
of such equipment, while the other 84% is provided by various third party
lenders. In the domestic sale/leaseback transactions, nonrecourse debt is
generally provided by institutional lenders, whereas in the offshore
lease/leaseback transactions, nonrecourse debt is generally provided by foreign
banks. In all cases, the equipment which is the subject of the structured lease
transaction serves as collateral. When the leases expire, the residual value of
the equipment and facilities belongs to Montauk or one of its subsidiaries,
subject to any renewal or repurchase options the lessee may have. The domestic
sale/leaseback and the offshore lease/leaseback investments expire between 2004
and 2033, while the leasehold interest investments expire between 1998 and 2000.
All the structured lease transactions are passive investments of
Montauk and its subsidiaries, and are structured with the users of such
equipment and facilities so that Montauk, and ultimately DQE, obtains certain
tax advantages and receives periodic rental income, but has no actual
involvement in the operation of the equipment and facilities. Montauk has only
six employees to monitor and administer its various investments and those of its
subsidiaries. To ensure the quality and financial safety of the investments in
such structured lease transactions, Montauk not only retains knowledgeable
investment advisors with experience in the underlying industry, but also selects
a co-investor experienced in the leasing business. When necessary, experienced
remarketers are also engaged. Montauk's small staff and its extensive reliance
on experienced advisors and co-investors underscore the fact that Montauk and
its subsidiaries are making passive investments and are not actively involved in
the leasing business. Further, under the terms of such transactions, the lessees
operate and maintain the equipment and facilities, and are responsible for
maintaining insurance and paying property taxes thereon. Thus, the residual tax
advantages (such as depreciation deductions) and rental payments from the
lessees comprise all of Montauk's substantive interest in the structured lease
transactions and the underlying equipment and facilities.
The Commission approved leveraged lease investments by a registered
holding company in Central and South West Corp., Holding Co. Act Release No.
23578 (Jan. 22, 1985). It did so because it found that such acquisition was done
"as an investment and not [as] an acquisition that involves ownership and
management of a nonutility business." Central and South West's interest in its
leased property did not constitute ownership or management because its
substantive interest was limited to receipt of contractual rentals. The same is
true in the instant matter. Montauk's leveraged leases are intended as passive
investments, which generate rental income and favorable tax benefits; they are
not an entry into the leasing business./26
Further, Applicant hereby requests Commission authorization to allow
Montauk to continue to invest, from time to time, through one or more newly
formed subsidiaries, in leasing arrangements and other
- --------
26 In addition, with respect to Maasvlakte, Utrecht, Diemen No. 33, Schiphol
and Alkmaar, which hold lease interests in power plants located in the
Netherlands, it appears that each of the companies owning these plants could
also be qualified as a FUCO under Section 33 of the Act. The acquisition by
a registered holding company of a direct or indirect interest in the
business of a FUCO is expressly exempted by Section 33(c)(1).
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transactions that satisfy the standards set forth in the Central and South West
order; namely, each investment will be passive in nature and will not involve
ownership or management of a new business by Montauk or other companies in the
AYE system.
Alternative Energy. In order to acquire tax credit under Section 29 of
the Code for producing fuel from a nonconventional source, Montauk also
indirectly invests in landfill gas recovery operations through Amagansett, which
presently holds interests, through Monteco Gas, L.L.C., in Dallas Landfill Gas
Production, L.L.C., GSF Energy, L.L.C., Landfill Gas Production, L.L.C., San
Antonio LGP, L.L.C. and Dade County LGP, L.L.C. Commission orders have
previously authorized substantially similar investments by a subsidiary of a
registered holding company. Specifically, the Commission has authorized
investment in research and development associated with alternative fuels, as
well as a variety of ancillary activities related to the development and
financing of landfill gas recovery and other resource recovery facilities. The
Southern Company, Holding Co. Act Release No. 26221 (Jan. 25, 1995). More
recently, the Commission authorized an indirect investment in an alternative
energy generation facility. New England Electric System, et al., Holding Co. Act
Release No. 26277 (Apr. 26, 1995). Further, such activities are clearly energy
related within the meaning of Rule 58(b)(1)(vi), which authorizes the production
of alternative fuels, and Rule 58(b)(1)(ix), which authorizes the ownership of
resource recovery facilities.
Other Investments. Finally, Montauk's other investments are similarly
retainable. First, Bushton is a limited partner in Ogden Martin, a
waste-to-energy facility in New York State. Ogden Martin is a QF pursuant to the
PURPA and Montauk's investment is therefore retainable under Rule
58(b)(1)(viii).
Second, Bushton, through Appalachian Basin Partners, L.P., and
Carthage, holds limited partnership interests in oil and gas wells. Bushton is a
passive investor in these wells. It does not manage these operations, it is not
involved in the technical or administrative details of these wells and it has no
right to purchase the oil and gas other than in arm's-length transactions.
Bushton's participation in these investments is thus in all material respects
identical to the role permitted by the Commission with respect to investments by
registered holding companies in the leveraged lease transactions at issue in
Central and South West Corp., Holding Co. Act Release No. 23578 (Jan. 22, 1985),
and should be permitted for the same reasons.
Third, Montauk is also a limited partner in AG&J Power Fund, L.P.,
which invests in utility stocks. To date, Montauk has invested approximately $7
million in the fund. The Commission should approve the investment as "in the
ordinary course of business" under Section 9(c)(3). In the alternative, the
Applicant requests that the Commission reserve jurisdiction over the acquisition
for a period of five years to permit Applicant to satisfy any concerns the
Commission may have or else to arrange for an orderly divestiture of its
interest in the fund.
(ii) Integrated Public Utility System
(a) Electric System
As applied to electric utility companies, the term "integrated public
utility system" is defined in Section 2(a)(29)(A) of the PUHCA as:
a system consisting of one or more units of generating plants and/or
transmission lines and/or distributing facilities, whose utility
assets, whether owned by one or more electric utility
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companies, are physically interconnected or capable of physical
interconnection and which under normal conditions may be economically
operated as a single interconnected and coordinated system confined in
its operations to a single area or region, in one or more States, not
so large as to impair (considering the state of the art and the area or
region affected) the advantages of localized management, efficient
operation, and the effectiveness of regulation.
On the basis of this statutory definition, the Commission has established four
standards that must be met before the Commission will find that an integrated
electric system will result from a proposed acquisition of securities:
(1) the utility assets of the system are physically
interconnected or capable of physical interconnection;
(2) the utility assets, under normal conditions, may be
economically operated as a single interconnected and coordinated
system;
(3) the system must be confined in its operations to a single
area or region; and
(4) the system must not be so large as to impair (considering the
state of the art and the area or region affected) the advantages of
localized management, efficient operation, and the effectiveness of
regulation.
Environmental Action, Inc. v. SEC, 895 F.2d 1255, 1263 (9th Cir. 1990) (citing
In re Electric Energy, Inc., et al., 38 SEC 658, 668 (1958)). In the 1995
Report, the Division recommended that the Commission "respond realistically to
the changes in the utility industry and interpret more flexibly each piece of
the integration equation."/27 The Merger satisfies all four of these
requirements.
First, as noted in Item 1.B.3 above, AYE and DQE are already
interconnected on the Elrama (Duquesne Light)-Mitchell (AYE) 138 kV line and the
Cheswick (Duquesne Light)-Springdale (AYE) 138 kV line. Both of these lines
permit two way transfer capability and have adequate capacity for the AYE and
DQE systems to be thoroughly integrated, with sufficient transfer capability to
carry anticipated flows associated with joint dispatch.
Second, AYE and DQE will be economically operated as a single
interconnected and coordinated system. The combined system will be centrally and
economically dispatched and generating units committed as a single integrated
system. The combined system will use common dispatch and the dispatch will
utilize the existing capacity of the existing interconnections, which
interconnections will be sufficient to handle all desired flows between the two
service territories. It will not be necessary to wheel energy through
neighboring utilities. West Penn, Potomac Edison, Monongahela and Duquesne Light
have signed a Joint Dispatch and Power Sale Agreement which has been submitted
for FERC approval as part of AYE's and DQE's August 1, 1997, joint application
to the FERC, and which will become effective as soon as practicable after the
Merger. A copy of the Joint Dispatch and Power Sale Agreement is filed as
Exhibit B-6. All
- --------
/27 1995 Report at 71.
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production and cost savings anticipated from the Merger are based on the
existing level of interconnection between the AYE and DQE systems.
AYE will have sufficient internal transmission capacity to fully
accommodate the anticipated transfers between the AYE and DQE systems under
central economic dispatch, and does not anticipate any transfers that might
exceed the capabilities of its system. Further, AYE's estimated generation
capacity and production cost savings can be fully achieved without the need for
contracting for transmission service with other utilities. The scheduled
transfers to achieve the projected production dispatch savings can be achieved
without exceeding the capabilities of the Elrama-Mitchell and Cheswick-
Springdale lines.
Third, the AYE system will operate in a single area or region. The
system will operate in five contiguous states (Maryland, Pennsylvania, Virginia,
West Virginia and Ohio) in the mid-eastern part of the United States. The 1995
Report recommends that primacy be given to "demonstrated economies and
efficiencies to satisfy the integration requirements" under the Act. As set
forth in Item 3.A.2.b.i below, the Merger will result in significant economies
and efficiencies for the utilities and, ultimately, their customers.
Fourth, the AYE electric system will not be so large as to impair the
advantages of localized management, efficient operations, and the effectiveness
of regulation. After the Merger, substantial operations of DQE will remain at
its current headquarters in Pittsburgh, Pennsylvania, which operations will
function as a subsidiary headquarters for the location that DQE presently
serves. Further, the combined company will draw its new management from the
present management of each of the companies. See Centerior Energy Corp., Holding
Co. Act Release No. 24073 (Apr. 29, 1986). This structure will preserve all the
benefits of localized management AYE and DQE currently enjoy while
simultaneously allowing for the efficiencies and economies that will derive from
their strategic alliance. Furthermore, as described above, the system will
facilitate efficient operation. In addition, the new AYE Board of directors is
expected to be drawn from the respective boards of AYE and DQE at the Effective
Time.
Finally, the AYE system will not impair the effectiveness of state
regulation. Each utility subsidiary of AYE and DQE will remain subject to the
same regulatory authorities by which they are presently regulated, namely, the
PAPUC, MDPSC, VASCC, WVPSC and PUCO. Both AYE and DQE have worked, and continue
to work, closely with each such regulatory authority, as well as with the FERC
and the NRC, to ensure that they are well informed about this Merger. To date,
the PAPUC has held public pre-hearing conferences in connection with West Penn's
and Duquesne Light's respective stand-alone applications, as well as AYE's and
DQE's joint filing with respect to the Merger, see Item 1.C above, and it is
expected that the PAPUC will hold further public hearings prior to issuing its
orders in connection with such applications. It is also expected that the FERC
will hold public hearings in connection with the AYE and DQE joint application
filed with the FERC on August 1, 1997. Furthermore, the Merger will not be
consummated unless all required regulatory approvals are obtained.
(iii) Section 11(b)(2)
In addition to the restrictions on utility and nonutility activities,
Section 11 also limits the number of tiers of holding companies in a registered
system. Section 11(b)(2), in pertinent part, provides that:
the Commission shall require each registered holding company
(and any such company in the same holding company system with
such holding company) to take such action
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as the Commission shall find necessary in order that such
holding company shall cease to be a holding company with
respect to each of its subsidiary companies which itself has a
subsidiary company which is a holding company.
Immediately following the Merger, AYE will be a holding company with respect to
DQE which, in turn, will be a holding company with respect to DE and DES, the
holding companies with respect to ADC, MT and DH Services. Although it is
intended that these interests will be restructured in compliance with Section
11(b)(2), the final ownership structure has not yet been determined.
Accordingly, Applicant requests the Commission to reserve jurisdiction over this
issue for a period of five years from the date of the Merger to permit AYE to
effect the necessary restructuring, subject to such further regulatory approval
as may be required.
(b) Section 10 (c)(2)
Because the Merger is expected to result in substantial cost savings
and synergies, it will tend toward the economical and efficient development of
an integrated public utility system, thereby serving the public interest, as
required by Section 10(c)(2) of the PUHCA.
(i) Efficiencies and Economies
The Merger will produce economies and efficiencies more than sufficient
to satisfy the standards of Section 10(c)(2) of the PUHCA. Although some of the
anticipated economies and efficiencies will be fully realizable only in the
longer term, they are nonetheless properly considered in determining whether the
standards of Section 10(c)(2) have been met. See American Electric Power Co., 46
SEC 1299, 1320-1321 (1978). Moreover, regardless of the fact that some potential
benefits cannot be precisely estimated, they too are entitled to be considered.
"[S]pecific dollar forecasts of future savings are not necessarily required; a
demonstrated potential for economies will suffice even when these are not
precisely quantifiable." Centerior Energy Corp., Holding Co. Act Release No.
24073 (Apr. 29, 1986).
DQE and AYE have estimated the nominal dollar value of synergies from
the Merger to be approximately $1.0 billion. The estimation period utilized was
mid-year 1998 through mid-year 2008, except for generation related synergies,
which were estimated over 20 years. The Merger is expected to yield several
types of presently quantifiable benefits and savings, which are identified by
area as follows: (1) corporate and operations labor costs; (2) facilities
consolidation; (3) corporate and administrative programs; (4) purchasing
economies; (5) production dispatch; (6) financing; and (7) generation savings.
The total amount of savings currently estimated in each of these categories on a
nominal dollar basis is summarized in the table below:
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Merger Synergies in Nominal Dollars
- --------------------------------------------------------------------------------
Category Nominal Amount
- ------------------------------------- ----------------------------------------
Corporate and Operations Labor $411.9 million
Facilities Consolidation $25.5 million
Corporate and Administrative Programs $291.0 million
Purchasing Economies $72.1 million
Production Dispatch $100.0 million
Financing $55.7 million
Generation Savings (over an additional
ten years) $325.9 million
- --------------------------------------------------------------------------------
Total Savings $1,282.1 million
Less: Costs to Achieve
Pre-merger Initiatives ($97.0 million)
- --------------------------------------------------------------------------------
Net Savings $1,185.1 million
These expected savings are comparable to or exceed the anticipated
savings in a number of other acquisitions approved by the Commission. See, e.g.,
New Century Energies, Inc., Holding Co. Act Release No. 26748 (Aug. 1, 1997)
(expected savings of $770 million over 10 years); Entergy Corporation, et al.,
Holding Co. Act Release No. 25952 (Dec. 17, 1993) (expected savings of $1.67
billion over ten years); Northeast Utilities, Holding Co. Act Release No. 25221
(Dec. 21, 1990) (estimated savings of $837 million over 11 years); Kansas Power
and Light Co., Holding Co. Act Release No. 25465 (Feb. 5, 1992) (expected
savings of $140 million over five years); IE Industries, Holding Co. Act Release
No. 25325 (June 3, 1991) (expected savings of $91 million over ten years);
Midwest Resources, Holding Co. Act Release No. 25159 (Sept. 26, 1990) (estimated
savings of $26 million over five years); CINergy Corp., Holding Co. Act Release
No. 26146 (Oct. 21, 1994) (estimated savings of approximately $895 million over
ten years). AYE estimates that approximately $546.8 million of the total savings
will be allocated to DQE and approximately $638.4 million will be allocated to
AYE. AYE's estimated portion of the savings will be allocated between AYE's
utility subsidiaries, with West Penn receiving approximately $271.5 million in
savings, Monongahela receiving approximately $166.6 million in savings, and
Potomac Edison receiving approximately $200.3 million in savings. Total savings,
by category, are described in greater detail below.
Corporate and Operations Labor Costs Savings: AYE estimates that a net
reduction in labor costs of approximately $411.9 million over a ten-year period
can be achieved as a result of the Merger through elimination of approximately
255 full time equivalent positions in certain corporate functions.
Facilities Consolidation: AYE estimates that the combination and
elimination of existing facilities will result in savings of approximately $25.5
million. These savings will be attributable generally to having only one primary
energy management system rather than two.
Corporate and Administrative Programs: AYE estimates a reduction in
corporate and administrative programs through the consolidation of overlapping
or duplicative programs and expenses of $291.0 million. Specific areas in which
savings are expected to occur include information systems,
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professional services, demand-side management administration, benefits
administration, insurance, regulatory expenses, advertising and shareholder
services.
Purchasing Economies: AYE estimates savings of $72.1 million through
the combined procurement of material and supplies, inventory reduction from
standardization and limited sharing of parts and components and from economies
of scale from the aggregation of related work activities and increased
purchasing power with respect to service providers.
Production Dispatch Savings: AYE estimates that production dispatch
savings of approximately $100 million will result from the integrated economic
dispatch of both electric systems. DQE and AYE currently commit and dispatch
their respective systems on an "economic dispatch" basis, that is, each company
commits and dispatches its generating system to meet the load in such manner as
to minimize production costs. Currently, energy transactions between the
companies occur when it is economically beneficial to do so. However, there are
differences in incremental cost between the two systems. AYE will be able to
take advantage of these factors by committing and dispatching the lowest cost
generation from Duquesne Light, Monongahela, Potomac Edison and West Penn to
serve the total load of AYE at a cost that is lower than the combined cost of
the two systems on a stand-alone basis.
Financing: AYE estimates savings of approximately $55.7 million through
the increased use of long-term debt financing. After the Merger, AYE will have a
lower debt-to-equity ratio than AYE alone and thus the ability of AYE to use
long-term debt financing will be increased as a result of the Merger.
Generation Savings: Unlike the other savings described above, which
were quantified as estimates over ten years, generation savings from the Merger
were estimated over 20 years to more closely match the time period of stranded
cost estimates being discussed with state regulatory commissions. (The 20 year
period is based on the assumption of an average remaining life of 20 years for
generating units.) The first ten years of savings discussed in the other
categories above include a total of about $325.9 million that is attributable to
the generation portion of AYE's and DQE's business. The second ten years of
generation synergies represent an additional $325.9 million in estimated
savings.
Additional Expected Benefits: In addition to the benefits described
above, there are other benefits which, while presently difficult to quantify,
are nonetheless substantial. These other benefits include maintenance of
competitive rates, expanded management resources, more diverse service territory
and continued community involvement.
Maintenance of Competitive Rates: AYE will be able to
meet the challenges of the increasingly competitive environment
in the utility industry more effectively than either AYE or DQE
standing alone. The Merger will create the opportunity for
strategic, financial and operational benefits for customers in
the form of lower rates over the long term and for stockholders
in the form of greater financial strength and financial
flexibility. In their filings with the PAPUC, West Penn and
Duquesne Light have proposed largely to apply the expected cost
savings from the Merger to write down stranded costs, which is
expected to maintain each of West Penn's and Duquesne Light's
competitive rates. In their joint application to the FERC,
which was filed on August 1, 1997, DQE and AYE offered to
freeze the wholesale rates of Duquesne Light, West Penn,
Monongahela and Potomac Edison as of the Effective Date of the
Merger,
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subject to certain exceptions regarding matters beyond their
control, such as an increase in the federal corporate tax rate.
Expanded Management Resources: A combined AYE and DQE
entity will be able to draw on a larger and more diverse mid-
and senior-level management pool to lead AYE forward in an
increasingly competitive environment for the delivery of
energy, and should be better able to attract and retain the
most qualified employees. The employees of AYE should also
benefit from new opportunities in the expanded organization.
More Diverse Service Territory and Customer Base: The
addition of Duquesne Light's service territory to that of
Monongahela, Potomac Edison and West Penn will increase the
geographical diversity of AYE and will mitigate the risk of
changes in economic, competitive or climatic conditions in any
given sector of the combined service territory. Further, the
Merger will increase electric load diversity by combining AYE's
winter-peaking operation and suburban, rural and heavy
industrial customer base, with DQE's summer peaking operation
and urban, commercial and residential customer base.
Community Involvement: AYE will continue to play a strong
role in the economic development efforts of the communities DQE
and AYE now serve. The philanthropic and volunteer programs
currently maintained by the two companies will be continued.
3. Section 10(f)
Section 10(f) provides that:
The Commission shall not approve any acquisition as to which an
application is made under this section unless it appears to the
satisfaction of the Commission that such State laws as may
apply in respect of such acquisition have been complied with,
except where the Commission finds that compliance with such
State laws would be detrimental to the carrying out of the
provisions of section 11.
As described below under Item 4--"Regulatory Approvals," and as evidenced by the
applications before the PAPUC and MDPSC, AYE intends to comply with all
applicable state laws related to the proposed transaction.
B. INTRA-SYSTEM FINANCING
With respect to AYE, there have been and will continue to be
intercompany loans in the ordinary course of business among AYE and its direct
and indirect nonutility subsidiaries, all of which have already received
Commission approval, as follows:
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(i) In Allegheny Power System, Inc., Holding Co. Act Release No.
21378 (Jan. 2, 1980), AYE was authorized to make, from time to time,
interest-bearing open account cash advances to Allegheny Pittsburgh
Coal Company, in an aggregate amount not to exceed $35 million;
(ii) In Allegheny Power System, Inc., Holding Co. Act Release No.
26506 (Apr. 18, 1996), the Commission approved Monongahela's, Potomac
Edison's, West Penn's, AGC's and AYE's participation in the Money Pool,
which is designed to match, on a daily basis, the available cash and
short-term borrowing requirements of the participants, thereby
minimizing the need for short-term borrowings to be made by the
participants from external sources. Pursuant to Commission order, each
of Monongahela, Potomac Edison, and West Penn are permitted to lend
their surplus funds available from day to day to the Money Pool on a
short-term basis (from 1 day to 270 days) and each of Monongahela,
Potomac Edison, West Penn and AGC may borrow from the Money Pool. AYE
participates in the Money Pool only to the extent that is has funds
available for lending, and AGC participates only to the extent that it
may borrow from, but may not invest in, the Money Pool. The Money Pool
is administered by APSC, which acts as agent for the participants, and
invests surplus funds remaining in the Money Pool after satisfaction of
the borrowing needs of Monongahela, Potomac Edison, West Penn and AGC.
All borrowing from and contributions to the Money Pool are documented
on a daily basis and are evidenced on the books of each participant
that contributes to, or borrows from, the Money Pool. All loans to the
Money Pool are payable on demand, and may be prepaid by the borrower at
any time without premium or penalty. Loans from the Money Pool bear
interest, payable monthly, equal to the daily Federal Funds Effective
Rate; and
(iii) In Allegheny Power System, Inc., Holding Co. Act Release No.
26590 (Oct. 9, 1996), AYP Capital and certain of its subsidiaries were
authorized to borrow or obtain loan guarantees from AYE for up to $300
million for "Approved Activities" (as described in Item 1.B.4.a above).
DQE and its direct and indirect nonutility subsidiaries have
outstanding intra-system debt and guarantees, all of which were entered into in
the ordinary course of business and on arm's length terms.
DQE and its subsidiaries are parties to the following financing
arrangements:
(i) DQE provides credit support (under the terms of certain "Support
Agreements" and related "Support Letters") to Montauk in connection
with Montauk's $125 million revolving credit facility and its five term
loan facilities with an aggregate committed amount of $150 million. The
revolving credit facility has a borrowing period ending June 1998, and
an annual interest rate of LIBOR plus .45%. The term loan facilities
all mature in either 2000 or 2001 and have an average annual interest
rate of 6.92%. The proceeds of these loans are used for working capital
and general corporate purposes (including the provision of financing to
Montauk's affiliates as described in paragraph (iii) below);
(ii) DQE also provides credit support to Bushton in connection with
guarantees granted in connection with certain affordable housing
transactions (see Item 3.A.2.a.i above);
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(iii) Montauk's board of directors has approved intercompany
financing of up to $50 million with its affiliates, of which $30
million has been committed to DE and $5 million has been committed to
DQEnergy Partners, each under a revolving credit agreement with a
borrowing period ending in June, 1998. The annual interest rate for
each such commitment is LIBOR plus 1.55%. The proceeds of the loans are
used for working capital and general corporate purposes;
(iv) Diemen-Flevo holds a $235 million first mortgage bond issued by
Duquesne Light under its 1992 indenture of mortgage and deed of trust.
The annual interest rate on the first mortgage bond is 7.25%;
(v) Montauk maintains a mortgage on the Cherrington office complex
owned by Property Ventures in the amount of $1.3 million, with an
annual interest rate of 8.00%;
(vi) DQE and Duquesne Light are parties to certain stock purchase
agreements regarding DQE Common Stock in connection with the funding of
certain Duquesne Light employee benefit plans;
(vii) Amagansett has guaranteed the repayment of a $2 million
revolving credit facility provided to GSF Energy LLC by Union Bank of
California. The revolving credit facility has a borrowing period ending
June 2000 and an annual interest rate of LIBOR plus 1%. The proceeds
are used for working capital and general corporate purposes; and
(viii) Ventures has guaranteed the repayment of a 500 million Dutch
Guilder term loan facility provided to EnviroGas and a third party by
Utrecht America Finance Co. The facility matures in 2007 and has an
annual interest rate of the Netherlands Interbank Offering Rate plus
.25%. Approximately 92% of the loan proceeds have been placed in a
collateral account and invested in Netherlands government treasury
securities; the remainder of the proceeds will be used to invest in
landfill gas recovery projects in Pennsylvania.
Applicant requests that its authority under Allegheny Power System,
Inc., Holding Co. Act Release No. 26506 (Apr. 18, 1996) be amended to permit
DQE's direct and indirect subsidiaries to participate in the Money Pool on the
same terms and conditions as Monongahela, Potomac Edison and West Penn (i.e. be
permitted to both invest in and borrow from the Money Pool). In addition,
Applicant requests that its authority under Allegheny Power System, Inc.,
Holding Co. Act Release No. 26590 (Oct. 9, 1996) be amended so that DQE's
nonutility subsidiaries can borrow or obtain loan guarantees from AYE on the
same terms and conditions as the existing nonutility subsidiaries of AYE.
C. SERVICE AGREEMENTS BETWEEN APSC AND SUBSIDIARIES OF DQE
As described in Item 1.B.1.a above, APSC is a service company which,
pursuant to service agreements signed with each of Monongahela, Potomac Edison,
West Penn, AGC, AYP Capital and subsidiaries of AYP Capital (together, the
"Client Companies"), provides various technical, engineering, accounting,
administrative, financial, purchasing, computing, managerial, operational, and
legal services to each of the Client Companies. Pursuant to the service
agreements, such services are provided at cost. The Commission has previously
determined that APSC is so organized and so conducted as to meet the
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requirements of Section 13(b) of the PUHCA and Rule 88 thereunder. Allegheny
Power System, Inc., Holding Co. Act Release No. 14966 (Nov. 8, 1963).
The service agreements to be entered into between APSC and certain
utility and nonutility subsidiaries of DQE (including Duquesne Light), which,
pending Commission approval thereof, will become effective upon the consummation
of the Merger, are similar in all material respects to those service agreements
which APSC has signed with the Client Companies. Under the terms of the proposed
service agreements, APSC will render to DQE's subsidiaries, at cost, various
technical, engineering, accounting, administrative, financial, purchasing,
computing, managerial, operational and legal services. APSC will account for,
allocate and charge its costs of the services provided on a full cost
reimbursement basis under a work order system consistent with the Uniform System
of Accounts for Mutual and Subsidiary Service Companies. The time APSC employees
spend working for such subsidiaries of DQE will be billed to and paid by the
applicable subsidiary on a monthly basis, based upon time records. Each DQE
subsidiary party to a service agreement will maintain separate financial records
and detailed supporting records. The proposed Service Agreement between APSC and
Duquesne Light is filed as Exhibit B-4; a Form of proposed Service Agreement
between APSC and subsidiaries of DQE except Duquesne Light is filed as Exhibit
B-5.
Applicant hereby requests that the Commission approve the service
agreements between APSC and various subsidiaries of DQE.
D. OTHER SERVICES
Duquesne Light, Monongahela, Potomac Edison and West Penn may provide
one another with certain services incidental to their utility businesses, such
as meter reading, materials management, transportation, and services of linemen,
pursuant to Rule 87 under the PUHCA. Prior to rendering such services, Duquesne
Light, Monongahela, Potomac Edison and West Penn will enter into a services
agreement, which will set forth the terms and conditions for the provision of
such services, and provide that such services will be provided at cost in
accordance with the standards of the PUHCA and the Commission's rules and
regulations thereunder.
Item 4. REGULATORY APPROVALS
Set forth below is a summary of the regulatory approvals that AYE
expects to obtain in connection with the Merger. It is a condition to the
consummation of the Merger that final orders approving the Merger be obtained
from the Commission under the PUHCA and from the various federal and state
commissions described below on terms and conditions which would not have, or
would not be reasonably likely to have, a material adverse effect on AYE
(excluding, after the Effective Time, DQE and its subsidiaries) or DQE or which
would not prohibit or restrict the agreements of the parties contained in the
Merger Agreement.
A. ANTITRUST
The HSR Act and the rules and regulations thereunder provide that
certain transactions (including the Merger) may not be consummated until certain
information has been submitted to the DOJ and the FTC and the specified HSR Act
waiting period requirements have been satisfied. DQE and AYE will submit the
Notification and Report Forms and all required information to the DOJ and FTC.
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The expiration of the HSR Act waiting period does not preclude the
Antitrust Division or the FTC from challenging the Merger on antitrust grounds;
however, AYE believes that the Merger will not violate Federal antitrust laws.
If the Merger is not consummated within twelve months after the expiration or
earlier termination of the initial HSR Act waiting period, DQE and AYE will be
required to submit new information to the Antitrust Division and the FTC, and a
new HSR Act waiting period would have to expire or be terminated before the
Merger could be consummated.
B. FEDERAL POWER ACT
Section 203 of the Power Act provides that no public utility shall sell
or otherwise dispose of its jurisdictional facilities or directly or indirectly
merge or consolidate such facilities with those of any other person or acquire
any security of any other public utility, without first having obtained
authorization from the FERC. On August 1, 1997, AYE and DQE filed a joint
application with the FERC for approval of the Merger under Section 203 and Part
33 of the FERC's regulations. Duquesne Light, Monongahela, Potomac Edison and
West Penn also filed on August 1, 1997, a Network Integration Service Tariff and
a Point-to-Point Transmission Service Tariff under Section 205 of the Power Act.
C. ATOMIC ENERGY ACT
Duquesne Light holds NRC operating licenses in connection with its
ownership and operation of the Nuclear Facilities. The operating licenses
authorize DQE to own or lease, and operate the facilities. The Atomic Energy Act
provides that such a license or any rights thereunder may not be transferred or
in any manner disposed of, directly or indirectly, to any person through
transfer of control unless the NRC finds that such transfer is in accordance
with the Atomic Energy Act and consents to the transfer. Pursuant to the Atomic
Energy Act, DQE has filed an application seeking approval from the NRC to
reflect the fact that after the Merger, Duquesne Light, although continuing to
own or lease, and operate the Nuclear Facilities, will become an operating
company subsidiary of AYE. The application to the NRC is filed as Exhibit D-5.
D. STATE PUBLIC UTILITY REGULATION
1. Pennsylvania Public Utility Commission
As noted above, DQE is a Pennsylvania corporation and is the parent
corporation of Duquesne Light, a Pennsylvania public utility; AYE's subsidiaries
own significant generating units in Pennsylvania and West Penn is a Pennsylvania
public utility. Pursuant to the laws of Pennsylvania, approval of the PAPUC is
required for any public utility to be acquired by or to be transferred to any
person or corporation, including a transfer by way of merger. The PAPUC will
approve transfers if the PAPUC finds or determines that such transfer is
necessary or proper for the service, accommodation, convenience or safety of the
public. In addition, under the Pennsylvania Restructuring Legislation, the PAPUC
may investigate the effect of mergers on the proper functioning of a competitive
retail electricity market. Duquesne Light and West Penn have each filed
appropriate applications seeking any required or necessary approval of the
PAPUC.
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2. Maryland Public Service Commission
AYE is a Maryland corporation. The MDPSC is granted general authority
to supervise and regulate public utility operations in the State of Maryland. On
August 1, 1997, AYE filed an application requesting the MDPSC approve the
issuance of AYE Common Stock to effect the Merger.
3. Other Regulatory Matters
In addition to Pennsylvania, AYE has public utility subsidiary
operations in Maryland, Ohio, West Virginia and Virginia. Certain of these
states may contend that they have jurisdiction over the Merger and that their
consent to the Merger is required. Amendment of certain affiliate agreements
which may occur in connection with the Merger will require the approval of the
VASCC and the WVPSC. Other than with respect to the amendment of these affiliate
agreements, AYE does not believe that any of these states has jurisdiction with
respect to the Merger.
Except as set forth above, no other state or local regulatory body or
agency and no other Federal commission or agency has jurisdiction over the
transactions proposed herein.
Item 5. PROCEDURE
The Commission is respectfully requested to issue and publish not later
than December 19, 1997, the requisite notice under Rule 23 with respect to the
filing of this Application-Declaration, such notice to specify a date not later
than _____, 1998 by which comments may be entered and a date on or after May 30,
1998, as the date when an order of the Commission granting and permitting this
Application-Declaration to become effective may be entered by the Commission.
It is submitted that a recommended decision by a hearing or other
responsible officer of the Commission is not needed for approval of the proposed
Merger. The Division of Investment Management may assist in the preparation of
the Commission's decision. There should be no waiting period between the
issuance of the Commission's order and the date on which it is to become
effective.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. EXHIBITS
A-1 Restated Charter of Allegheny Power System, Inc. (filed
as Exhibit (a)(3) to the Allegheny Power System, Inc.
Quarterly Report on Form 10-Q for the period ended
September 30, 1993 (File No. 1-267), and incorporated
herein by reference)
A-2 Articles of Amendment to the Restated Charter of
Allegheny Power System, Inc. (filed herewith)
A-3 Restated Articles of Incorporation of DQE, Inc. (filed as
Exhibit 3.5 to the DQE Annual Report on Form 10-K for the
year ended December 31, 1995 (File No. 1-10290), and
incorporated herein by reference)
A-4 Amendment to the Restated Articles of Incorporation of
DQE, Inc. (filed as Exhibit 3.1 to the DQE Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997 (File No. 1-10290), and incorporated herein by
reference)
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A-5 Draft Articles of Incorporation of AYP Sub, Inc. (filed
herewith)
A-6 Draft By-laws of AYP Sub, Inc. (filed herewith)
B-1 Merger Agreement among Allegheny Power System, Inc. DQE,
Inc. and AYP Sub Inc., dated as of April 5, 1997 (filed
as Annex A to the Registration Statement on Form S-4 on
June 25, 1997 (Registration No. 333-26449), and
incorporated herein by reference)
B-2 Stock Option Agreement, between Allegheny Power System,
Inc. and DQE, Inc. dated as of April 5, 1997 (filed as
Exhibit 2(b) to the APS Report on Form 8-K, dated April
5, 1997 (File No. 1-267), and incorporated herein by
reference)
B-3 Letter Agreement between Allegheny Power System, Inc. and
DQE, Inc., dated as of April 5, 1997 (filed as Exhibit
2(c) to the APS Report on Form 8-K, dated April 5, 1997
(File No. 1-267), and incorporated herein by reference)
B-4 Proposed Service Agreement between Allegheny Power
Service Corporation and Duquesne Light Company (filed
herewith)
B-5 Form of Proposed Service Agreement between Allegheny
Power Service Corporation and subsidiaries of DQE except
Duquesne Light Company (filed herewith)
B-6 Joint Dispatch and Power Sale Agreement between West
Penn, Potomac Edison, Monongahela and Duquesne Light
(filed herewith)
C-1 Registration Statement of Allegheny Power System, Inc. on
Form S-4 (as amended) (filed as Registration Statement
No. 333-26449 and incorporated herein by reference)
C-2 Joint Proxy Statement and Prospectus (included in Exhibit
C-1)
D-1 Joint Application of Allegheny Power System, Inc. and
DQE, Inc. to the FERC (to be filed by amendment)
D-2 Testimony of Dr. Howard Pifer before the FERC (to be
filed by amendment)
D-3 Application of West Penn Power Company before the
Pennsylvania Public Utility Commission dated August 1,
1997 (to be filed by amendment)
D-4 Application of Allegheny Power System, Inc. before the
Maryland Public Service Commission dated August 4, 1997
(to be filed by amendment)
D-5 Application for Transfers of Control Regarding Operating
License Nos. DPR-66 and NPF-73 for the Beaver Valley
Power Station and Operating License NPF-58 for the Perry
Nuclear Power Plant (filed herewith)
E-1 Map of service area of Allegheny Energy, Inc. and DQE,
Inc., and showing AYE's transmission lines and
interconnections between Allegheny Energy, Inc. and
Duquesne Light Company (filed herewith on Form SE)
E-2 Map of Duquesne Light Company's electric service
territory, major transmission lines and interconnection
points (filed herewith on Form SE)
E-3 Allegheny Energy, Inc. corporate chart (filed herewith on
Form SE)
E-4 DQE, Inc. corporate chart (filed herewith on Form SE)
E-5 Corporate chart of Allegheny Energy, Inc. after the
Merger (filed herewith on Form SE)
F-1(a) Opinion of Counsel (to be filed by amendment)
F-1(b) Opinion of Counsel (to be filed by amendment)
F-2 Past-tense Opinion of Counsel (to be filed by amendment)
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G-1 Financial Data Schedules (to be filed by amendment)
H-1 Proposed Form of Notice (filed herewith)
I-1 Annual Report of Allegheny Power System, Inc. on Form
10-K for the year ended December 31, 1996 (File No. 1-267
and incorporated herein by reference)
I-2 Annual Report of DQE, Inc. on Form 10-K for the year
ended December 31, 1996 (File No. 1-10290 and
incorporated herein by reference)
I-3 Annual Report of Duquesne Light Company on Form 10-K for
the year ended December 31, 1996 (File No. 1-956 and
incorporated herein by reference)
B. FINANCIAL STATEMENTS
FS-1 Allegheny Power System, Inc. Consolidated Balance Sheet
as of September 30, 1997 (incorporated by reference to
the Quarterly Report on Form 10-Q of Allegheny Power
System, Inc. for the three-month period ended September
30, 1997 (File No. 1-267))
FS-2 Allegheny Power System, Inc. Unaudited Pro Forma Combined
Balance Sheet at September 30, 1997 (to be filed by
amendment)
FS-3 Allegheny Power System, Inc. Statement of Income for the
period ended September 30, 1997 (incorporated by
reference to the Quarterly Report on Form 10-Q of
Allegheny Power System, Inc. for the three-month period
ended September 30, 1997 (File No. 1- 267))
FS-4 Allegheny Power System, Inc. Unaudited Pro Forma Combined
Statement of Income for the twelve-month period ended
September 30, 1997 (to be filed by amendment)
FS-5 Allegheny Power System, Inc. Unaudited Pro Forma Combined
Statement of Retained Earnings for the twelve month
period ended September 30, 1997 (to be filed by
amendment)
FS-6 DQE, Inc. Condensed Consolidated Balance Sheet as of
September 30, 1997 (incorporated by reference to the
Quarterly Report on Form 10-Q of DQE, Inc. for the period
ended September 30, 1997 (File No. 1-10290))
FS-7 DQE, Inc. Consolidated Statement of Income as of
September 30, 1997 (to be filed by amendment)
FS-8 DQE, Inc. Consolidated Statement of Income for the fiscal
years ended December 31, 1996, 1995 and 1994
(incorporated herein by reference to the Annual Report of
DQE, Inc. on Form 10-K for the year ended December 31,
1996 (File No. 1-10290) (Exhibit I-2 hereto))
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
The Merger neither involves "major federal actions" nor "significantly
[affects] the quality of the human environment" as those terms are used in
Section (2)(C) of the National Environmental Policy Act, 42 U.S.C. Sec. 4332.
The only federal actions related to the Merger pertain to the Commission's
declaration of the effectiveness of the Registration Statement, the approvals
and actions described under Item 4 and Commission approval of this
Application-Declaration. Consummation of the Merger will not result in changes
in the operations of Duquesne Light, Monongahela, Potomac Edison, West Penn or
AGC that would have any significant impact on the environment. No federal agency
is preparing an environmental impact statement with respect to this matter.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding Company Act
of 1935, the undersigned company has duly caused this Application-Declaration to
be signed on its behalf by the undersigned thereunto duly authorized.
ALLEGHENY ENERGY, INC.
BY: /s/ Thomas K. Henderson
---------------------------
Name: Thomas K. Henderson
Title: Vice President
Date: November 26, 1997
<PAGE>
EXHIBIT INDEX
SEC
EXHIBIT NO. DEFINITION PAGE
- ----------- -------------------------------------------------------- ----
3.(I).A-1 Restated Charter of Allegheny Power System, Inc. (filed
as Exhibit (a)(3) to the Allegheny Power System, Inc.
Quarterly Report on Form 10-Q for the period ended
September, 1993 (File No. 1-267), and incorporated
herein by reference)
3.(I).A-2 Articles of Amendment to the Restated Charter of 73
Allegheny Power System, Inc. (filed herewith)
3.(I).A-3 Restated Articles of Incorporation of DQE, Inc. (filed
as Exhibit 3.5 to the DQE Annual Report on Form 10-K
for the year ended December 31, 1995 (File No.
1-10290), and incorporated herein by reference)
3.(I).A-4 Amendment to the Restated Articles of Incorporation of
DQE, Inc. (filed as Exhibit 3.1 to the DQE Quarterly
Report on Form 10-Q for the quarter ended September 30,
1997 (File No. 1-10290) and incorporated herein by
reference)
3.(I).A-5 Draft Articles of Incorporation of AYP Sub, Inc. (filed 76
herewith)
3.(II).A-6 Draft By-laws of AYP Sub, Inc. (filed herewith) 78
2.B-1 Merger Agreement among Allegheny Power System, Inc.
DQE, Inc. and AYP Sub Inc., dated as of April 5, 1997
(filed as Annex A to the Registration Statement on Form
S-4 on June 25, 1997 (Registration No. 333-26449), and
incorporated herein by reference)
10.B-2 Stock Option Agreement, between Allegheny Power System,
Inc. and DQE, Inc. dated as of April 5, 1997 (filed as
Exhibit 2(b) to the APS Report on Form 8-K, dated April
5, 1997 (File No. 1-267), and incorporated herein by
reference)
10.B-3 Letter Agreement between Allegheny Power System, Inc.
and DQE, Inc., dated as of April 5, 1997 (filed as
Exhibit 2(c) to the APS Report on Form 8-K, dated April
5, 1997 (File No. 1-267), and incorporated herein by
reference)
13.I-1 Annual Report of Allegheny Power System, Inc. on Form
10-K for the year ended December 31, 1996 (File No.
1-267 and incorporated herein by reference)
13.I-2 Annual Report of DQE, Inc. on Form 10-K for the year
ended December 31, 1996 (File No. 1-10290 and
incorporated herein by reference)
13.I-3 Annual Report of Duquesne Light Company on Form 10-K
for the year ended December 31, 1996 (File No. 1-956
and incorporated herein by reference)
99.B-4 Proposed Service Agreement between Allegheny Power 100
Service Corporation and Duquesne Light Company (filed
herewith)
99.B-5 Form of Proposed Service Agreement between Allegheny 110
Power Service Corporation and subsidiaries of DQE
except Duquesne Light Company (filed herewith)
99.B-6 Joint Dispatch and Power Sale Agreement between West 115
Penn, Potomac Edison, Monongahela and Duquesne Light
(filed herewith)
99.C-1 Registration Statement of Allegheny Power System, Inc.
on Form S-4 (as amended) (filed as Registration
Statement No. 333-26449 and incorporated herein by
reference)
99.C-2 Joint Proxy Statement and Prospectus (included in
Exhibit C-1)
<PAGE>
99.D-1 Joint Application of Allegheny Power System, Inc. and
DQE, Inc. to the FERC (to be filed by amendment)
99.D-2 Testimony of Dr. Howard Pifer before the FERC (to be
filed by amendment)
99.D-3 Application of West Penn Power Company before the
Pennsylvania Public Utility Commission dated August 1,
1997 (to be filed by amendment)
99.D-4 Application of Allegheny Power System, Inc. before the
Maryland Public Service Commission dated August 4, 1997
(to be filed by amendment)
99.D-5 Application for Transfers of Control Regarding 131
Operating License Nos. DPR-66 and NPF-73 for the Beaver
Valley Power Station and Operating License NPF-58 for
the Perry Nuclear Power Plant (filed herewith)
99.E-1 Map of service area of Allegheny Energy, Inc. and DQE, 146
Inc., and showing AYE's transmission lines and
interconnections between Allegheny Energy, Inc. and
Duquesne Light Company (filed herewith on Form SE)
99.E-2 Map of Duquesne Light Company's electric service 147
territory, major transmission lines and interconnection
points (filed herewith on Form SE)
99.E-3 Allegheny Energy, Inc. corporate chart (filed herewith 148
on Form SE)
99.E-4 DQE, Inc. corporate chart (filed herewith on Form SE) 149
99.E-5 Corporate chart of Allegheny Energy, Inc. after the 150
Merger (filed herewith on Form SE)
99.F-1(a) Opinion of Counsel (to be filed by amendment)
99.F-1(b) Opinion of Counsel (to be filed by amendment)
99.F-2 Past-tense Opinion of Counsel (to be filed by amendment)
99.FS-1 Allegheny Power System, Inc. Consolidated Balance Sheet
as of September 30, 1997 (incorporated by reference to
the Quarterly Report on Form 10-Q of Allegheny Power
System, Inc. for the three-month period ended September
30, 1997 (File No. 1-267))
99.FS-2 Allegheny Power System, Inc. Unaudited Pro Forma
Combined Balance Sheet at September 30, 1997 (to be
filed by amendment)
99.FS-3 Allegheny Power System, Inc. Statement of Income for
the period ended September 30, 1997 (incorporated by
reference to the Quarterly Report on Form 10-Q of
Allegheny Power System, Inc. for the three- month
period ended September 30, 1997 (File No. 1-267))
99.FS-4 Allegheny Power System, Inc. Unaudited Pro Forma
Combined Statement of Income for the twelve-month
period ended September 30, 1997 (to be filed by
amendment)
99.FS-5 Allegheny Power System, Inc. Unaudited Pro Forma
Combined Statement of Retained Earnings for the twelve
month period ended September 30, 1997 (to be filed by
amendment)
99.FS-6 DQE, Inc. Condensed Consolidated Balance Sheet as of
September 30, 1997 (incorporated by reference to the
Quarterly Report on Form 10-Q of DQE, Inc. for the
period ended September 30, 1997 (File No. 1-10290))
99.FS-7 DQE, Inc. Consolidated Statement of Income as of
September 30, 1997 (to be filed by amendment)
99.FS-8 DQE, Inc. Consolidated Statement of Income for the
fiscal years ended December 31, 1996, 1995 and 1994
(incorporated herein by reference to the Annual Report
of DQE, Inc. on Form 10-K for the year ended December
31, 1996 (File No. 1-10290) (Exhibit I-2 hereto))
99.H-1 Proposed Form of Notice (filed herewith) 151
ALLEGHENY POWER SYSTEM, INC.
ARTICLES OF AMENDMENT
Allegheny Power System, Inc., a Maryland Corporation having its
principal office in Washington County, Maryland (hereinafter called the
Corporation) hereby certifies to the State Department of Assessments and
Taxation of Maryland, that:
FIRST: The Charter of the Corporation is hereby amended by striking out
Article II and inserting in lieu thereof the following:
II.
The name of the Corporation (which is here-
inafter called the "Corporation") is
ALLEGHENY ENERGY, INC.
-----------------------------
SECOND: The Board of Directors of the Corporation on April 4, 1997 duly
adopted a resolution in which was set forth the foregoing amendment to the
Charter, declaring that the said amendment of the Charter was advisable and
directing that it be submitted for action thereon by the stockholders at a
special meeting to be held on August 7, 1997.
THIRD: At a special meeting of the stockholders of the Corporation,
notice of which having been given as required by law, held in Hagerstown,
Maryland as provided by the By-Laws of the Corporation, on August 7, 1997, the
stockholders, by the affirmative vote of the holders of more than a majority of
the total number of shares of the Corporation outstanding and entitled to vote
thereon, (the Charter of the Corporation providing that notwithstanding any
provisions of law requiring any action to be taken or authorized by the majority
or other designated proportion of the shares or of the shares of each class, or
otherwise to be taken or authorized by vote of the stockholders, such action
shall be effective and valid if taken or authorized by the affirmative vote of
the holders of a majority of the total number of shares outstanding and entitled
to vote thereon, except as otherwise provided in the Charter) duly approved the
amendment of the Charter of the Corporation hereinabove set forth.
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IN WITNESS WHEREOF, Allegheny Power System, Inc. has caused these
presents to be signed in its name and on its behalf by its President and its
corporate seal to be hereunto affixed and attested by its Secretary on August
25, 1997 and its President acknowledges that these Articles of Amendment are the
act and deed of the Corporation and, under penalties of perjury, that the
matters and facts set forth herein with respect to authorization and approval
are true in all material respects to the best of his knowledge, information and
belief.
ALLEGHENY POWER SYSTEM, INC.
By: /s/ Alan J. Noia
Alan J. Noia, President
(SEAL)
/s/ E.M. Beck
E.M. Beck, Secretary
Dated: August 25, 1997
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STATE OF MARYLAND )
) SS:
COUNTY OF WASHINGTON)
I HEREBY CERTIFY that on August 25, 1997, before me, the subscriber, a
Notary Public of the State of Maryland, in and for the County of Washington,
personally appeared Alan J. Noia, President of Allegheny Power System, Inc., a
Maryland corporation, and in the name and on behalf of the corporation
acknowledged the foregoing Articles of Amendment to be the corporate act of said
corporation; and at the same time personally appeared E. M. Beck and made oath
in due form of law that she was secretary of the special meeting of the
stockholders of said corporation at which the amendment of the charter of the
corporation therein set forth was approved, and that the matters and facts set
forth in said Articles of Amendment are true to the best of her knowledge,
information and belief.
WITNESS my hand and notarial seal or stamp, the day and year last above
written.
(Seal) /s/ Judith A. Bohner
Notary Public
JUDITH A. BOHNER
NOTARY PUBLIC STATE OF MARYLAND
My Commission Expires October 14, 1998
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DRAFT
ARTICLES OF INCORPORATION
OF
AYP SUB, INC.
FIRST. The name of the corporation is AYP Sub, Inc.
SECOND. The address of the corporation's registered office in the
Commonwealth of Pennsylvania is Allegheny Energy, Inc., 800 Cabin Hill Drive,
Greensburg, Pennsylvania 15601, in the County of Westmoreland. The name of its
registered agent at such address is _____.
THIRD. The corporation is incorporated under the provisions of the
Business Corporation Law of 1988.
FOURTH. The total number of shares which the corporation shall have
authority to issue is 1,000 shares of Common Stock, par value $0.01 per share.
FIFTH. The name and mailing address of the incorporator is Carol Russ,
c/o Allegheny Energy, Inc., 800 Cabin Hill Drive, Greensburg, PA 15601.
SIXTH. The board of directors of the corporation is expressly
authorized to adopt, amend or repeal bylaws of the corporation.
SEVENTH. The number of directors of the corporation shall be as
established from time to time by resolution of the Board of Directors of the
corporation.
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EIGHTH. Except with respect to the responsibilities and liabilities of
directors pursuant to any criminal statute and the liabilities of directors to
pay taxes pursuant to Federal, State and local law, a director of the
corporation shall not be liable to the corporation or its stockholders for
monetary damages for any action taken as a director, except to the extent that
any breach of, or failure to perform, the duties of the office involves
self-dealing, willful misconduct or recklessness. No amendment, modification or
repeal of this Article EIGHTH shall adversely affect any right or protection of
a director that exists at the time of such amendment, modification or repeal.
IN TESTIMONY WHEREOF, I have signed these Articles of Incorporation
this ____ day of _______________, 19__.
------------------------------
Carol G. Russ
INCORPORATOR
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DRAFT
BYLAWS
OF
AYP SUB, INC.
ARTICLE 1.
Definitions, etc.
Section 1.1. For all purposes of these bylaws, unless the context
otherwise requires:
(a) "Corporation" shall mean AYP Sub, Inc.
(b) "Charter" shall mean the Articles of Incorporation of the
Corporation, as from time to time amended.
(c) "Board" shall mean the Board of Directors of the Corporation.
Whenever reference is made to stockholders present at a meeting, the
reference shall include every stockholder present in person or by proxy
appointed by instrument in writing and subscribed by such stockholder or by his
attorney thereunto authorized; and, whenever reference is made to action by any
stockholder at or in connection with any meeting, the reference shall include
action in person or by such proxy. No proxy shall be valid after three years
from this date, unless otherwise provided in the proxy.
(d) "Stock Book" shall mean a book or list containing the names,
alphabetically arranged, of all stockholders of the Corporation with their
mailing addresses and the respective numbers and classes of shares of stock held
by them.
(e) All references to Articles and Sections are to Articles and
Sections of these bylaws; and the words "herein," "hereof", "hereby" and
"hereunder" and other equivalent words, refer to these bylaws and not to any
particular Article, Section or subdivision.
<PAGE>
ARTICLE 2.
Meetings of Stockholders
Section 2.1. Annual Meeting. The annual meeting of stockholders for the
election of directors and for the transaction of such other business as may
properly come before it shall be held on the fourth Wednesday in April in each
year, but if that be a legal holiday under the laws of the state where such
meeting is to be held, then on the next succeeding day not a holiday, at such
hour as may be named in the notice of said meeting.
Section 2.2. Special Meetings. A special meeting of stockholders may be
called at any time by the Chairman of the Board, if there be one, or by the
President, and shall be called by the Secretary when so ordered by a majority of
the directors or upon the written request, stating the purpose of the meeting,
of stockholders holding of record issued and outstanding shares of stock of the
Corporation entitled to not less than twenty per cent of all the votes entitled
to be cast at such meeting.
Section 2.3. Place of Meetings. All meetings of stockholders shall be
held at the registered office of the Corporation in Pennsylvania or at such
other place within the United States as may from time to time be fixed by the
Board and specified in the respective notices of such meetings or any waivers of
notice thereof.
Section 2.4. Notice of Meetings. Except as otherwise provided by law,
notice of each meeting shall be in writing and signed by the President or a Vice
President or the Secretary or an Assistant Secretary and shall state the purpose
for which the meeting is called and the time and place it is to be held. A copy
shall be served either personally or by mail upon each stockholder entitled to
vote at the meeting not less than 10 nor more than 90 days before the meeting.
If mailed, it shall be directed, postage prepaid, to the stockholder at his
address as it appears on
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the Stock Book. Except as otherwise expressly provided by law, no publication or
advertisement of any notice of any meeting of stockholders and no notice of any
adjourned meeting of stockholders shall be required.
Section 2.5. Quorum. Except as otherwise provided by law or by the
Charter, at each meeting of stockholders the holders of record of a majority in
number of the issued and outstanding shares of stock of the Corporation entitled
to vote thereat must be present to constitute a quorum for the transaction of
business. Whether or not there is a quorum at any meeting, the stockholders
present and entitled to cast a majority of the votes thereat, or in the absence
of all the stockholders any officer entitled to preside or act as secretary at
such meeting, may adjourn the meeting from time to time. At any such adjourned
meeting at which a quorum is present, any business may be transacted which might
have been transacted at the meeting as originally called.
Section 2.6. Organization. At each meeting of stockholders, the
Chairman of the Board, or, in his absence, the President, or, in his absence, a
Vice President designated by the Chairman of the Board, or, in the absence of
such designation, a chairman chosen by the stockholders present and entitled to
cast a majority of the votes thereat, shall preside. The Secretary of the
Corporation or, in his absence, an Assistant Secretary, or, if none is present,
some other person designated by the chairman of the meeting, shall act as
secretary of the meeting.
Section 2.7. Voting. Except as otherwise provided by law or by the
Charter, at any meeting of stockholders every stockholder present shall be
entitled to 1 vote for each share of stock entitled to vote thereat standing in
his name on the books of the Corporation
(a) at the record date fixed as provided in Section 8.3 hereof, or
(b) if no such record date shall have been fixed, then 10 days prior to
such meeting;
provided, however, that, except where the transfer books of the Corporation
shall have been closed or such a record date shall have been so fixed, no share
of stock of the Corporation which shall have been transferred on the books
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of the Corporation within 20 days next preceding any election of directors shall
be voted on at such election of directors.
Shares of its own stock owned directly or indirectly by the Corporation
shall not be voted at any meeting and shall not be counted in determining the
total number of outstanding shares entitled to vote at any given time, but
shares of its own stock held by it in a fiduciary capacity may be voted and
shall be counted in determining the total number of outstanding shares at any
given time.
Except as otherwise provided by law or by the Charter, all matters
which shall properly come before any meeting of stockholders shall be decided by
the affirmative vote of stockholders present and entitled to cast a majority of
the votes thereat, a quorum being present. A stock vote upon any question shall
be taken upon a demand therefor by any stockholder present and entitled to vote.
Section 2.8. Written Consent. Except as otherwise expressly provided by
law or in the Charter any action which might be taken at a meeting of
stockholders, the Board, or any committee, may be taken without a meeting by a
written consent setting forth such action, signed by all persons who would be
entitled to vote at the meeting if it were held and filed with the minutes of
proceedings of the stockholders, the Board or such committee, as the case may
be.
ARTICLE 3.
Board of Directors
Section 3.1. General Powers. The property, affairs and business of the
Corporation, except as otherwise expressly provided by law or by the Charter,
shall be managed by the Board.
Section 3.2. Number, Election and Term of Office. A Board of Directors
shall be elected at the annual meeting of stockholders, and, subject to Sections
3.8 and 3.9 hereof, each director shall hold office until the next annual
meeting of stockholders and until his successor shall have been elected and
qualified, or until his death, resignation, disqualification or removal. Except
as otherwise provided herein or in the Charter, directors shall be elected by a
majority of the votes of the stockholders entitled to vote at each meeting of
stockholders for the election of a director or directors. Directors need not be
stockholders. The number of directors shall be not more than fifteen, but the
number of directors may be increased to any number not exceeding fifteen, or may
be decreased to not less than three, by the affirmative vote of a majority of
the whole Board without a vote of the stockholders. The tenure of
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office of a director shall not be affected by any decrease in the number of
directors so made by the Board.
Section 3.3. Meetings. The Board shall hold its first regular meeting,
as soon as practicable after the meeting of the stockholders at which such Board
shall have been elected, for the purpose of organization and the election of
officers, and for the transaction of such other business as may be required by
law or by these bylaws or designated by the Board. In case such meeting is not
held within 30 days after such meeting of stockholders, it may be called by any
director by giving notice in the manner set forth in Section 3.5 hereof.
The Board by resolution may provide for other regular meetings and may
fix the time and place of such meetings.
Special meetings shall be held whenever called by the Chairman of the
Board or by the President or by a majority of the directors.
Section 3.4. Place of Meetings. The Board may hold its meetings at such
place or places, within or without the State of Pennsylvania, as the Board from
time to time may determine or as may be designated in waivers of notice thereof
signed by all the directors.
Section 3.5. Notice of Meeting. Except as provided in Section 3.3
hereof, notice need not be given of the first regular meeting of the Board.
Notice need not be given of any other regular meeting of the Board if the time
and place of such meeting are specified in a resolution of the Board prior to
the meeting and if notice of the adoption of such resolution is given, in the
manner herein provided for giving notice of meetings, to each director who was
absent from the meeting at which the resolution was adopted. Except as otherwise
required by law, notice of the time and place of each other meeting of the Board
shall be mailed to each director at his residence or usual place of business or
at such other address as he may have designated in writing to the Secretary, at
least five days before the day of the meeting, or shall be sent to him at such
address by telegram or cablegram, or given personally or by telephone, at least
24 hours before the time for the meeting. Notice of a meeting of the Board need
not state the purpose thereof, except as otherwise expressly provided by law or
by Section 12.1 hereof.
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Section 3.6. Quorum and Manner of Acting. Except as otherwise provided
in Section 3.10 hereof, at each meeting of the Board a majority of the total
number of directors, but not less than three directors, shall constitute a
quorum for the transaction of business, and, except as otherwise provided by law
or in the Charter or in Section 3.10, 4.1, 4.5, 4.6, 5.3, or 12.1 hereof, the
act of a majority of the directors present at any such meeting at which a quorum
is present shall be the act of the Board. Whether or not there is a quorum at a
meeting, a majority of the directors who are present may adjourn the meeting
from time to time to a day certain. No notice of an adjourned meeting need be
given.
Any action required or permitted to be taken at a meeting of the Board
may be taken without a meeting if the action is taken by the whole Board and is
evidenced by one or more written consents describing the action taken, signed by
all directors on the Board, and filed with the minutes or corporate records of
Board proceedings. Members of the Board may participate in a regular or special
meeting of the Board by means of conference telephone or similar communications
equipment by which all persons participating can simultaneously hear each other.
Participation in a meeting by these communications means constitutes presence in
person at the meeting. The directors shall act only as a Board, and the
individual directors shall have no power as such.
Section 3.7. Organization. At each meeting of the Board, the Chairman
of the Board, if there be one, or, in his absence, the President or, in his
absence, a chairman (who shall be a Vice President, if any is present) chosen by
a majority of the directors present, shall preside. The Secretary of the
Corporation or, in his absence, an Assistant Secretary or, if none is present,
some other person designated by the chairman of the meeting, shall act as
secretary of the meeting.
Section 3.8. Resignations. Any director may resign at any time by
giving written notice to the Chairman of the Board or to the Secretary of the
Corporation or to the Board. A resignation shall take effect at the time
specified therein and, unless otherwise specified therein, acceptance of such
resignation shall not be necessary to make it effective.
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Section 3.9. Removal of Directors. Except as otherwise provided by law
or by the Charter, any director may be removed, either with or without cause, at
any time, by the affirmative vote of the holders of record of a majority in
number of the issued and outstanding shares of stock of the Corporation entitled
to vote for the election of directors, at a special meeting of the stockholders
called and held for that purpose.
Section 3.10. Vacancies. Except as otherwise provided by law or by the
Charter, (a) any vacancy occurring in the Board for any cause other than by
reason of an increase in the number of directors, may be filled by a majority of
the remaining members of the Board, although such majority is less than a
quorum, (b) any vacancy occurring by reason of an increase in the number of
directors may filled by action of a majority of the entire Board, and (c) any
vacancy occurring in the Board for any cause whatsoever may be filled by
stockholders entitled to vote upon an election of directors, at the next annual
meeting held, or at the meeting of stockholders at which such vacancy was
created, or at a meeting of stockholders called for the purpose of filling such
vacancy. The directors so appointed or elected shall, subject to Sections 3.8
and 3.9 hereof, hold office until the next annual election of directors and
until their successors have been duly elected and qualified.
Section 3.11. Remuneration. Directors shall be entitled to receive such
remuneration as may be fixed from time to time by resolutions of the Board, in
the form of payment of a fixed sum per month or of fees for attendance at
meetings of the Board and committees thereof, or both. Directors shall also be
entitled to be reimbursed for expenses incurred in attending any meeting or
otherwise in connection with their attention to the affairs of the Corporation.
Nothing herein shall preclude any director from serving in any other capacity or
receiving compensation for such service.
ARTICLE 4.
Executive and Other Committees
Section 4.1. General Powers and Membership. The Board, by resolution
adopted by a majority of the whole
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Board, may elect from its members, an Executive Committee and one or more other
committees, each consisting of not less than three and not more than five
members. Unless otherwise expressly provided by law or by the Charter or by
resolution of the Board, the Executive Committee shall have all the powers of
the Board (except the power to appoint or remove a member of the Executive
Committee or other committee, to create or fill vacancies in the Board, to
remove an officer appointed by the Board, to alter, amend or repeal these
bylaws, to declare dividends, to issue stock or to recommend to stockholders
any action requiring stockholders' approval) when the Board is not in session,
and each other committee shall have such powers as the Board shall confer. In
the absence of any member of any such committee, the members thereof present at
any meeting and not disqualified from voting, whether or not they constitute a
quorum, may unanimously appoint a member of the Board to act in the place of
such absent member. In so far as the rights of third parties shall not be
affected thereby, all action by any committee shall be subject to revision and
alteration by the Board.
Section 4.2. Organization. Unless otherwise provided by resolution of
the Board, a chairman chosen by each committee shall preside, and the Secretary
of the Corporation shall act as secretary, at all meetings of each committee
thereof. In the absence of the Secretary, the chairman of the meeting shall
designate an Assistant Secretary, or, if none is present, some other person, to
act as secretary of the meeting.
Section 4.3. Meetings. Each committee may determine the time and place,
and the method of calling, its meetings and conduct of its proceedings. Any
action required or permitted to be taken at a meeting of the members of the
Executive or any other committee may be taken without a meeting if the action is
taken by the whole committee and is evidenced by one or more written consents
describing the action taken, signed by all members of the committee, and filed
with the minutes or corporate records of committee proceedings. Members of any
committee may participate in a regular or special meeting of such committee by
means of conference telephone or similar communications equipment by which all
persons participating can simultaneously hear each other. Participation in a
meeting by these communications means constitutes presence in person at the
meeting.
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Section 4.4. Quorum and Manner of Acting. Except as otherwise provided
in Section 4.1 hereof, a majority of the members at any meeting of a committee
shall constitute a quorum for the transaction of business, and the act of a
majority of the members present at any such meeting at which a quorum is present
shall be the act of such committee. The committees shall keep minutes of their
proceedings and shall report the same to the Board at the meeting of the Board
next ensuing. The members of each committee shall act only as a committee, and
the individual members shall have no power as such.
Section 4.5. Removal. Any member of any committee may be removed,
either with or without cause, at any time, by resolution adopted by a majority
of the whole Board.
Section 4.6. Vacancies. Except as otherwise provided in Section 4.1
hereof, any vacancy in any committee shall be filled in the manner prescribed
for the regular election of the members of that committee.
ARTICLE 5.
Officers
Section 5.1. Election, Term of Office and Qualifications. The Board
shall elect annually from its membership a Chairman of the Board. It shall also
elect annually a President, a Controller, a Secretary and a Treasurer, and may
elect one or more Vice Presidents (including an Executive Vice President) and
any other officers whose appointment shall not be delegated as provided in
Section 5.2 hereof. Each officer shall, subject to Sections 5.3 and 5.4 hereof,
hold office until the next annual election and until his successor is chosen and
qualified. One person may hold any two or more offices, except those of
President and Vice President. No instrument shall be executed, acknowledged or
verified by the same individual in more than one such capacity if such
instrument is required by law, the Charter, or these bylaws to be executed,
acknowledged or verified by two or more officers. The executive officers of the
Corporation shall be the Chairman of the Board, the President, the Vice
Presidents, the Controller, the Secretary and the Treasurer.
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Section 5.2. Other Officers. The Board may authorize any executive
officer or committee to appoint such other officers or agents as the Board or
the appointing officer or committee may deem advisable, including one or more
Assistant Treasurers and one or more Assistant Secretaries, each of whom shall
hold office for such period, have such powers and perform such duties as are
provided herein or as the Board or his appointing officer or committee may from
time to time determine. Any such officer, if required by the Board or by his
appointing officer or committee, shall give bond for the faithful discharge of
his duty in such sum and with such surety as the Board or his appointing officer
or committee shall require.
Section 5.3. Removal. Any officer may be removed, either with or
without cause, at any time, by resolution adopted by a majority of the whole
Board or by the officer or committee by whom he shall have been appointed, or by
any officer or committee upon whom the power of removal has been conferred by
resolution adopted by a majority of the whole Board.
Section 5.4. Resignations. Any officer may resign at any time by giving
written notice to the President or to the Secretary or to the Board. A
resignation shall take effect at the time specified therein and, unless
otherwise specified therein, the acceptance of such resignation shall not be
necessary to make it effective.
Section 5.5. Vacancies. A vacancy in any office may be filled in the
manner prescribed for regular election or appointment to that office.
Section 5.6. Chairman of the Board. The Chairman of the Board shall be
the chief executive officer of the Corporation and shall have general
supervision of the business of the Corporation and over its officers, subject,
however, to the control of the Board. He may execute, in the name of the
Corporation, deeds, mortgages, bonds, contracts and other instruments authorized
by the Board; and, in general, shall have all powers and duties incident to the
office and such others as from time to time may be given him by the Board or by
any committee thereunto authorized.
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He shall, unless otherwise directed by the Board or by any committee
thereunto authorized, attend in person or by substitute or proxy appointed by
him, and act and vote in behalf of the Corporation, at all meetings of the
stockholders of any corporation in which the Corporation holds stock.
Section 5.7. President and Vice President. At the request of the
Chairman of the Board, or in his absence or disability, the President or any
Vice President may perform all the duties of the Chairman of the Board, and,
when so acting, shall have all the powers of the Chairman of the Board. He may
sign and execute, in the name of the Corporation, deeds, mortgages, bonds,
contracts or other instruments authorized by the Board; may, unless otherwise
directed by the Board or any committee thereunto authorized, attend in person or
by substitute or proxy appointed by him, and act and vote in behalf of the
Corporation, at all meetings of the stockholder of any corporation in which the
Corporation holds stock, and shall have such other powers and duties as from
time to time may be assigned to him by the Chairman of the Board or by the Board
or by any committee thereunto authorized.
Section 5.8. Controller. The Controller shall have general charge,
supervision and control of the accounts of the Corporation. He shall supervise
and direct the preparation of the construction and operating budgets of the
Corporation; shall cause to be maintained internal control procedures adequate
to safeguard the assets of the Corporation; shall supervise the preparation of
all official reports made to State or other governmental authorities; shall, as
and when required, furnish to the Board of Directors, or the Executive Committee
thereof, or such executive officer as either may designate, full and complete
statements of account showing the financial position of the Corporation; shall
measure performance against approved operating plans, and report and interpret
results of operations to all levels of management; and shall have such other
duties incident to his office as may be assigned to him by the President or by
the Board or by any committee thereunto authorized.
Section 5.9. Secretary. The Secretary shall record or cause to be
recorded in books provided for the purpose all the proceedings of the meetings
of the Corporation, including those of the stockholders, the Board
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and all committees for which a secretary shall not have been appointed; shall
see that all notices are duly given in accordance with these bylaws or as
required by law; shall be custodian of the records (other than financial) and of
the seal of the Corporation; and, in general, shall have all powers and duties
incident to the office of Secretary and such others as from time to time may be
assigned to him by the President or by the Board or by any committee thereunto
authorized.
Section 5.10. Assistant Secretaries. At the request of the Secretary,
or in his absence or disability, any Assistant Secretary may perform all the
duties of the Secretary and, when so acting, shall have all the powers of the
Secretary. Each Assistant Secretary shall perform such other duties as from time
to time may be assigned to him by the President or the Secretary or by the Board
or by any committee thereunto authorized.
Section 5.11. Treasurer. The Treasurer, if required by the Board, shall
give a bond for the faithful discharge of his duty, in such sum and with such
surety as the Board will require. The Treasurer shall prepare or cause to be
prepared annually a full and correct statement of the affairs of the
Corporation, including a balance sheet and a financial statement of operations
for the preceding fiscal year, which shall be submitted at the annual meeting of
the stockholders. The Treasurer shall have charge and custody of, and be
responsible for, all funds and securities of the Corporation and shall deposit
or cause to be deposited all such funds and securities in the name of the
Corporation in such depositaries as shall be selected by the Board, or any
committee, officer, or agent authorized by the Board to make such selection; may
receive, and give receipt for, monies paid to the Corporation and, subject to
the direction of the Board, or of any committee thereunto authorized, or of the
President, pay out and supervise the disbursement of monies of the Corporation;
and in general, shall have all powers and duties incident to the office of
Treasurer and such others as from time to time may be assigned to him by the
President or by the Board or by any committee thereunto authorized.
Section 5.12. Assistant Treasurer. Each Assistant Treasurer, if
required by the Board, shall give bond for the faithful discharge of his duty,
in such sum and with such surety as the Board shall require. At the request
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of the Treasurer, or in his absence or disability, any Assistant Treasurer may
perform all the duties of the Treasurer, and, when so acting, shall have all the
powers of the Treasurer. Each Assistant Treasurer shall perform such other
duties as from time to time may be assigned to him by the President or the
Treasurer or by the Board or by any committee thereunto authorized.
Section 5.13. Salaries. The compensation of each officer shall be fixed
from time to time by the Board or the Executive Committee. No officer shall be
precluded from receiving such compensation by reason of the fact that he is also
a director of the Corporation.
ARTICLE 6.
Indemnification of Directors and Officers
Section 6.1. The Corporation shall indemnify any person who was or is a
party or is threatened with being made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, including all appeals (other than an action, suit or proceeding
by or in the light of the Corporation) by reason of the fact that he is or was a
director, officer or employee of the Corporation, or is or was serving at the
request of the Corporation as a director, officer or employee of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgements, decrees, fines, penalties and
amounts paid in settlement actually and reasonably incurred by him in connection
with such action, suit or proceeding if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its equivalent, shall not of itself create a
presumption that the person did not act in good faith or in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal action, suit or proceeding, that he
had reasonable cause to believe that his conduct was unlawful.
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Section 6.2. The Corporation shall indemnify any person who was or is a
party or is threatened with being made a party to any threatened, pending or
completed action, suit or proceeding, including all appeals, by or in the right
of the Corporation to procure a judgment in its favor by reason of the fact that
he is or was a director, officer or employee of the Corporation, or is or was
serving at the request of the Corporation as a director, officer or employee of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection with the defense or settlement of such action, suit or
proceeding. The Corporation shall also indemnify any such person against amounts
paid in settlement of such action, suit or proceeding up to the amount that
would reasonably have been expended in his defense (determined in the manner
provided for in Section 6.4 hereof) if such action, suit or proceeding had been
prosecuted to a conclusion. However, indemnification under this Section shall be
made only if the person to be indemnified acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation; and no such indemnification shall be made in respect of any claim,
issue or matter as to which such person shall have been finally adjudged to be
liable to the Corporation unless, and only to the extent that, the court or body
in or before which such action, suit or proceeding was finally determined, or
the court of common pleas of the judicial district embracing the county in which
the registered office of the Corporation is located, shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses or other amounts paid as such court or body shall
deem proper.
Section 6.3. Without limiting this right of any director, officer or
employee of the Corporation to indemnification under any other Section hereof,
if such person has been substantially and finally successful on the merits or
otherwise in defense of any action, suit or proceeding referred to in Sections
6.1 and 6.2 hereof or in defense of any claim, issue, or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
Section 6.4. Any indemnification under Sections 6.1 and 6.2 hereof
(unless ordered by a court) shall be made by the
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Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer or employee is proper in the
circumstances because he has met the applicable standard of conduct set forth in
Sections 6.1 and 6.2 hereof. Such determination shall be made (1) by the Board
of Directors by a majority vote of a quorum consisting of directors who are or
were not parties to or threatened with such action, suit or proceeding, or (2)
if such a quorum is not obtainable, or even if obtainable, if a majority of a
quorum of disinterested directors so directs, by independent legal counsel
(compensated by the Corporation) in a written opinion, or (3) by the holders of
a majority of the shares entitled to vote in the election of directors without
reference to default or contingency which would permit the holders of one or
more classes of shares to vote for the election of one or more directors.
Section 6.5. Expenses of each person indemnified hereunder incurred in
defending a civil, criminal, administrative or investigative action, suit, or
proceeding (including all appeals) or threat thereof, may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding as authorized by the Board of Directors, whether a disinterested
quorum exists or not, upon receipt of an undertaking by or on behalf of the
director, officer or employee to repay such expenses unless it shall ultimately
be determined that he is entitled to be indemnified by the Corporation.
Section 6.6. The indemnification provided by this Article shall not be
deemed exclusive of or in any way to limit any other rights to which any person
indemnified may be or may become entitled as a matter of law, by the articles,
regulations, agreements, insurance, vote of shareholders or otherwise, with
respect to action in his official capacity and with respect to action in another
capacity while holding such office and shall continue as to a person who has
ceased to be a director, officer or employee and shall inure to the benefit of
the heirs, executors, administrators and other legal representatives of such
person.
Section 6.7. Sections 6.1 through 6.6 hereof shall also apply to such
other agents of the
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Corporation as are designated for such purpose at any time by the Board of
Directors.
Section 6.8. If any part of this Article shall be found, in any action,
suit or proceeding, to be invalid or ineffective, the validity and the effect of
the remaining parts shall not be affected.
Section 6.9. The provisions of this Article shall be applicable to
claims, actions, suits or proceedings made or commenced after the adoption
hereof, whether arising from acts or omissions to act occurring before or after
the adoption hereof.
ARTICLE 7.
Contracts, Checks, Drafts, Bank Accounts, etc.
Section 7.1. Contracts, etc., How Executed. The Board or any committee
thereunto authorized may authorize any officer or officers or agent or agents of
the Corporation to enter into any contract or execute and deliver any contract
or other instrument in the name and on behalf of the Corporation, and such
authority may be general or confined to specific instances. Unless authorized so
to do by the Board or any committee thereunto authorized, no officer, agent or
employee shall have any power or authority to bind the Corporation by any
contract or engagement or to pledge its credit or to render it liable
pecuniarily for any purpose or to any amount.
Section 7.2. Loans. No loan shall be contracted on behalf of the
Corporation, and no negotiable paper shall be issued in its name, unless
authorized by the Board or any committee thereunto authorized. Such authority
may be general or confined to specific instances. When so authorized, the
officer or officers thereunto authorized may effect loans and advances at any
time for the Corporation from any bank, trust company or individual, and for
such loans and advances may make, execute and deliver promissory notes or other
evidences of indebtedness of the Corporation and, when authorized as aforesaid,
as security for the payment of any and all loans, advances, indebtedness and
liability of the Corporation, may mortgage, pledge, hypothecate or transfer any
real or personal property at any time held by the Corporation and to that end
execute
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instruments of mortgage or pledge or otherwise transfer such property.
Section 7.3. Checks, Drafts, etc. All checks, drafts, bills of exchange
or other orders for the payment of money, obligations, notes, acceptances, or
other evidences of indebtedness, bills of lading, warehouse receipts and
insurance certificates issued in the name of the Corporation, shall be signed or
endorsed by such officer or officers, agent or agents, of the Corporation, and
in such manner, as shall from time to time be determined by resolution of the
Board or any committee thereunto authorized.
Section 7.4. Deposits. Unless otherwise provided by resolution of the
Board or such committee, endorsements for deposit to the credit of the
Corporation in any of its duly authorized depositaries may be made, without
countersignature, by the President or any Vice President or the Treasurer, or by
any other officer or agent of the Corporation to whom such power shall have been
delegated by the Board or such committee, or may be made by stamped impression
in the name of the Corporation.
Section 7.5. Proxies. Unless otherwise provided by resolution of the
Board or any committee thereunto authorized, the President or any Vice President
may from time to time appoint an attorney or attorneys or agent or agents, of
the Corporation, in the name and on behalf of the Corporation, to cast the votes
which the Corporation may be entitled to cast as the holder of stock or other
securities in any other corporation, any of whose stock or other securities may
be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, or to consent in writing, in the name of
the Corporation as such holder, to any action by such other corporation, and may
instruct the person or persons so appointed as to the manner of casting such
votes or giving such consent, and may execute or cause to be executed in the
name and on behalf of the Corporation and under its corporate seal, or
otherwise, all such written proxies or other instruments as he may deem
necessary or proper in the circumstances.
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ARTICLE 8.
Books and Records
Section 8.1. Place, etc. The Board of Directors may keep the books and
records of the Corporation at such places within or without the State of
Pennsylvania, as it may from time to time determine. The stock record books and
the blank stock certificate books shall be kept by the Secretary or by a
transfer agent or by any other officer or agent designated by the Board of
Directors or any committee thereunto authorized. The original or a duplicate
stock ledger containing the names and addresses of the stockholders and the
number of shares held by them, respectively, shall be kept at the principal
office or place of business of the Corporation in the State of Pennsylvania. The
original or a certified copy of these bylaws, as amended from time to time,
shall be kept at the principal office of the Corporation in the State of
Pennsylvania.
Section 8.2. Addresses of Stockholders. Each stockholder shall
designate to the Secretary or transfer agent of the Corporation an address at
which notices of meetings and all other corporate notices may be served upon or
mailed to him, and if any stockholder shall fail to designate such address,
corporate notices may be served upon him by mail directed to him at his last
known post office address.
Section 8.3. Closing of Transfer Books. The Board may, by resolution,
direct that the stock transfer books of the Corporation be closed for a period
not exceeding 20 days preceding the date of any meeting of the stockholders, or
the date for the payment of any dividend, or the date for the allotment of
rights, or the date when any change or conversion or exchange of capital stock
of the Corporation shall go into effect, or for a period of not exceeding 20
days in connection with obtaining the consent of stockholders for any purpose.
If the stock transfer books are closed for the purpose of determining
stockholders entitled to notice of or to vote at a meeting of stockholders, such
books shall be closed for at least 10 days immediately preceding such meeting.
In lieu of closing the stock transfer books as aforesaid, the Board may fix in
advance a date as the record date for the determination of the stockholders
entitled to notice of, and to vote at, any such meeting of stockholders and any
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adjournment thereof, or entitled to receive payment of any such dividend, or
entitled to any such allotment of rights, or entitled to exercise the rights in
respect of any such change, conversion or exchange of capital stock of the
Corporation, or entitled to give any such consent, and in each such case such
stockholders and only such stockholders as shall be stockholders of record on
the date so fixed shall be entitled to such notice of, and to vote at, such
meeting and any adjournment thereof, or to receive payment of such dividend, or
to receive such allotment of rights, or to exercise such rights, or to give such
consent, as the case may be, notwithstanding any transfer of any stock on the
books of the Corporation after any such record date fixed as aforesaid. Such
record date in any case shall be not more than 40 days, and in case of a meeting
of stockholders not less than 10 days, prior to the date on which the particular
action, requiring such determination of stockholders, is to be taken.
Section 8.4. Examination of Books by Stockholders. The Board shall have
power to determine, from time to time, whether and to what extent and at what
times and places and under what conditions and regulations the accounts,
corporate records, books and documents of the Corporation, or any of them, shall
be open to the inspection of the stockholders; and no stockholder shall have any
right to inspect any account, corporate record, book or document of the
Corporation, except as conferred by the laws of the State of Pennsylvania,
unless and until authorized so to do by resolution of the Board or of the
stockholders of the Corporation.
ARTICLE 9.
Shares and Their Transfer
Section 9.1. Certificates of Stock. The stock of the Corporation shall
be represented by certificates signed by the Chairman of the Board or the
President or a Vice President and countersigned by the Secretary or an Assistant
Secretary or the Treasurer or an Assistant Treasurer and sealed with the seal of
the Corporation, any or all of which may be facsimile, engraved or printed. When
any such certificate is signed by a transfer agent and by a registrar, the
signatures of the officers and the seal upon such certificate may be facsimiles,
engraved or printed. In
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case any officer who shall have signed, or whose facsimile signature shall have
been used on, any such certificates shall cease to be such officer of the
Corporation before such certificate is issued, such certificate may nevertheless
be issued by the Corporation with the same effect as if the person who signed
such certificate or whose facsimile signature shall have been used thereon had
not ceased to be such officer of the Corporation.
Section 9.2. Record, etc. A record shall be kept in the Stock Book of
the name of the person, firm or corporation owning the stock represented by each
certificate for stock of the Corporation issued, the number and class of shares
represented by each such certificate, and the date thereof, and, in the case of
cancellation, the date of cancellation. Every certificate surrendered to the
Corporation for exchange or transfer shall be cancelled, and no new certificate
or certificates shall be issued in exchange for any existing certificate until
such existing certificate shall have been so cancelled except in cases provided
for in Section 9.6 hereof. The person in whose name shares of stock stand in the
Stock Book shall be deemed the owner thereof for all purposes as regards the
Corporation.
Section 9.3. Transfer of Shares. Transfers of shares of the stock of
the Corporation shall be made on the books of the Corporation by the holder of
record, or by his attorney thereunto duly authorized, upon surrender of the
certificates for such shares, but no share shall be transferred until all
previous calls thereon shall have been fully paid.
Section 9.4. Transfer Agents and Registrars. The Board may appoint one
or more transfer agents and registrars for stock of the Corporation of any class
and may require stock certificates to be countersigned or registered by one or
more of such transfer agents or registrars.
Section 9.5. Lost and Destroyed Certificates. The holder of record of
any certificate of stock who shall claim that such certificate is lost or
destroyed may make an affidavit or affirmation of that fact in such manner as
the Board may require and give a bond, if required by the Board, in such form
and sum and with such surety as the Board shall require, to indemnify the
Corporation against any claim that may be made against it on account of such
certificate,
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whereupon one or more new certificates may be issued of the same tenor and for
the same aggregate number of shares as the certificate alleged to be lost or
destroyed. The Board may delegate authority to administer the provisions of this
Section.
ARTICLE 10.
Notice
Section 10.1. Waiver of Notice. No notice of the time, place or purpose
of any meeting of stockholders or directors, or of any committee, or any
publication thereof, whether prescribed by law, by the Charter or by these
bylaws, need be given to any person who attends the meeting, or who, in writing,
executed either before or after the meeting and filed with the records of the
meeting, waives such notice, and such attendance or waiver shall be deemed
equivalent to notice except where a person attends such meeting for the express
purpose of objecting at the beginning of the meeting to the transaction of any
business because the meeting was not lawfully called or convened.
ARTICLE 11.
Miscellaneous
Section 11.1. Fiscal Year. The fiscal year of the Corporation shall be
determined by the Board. In the absence of any such determination the fiscal
year of the Corporation shall be the calendar year.
Section 11.2. Seal. The seal of the Corporation shall be a device
containing the name of the Corporation, the year of its organization and the
word "Pennsylvania". The corporate seal may be used by printing, engraving,
lithographing, stamping or otherwise making, placing or affixing, or causing to
be printed, engraved, lithographed, stamped or otherwise made, placed or
affixed, upon any paper or document, by any process whatsoever, an impression,
facsimile, or other reproduction of the Corporation seal.
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ARTICLE 12.
Amendments
Section 12.1. These bylaws may be amended or repealed by the
stockholders at any annual meeting, or at any special meeting if notice of the
proposed amendment or new bylaws is included in the notice of such meeting.
Except as otherwise provided by law, these bylaws may be amended or repealed by
the affirmative vote of a majority of the entire Board given at any meeting if
notice of the proposed amendment or repeal is contained in the notice or waiver
of notice of such meeting. Bylaws made, altered or amended by the Board shall be
subject to alteration, amendment or repeal by the stockholders.
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PROPOSED
SERVICE AGREEMENT
BETWEEN THE
ALLEGHENY POWER SERVICE CORPORATION
AND
DUQUESNE LIGHT COMPANY
THE SERVICE AGREEMENT, effective upon the consummation of the merger
between DQE, Inc., and AYP Sub, Inc., between Allegheny Power Service
Corporation, a corporation formed under the laws of the State of Maryland (the
"Service Company") and Duquesne Light Company, a corporation formed under the
laws of the Commonwealth of Pennsylvania (the "Company").
WITNESSETH:
WHEREAS, pursuant to a service agreement dated November 22, 1963, the
Service Company was created to perform certain management duties on behalf of
Allegheny Power System, Inc. (the "System") and its utility subsidiary companies
(the "Subsidiaries"); and
WHEREAS, by merger agreement dated April 5, 1997, DQE, Inc., the parent
of Company, agreed to merge with AYP Sub, Inc., a special purpose subsidiary of
the System; and
WHEREAS, the Service Company offers to provide a central organization
to furnish to the System and the Subsidiaries, including Company, certain
advisory, supervisory and other services in accordance with said current
practices and procedures; and
WHEREAS, the Company wishes to accept the offer proposed by the Service
Company;
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NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and for other good and valuable consideration, the receipt of
which is hereby acknowledged, the parties hereto, intending to be reasonably
bound, hereby agree as follows:
1. The Service Company hereby offers to furnish to the Company the
services detailed on Exhibit I attached hereto and made a part hereof.
2. For all services rendered for the Company by the Service Company,
the Company agrees to pay the cost thereof. When a service is rendered to two or
more Subsidiaries, the cost thereof shall be shared by such Subsidiaries in
proportion to the average electric operating revenues of each (exclusive of
sales to the Subsidiaries), operating and maintenance expenses (exclusive of
those costs for fuel, deferred fuel, and purchased power and exchanges),
kilowatt hours sold to regular customers (other than the Subsidiaries) and total
electric plant in service (less reserves for depreciation and amortization) over
the three preceding calendar years. For services rendered to one or more
Subsidiaries and the System, the allocation will be based on the average of the
prior three years' direct costs charged by the Service Company to each
Subsidiary and the System.
3. The payment for services rendered by the Service Company to the
System and Subsidiaries shall cover all the costs and expenses of its doing
business, excluding only a return for the use of equity capital, and that each
Subsidiary and the System shall pay its direct or fair proportionate share.
4. Payment shall be made by the Company to the Service Company on a
monthly basis on or before the 20th day of the succeeding month, upon receipt of
a statement showing the amount due. Certain charges billed by the Service
Company to the Company may not be due immediately and will be so indicated on
the statement of billing. Monthly charges may be made on an estimated basis, but
adjustments will be made at the end of each calendar year so that all charges
for the calendar year will be in accordance with the foregoing.
5. Nothing herein shall be construed to release the officers and
directors of the Company from the performance of their respective duties or
limit the exercise of their powers as prescribed by law or otherwise.
6. The offer set forth herein shall become a contract effective upon
the consummation of the merger between DQE, Inc., and AYP Sub, Inc. Such Service
Agreement shall continue in full force and effect from year to year but may be
terminated by either party upon 60 days' prior notice, and the Company may
terminate such contract at any time with or without notice for any cause deemed
by it to be sufficient.
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<PAGE>
7. The Service Agreement will be subject to termination or modification
at any time to the extent its performance may conflict with the provisions of
the Public Utility Holding Company Act of 1935, as amended, or with any rule,
regulation or order of the Securities and Exchange Commission adopted before or
after the making of this Service Agreement and shall be subject to the approval
of any state commission or other regulatory body whose approval is a legal
prerequisite to its execution and delivery or performance.
If your Company desires to accept this offer, please cause it to be
executed in the space provided below by your duly authorized officers.
Very truly yours,
ALLEGHENY POWER SERVICE CORPORATION
By_________________________________
President
Attest:
________________________
Secretary
Pursuant to authorization of the Board of Directors of this Company, we hereby
accept the above offer this _____ day of _____,1997.
DUQUESNE LIGHT COMPANY
By___________________________________
President
_________________________
Assistant Secretary
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EXHIBIT I
(As Amended, effective July 1, 1996)
Allegheny Power Service Corporation Principal Functions
The following is a description of the principal functions of Allegheny
Power Service Corporation ("APSC"). In accordance with the terms and conditions
of the Service Agreement dated __________, 1997, APSC may perform the services
described herein for Duquesne Light Company.
1. Corporate Services
1. Accounting
(a) Payroll - Processes and verifies timesheets and paychecks for
Duquesne Light Company employees. Ensures compliance with payroll tax laws and
regulations.
(b) Asset Accounting - Maintains corporate accounting records for
Duquesne Light Company's fixed assets in accordance with regulatory
requirements, corporate capital budget management, and fixed asset return
objectives.
(c) Taxes - Ensures compliance with all federal, state and local
tax laws (except payroll and benefits matters). Prepares and files applicable
returns, gives instructions for timely payment of tax liabilities, and
coordinates the issuance of tax accounting instructions to Duquesne Light
Company. Also provides tax planning services.
(d) Corporate Accounting - Gathers, reports, and analyzes
accounting and management information. Reviews and corrects accounting data.
(e) Payment Processing - Processes invoices from, and issues
payment to, vendors for goods and services provided to Duquesne Light Company.
(f) Fuel Accounting - Initiates payment for fuel receipts and
compiles fuel data for report preparation on fuel purchases and generation
statistics to meet various regulatory requirements.
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2. Information Services
Provides electronic data processing services:
(a) Machine related computer activity - services such as data
processing for customer accounting, payroll and general accounting, engineering
planning, purchasing and stores studies, forecasts and various other
administrative and engineering applications.
(b) Computer applications activity - services such as feasibility
studies for new applications, development and/or acquisition of new
applications, enhancement of existing applications and other related activity.
3. Financial Management
Oversees annual budgeting and capital management, long-term
forecasting, and financial planning.
4. Treasury
(a) Cash Processing - Maintains relationship with banking
institutions for lines of credit. Handles customer bill processing, money pool
(internal funding among certain Allegheny Power System, Inc. companies, external
short-term borrowing and investing), and long-term financing and cash
forecasting.
(b) Risk Management - provides risk financing through insurance
purchases and other funding mechanisms. Provides transfer of risk via contracts
and insurance certification for all contractors, lessees, cogenerators, and
PURPA projects. Provides risk control to protect Duquesne Light Company's
properties from loss, and provides advice to Legal, Claims, and Human Resources
relative to liability and worker's compensation issues, including litigation.
(c) Electronic Commerce - Provides guidance, implementation, and
oversight of Electronic Commerce (EC) activities. EC is defined as any binding
business transaction conducted or consummated over an electronic network between
Duquesne Light Company and its customers, suppliers, financial institutions, or
other entities.
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5. Audit Services
Performs independent appraisals of significant activities
carried out within, and/or related to, Duquesne Light Company through
application of financial, contract, operational and compliance audit techniques.
Provide consulting services upon management request.
6. Legal
(a) Legal Services - Renders services relating to financings,
financial reporting, shareholders' meetings, rates and other regulatory
proceedings, environmental matters, litigation, marketing, human resources,
contracts, real estate, leasing, corporate and other legal matters.
(b) Corporate Secretary - Responsible for creation, maintenance,
and retention of corporate records; liaison with Board of Directors;
administration of indentures (performed by Assistant Secretaries); support for
long-term financing, regulatory filings; handles shareholder/bondholder
relations and relationship with stock transfer agent and bond trustee (records
kept, checks sent, etc., by outside agents.)
(c) Claims - Responsible for investigating and taking other
appropriate actions concerning claims made against Duquesne Light Company by
third parties. Also responsible for activities involved with collecting monies
owed to Duquesne Light Company by third parties for property damage.
7. Regulation & Pricing
(a) Costing & Pricing - Provides cost of service analysis.
Identifies usage pattern trends to assist marketing effort. Performs special
studies requesting internally or by regulatory agencies. Provides analyses such
as separation, cost of service and loss studies.
(b) Financial Analysis - Assembles and provides primary support
for regulatory filings. Maintains contacts with state commission staff members.
Performs special financial studies.
(c) Fuel & Capital Recovery - Assembles and provides primary
support for fuel and depreciation regulatory filings.
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8. Human Resources
Initiates, maintains, supervises and administers the human
resources policies of Duquesne Light Company. Assists Duquesne Light Company's
management in maximizing the results from their employees. This is accomplished
by developing and administering programs and policies, and consulting in five
primary functions. They are:
(a) Employee Relations - labor relations, litigation/regulatory
compliance, employee communications, and employee policies.
(b) Employee Development - training program development and
delivery, performance evaluation and management development.
(c) Medical Services - workers' compensation, employee assistance
program, and employee wellness/awareness programs.
(d) Rewards - design and administration of compensation, benefits,
and recognition programs.
(e) Staffing - employment/placement, succession planning and
EEO/affirmative action.
In addition, Business Practices is a group within HR which
coordinates and participates in the development and/or documentation of new and
revised policies, business practices, procedures, references and forms.
9. Governmental Affairs
Analyzes and provides views and recommendations on state and
federal legislation to assure fair and equitable treatment of Duquesne Light
Company. Provides information to assist management decision-making on company
strategy and policy.
10. System Security
Originates, establishes, and administers security standards,
procedures and policies. Provides investigative and loss prevention services in
reference to the protection of assets and its employees. Acts as liaison with
federal, state and local law enforcement agencies.
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11. Procurement
Provides services and gives functional direction in connection
with the procurement of goods and services, including market research,
preparation of commitments, requests for quotations, preparation of bid
summaries, and materials management.
12. Corporate Communications
Responsible for media relations, including the financial and
trade press, production of stockholder publications, advertising, and numerous
internal and customer communications.
13. AYP Capital
Oversees the business development and operations of and
investments in products, services and ventures that are not regulated as public
utility services. Included are unregulated power generators, power marketing and
relating activities.
2. Business Units
1. Operating Business Unit (OBU)
(a) Customer Service Center - Answers all incoming calls to
Duquesne Light Company via one toll-free number, responds to customer inquiries,
initiates new service, dispatches service and line crews in response to power
outages, handles credit and collection activities, responds to customer and
public service/utility commission complaints, and manages the meter reading and
billing activities.
(b) Operations Services - Operations Services provides the
following services in the indicated areas: Stores - Centralizes materials supply
and distribution; Technical Services - Provides electrical equipment repair and
testing; Transportation - Handles fleet management and repair services; Safety,
Quality and Training - Develops safety and training programs; Building Services
- - Provides building maintenance and management, and offices services;
Substations - Builds, operates, and maintains substations and equipment; T & D
Operation - Performs switching functions for all facilities above distribution
voltage; Forestry - Provides maintenance services for electrical facilities
rights-of-way; Planning - Provides planning services for all non-network
electrical facilities; Lines Services - Provides lines support for lines teams
in service centers; and Telecommunications - Provides support and maintenance
for the telecommunications systems.
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<PAGE>
(c) Various Regions - Each region supports the processes for
responding to electric service requests, ensuring reliable service, and
restoration of service.
2. Retail Marketing
Executes the marketing and sales of the products and services
of Duquesne Light Company. Also performs economic development activities which
affect areas served by the Duquesne Light Company.
3. Corporate Affairs
Maintains relationships with state regulatory commissions,
municipal and county governments and is responsible for identifying state-level
regulatory issues.
4. Transmission Business Unit (TBU)
Responsible for ensuring that adequate high-voltage network
facilities are available and on-line to convey power produced from the power
production operations run by, or procured by, the Generation Business Unit (GBU)
to serve native load and to engage in wholesale transmission sales to
nonaffiliates. Will engage in marketing efforts for sales of bundled and
unbundled transmission services to nonaffiliates and will be responsible for
accommodating requests for transmission service submitted by nonaffiliates who
qualify as customers for that service under federal regulations. Finally, is
responsible for maintaining the optimal economic balance on a real-time basis
between native customer load and the output of the generation resources supplied
by the GBU.
5. Generation Business Unit (GBU)
Responsible for ensuring that adequate generation is available
to serve the native load customers of Duquesne Light Company by using its own
generating facilities and the third-party generation obtained through its
marketing efforts. Primary responsibilities include ensuring the cost-effective
operation and maintenance of our generating units, and providing the most
economic mix of generation by available generating units and off-system
purchases and sales. It also provides advisory and supervisory services as
needed. The GBU will also broker energy services.
6. Planning and Compliance Business Unit (P&CBU)
Forecasts electric demand and energy requirements for Duquesne
Light Company and develops plans to provide and integrate the production and
transmission
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<PAGE>
facilities needed to serve the electricity requirements of customers of the
Duquesne Light Company. Oversees compliance with state and federal regulatory
and legal requirements.
3. Additional Services
Certain other services in addition to the above as APSC may be
able to provide to the Duquesne Light Company.
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FORM OF PROPOSED
SERVICE AGREEMENT
BETWEEN THE
ALLEGHENY POWER SERVICE CORPORATION
AND
SUBSIDIARIES OF DQE, INC.
EXCEPT DUQUESNE LIGHT COMPANY
THE SERVICE AGREEMENT, effective upon the consummation of the
merger between DQE, Inc. and AYP Sub, Inc., between Allegheny Power Service
Corporation, a corporation formed under the laws of the State of Maryland (the
"Service Company"), and __________, a corporation formed under the laws of the
State of __________ (the "Company").
WITNESSETH:
WHEREAS, the Service Company was created to perform certain
management duties on behalf of Allegheny Power System, Inc. (the "System"), its
utility subsidiary companies (the "Subsidiaries") and its non-utility subsidiary
company; and
WHEREAS, the Service Company offers to provide a central
organization to furnish to the System, the Subsidiaries and the Company certain
advisory, supervisory and other services in accordance with current practices
and procedures; and
WHEREAS, the Company wishes to accept the offer proposed by the
Service Company;
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein contained, and for other good and valuable consideration, the
receipt of which is hereby acknowledged, the parties hereto, intending to be
reasonably bound, hereby agree as follows:
1. The Service Company hereby offers to furnish to the Company the
services detailed on Exhibit I attached hereto and made a part hereof.
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<PAGE>
2. For all services rendered for the Company by the Service the
Company agrees to pay the cost thereof. For services rendered to one or more
Subsidiaries and/or the System and/or the Company, the allocation will be based
on the average of the prior three years' direct costs charged by the Service
Company to each Subsidiary and the Company. Until a three-year history for the
Company is developed, the Company's costs will be deemed to be the same as the
average of the System's prior three years' direct costs, thereby reducing each
Subsidiary's share proportionately. Once a three-year history for the Company is
available, APSC will calculate an allocation percentage for the Company. If the
difference between that allocation percentage and the one used for any of the
Company's first three years is material, then APSC will recalculate all
allocation percentages for those years in which the difference was material and
the Company, the Subsidiaries or the System will each either pay an additional
amount or receive a refund of a particular amount for that year.
3. The payment for services rendered by the Service Company to the
System, the Subsidiaries and the Company shall cover all the costs and expenses
of its doing business, excluding only a return for the use of equity capital,
and that each Subsidiary, the System and the Company shall pay its direct or
fair proportionate share.
4. Payment shall be made by the Company to the Service Company on
a monthly basis on or before the 20th day of the succeeding month, upon receipt
of a statement showing the amount due. Certain charges billed by the Service
Company to the Company may not be due immediately and will be so indicated on
the statement of billing. Monthly charges may be made on an estimated basis, but
adjustments will be made at the end of each calendar year so that all charges
for the calendar year will be in accordance with the foregoing.
5. Nothing herein shall be construed to release the officers and
directors of the Company from the performance of their respective duties or
limit the exercise of their powers as prescribed by law or otherwise.
6. The offer set forth herein shall become a contract effective
upon the consummation of the merger between DQE, Inc. and AYP Sub, Inc. Such
Service Agreement shall continue in full force and effect from year to year but
may be terminated by either party upon 60 days' prior notice, and the Company
may terminate such contract at any time with or without notice for any cause
deemed by it to be sufficient.
7. The Service Agreement will be subject to termination or
modification at any time to the extent its performance may conflict with the
provisions of the Public Utility Holding Company Act of 1935, as amended, or
with any rule, regulation or order of the Securities and Exchange Commission
adopted before or after the making of this Service Agreement and shall be
subject to the approval of any state
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commission or other regulatory body whose approval is a legal prerequisite to
its execution and delivery or performance.
If the Company desires to accept this offer, please cause it to be
executed in the space provided below by your duly authorized officers.
Very truly yours,
ALLEGHENY POWER SERVICE CORPORATION
By_________________________________
President
Attest:
__________________
Secretary
Pursuant to authorization of the Board of Directors of this Company, we hereby
accept the above offer this ___ day of __________, 1994.
__________
By_________________________________
President
Attest:
___________________
Secretary
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Exhibit I
Allegheny Power Service Corporation Principal Functions
In accordance with the terms and conditions of the Service
Agreement dated __________, 1997, the Service Company shall perform for the
Company the following services:
1. Provide technical support as needed to evaluate, implement,
and develop unregulated opportunities related to the System's
electric business (including, but not limited to, any
engineering, construction, management and/or operating
activities associated with the development of bulk power
supply opportunities).
2. Planning and implementation of financial programs to raise
the funds required for the Company, including handling
arrangements for bank borrowings and sales of securities and
relationships with investors and analysts.
3. Counsel on corporate, legal and regulatory matters and on
important contractual relationships.
4. Provide general and administrative services including, but
not limited to, the following:
a) Purchasing.
b) Customer billing and accounting.
c) Information services, including computer applications
and programming and electronic data processing.
d) Preparation of consolidated financial statements and
cost, statistical, and financial data, as required.
e) Assistance with respect to certain personnel matters,
including, but not limited to, employee benefit matters.
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Exhibit I
f) Preparation and filing of consolidated income tax
returns and following developments in federal and
state taxation regulations.
g) Administration of insurance.
h) Internal auditing.
i) Corporate security.
5. Certain other services in addition to the above as the Service
Company may be able to provide and/or the Company may require
or request.
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JOINT DISPATCH
AND
POWER SALES AGREEMENT
AMONG
MONONGAHELA POWER COMPANY
THE POTOMAC EDISON COMPANY
WEST PENN POWER COMPANY
AND
DUQUESNE LIGHT COMPANY
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JOINT DISPATCH
AND
POWER SALES AGREEMENT
AMONG
MONONGAHELA POWER COMPANY
THE POTOMAC EDISON COMPANY
WEST PENN POWER COMPANY
AND
DUQUESNE LIGHT COMPANY
THIS AGREEMENT is made and entered into this 1st day of August, 1997,
by and between MONONGAHELA POWER COMPANY ("MP"), an Ohio corporation, THE
POTOMAC EDISON COMPANY ("PE"), a Maryland and Virginia corporation, WEST PENN
POWER COMPANY ("WP"), a Pennsylvania corporation and DUQUESNE LIGHT COMPANY
("DL"), a Pennsylvania corporation, referred to collectively as "Parties" and
singularly as "Party".
WHEREAS, DQE, INC. and Allegheny Power System, Inc., parent companies
of Parties, have entered into an Agreement and Plan of Merger, dated April 5,
1997; and
WHEREAS, Pursuant to the Agreement and Plan of Merger, DQE, Inc.
("DQE") will become wholly-owned subsidiaries of Allegheny Power System, Inc.
("APS"), a Maryland corporation; and
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<PAGE>
WHEREAS, Parties are the owners and operators of electric generation,
transmission and distribution facilities and are engaged in the business of
generating, transmitting, distributing and selling electric energy to the
general public, electric utilities, municipalities and cooperatives; and
WHEREAS, MP, PE and WP are already parties to a Power Supply Agreement
dated January 1, 1968, as amended, under which they jointly operate and dispatch
their electric systems; and
WHEREAS, to maximize efficiency, and to achieve merger related savings,
WP, MP, PE and DL will be operated as an integrated control area, will
economically commit and dispatch the combined Generating Resources, and will
economically utilize power and energy available to the Combined System to
transact with other utilities and wholesale entities in order to operate the
Combined System in a reliable, efficient, and economic manner;
NOW, THEREFORE, in consideration of the covenants and premises herein
set forth, the Parties mutually agree as follows:
ARTICLE I
DEFINITIONS
For the purpose of this Agreement, and the Appendices and Service
Schedules which are a part hereof, the following definitions shall apply:
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1.01 AGENT means Allegheny Power Service Corporation.
1.02 AGREEMENT means this Joint Dispatch Agreement together with all
Appendices and Service Schedules applying thereto and any amendments made
hereafter.
1.03 PSA means the Power Supply Agreement dated January 1, 1968 among
MP, PE and WP and all amendments and schedules thereto.
1.04 COMBINED SYSTEM means the combined Generating Resources and
Transmission Plant of the Parties.
1.05 CONTROL AREA means the combined electric systems of MP, PE, WP and
DL as bounded by interconnection (tie line) metering and telemetry, such that
the Generating Resources are controlled directly to maintain the interchange
schedule with other control areas to contribute to frequency regulation of the
interconnected system.
1.06 GENERATING RESOURCES means all power generating facilities owned
by a Party available to meet the Load Requirements of the Parties.
1.07 GENERATING UNIT means an electric generator, together with all
auxiliary devices and equipment designed to be operated for the production of
electric power and energy.
1.08 INCREMENTAL COST means any costs incurred by a Party solely by
reason of its generation of an incremental amount of energy, which may include
but shall not be limited to, costs of fuel, labor, operation, maintenance,
start-up, fuel handling, taxes, regulatory commission charges, transmission
losses and emissions allowances.
1.09 LOAD REQUIREMENTS means the demand and energy which each Party is
obligated to provide to satisfy regulated retail service territory commitments.
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1.10 OFF-SYSTEM PURCHASES means purchases from a third party of energy
and/or associated capacity to reduce costs or to provide reliability for the
system or as required by law.
1.11 OFF-SYSTEM SALES means all wholesale sales of power and energy to
third parties.
1.12 OPEN ACCESS TRANSMISSION TARIFF means the Allegheny Energy
transmission tariff filed with the FERC on behalf of MP, PE, WP and DL to
provide transmission service over the Combined System in compliance with FERC
Order No. 888.
1.13 SYSTEM DISPATCH means the centralized, economic commitment and
dispatch of the Combined System's Generating Resources and Off-System Purchases.
1.14 TRANSMISSION PLANT means the facilities owned, controlled or
operated by MP, PE, WP, and DL that are used to provide transmission service.
1.15 UNREGULATED LOAD is demand and energy which any Party serves on a
competitive basis as a result of retail competition.
ARTICLE II
TERM OF AGREEMENT
2.01 This Agreement shall take effect as soon as practicable after the
merger between DQE and APS becomes effective, and shall continue in full force
and effect for a minimum of one year, continuing thereafter until terminated by
one or more of the Parties with at least 30 days written notice.
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<PAGE>
2.02 This Agreement will be reviewed periodically by the Parties to
determine whether revisions are necessary or appropriate.
ARTICLE III
PURPOSE
The purpose of this Agreement is to provide the contractual basis for
coordinated operation of the Combined System to achieve economies consistent
with the provision of reliable electric service.
ARTICLE IV
AGENT
4.01 RESPONSIBILITY OF THE AGENT
As soon as the merger becomes effective, DL shall execute a service
agreement with APSC for the purpose of, among other things:
a) coordinating the System Dispatch;
b) maintaining the reliability of the Combined System through
monitoring and security assessments;
c) scheduling Off-System Purchases and Off-System Sales;
d) coordinating the provision of transmission service;
e) the development of all bills and billing related information between
the Parties and with other transacting entities;
f) operation and maintenance of a central control center to achieve
these purposes; and
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<PAGE>
g) other such activities and duties as may be necessary or as assigned
by the Parties.
4.02 EXPENSES
All expenses incurred by the Agent in the performance of its
responsibilities shall be settled in accordance with the arrangements provided
for in the service agreement, between DL and APSC, dated as of the effective
date of the merger.
ARTICLE V
COORDINATED OPERATION
5.01 OPERATION OF THE COMBINED SYSTEM
The Agent shall administer the System Dispatch of the Combined System
for Load Requirements in accordance with the provisions of Article II of the
PSA. The Agent shall administer a separate System Dispatch for the Unregulated
Load of DL and WP.
5.02 COMMUNICATIONS AND OTHER FACILITIES
The Parties shall provide communications, metering and other facilities
necessary for the metering and control of the Generating Resources and
interconnected transmission facilities. Each Party shall be responsible for any
expenses it incurs for the installation, operation and maintenance of facilities
at its own Generating Units and interconnected transmission facilities. Any
expenses incurred due to facilities required at or for the central control
center to operate the Combined System shall be settled in accordance with the
arrangements made by the Parties for compensation for services provided among
and on behalf of the Parties.
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<PAGE>
ARTICLE VI
ASSIGNMENT OF COSTS AND BENEFITS
OF COORDINATED OPERATIONS
6.01 ACCOUNTING FOR ENERGY COSTS OF DL GENERATING RESOURCES
Where DL Generating Resources are dispatched to serve Load Requirements
of WP, MP or PE, DL shall be compensated at Incremental Cost by WP. WP shall
treat this purchase as an own account purchase under the PSA. Where MP, PE, or
WP Generating Resources are dispatched to serve DL Load Requirements, DL shall
pay at Incremental Cost as an own account sale from WP under the PSA and WP
shall be compensated for its Incremental Costs under the terms of the PSA.
6.02 FIXED COSTS OF EXISTING GENERATING RESOURCES
All fixed costs of DL's Generating Resources shall remain the
responsibility of DL.
6.03 OFF-SYSTEM ENERGY SALES
When the Combined System is dispatched to serve an Off-System Sale,
the benefits of that sale shall be shared by WP with DL on the following basis.
WP's benefits received under Article V of the PSA shall be shared with DL on the
basis of the ratio of average peak DL Load Requirements for the twelve (12)
coincident monthly peaks preceding the Off-System Sale (DL Peak Load Average)
over the sum of the DL Peak Load Average, plus the average peak WP Load
Requirements for the twelve (12) coincident monthly peaks preceding the
Off-System Sale.
6.04 UNREGULATED LOAD SALES When DL's and WP's Generating Resources are
dispatched to serve Unregulated Load Requirements, the benefits of the
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<PAGE>
sale shall be shared by WP and DL on the basis of the ratio of the average peak
DL Unregulated Load Requirements for the twelve coincident monthly peaks
preceding the sale (DL Unregulated Peak Load Average) over the sum of the DL
Unregulated Peak Load Average, plus the average peak WP Unregulated Load
Requirements for the twelve coincident monthly peaks preceding the sale.
ARTICLE VII
ASSIGNMENT OF TRANSMISSION SERVICE REVENUES
7.01 REVENUE FROM THE COMBINED SYSTEM'S OPEN ACCESS TRANSMISSION TARIFF
Revenue from the Combined System's Open Access Transmission Tariff
("Tariff") and any other applicable transmission service revenues shall be
assigned to DL consistent with the "network customer-owned transmission
facilities" requirements of Section 30.9 of the Tariff. Each Party to this
Agreement recognizes that all Parties have significant transmission investments
that qualify as network customer owned transmission facilities under the Tariff.
ARTICLE VIII
BILLING PROCEDURES
8.01 RECORDS
The Agent shall maintain such records as may be necessary to determine
the assignment of costs and benefits of coordinated operations pursuant to
Article VI of this Agreement. Such records shall be made available to the
Parties upon request.
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<PAGE>
8.02 MONTHLY STATEMENTS
As promptly as practicable after the end of each calendar month, the
Agent shall prepare a statement setting forth the monthly summary of the costs
and revenues allocated or assigned to the Parties in sufficient detail as may be
needed for settlements under the provisions of this Agreement.
8.03 TAXES
Should any federal, state, or local tax, in addition to such taxes as
may now exist, be levied upon the electric power, energy, or service to be
provided in connection with this Agreement, or upon the provider of service as
measured by the power, energy, or service, or the revenue therefrom, such
additional tax shall be included in the net billing.
ARTICLE IX
FORCE MAJEURE
No Party shall be liable to the other Parties for or on account of any
loss, damage, injury, or expense resulting from or arising out of a delay or
failure to perform, either in whole or in part, any of the agreements
covenants, or obligations made by or imposed upon the Parties by this Agreement,
by reasons of or through strike, work stoppage of labor, failure of contractors
or suppliers of materials (including fuel), failure of equipment, environmental
restrictions, riot, fire, flood, ice, invasion, civil war, commotion,
insurrection, military or usurped power, order of any Court granted in any bona
fide adverse legal proceedings or action, or of any civil or military authority
either
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<PAGE>
de facto or de jure, explosion, Act of God or the public enemies, or any
cause reasonably beyond its control and not attributable to its neglect. Any
Party experiencing such a delay or failure to perform shall use due diligence to
remove the cause or causes thereof. However, no Party shall be required to add
to, modify, or upgrade any facilities, or to settle a strike or labor dispute
except when, according to its own best judgment, such action is advisable.
ARTICLE X
INDUSTRY STANDARDS
The Parties agree to conform to all applicable NERC and ECAR
principles, guides, criteria, and standards and industry standard practices of
reliable system operations as they affect the implementation of this Agreement.
ARTICLE XI
GENERAL
11.01 NO THIRD PARTY BENEFICIARIES
This Agreement does not create rights of any character whatsoever in
favor of any person, corporation, association, entity or power suppliers, other
than the Parties, and the obligations herein assumed by the Parties are solely
for the use and benefit of said Parties. Nothing in this Agreement shall be
construed as permitting or vesting, or attempting to permit or vest, in any
person, corporation, association, entity or power suppliers, other than the
Parties, any rights hereunder or in any of the Generating Resources or
Transmission Plant owned by the Parties or the use thereof.
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<PAGE>
11.02 WAIVERS
Any waiver at any time by any Party of its right with respect to a
default under this Agreement, or with respect to any other matter arising in
connection with this Agreement, shall not be deemed a waiver with respect to any
subsequent default or matter. Any delay, short of the statutory period of
limitation, in asserting or enforcing any right under this Agreement, shall not
be deemed a waiver of such right.
11.03 SUCCESSORS AND ASSIGNS
This Agreement shall inure to the benefit of and be binding upon the
Parties only, and their respective successors and assigns, and shall not be
assignable by any Party without the written consent of the other Parties except
to a successor in the operation of its properties by reason of a merger,
consolidation, sale or foreclosure where substantially all such properties are
acquired by or merged with such a successor.
11.04 LIABILITY AND INDEMNIFICATION
Subject to any applicable state or federal law which may specifically
restrict limitations on liability, each Party shall release, indemnify, and hold
harmless the other Parties, their directors, officers and employees from and
against any and all liability for loss, damage, or expense alleged to arise
from, or incidental to, injury to persons and/or damage to property in
connection with its facilities or the production or transmission of electric
energy by or through such facilities, or related to performance or
non-performance of this Agreement, including any negligence arising hereunder.
In no event shall any Party be liable to the other Parties for any indirect,
special incidental, or consequential damages with respect to any claim arising
out of this Agreement.
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11.05 GOVERNING LAW
The validity, interpretation and performance of this Agreement and each
of its provisions shall be governed by the applicable laws of the commonwealth
of Pennsylvania.
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<PAGE>
ARTICLE XII
REGULATORY APPROVAL
12.01 REGULATORY AUTHORIZATION
This Agreement shall be subject to the approval of the regulatory
agencies having jurisdiction. In the event that this Agreement is not accepted
in its entirety by all such agencies, any Party may terminate this Agreement
immediately.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed and attested by their duly authorized officers on the day and year
first above written.
MONONGAHELA POWER COMPANY
/s/ Eileen M. Beck BY /s/ Michael P. Morrell
Secretary Vice President
THE POTOMAC EDISON COMPANY
/s/ Eileen M. Beck BY /s/ Michael P. Morrell
Secretary Vice President
<PAGE>
WEST PENN POWER COMPANY
/s/ Eileen M. Beck By /s/ Michael P. Morrell
Secretary Vice President
DUQUESNE LIGHT COMPANY
By_____________________________________
President and Chief Executive Officer
<PAGE>
WEST PENN POWER COMPANY
/s/ Eileen M. Beck By /s/ Michael P. Morrell
Secretary Vice President
DUQUESNE LIGHT COMPANY
/s/ Diane S. Eismont By /s/ David Marshall
Secretary President and Chief Executive Officer
UNITED STATES OF AMERICA
NUCLEAR REGULATORY COMMISSION
In the Matter of )
)
Duquesne Light Company )
)
Beaver Valley Power Station, ) Docket Nos. 50-334
Units 1 and 2 ) and 50-412
)
Perry Nuclear Power Plant Unit 1 ) Docket No. 50-440
APPLICATION FOR TRANSFERS OF CONTROL
REGARDING OPERATING LICENSE NOS. DPR-66 AND
NPF-73 FOR THE BEAVER VALLEY POWER
STATION AND OPERATING LICENSE NPF-58
FOR THE PERRY NUCLEAR POWER PLANT
INTRODUCTION AND BACKGROUND
The Duquesne Light Company ("Duquesne Light"), Ohio Edison Company ("Ohio
Edison") and Pennsylvania Power Company ("Penn Power") are the holders of
Facility Operating License No. DPR-66, dated July 2, 1976 ("Operating License
DPR-66"). Operating License DPR-66 authorizes the holders to possess the Beaver
Valley Power Station, Unit 1 ("Beaver Valley Unit 1") and authorizes Duquesne
Light to use and operate Beaver Valley Unit 1 in accordance with the procedures
and limitations set forth in the operating license.
<PAGE>
Duquesne Light, Ohio Edison, The Cleveland Electric Illuminating Company
("CEI") and The Toledo Edison Company ("TE") are the holders of Facility
Operating License No. NPF-73, dated August 14, 1987 ("Operating License
NPF-73"). Operating License NPF-73 authorizes the holders to possess the Beaver
Valley Power Station, Unit 2 ("Beaver Valley Unit 2") and authorizes Duquesne
Light to use and operate Beaver Valley Unit 2 in accordance with the procedures
and limitations set forth in the operating license.
Duquesne Light, CEI, Centerior Service Company ("CSC"), Ohio Edison, OES
Nuclear Inc., Penn Power and the TE are holders of Facility Operating License
No. NPF-58, dated November 13, 1986 ("Operating License NPF-58"). The operating
license authorizes the holders to possess the Perry Nuclear Power Plant, Unit
No. 1 ("Perry") and authorizes CEI and CSC to use and operate Perry in
accordance with the conditions and requirements set forth in the operating
license.
The purpose of this Application is to request the consent of the Nuclear
Regulatory Commission ("NRC") under 10 C.F.R. Sec. 50.80 to the indirect
transfers of control of Duquesne Light's interests in the operating licenses for
Beaver Valley Unit 1, Beaver Valley Unit 2 and Perry that will occur under a
proposed merger of DQE, Inc. ("DQE") and Allegheny Power System, Inc.
("Allegheny Power"). Duquesne Light is a wholly owned subsidiary of DQE; it owns
a 47.50% interest in Beaver Valley Unit 1, a 13.74% interest in Beaver Valley
Unit 2, and a 13.74% interest in Perry. The merger will result in the indirect
transfer of control of the interests held by Duquesne Light in the Beaver Valley
and Perry operating licenses to Allegheny Power, which will be renamed Allegheny
Energy, Inc. ("Allegheny Energy"). A copy of the Joint Proxy
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Statement and Prospectus (which includes as an exhibit a copy of the merger
agreement between Allegheny Power and DQOE) is filed with this Application as
Exhibit A.
Under the proposed merger, Duquesne Light will become an indirect wholly
owned subsidiary of Allegheny Energy. As a result of the merger, Duquesne Light
and Allegheny Power will achieve significant cost savings and efficiencies that
will reduce their operating costs to the benefit of their customers,
shareholders and the communities that they serve. The merger will therefore
enhance Duquesne Light's financial resources to possess its ownership interests
in the Beaver Valley and Perry plants.
The merger will have no adverse affect on either the technical management
or operation of the Beaver Valley or Perry plants. The technical qualifications
of Duquesne Light, the plant operator for Beaver Valley Units 1 and 2, will be
unaffected since the technical management and nuclear organization of Duquesne
Light currently responsible for operating and maintaining Beaver Valley will
remain responsible for the plant's operation and maintenance after the merger.
Similarly, the merger will have no adverse affect on either the technical
management or operation of the Perry plant since CEI and CSC, responsible for
the operation and maintenance of Perry, are not involved in the merger.
In addition to the NRC's review, the merger will be reviewed by other
Federal and state agencies, including the Federal Energy Regulatory Commission
("FERC"), the Securities Exchange Commission ("SEC") and potentially the U.S.
Department of Justice and the Federal Trade Commission ("FTC"), and the
Pennsylvania Public Utility Commission. Among the issues that these agencies
will consider are the competitive aspects of the proposed merger. The NRC itself
need not undertake any
3
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additional antitrust review with respect to the proposed indirect transfers of
control concerning the Beaver Valley Unit 2 and Perry licenses because approval
of this application -- like the NRC's recent approval of the indirect transfers
of control resulting from the proposed merger of Ohio Edison and Centerior
Energy -- does not involve the issuance of a license.1 Therefore, as the NRC
recently concluded in its review of the Ohio Edison and Centerior Energy merger,
the antitrust provisions of section 105c of the Atomic Energy Act do not apply.2
Part I below sets forth the information required by 10 C.F.R. Sec. 50.80
with respect to the proposed transfers. Part II discusses the effective date for
the license transfers.
I. INFORMATION FOR INDIRECT TRANSFERS OF CONTROL
A. General Information Concerning Duquesne Light
1. Name and Address
Duquesne Light Company
411 Seventh Ave., 16-006
P.O. Box 1930
Pittsburgh, Pennsylvania 15320-1930
2. Description Of Business
Following the merger, Duquesne Light will be an indirect wholly owned
subsidiary of Allegheny Energy. Its purpose will remain the same as it is now,
which is to
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1 Beaver Valley Unit 1 is a section 104b plant, and therefore the NRC has no
antitrust jurisdiction with respect to Unit 1.
2 See, e.g., Safety Evaluation by the Office of Nuclear Reactor Regulation
Related to the Indirect Transfers of Control of License Nos. DPR-66 and NPF-73
for Beaver Valley Power Station, Unit Nos. 1 and 2, Docket Nos. 50-334 and
50-412 at 3 (June 19, 1997).
4
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engage principally in the generation, transmission, distribution and sale of
electric energy in Pennsylvania to residential, commercial and industrial
customers for their own use and in Pennsylvania and elsewhere to wholesale
customers for resale.
3. Organization And Management
Duquesne Light is -- and will remain after the merger -- a corporation
organized and existing under the laws of the State of Pennsylvania. All of
Duquesne Light's directors and principal officers are citizens of the United
States.
The Board of Directors of Allegheny Energy will be composed of 15
directors; DQE is to designate six of the directors and Allegheny Power is to
designate nine of the directors. Neither DQE nor Allegheny Power has determined
who it will designate to be directors, but each currently intends to nominate
persons from among the members of its respective board of directors at the time
of the merger. Additionally, the merger agreement provides that the chairman of
the Nuclear Review committee of the new board shall be one of the six directors
designated by DQE.
Following the proposed merger, Duquesne Light will not be owned, controlled
or dominated by an alien, foreign corporation or foreign government. Duquesne
Light is not acting as an agent or representative of any other person in this
request for consent to the indirect transfer of control of the licenses.
B. Technical Qualifications
The technical qualifications of Duquesne Light to operate Beaver Valley
Units 1 and 2 will be unchanged by the merger since the technical management and
nuclear
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organization of Duquesne Light currently responsible for operating and
maintaining Beaver Valley will be responsible for the operation and maintenance
of Beaver Valley after the merger. The merger does not involve any change to the
Beaver Valley Nuclear organization responsible for operating the plant or the
reporting relationships within that organization. The Nuclear organization will
continue to have clear and direct lines of responsibility and authority. While
specific individuals may over time join or leave the nuclear staff and/or titles
or responsibilities may change, the technical and administrative abilities will
remain essentially unchanged. Therefore, the technical qualifications of
Duquesne Light to carry out its responsibilities under the Beaver Valley Unit 1
and Unit 2 Operating Licenses will remain unchanged and will not be adversely
affected by the proposed merger.
The proposed merger involves no change to either the management
organization or technical personnel of CEI and CSC responsible for operating and
maintaining Perry. CEI and CSC are not involved in the merger. Therefore, the
technical qualifications of CEI and CSC to carry out their responsibilities
under the Perry Operating License will remain unchanged and will not be
adversely affected by the proposed merger.
C. Financial Qualifications
After the proposed merger, Duquesne Light will continue to generate and
distribute electricity and recover the cost of this electricity through rates
authorized by the Pennsylvania Public Utility Commission and by the FERC.
Therefore, Duquesne Light will continue to meet the definition of electric
utility set forth in 10 C.F.R. Sec.
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50.2. Accordingly, its financial qualifications are presumed by 10 C.F.R.
Sec. 50.33(f) and no specific demonstration of financial qualifications is
required.
We understand that in connection with recent mergers of other licensees,
the NRC has expressed interest in being kept informed of subsequent asset
transfers. If this is a consideration in this merger, Duquesne Light is willing
to commit to provide the Director of the Office of Nuclear Reactor Regulation a
copy of any application, at the time it is filed, to transfer (excluding grants
of security interests or liens) from Duquesne Light to its proposed parent, or
to any other affiliated company, facilities for the production, transmission or
distribution of electric energy having a depreciated book value exceeding ten
percent of Duquesne Light's consolidated net utility plant, as recorded on the
its books of account.
D. Decommissioning Funding
NRC regulations require information showing "reasonable assurance . . .
that funds will be available to decommission the facility." 10 C.F.R. Sec.
50.33(k). Duquesne Light has filed decommissioning reports with the NRC under 10
C.F.R. Sec. 50.75(b) and is providing financial assurance for decommissioning
its respective ownership interests in Beaver Valley Units 1 and 2 and Perry in
accordance with those reports through external sinking trust funds in which
deposits are made at least annually. After the merger, Duquesne Light will
remain responsible for the decommissioning liabilities associated with its
ownership interests in Beaver Valley and Perry and will continue to fund its
decommissioning trusts for those plants in accordance with NRC regulations.
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E. Antitrust Considerations
1. Beaver Valley Unit 1 Is Not Subject To NRC Antitrust Review
Beaver Valley Unit 1 was licensed under section 104b of the Atomic Energy
Act. Nuclear plants licensed under section 104b are not subject to antitrust
review by the NRC. As stated by the NRC in its approval for the license transfer
of the Calvert Cliffs Nuclear Power Plant (also a section 104b plant):
The Calvert Cliffs Nuclear Power Plant received its
construction permit (CP) prior to enactment of Section 105 of
the Atomic Energy Act. Nuclear plants that receive CPs prior
to enactment of Section 105 in December 1970 were issued 104b
licenses rather than 103 commercial licenses and were
grandfathered for purposes of antitrust review. Consequently,
the staff is not conducting a significant change antitrust
review as a result of the proposed merger involving BGE and
PEPCO.
61 Fed. Reg. 56,714, 56,715 (Nov. 4, 1996). Therefore, the NRC lacks antitrust
jurisdiction to conduct any antitrust review with respect to the license
transfer for Beaver Valley Unit 1.
2. No NRC Antitrust Review Is required With
Respect to Beaver Valley Unit 2 and Perry
Beaver Valley Unit 2 and Perry were licensed under section 103 of the
Atomic Energy Act and therefore the NRC does have certain, limited antitrust
jurisdiction with respect to Beaver Valley Unit 2 and Perry. The Act, however,
only provides for an antitrust review in connection with a construction permit
application and, where there have been "significant changes" from the time of
the construction permit, in
8
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connection with the initial operating license application. 42 U.S.C.
Sec. 2135(c). The legislative history of section 105c strongly reinforces its
statutory language that the antitrust review provided for by section 105c is
limited to the "initial application" for a construction permit or operating
license and not to "other applications that may be filed during the licensing
process."3 Accordingly, no antitrust review is required with respect to the
indirect transfers of control that would result from the proposed merger of
DQE and Allegheny Power.
In its recent approval of the indirect transfers of control resulting from
the proposed merger of Ohio Edison and Centerior Energy, the NRC has expressly
recognized that no antitrust review -- not even a no significant change review
- -- is to be undertaken with respect to an application for an indirect transfer
of control of a license under 10 C.F. R. Sec. 50.80. As stated by the NRC in the
Beaver Valley Safety Evaluation for the Ohio Edison and Centerior merger:
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3 As stated by the Joint Committee on Atomic Energy,
The Committee recognizes that applications may be amended
from time to time, that there may be applications to extend
or review [sic] a license, and also that the form of an
application for a construction permit may be such that, from
the applicant's standpoint, it ultimately ripens into the
application for an operating license. The phrases "any
license application", "an application for a license", and
"any application" as used in the clarified and revised
subsection 105 c. refer to the initial application for a
construction permit, the initial application for an operating
license, or the initial application for a modification which
would constitute a new or substantially different facility,
as the case may be, as determined by the Commission. The
phrases do not include, for the purposes of triggering
subsection 105 c., other applications which may be filed
during the licensing process.
H. Rep. 91-1470, 91st Cong. 2d Sess., at 29 (1970) (emphasis added).
9
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The antitrust provisions of Section 105c of the Atomic Energy
Act apply to an application for a license to construct or
operate a facility licensed under Section 103 of the Act.
Although FirstEnergy may become the holding company of the
licensees for the Beaver Valley facilities, i.e., may
indirectly acquire control of the licenses, it will not be
performing activities for which a license is needed. Since
approval of the instant application would not involve the
issuance of a license, the procedures under Section 105c do
not apply, including the making of any "significant changes"
determination. Therefore, there is no need to conduct any
additional antitrust review.4
Similarly here, the NRC's approval of the instant application for indirect
transfer of control does not involve the issuance of a license. After the
merger, Duquesne will remain the licensee with respect to its interests in both
the Beaver Valley and Perry plants. Accordingly, no antitrust review is to be
undertaken with respect to this application, not even the making of a no
"significant changes" determination.
Additionally, no practical purpose would be served by conducting any type
of antitrust review here for the NRC has previously conducted an extensive
antitrust review with respect to the Perry license. This review resulted in
comprehensive antitrust conditions being added to the Perry license to which
Duquesne Light is subject. See Operating License NPF-58, Conditions 2.C(3)a,
2.C(3)b, and Appendix C. In 1987 in connection with the issuance of the
operating license for Beaver Valley Unit 2, the NRC concluded that there had
been no significant changes warranting further antitrust review with respect to
Beaver Valley Unit 2, in large measure because of "the implementation of the
Davis-Besse/Perry license conditions and the procompetitive
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4 Safety Evaluation by the Office of Nuclear Reactor Regulation Related to the
Indirect Transfers of Control of License Nos. DPR-66 and NPF-73 for Beaver
Valley Power Station, Unit Nos. 1 and 2, Docket Nos. 50-334 and 50-412 at 3
(June 19, 1997) (emphasis added).
10
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effect they have had on the planning and day-to-day operations of all CAPCO
systems." 52 Fed. Reg. 15,402, 15,403 (1987). Further, the NRC itself recently
concluded (in reviewing a proposed merger between CEI and TE) that the license
conditions found in the Perry Operating License are "extensive and
procompetitive." 59 Fed. Reg. 40,928, 40,929 (August 10, 1994).
Moreover, the competitive effects of the merger will be thoroughly reviewed
by other federal and state agencies reviewing the merger, including the FERC and
the Pennsylvania Public Utility Commission. The potential effect of the business
combination of DQE and Allegheny Power on competition will be one of the issues
considered by FERC in its review of the merger. The NRC's antitrust role is far
more limited than FERC's; the NRC does not possess plenary antitrust
jurisdiction. See, e.g., Houston Lighting & Power Co. (South Texas Project,
Units Nos. 1 and 2), CLI-77-13, 5 N.R.C. 1303 (1977). Therefore, consistent
with Regulatory Guide 9.1, Regulatory Staff Position Statement on Antitrust
Matters, the NRC should not duplicate FERC's role of evaluating the potential
competitive effects of the merger.5
In short, no additional antitrust review by the NRC is required or
warranted in connection with its review of this application.
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5 Regulatory Guide 9.1 provides in relevant part as follows: "In general,
reliance will be placed on the exercise of Federal Power Commission [now FERC]
and State agency jurisdiction regarding the specific terms and conditions of the
sale of power, rates of transmission services and such other matters as may be
within the scope of their jurisdiction." In addition to FERC review, the
proposed merger of DQE and Allegheny Power is subject to the provisions of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Consequently,
both the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice will be provided an opportunity to evaluate the
antitrust implications, if any, of the proposed merger.
11
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F. Statement Of Purposes For The Transfer And The Nature Of The Transaction
Necessitating Or Making The License Transfer Desirable
The purpose of the merger is to achieve benefits for DQE's and Allegheny
Power's shareholders, customers and communities that would not be achievable if
they were to remain separate companies. The expected savings related to the
merger are approximately $ 1 billion over the first 10 years. The savings will
come from the elimination of duplicative activities, improved operating
efficiencies, lower capital costs, and the combination of the companies' work
forces.
G. Restricted Data
This application does not contain any Restricted Data or other classified
defense information, and it is not expected that any will become involved in the
licensed activities. However, in the event that such information does become
involved, Duquesne Light agrees that it will appropriately safeguard such
information and will not permit any individual to have access to Restricted Data
until the Office of Personnel Management (the successor to the Civil Service
Commission) shall have made an investigation and reported to the NRC on the
character, associations, and loyalty of the individual, and the NRC has
determined that permitting such person to have access to Restricted Data will
not endanger the common defense and security of the United States.
H. No Environmental Impact
The merger does not involve any change to the nuclear plant operations or
equipment and does not change any environmental impact previously evaluated in
the
12
<PAGE>
plant's Final Environmental Statement. Accordingly, this application involves
no significant environmental impact.
II. EFFECTIVE DATE
The proposed merger of DQE and Allegheny Power requires the approval of
other federal and state regulatory authorities in addition to the NRC, such as
FERC. Approval by DQE's and Allegheny Power's shareholders is also required.
Until all necessary approvals have been obtained, the merger cannot be
implemented. DQE and Allegheny Power intend to consummate the merger as soon as
reasonably possible after all the necessary approvals have been obtained which
are expected by May 1, 1998. Therefore, the NRC is requested to review this
Application on a schedule that will permit it to act on and provide its final
consent to the proposed indirect transfers of control that would be effectuated
by the merger as promptly as possible and in any event before May 1, 1998.
13
<PAGE>
CONCLUSION
For the foregoing reasons, the NRC is requested to consent to the
indirect transfers of control that would result from the merger of DQE and
Allegheny Power regarding the interests held by Duquesne Light in Operating
Licenses Nos. DPR-66 and NPF-73 for the Beaver Valley plant and
operating license No. NPF-58 for Perry plant.
/s/ James E. Cross
James E. Cross
President, Generation Group
Subscribed and sworn to before me
this 28 day of July, 1997
/s/ Tracey A. Baczek
Notary Public
14
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EXHIBIT A
JOINT PROXY STATEMENT AND PROSPECTUS
DESCRIPTION OF
MAP OF SERVICE AREA OF ALLEGHENY ENERGY, INC.
AND DQE, INC., SHOWING AYE'S TRANSMISSION LINES
AND INTERCONNECTIONS BETWEEN
ALLEGHENY ENERGY, INC. AND DUQUESNE LIGHT COMPANY
The map of Allegheny Energy, Inc.'s and Duquesne Light's respective
electric service territories and interconnection points (the "Map"), which has
been omitted, provides a broad illustration of the names and approximate
locations of Allegheny Energy's and Duquesne Light's major generation,
distribution and transmission facilities in their respective service
territories.
The Map depicts each of Allegheny Energy, Inc.'s generating stations,
Duquesne Light's generating stations, foreign company generating stations, PURPA
generating stations, Allegheny Energy, Inc. substations, Duquesne Light
substations, foreign company substations, customer substations and major
interconnection points.
DESCRIPTION OF
MAP OF DUQUESNE LIGHT'S
ELECTRIC SERVICE TERRITORY,
MAJOR TRANSMISSION LINES
AND INTERCONNECTION POINTS
The map of Duquesne Light's electric service territory, major
transmission lines and interconnection points (the "Map"), which has been
omitted, provides a broad illustration of the names and approximate locations of
Duquesne Light's major generation, distribution and transmission facilities in
Allegheny, Beaver and Westmoreland Counties, Pennsylvania, as well as Duquesne
Light's interconnection with the CAPCO territory of northern Ohio.
The Map depicts each of Duquesne Light's power stations, its
transmission substations, its distribution substations, foreign power company
substations, customer substations and major interconnection points with
industrial companies and other utilities.
DESCRIPTION OF ALLEGHENY ENERGY, INC.'S CORPORATE CHART
The corporate chart of Allegheny Energy, Inc. and its subsidiaries,
which has been omitted, sets forth the ownership of Allegheny Energy, Inc's
various direct and indirect subsidiaries.
DESCRIPTION OF DQE, INC.'S CORPORATE CHART
The corporate chart of DQE, Inc. and its subsidiaries, which has been
omitted, sets forth the ownership of DQE, Inc's various direct and indirect
subsidiaries.
DESCRIPTION OF ALLEGHENY ENERGY, INC.'S
CORPORATE CHART AFTER THE MERGER
The corporate chart of Allegheny Energy, Inc. and its subsidiaries
after consummation of the Merger, which has been omitted, sets forth the
ownership structure of Allegheny Energy, Inc's various direct and indirect
subsidiaries after consummation of the Merger.
Exhibit 99.H-1
SECURITIES AND EXCHANGE COMMISSION
(Release No. 35- )
Filing under the Public Utility Holding Company Act of 1935
November 26, 1997
Allegheny Energy, Inc. (70- )
Allegheny Energy, Inc. (formerly Allegheny Power System, Inc.) ("AYE"),
10435 Downsville Pike, Hagerstown, Maryland 21740, a registered public utility
holding company under the Act, has filed an application-declaration under
sections 6(a), 7, 9(a)(1), 9(c)(3), 10, 11, 12, 13 and Rules 54, 58, 80-92.
The application-declaration seeks approval of the proposed Merger (the
"Merger") of AYP Sub, Inc. ("AYP Sub"), a corporation to be formed under the
laws of the Commonwealth of Pennsylvania as a wholly owned subsidiary of AYE,
with and into DQE, Inc. ("DQE"), a Pennsylvania corporation and electric public
utility holding company which claims exemption from registration pursuant to
Rule 2 under Section 3(a)(1) of the Act, by which DQE would become a wholly
owned subsidiary of AYE. AYE also seeks approval for the formation and
capitalization of AYP Sub, the issuance and sale of shares of AYE common stock
(the "AYE Common Stock") to effect the Merger, such additional financing
transactions, not otherwise exempted, as may be necessary for DQE and its
subsidiaries to continue their authorized operations following the Merger,
including the addition of DQE and its subsidiaries to the Allegheny Power System
Money Pool and the amendment of AYE's existing financing authority to authorize
AYE to provide loans and guarantees to DQE's nonutility subsidiaries on the same
terms and conditions as the existing nonutility subsidiaries of AYE, the
retention by AYE of the nonutility businesses of DQE and of the nonutility
affiliates of DQE, the approval of service agreements to permit Allegheny Power
Service Corporation ("APSC"), a subsidiary service company of AYE approved by
the Commission under Section 13 of the Act and Rule 88 thereunder, to render
services to DQE's utility and nonutility subsidiaries, and such other
authorizations as may be necessary in connection with the proposed Merger.
AYE, through its utility subsidiaries, is primarily engaged in
providing electric service in parts of
<PAGE>
Pennsylvania, Virginia, Ohio, West Virginia and Maryland. As of December 31,
1996, AYE provided electric utility service to approximately 1.4 million
customers throughout a 29,000 square mile service area. As of September 30,
1997, there were 122,436,317 shares of AYE Common Stock, par value $1.25 per
share, outstanding. AYE's principal executive office is located in Hagerstown,
Maryland. On a consolidated basis, for the twelve months ended September 30,
1997, AYE's total revenues were approximately $2.3 billion, all but
approximately $55 million of which was derived from electric operations.
Consolidated assets of AYE were approximately $6.5 billion, consisting of $5.2
billion in net electric utility property, plant, and equipment and $1.3 billion
in other corporate assets.
AYE has five major/1 direct and indirect nonutility subsidiaries, all
of which are wholly owned: AYP Capital, which has received Commission approval
pursuant to orders dated July 14, 1994 (HCAR No. 26085), February 3, 1995 (HCAR
No. 26229) and October 27, 1995 (HCAR No. 26401) to pursue and develop
opportunities related to power generation in unregulated markets; AYP Energy,
Inc., which owns an undivided 50% interest in Unit No. 1 of the Fort Martin
Power Station and markets the power from this and other generation facilities in
the wholesale market; Allegheny Communications Connect, Inc., which is an exempt
telecommunications company whose purpose is to develop opportunities in the
unregulated communications market; Allegheny Energy Solutions, Inc. which
intends to provide unregulated energy and related services to retail customers;
and APSC, a service company regulated under the Act which provides various
technical, engineering, operational and other services to AYE's subsidiaries at
cost.
DQE, incorporated under the laws of Pennsylvania, is an electric public
utility holding company exempt under the Act
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/1 AYE also indirectly owns three other small nonutility companies.
Allegheny Pittsburgh Coal Company, a Pennsylvania corporation which is
jointly owned by AYE's utility subsidiaries, owns coal rights in a tract
of land located in Washington County, Pennsylvania. West Virginia Power
and Transmission Company (WVP&T), a West Virginia corporation, is a
wholly owned subsidiary of West Penn Power Company, one of AYE's utility
subsidiaries. West Penn West Virginia Water Power Company (WPWVWPC), a
Pennsylvania corporation, is a wholly owned subsidiary of WVP&T. WVP&T
and WPWVWPC each own tracts of land in West Virginia and Pennsylvania,
respectively, generally along the Cheat River.
-2-
<PAGE>
which, through its operating utility subsidiary, Duquesne Light Company
("Duquesne Light"), is engaged in the generation, transmission, distribution and
sale of electric energy. DQE serves a population of approximately 580,000 in an
800 square-mile area covering parts of Allegheny County, including the City of
Pittsburgh, Beaver County and Westmoreland County, Pennsylvania. As of September
30, 1997, there were 77,670,083 shares of DQE common stock, par value $1.00 per
share ("DQE Common Stock"), outstanding. DQE also has issued and outstanding
11,720 shares of Preferred Stock, Series A (convertible), no par value. DQE's
principal corporate office is located in Coraopolis, Pennsylvania. On a
consolidated basis, for the twelve months ended September 30, 1997, DQE's total
revenues were approximately $1.22 billion, of which approximately $1.16 billion
was derived from electric operations and approximately $58 million from other
operations. Consolidated assets of DQE were approximately $4.7 billion,
consisting of $3.7 billion in net electric utility assets and $1.0 billion in
nonutility assets.
DQE has four active, direct, wholly owned nonutility subsidiaries:
Duquesne Enterprises ("DE"), DQE Energy Services ("DES"), DQEnergy Partners,
Inc. ("DQEnergy Partners") and Montauk, Inc. ("Montauk").
DE makes strategic investments related to DQE's core energy business.
These investments are intended to enhance DQE's capabilities as an energy
provider, increase asset utilization, and act as a hedge against changing
business conditions. DES is a diversified energy services company offering a
wide range of energy solutions for industrial, utility and consumer markets
worldwide. DES initiatives include energy facility development and operation,
domestic and international independent power production, and the production and
supply of innovative fuels. DQEnergy was formed in December 1996 to align DQE
with strategic partners to capitalize on opportunities in the energy services
industry. These alliances are intended to enhance the utilization and value of
DQE's strategic investments and capabilities while establishing DQE as a total
energy provider. Montauk is a financial services company that makes long-term
investments and was established to provide financing for DQE's market-driven
businesses and their customers.
-3-
<PAGE>
AYP Sub will be incorporated under the laws of the Commonwealth of
Pennsylvania and will be a wholly owned subsidiary of AYE. The only authorized
capital stock of AYP Sub will be common stock, par value $0.01 per share, and
all outstanding shares will be held by AYE. AYP Sub has not had, and prior to
the closing of the Merger will not have, any operations other than the
activities contemplated by the Merger Agreement necessary to accomplish the
combination of AYE and DQE.
Pursuant to an Agreement and Plan of Merger, dated as of April 5, 1997
("Merger Agreement"), AYP Sub will be merged with and into DQE. DQE will be the
surviving corporation in the Merger and will become a wholly owned subsidiary of
AYE. Upon the Merger becoming effective, each share of DQE Common Stock (other
than Excluded Shares, as such term is defined in the Merger Agreement) issued
and outstanding immediately prior to such time will be converted into the right
to receive, and become exchangeable for, 1.12 shares of AYE Common Stock. Upon
consummation of the Merger, holders of DQE Common Stock immediately prior to the
Merger will own approximately 42% of the outstanding shares of AYE Common Stock
after the Merger (based on the number of shares of AYE Common Stock and DQE
Common Stock outstanding as of September 30, 1997).
Each outstanding share of AYE Common Stock and the outstanding common
stock, preferred stock and debt securities of each of DQE, DQE's subsidiaries
and AYE's subsidiaries will remain unchanged. AYE states that the transaction is
expected to be tax-free to AYE's and DQE's stockholders (except as to fractional
shares). AYE states that the proposed Merger is expected to qualify for
treatment as a pooling of interests.
Following the Merger, DQE will become a direct public utility holding
company subsidiary of AYE and the utility and nonutility subsidiaries of DQE
will become indirect utility and nonutility subsidiaries of AYE. The Merger
Agreement provides that AYE's principal corporate office will remain in
Hagerstown, Maryland, with substantial operations to remain in the Pittsburgh,
Pennsylvania area. AYE's board of directors will consist of a total of 15
directors, 9 of whom will be designated by AYE and 6 of whom will be designated
by DQE.
-4-
<PAGE>
AYE also requests approval of service agreements to be signed between
APSC and various subsidiaries of DQE. Subject to Commission approval thereof,
the service agreements will become effective upon the consummation of the Merger
and are similar in all material respects to those service agreements which APSC
has signed with AYE's other subsidiaries and which have been approved by the
Commission under Section 13 of the Act and Rule 88 thereunder. APSC will account
for, allocate and charge its costs of the services provided on a full cost
reimbursement basis under a work order system consistent with the Uniform System
of Accounts for Mutual and Subsidiary Service Companies. All of the time APSC
employees spend working for subsidiaries of DQE will be billed to and paid by
the applicable subsidiary on a monthly basis, based upon time records. Each DQE
subsidiary party to a service agreement will maintain separate financial records
and detailed supporting records.
AYE requests authorization to retain the nonutility businesses of DQE
and the nonutility affiliates of DQE.
AYE requests authority to form and capitalize a new subsidiary, AYP
Sub, which will be incorporated under the laws of the Commonwealth of
Pennsylvania, and will be a wholly owned subsidiary of AYE. AYP Sub will be
incorporated solely for the purpose of effectuating the Merger.
AYE also requests authorization to issue shares of AYE Common Stock in
connection with the Merger.
AYE further requests that its authority under Allegheny Power System,
Inc., Holding Co. Act Release No. 26506 (Apr. 18, 1996) be amended to permit
DQE's direct and indirect subsidiaries to participate in the Money Pool on the
same terms and conditions as Monongahela, Potomac Edison and West Penn (i.e. be
permitted to both invest in and borrow from the Money Pool).
In addition, AYE requests that its authority under Allegheny Power
System, Inc., Holding Co. Act Release No. 26590 (Oct. 9, 1996) be amended so
that DQE's nonutility subsidiaries can borrow or obtain loan guarantees from AYE
on the same terms and conditions as the existing nonutility subsidiaries of AYE.
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<PAGE>
For the Commission, by the Division of Investment Management, pursuant
to delegated authority.
-6-
