File No. 70-09_____
(Enron Units Acquisition & Finance)
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM U-1
APPLICATION / DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
______________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
Allegheny Energy Supply Company, LLC
R.R. 12, P.O. Box 1000 Roseytown Road
Greensburg, PA 15601
_____________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
The Commission is requested to send copies of all notices, orders
and communications in connection with this Application/Declaration to:
Thomas K. Henderson, Esq.
Vice President and General Counsel
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, MD 21740
Patricia J. Clark, Esq.
Deputy General Counsel
Allegheny Energy Supply Company, LLC
R.R. 12, P.O. Box 1000 Roseytown Road
Greensburg, PA 15601
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
<PAGE>
TABLE OF CONTENTS
PAGE
Item 1. Description of Proposed Transactions 3
A. Background 3
B. Overview 4
C. Request for Authority 6
D. Alternate Financing Mechanism:
Sales-Leasebacks Authority 8
E. Use of Proceeds 8
Item 2. Fees, Commissions, and Expenses 8
Item 3. Applicable Statutory Provisions 8
Item 4. Regulatory Approval 9
Item 5. Procedure 9
Item 6. Exhibits and Financial Statements 9
Item 7. Information as to Environmental Effects 10
2
<PAGE>
Item 1. Description of the Proposed Transaction
A. Background
Allegheny Energy, Inc. ("Allegheny"), a registered public
utility holding company, and Allegheny Energy Supply Company, LLC
("AE Supply" or "Company"), its wholly owned generating company
subsidiary (collectively "Applicants"), have filed this
application - declaration pursuant to sections 6(a), 7, 9(a), 10,
12(b), 13(b) and 32 of the Public Utility Holding Company Act of 1935,
as amended ("Act"), and Rules 45, 53, 54, 90 and 91 under the Act, for
financing and other related authority in connection with the
proposed acquisition of the outstanding membership interests in
three (3) limited liability companies that are exempt wholesale
generators ("EWGs") and two (2) limited liability companies that
are non-EWGs. Applicants request expedited treatment of this
application and request an order issued and effective not later
than March 31, 2001.
AE Supply and Enron North America Corp. ("Enron"), a Delaware
corporation, have entered into a Purchase and Sale Agreement dated
November 13, 2000 ("Agreement").<F1> Under the Agreement, AE Supply
has agreed to purchase and Enron has agreed to sell the outstanding
membership interests in five (5) limited liability companies for
the sum of $1,028,000,000.00 (one billion twenty eight million
dollars) ("Purchase Price")<F2>. Three (3) of these L.L.C.s are EWGs:
Des Plaines Green Land Development, L.L.C.; Gleason Power I,
L.L.C.; and, West Fork Land Development, L.L.C. Two (2) are not
EWGs: Energy Financing Company, L.L.C.<F3>; and, Lake Acquisition
Company, L.L.C.<F4> ("Non-EWGs"). The acquisition of 1,710 megawatts
(MW) of natural gas-fired merchant generating capacity will give AE
Supply a total generating capacity of more than 10,400 MW and
represents a pivotal step in the Company's plan to become a
national energy supplier.
Allegheny and AE Supply will finance the acquisition with a
combination of debt and equity that is consistent with Allegheny's
existing limits on "aggregate investment" under Rule 53.
Specifically, Allegheny seeks authority to issue and sell a
combination of debt and equity securities, which shall not exceed
the lesser of the remaining permissible aggregate investment under
the "safe harbor" provision of Rule 53 limitation or $400 million
(as set forth more fully in this application-declaration).<F5>
Additionally, Allegheny seeks authority to issue and sell up to $1
billion in equity securities in connection with this transaction
<F1> See Exhibit A, Purchase and Sale Agreement (November 13, 2000).
<F2> The Purchase Price is subject to adjustment after closing in
accordance with the terms of the Agreement.
<F3> This limited liability company was set up to purchase some of
the equipment that was ultimately installed in the Des Plaines
Green Land Development, L.L.C. facility. The only transaction
currently in place with Energy Financing Company, L.L.C. is an
Equipment Sale Agreement dated October 5, 2000, for the purchase
by Des Plaines Green Land Development, L.L.C. of such equipment
in monthly installments through May 14, 2015.
<F4> This L.L.C. leases acreage and a lake to West Fork Land
Development Company, L.L.C.
<F5> Rule 53 sets forth the circumstances precluding a finding that
a security issued to finance the acquisition of an EWG is not,
among other things, reasonably adapted to the earning power or
security structure of the holding company. In general terms,
the rule establishes a "safe harbor." This safe harbor applies
when, like the present case, the holding company's investment
in EWGs and FUCOs does not exceed 50% of the holding company's
consolidated retained earnings.
3
<PAGE>
and for other corporate purposes and make a capital contribution of
up to $1 billion to AE Supply in support of this transaction and
for other corporate purposes.
AE Supply seeks authorization to increase by $550 million its
authority to issue debt and equity securities and to provide non-
recourse credit support to an aggregate amount of $950 million.<F6>
AE Supply also seeks approval to establish a financing vehicle,
Allegheny Energy Supply Capital, Inc. ("Supply Capital "), that
will, among other things, issue equity to and accept purchase notes
from AE Supply in connection with its activities described herein
and future transactions approved by the Commission or allowed by
Commission rules. Finally, Allegheny and AE Supply seek approval
to engage in certain intercompany transactions, including loans by
Allegheny to AE Supply from the proceeds of the equity issued by
Allegheny, and transactions between AE Supply and Supply Capital.
Due to the dynamic nature of the transaction and the penalty of
$41.1 million (4% of the Purchase Price) for failure to timely
receive Commission approval to close the transaction, Applicants
request expedited treatment of this application and request an
order issued and effective not later than March 31, 2001.
Applicants are of the view that the requested financing
authority is reasonably adapted to the security structure of
Allegheny and other companies in the Allegheny system and is
reasonably related to their earning power. Moreover, the proposed
means of financing the acquisitions are necessary, appropriate,
economical and efficient in light of the business in which the
Applicants are lawfully engaged. The terms and conditions of any
securities will not be detrimental to the public interest or the
investors or consumers. Any guarantees within the Allegheny system
will not pose an improper right for Allegheny or other companies in
the Allegheny system. Finally, all fees, commissions and
remuneration paid in connection with the issue, sale and
distribution of the securities will be reasonable. As set forth in
the following sections the proposed transaction satisfies the Act
and the Rules under the Act.
B. Overview
1. The Allegheny System
Allegheny is a diversified energy company, headquartered in
Hagerstown, Maryland. The Allegheny family of companies consists of
three regulated electric public utility companies, West Penn Power
Company ("West Penn"), Monongahela Power Company ("Monongahela
Power")(Monongahela Power also has a regulated natural gas utility
division as a result of its purchase of West Virginia Power) and
The Potomac Edison Company ("Potomac Edison") and a regulated
public utility natural gas company, Mountaineer Gas
Company, which is a wholly owned subsidiary of Monongahela Power
(all collectively d/b/a "Allegheny Power"). Allegheny Power
delivers electric energy to about three million people or
1.6 million customers in parts of Maryland, Ohio, Pennsylvania,
Virginia, and West Virginia and natural gas to about 230,000
customers in West Virginia. West Penn is subject to the
regulation of the Pennsylvania Public Utility Commission,
Monongahela Power is subject to the regulation of both
the West Virginia Public Service Commission and the Ohio Public
Utility Commission, Monongahela Power's subsidiary, Mountaineer Gas
<F6> The AE Supply financing will be non-recourse to Allegheny and
so will not count as "aggregate investment" for purposes of
Rule 53. As defined under Rule 53, "aggregate investment"
means all amounts invested, or committed to be invested,
in exempt wholesale generators and foreign utility companies,
for which there is recourse, directly or indirectly, to
the registered holding company.
4
<PAGE>
Company, is subject to the regulation of the West Virginia Public
Service Commission, and Potomac Edison is subject to the regulation
of the Maryland Public Service Commission, the West Virginia Public
Service Commission and the Virginia State Corporation Commission.
For the twelve (12) months ended September 30, 2000,
Allegheny's gross revenues and net income were approximately $3.524
billion and $188 million, respectively.
2. AE Supply
In the face of deregulation, and the resulting competition,
the Allegheny system has moved aggressively to expand its energy
holdings and customer base. By order dated November 12, 1999
(Holding Company Act Release No. 27101), the Commission authorized
Allegheny to form AE Supply for the purpose of holding generating
assets, rights, interests and related obligations and to transfer
the West Penn generating assets to AE Supply. Thereafter, the
Commission authorized the transfer to AE Supply of certain Potomac
Edison generating assets and other related interests. Holding
Company Act Release No. 27205 (July 31, 2000). Allegheny has also
filed an application for authority to transfer the generating
assets of Monongahela Power to AE Supply (File No. 70-9747 filed
September 14, 2000).
AE Supply also has pending a request (70-9683) to: i) organize
and finance one or more special purpose subsidiaries ("Exempt
Subsidiaries"); ii) engage in Rule 58 activities within the United
States and abroad; iii) permit the Exempt Subsidiaries to invest,
directly or indirectly, in development activities with respect to
EWGs and FUCOs; iv) permit AE Supply to organize one or more
special project entities ("Intermediate Companies") to facilitate
the development and consummation of investments in EWGs and FUCOs;
and, v) authorize Intermediate Companies to issue equity securities
and debt securities to persons other than AE Supply or Allegheny
(and with respect to which there will be no recourse to Allegheny),
including banks, insurance companies and other financial
institutions, exclusively for the purpose of financing (including
any refinancing) investments in EWGs and foreign utility companies
("FUCOs"). Applicants expect an order no later than early in the
first quarter of 2001.
In File 70-9713, also currently pending before this
Commission, AE Supply is seeking authorization to acquire 50% of
Potomac Electric Power Company's ("Pepco") 166 MW (9.72%) interest
in the Conemaugh Generating Station and the related auctioned
assets and assumed obligations.<F7> The total purchase price is
$152.5 million, subject to adjustment for storeroom and coal pile
inventories. The purchase price and any adjustment are to be split
equally between AE Supply and PPL Global, Inc. AE Supply and PPL
Global, Inc. will be entitled to one-half of the capacity and
energy associated with Pepco's Interest. AE Supply and PPL Global,
Inc. will each pay approximately $76.25 million for their
respective interests in Pepco's ownership shares or approximately
$918 per kW - a price consistent with other recent auctions of
utility assets.
<F7> AE's Supply's purchase includes 50% of Pepco's 9.72% interest
in Conemaugh together with corresponding interests in
"Auctioned Assets" and "Assumed Obligations" as defined in
sections 2.2 and 2.3 of the Agreement. PP&L Global is
purchasing Pepco's remaining 50% interests in the Conemaugh
Generating Station, "Auctioned Assets" and "Assumed Obligations."
5
<PAGE>
AE Supply is a public utility company within the meaning of
the Act but AE Supply is not a utility for purposes of state
regulation. For the nine (9) month period ended September 30,
2000, AE Supply, which began operating as a separate company on
November 18, 1999, had gross revenues of approximately $1.476
billion and net income of approximately $42.6 million.
3. Existing Financing Authority
By order dated July 14, 2000 (Holding Company Act Release No.
27199), the Commission authorized Allegheny to: (1) issue and sell
up to $138 million in long-term unsecured notes to banks or other
institutions, and (2) enter into Support Agreements for the benefit
of AE Supply in amounts up to $250 million. The Commission
authorized AE Supply to: (1) issue and sell up to $400 million of
secured and unsecured long-term debt, and (2) issue and sell Notes
and Paper, and borrow from the Allegheny Money Pool, in aggregate
outstanding amounts of up to the short-term debt limitation of $300
million, subject to certain conditions. The order states that
proceeds from the financings may be used by Allegheny and AE Supply
for general corporate purposes, including the acquisition of
interests in EWGs and FUCOs, provided that no Money Pool borrowings
will used to make capital contributions to, or investments in, EWGs
or FUCOs. AE Supply, in File No. 70-9713, which is pending before
this Commission, is seeking authorization to issue temporary short-
term debt, in an amount not to exceed $80 million.
C. Requests for Authority
1. Acquisition of Membership Interests
Pursuant to Section 32, and assuming a satisfactory
Commission order in file number 70-9683, no further approval is
required for Allegheny or AE Supply to acquire directly or
indirectly the membership interests in the Enron EWGs. With
respect to the non-EWG membership interests AE Supply seeks
authorization to acquire, Section 9(a)(1) provides that Commission
approval under Section 10 is required before a registered holding
company or subsidiary company thereof may "acquire, directly or
indirectly, any securities or utility assets or any other interest
in any business." Applicants believe that the proposed
acquisitions described herein satisfy the standards of Section 10,
for the following reasons.
Applicants believe that the consideration to be paid in
connection with the acquisitions is fair and reasonable. The
purchase price for these facilities represents an average of
approximately $600 per kilowatt, which is substantially less than
the average cost paid in many auctions for older, less efficient
facilities. Applicants believe that the acquisitions will not 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.
Applicants believe that the acquisitions, as well as the formation
of Supply Capital, do not unduly complicate the capital structure
of the Allegheny holding company system and are in the public
interest and in the interest of investors and consumers.
Finally, the acquisitions, as well as the formation of Supply
Capital, will tend toward the proper functioning of the Allegheny
holding company system in a partly deregulated, partly regulated
operating environment and, as a consequence, toward the economical
and efficient development of an integrated public utility system.
6
<PAGE>
Particularly in light of the trend towards deregulation, increased
competition and rapidly growing demand for energy in the areas
serviced by AE Supply it will allow for the efficient delivery of
energy to AE Supply's customers, and will allow AE Supply to more
effectively compete for customers, fostering a more competitive
environment benefiting all customers. Likewise, the acquisitions
are "reasonably incidental, or economically necessary and
appropriate to" the operations of a registered electric utility
holding company system such as Allegheny, as the acquisitions will
enable the Allegheny system to meet the rapidly growing demand for
energy within the East Central Area Reliability region, the Mid-
American Interconnected Network and the Southeastern Electric
Reliability Council.
Neither the acquisitions nor the formation of Supply Capital
will result in the existence of any company in the holding system
that would unduly or unnecessarily complicate the capital
structure, or unfairly or inequitably distribute voting power among
security holders, of the Allegheny system.
2. Financing Authority
a. AE Supply
AE Supply requests authorization to increase by $550 million,
to an aggregate amount of $950 million, the amount by which it is
authorized to issue long-term non-recourse debt.<F8> Additionally, AE
Supply seeks authority to sell such debt to banks and/or other
parties. Due to possible movements in interest rates as well as the
volatility in the bond market and to maximize financial
flexibility, in lieu of using long-term debt, AE Supply requests
authority to temporarily increase the authorized short-term debt
limitation by an additional $550 million, up to an aggregate of
$850 million, including, but not limited to, commercial paper
and/or bank credit facilities, in order to consummate the
transaction and to act as a "bridge" to the permanent (long-term)
financing of the transaction.
b. Allegheny
Allegheny seeks authority to increase the maximum level of
credit support and guarantees which Allegheny is authorized to
provide to AE Supply, primarily for AE Supply's marketing efforts,
by $150 million to an aggregate authorized amount of $400 million.<F9>
In addition, Allegheny, pursuant to the safe harbor provisions of
Rule 53, proposes to invest up to the lesser of the Rule 53
limitation or $400 million. Allegheny also seeks authorization to
issue up to $1 billion in equity securities for this transaction
and other corporate purposes. Further, Allegheny seeks
authorization to transfer certain of the equity proceeds raised to
AE Supply in the form of a capital contribution, interest-bearing
loan or a combination thereof. In the case of a loan, AE Supply
would issue a note to Allegheny at market interest rates and terms.
The loan would capitalize AE Supply in the most tax efficient
method. Allegheny and AE Supply may use the proceeds of the equity
<F8> The interest rates, fees and expenses associated with the long-
term debt issued by AE Supply or by Allegheny will be comparable
to those obtainable by similar utilities issuing comparable
securities containing the same or similar terms and maturities.
<F9> Consistent with prior Commission orders, support agreements may
take the form of reimbursement agreements, the assumption of
liabilities for the issuance of bonds, letters of credit and other
performance and financial guarantees.
7
<PAGE>
securities for general corporate purposes, including the
acquisition of interests in EWGs and FUCOs. However, AE Supply
will not use proceeds from Money Pool borrowings to make capital
contributions to, or investments in, EWGs or FUCOs.
c. Supply Capital
Next, AE Supply seeks authorization to form and capitalize
Supply Capital. Supply Capital will be a corporation formed to
engage in tax efficient and financially efficient transactions with
AE Supply or any of its subsidiaries for this and subsequent
transactions. AE Supply seeks authority to:
make a capital contribution of approximately $1.1 billion cash to
Supply Capital in exchange for equity ownership; have Supply
Capital make an initial interest-bearing loan of $1.1 billion to AE
Supply evidenced by a note at market interest rates and terms; use
the proceeds of the loan to acquire the Enron membership interests
as set forth in the Agreement; and, permit Supply Capital to make
additional loans to AE Supply from the interest and principal
payments it receives. The loans do not affect AE Supply's
debt-equity ratio and provide for a tax efficient capital structure.
Applicants also request authority to enter into a service
agreement with Supply Capital pursuant to Rules 90 and 91.
The benefit of using this financing technique is to provide an
administrative vehicle to identify and assign capital costs for
this acquisition (and subsequent acquisitions). Use of this
technique will provide substantial state tax benefits that will
serve to reduce the overall capital costs to AE Supply in
connection with this acquisition and future transactions.
D. Use of Proceeds
Applicants propose to issue the authorized debt and equity
securities to acquire the outstanding membership interests in the
limited liability companies as set forth under the Agreement and
for other corporate purposes.
Item 2. Fees, Commissions and Expenses
Fees, commissions and expenses in the estimated amount of
$100,000 (to be filed by amendment) are expected to be incurred in
connection with the proposed transactions plus ordinary expenses
not over $20,000 in connection with preparation of this
application. None of the fees, commissions or expenses are to be
paid to any associate or affiliate company of Allegheny or any
affiliate of any such associate company except for legal, financial
and other services to be performed at cost.
Item 3. Applicable Statutory Provisions
Sections 6(a), 7, 9(a), 10, 12(b) and 32 of the Act, and Rules
45, 53, 54, 90, and 91 under the Act are directly or indirectly
applicable to the proposed transactions for which authorization is
sought in this Application-Declaration.
Sections 6(a), 7, 12 and 32 and Rules 45, 53 and 54 apply to
the issue and sale of securities, and the provision of credit
support by Allegheny.
8
<PAGE>
Sections 6(a), 7 and 12 and Rule 45 apply to the issue and sale of
securities, and the provision of any non-recourse credit support by
AE Supply.
Section 13(b) of the Act and Rules 90 and 91 under the Act apply
to the services to be provided by Allegheny Energy Service Corporation
to AE Supply.
Rule 45(b)(7) applies to the issuance of a guaranty or credit
support by AE Supply and Supply Capital with respect to any
security issued by any other subsidiary company of Allegheny.
Sections 6 (a), 7, 9, 10 and 12 and Rule 45 apply to the
acquisition of the securities of the Non-EWG limited liability
companies and to the formation, capitalization, sales leaseback,
and operation of Supply Capital.
Concerning Rules 53 and 54, as of September 30, 2000,
Allegheny's consolidated retained earnings were approximately
$917.6 million, and Allegheny's aggregate investment in EWGs and
FUCOs was approximately $27.5 million. The proposed financing
arrangements will be structured so that Allegheny's "aggregate
investment" in EWGs and FUCOs will not exceed 50% of the system's
consolidated retained earnings (approximately $458.8 million). The
conditions specified under Rule 53(a) are otherwise satisfied and
none of the conditions set forth in Rule 53(b) exist or will exist
as a result of the proposed financing transactions.
Rule 54 provides that the Commission, in determining whether
to approve certain transactions by such registered holding company
or its subsidiaries other than with respect to EWGs and FUCOs, will
not consider the effect of the capitalization or earnings of any
subsidiary which is an EWG or FUCO upon the registered holding
company system if the provisions of Rule 53(a), (b) and (c) are
satisfied. For purposes of Rule 54, the conditions in Rule 53(a)
are satisfied and none of the conditions specified in Rule 53(b)
exist or will exist as a result of the proposed transactions.
Accordingly, Rule 53(c) is not implicated and Rule 54 is satisfied.
Item 4. Regulatory Approvals
An applications for approval has been filed with the
Federal Energy Regulatory Commission, under Sections 203 and 205,
and with the Department of Justice under Hart-Scott-Rudino. Except
as noted above, no state commission or federal commission other than
this Commission, has jurisdiction over the transactions for which
authority is sought herein.
Item 5. Procedure
Pursuant to the terms and conditions of the Purchase and
Sale Agreement, Applicants request that this Commission issue a
final order not later than March 31, 2001. It is submitted that a
recommended decision by a hearing or other responsible officer of
the Commission is not needed for approval of this transaction. 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.
9
<PAGE>
Item 6. Exhibits and Financial Statements
(a) Exhibits
A Purchase and Sale Agreement
(December 12, 2000).
D-1 Federal Energy Regulatory Commission Application
(filed December 12, 2000)
D-2 Order of the Federal Energy Regulatory Commission
Application (to be filed by amendment)
D-3 Department of Justice Hart-Scott-Rudino Filing
(December 12, 2000)
F Opinion of Counsel (to be filed by amendment)
G Financial Data Schedules (to be filed by amendment)
H Form of Notice (filed December 12, 2000)
(b) Financial Statements as of September 30, 2000
FS-1 AE Supply balance sheet, per books and pro forma
(to be filed by amendment).
FS-2 AE Supply statement of income and retained earnings,
per books and pro forma (to be filed by amendment).
Item No. 7. Information as to Environmental Effects
(a) For the reasons set forth in Item 1 above, the authorization
applied for herein does not require major federal action
significantly affecting the quality of the human environment
for purposes of Section 102(2)(C) of the a National
Environmental Policy Act (42 U.S.C. 4232(2)(C)).
(b) Not applicable.
10
<PAGE>
SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned companies have duly caused
this statement to be signed on their behalf by the undersigned
thereunto duly authorized.
ALLEGHENY ENERGY, INC.
ALLEGHENY ENERGY SUPPLY COMPANY, L.L.C.
By /S/ THOMAS K. HENDERSON
Thomas K. Henderson
Dated: December 12, 2000
<PAGE>
