File No. 70-98**
(GEM Transfer of 2% of AE Supply)
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
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Corporation
10435 Downsville Pike
Hagerstown, MD 21740
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TABLE OF CONTENTS
PAGE
Item 1. Description of Proposed Transactions 3
Item 2. Fees, Commissions, and Expenses 7
Item 3. Applicable Statutory Provisions 7
Item 4. Regulatory Approval 7
Item 5. Procedure 7
Item 6. Exhibits and Financial Statements 7
Item 7. Information as to Environmental Effects 8
<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,
L.L.C. ("AE Supply"), its wholly owned generating company
subsidiary (collectively "Applicants"), have filed this
application - declaration pursuant to sections 6(a), 7 and 12, of
the Public Utility Holding Company Act of 1935, as amended ("Act"),
and Rules 44, 53 and 54 under the Act.
The Applicants and Allegheny Energy Global Markets L.L.C., a
newly formed, wholly owned Rule 58 subsidiary of AE Supply ("Rule
58 Company"), Merrill Lynch & Co. ("ML") and Merrill Lynch Capital
Services, its wholly owned subsidiary ("MLCS" together with ML,
"Merrill Lynch"), have entered into an Asset Contribution and
Purchase Agreement dated January 8, 2001 ("Agreement"). Under the
Agreement AE Supply will acquire Global Energy Markets ("GEM"),
Merrill Lynch's energy commodity marketing and trading unit.<F1>
Under the Agreement, AE Supply, through the Rule 58 Company will
acquire GEM for $490 million plus, subject to Securities and
Exchange Commission ("Commission") approval, a two percent equity
interest in AE Supply. The Agreement further provides that if the
Commission does not approve the transfer of the two percent equity
interest by a date certain, AE Supply will make additional cash
payment to Merrill Lynch. The transaction will be accounted for
as a purchase.
Allegheny and AE Supply will finance the acquisition through a
sale of debt that is consistent with the Applicants' existing
financing limits under Rule 58.<F2> By this application, Applicants
seek authority to issue to Merrill Lynch a two percent (2%)
membership interest in AE Supply, or an equal percent in a
successor affiliate in the event AE Supply is merged therein.<F3>
Applicants request expedited treatment of this application and
request an order issued and effective not later than April 15,
2001.
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
<F1> See Exhibit A, Asset Contribution and Purchase Agreement.
<F2> Rule 58 provides that Section 9(a) of the Act shall not apply to:
The acquisition by a registered holding company, or a subsidiary
company thereof, of the securities of an energy-related company;
provided, that, after giving effect to any such acquisition, the
aggregate investment by such registered holding company and
subsidiaries in all such companies does not exceed the greater
of:(i) $50 million; or (ii) 15% of the consolidated capitalization
of such registered holding company, as reported in the registered
holding company's most recent Annual Report on Form 10-K or
Quarterly Report on Form 10-Q.
<F3> AE Supply may be merged into an existing corporate shell for tax
purposes.
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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
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. Applicants' efforts have resulted in a
number of filings with the Commission. Those filings are
summarized below.
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, in File No. 70-9627 the Commission
authorized the transfer to AE Supply of certain Potomac Edison
generating assets and other related interests.<F4> Under the terms of
Order No. 27101, pending completion of the record, the Commission
reserved jurisdiction over certain proposed transactions involving
the transfer of assets consisting of Potomac Edison's undivided
100% ownership interest in the Luray, Newport, Shenandoah and
Warren hydroelectric generating stations ("VA Hydro Assets"), and a
request to merge AE Units 1 and 2, L.L.C., a non-utility subsidiary
of Allegheny that owns two 44 MW generation units and associated
transmission facilities, step-up transformers, breakers and
interconnection facilities near Springdale, Pennsylvania, with AE
Supply in exchange for AE Supply assuming the former company's
outstanding debt. The record has been completed with the filing of
the Order of the Virginia State Corporation Commission approving
the transfer of the VA Hydro Assets and a copy of the Order of the
Federal Energy Regulatory Commission approving the merger of AE
Units 1 and 2, L.L.C. into AE Supply. An order is expected by
February 2001.
In the final asset transfer matter, Allegheny has also filed
and currently pending before the Commission an application for
authority to transfer the generating assets of Monongahela Power to
AE Supply (File No. 70-9747 filed September 14, 2000). Ohio and
the Federal Energy Regulatory Commission have issued the necessary
order. Currently, we are awaiting action by the West Virginia
Legislature. An order is expected by the end of the second quarter
2001.
<F4> Holding Company Act Release No. 27205 (July 31, 2000).
<PAGE>
AE Supply also has pending in File No. 70-9683 a request 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 Exempt Wholesale Generators ("EWGs" and Foreign Utility
Companies ("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 No. 70-9801 (Enron EWG application), Applicants
requested authority to 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 sought authority to issue and sell a combination of long-
term 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 <F5>
Additionally, Allegheny sought authority to issue and sell up to$1
billion in equity securities in connection with the transaction and
for other corporate purposes, and to make a capital contribution of
up to $1 billion to AE Supply in support of the transaction and for
other corporate purposes. AE Supply also sought authorization to
increase by $550 million its authority to issue long-term debt and
equity securities and to provide non-recourse credit support to an
aggregate amount of $950 million.<F6> Finally, AE Supply sought
approval to establish a financing vehicle, Allegheny Energy Supply
Capital, Inc., that would, 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. Applicants have
requested expedited treatment of that application and expect an
order issued and effective not later than March 31, 2001.
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.
C. Request for Authority
1. Transfer of Membership Interests
<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.
<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.
<PAGE>
Applicants seek authorization to issue 2% of the membership
interests in AE Supply, or its successor entities,<F7> to Merrill Lynch
pursuant to the Agreement. Specifically, Section 6 of the Act,
which governs the issuing, selling, or altering rights of
stockholders, provides that:
Except in accordance with a declaration effective under
Section 7 of this title and with the order under such section
permitting such declaration to become effective, it shall be
unlawful for any registered holding company or subsidiary
company thereof, by use of the mails or any means or
instrumentality of interstate commerce, or otherwise, directly
or indirectly (1) to issue or sell any security of such
company; or (2) to exercise any privilege or right to alter
the priorities, preferences, voting power, or other rights of
the holders of an outstanding security of such company.
Additionally, Rule 44, Sales of Securities and Assets, provides
that:
Sales of utility securities or assets. No registered holding
company shall, directly or indirectly, sell to any person any
security which it owns of any public utility company, or any
utility assets, except pursuant to a declaration notifying the
Commission of the proposed transaction, which has become
effective in accordance with the procedure specified in Sec.
250.23, and pursuant to the order of the Commission with
respect to such declaration under the applicable provisions of
the Act.
Applicants believe that the consideration to be paid in connection
with the acquisitions is fair and reasonable.
The transaction 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. 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 facilitate the Allegheny system
in meeting the rapidly growing demand for energy within the East
Central Area Reliability region, the Mid-American Interconnected
Network and the Southeastern Electric Reliability Council.
The issuance will not 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.
Item 2. Fees, Commissions and Expenses
Fees, commissions and expenses in the estimated amount of
$10,000 (to be filed by amendment) are expected to be incurred in
connection with the proposed transactions plus ordinary expenses
not over $2,000 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
<F7> AE Supply may be merged into an existing corporate shell for tax
purposes.
<PAGE>
such associate company except for legal, financial and other
services to be performed at cost.
Item 3. Applicable Statutory Provisions
Sections 6(a), 7, and 12 of the Act, and Rules 44, 53, and 54
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 and 12 of the Act and Rules under
the Act 44 apply to the issue and sale of securities, by AE Supply
under the Act are directly or indirectly applicable to the proposed
transactions for which authorization is sought in this Application-
Declaration.
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 application for approval has been filed with the
Department of Justice under Hart-Scott-Rudino and with the Federal
Energy Regulatory Commission under Sections 203 and 205. 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
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.
Item 6. Exhibits and Financial Statements
(a) Exhibits
A Purchase and Sale Agreement
(Filed Confidentially January 18, 2001)
<PAGE>
D-1 Federal Energy Regulatory Commission Application
(To be filed by amendment)
D-2 Order of the Federal Energy Regulatory Commission
Application (To be filed by amendment)
D-3 Department of Justice Hart-Scott-Rudino Filing
(To be filed by amendment)
F Opinion of Counsel (To be filed by amendment)
G Financial Data Schedules (To be filed by amendment)
H Form of Notice (Filed January 18, 2001)
(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.
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.
/s/ MICHAEL P. MORRELL
By __________________________
Michael P. Morrell
Dated: January 18, 2001
