File No. 70-_______
(Monongahela Power Asset Transfer)
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Energy, Inc. Allegheny Energy Supply Company,LLC
10435 Downsville Pike Roseytown Road
Hagerstown, Maryland 21740 R.R. 12, P.O. Box 1000
Greensburg, Penna. 15601
Monongahela Power Company Allegheny Energy Service Corporation
(d/b/a Allegheny Power) 10435 Downsville Pike
1310 Fairmont Avenue Hagerstown, Maryland 21740
Fairmont, West Virginia 26554
__________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 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
<PAGE>
TABLE OF CONTENTS
Page
Item 1. Description of Proposed Transaction . . . . . . . . . . 3
A. Introduction and Summary of the Proposed Transaction . 3
B. Background . . . . . . . . . . . . . . . . . . . . . 4
C. Regulatory Environment . . . . . . . . . . . . . . . . 6
1. West Virginia . . . . . . . . . . . . . . . . . . . 6
2. Ohio . . . . . . . . . . . . . . . . . . . . . . . 7
3. Federal Energy Regulatory Commission . . . . . . . . 8
D. Overview of Requested Authorizations . . . . . . . . 8
1. The Transaction . . . . . . . . . . . . . . . . . 8
i. Formation of Subsidiaries . . . . . . . . . . . . 8
ii. Capitalization of Subsidiaries . . .. . . . . . . 8
iii. Transfers . . . . . . . . . . . .. . . . . . . . 9
2. Agreements . . . . . . . . . . . . . . . . . . . . 9
3. Capitalization Ratios . . . .. . . . .. . . . . . . 10
Item 2. Fees, Commissions and Expenses . . . . . . . . . . . . .10
Item 3. Applicable Statutory Provisions . . . . . . . . . . . .10
A. Sections 9 & 10 . . . . . . . . . . . . . . . . . . .10
1. Compliance with State Law . . . . . . . . . . . . . 11
2. Capital Structure Not Unduly Complicated . . . . . .11
3. Consideration is Fair and Reasonable . . . . . . . .12
B. Section 12 & Rule 46 . . . . . . . . . . . . . . . . .12
C. Section 13(b) Compliance . . . . . . . . . . . . . . 13
D. Rule 54 Compliance . . . . . . . . . . . . . . . . . .13
Item 4. Regulatory Approvals . . . . . . . . . . . . . . . . . .14
Item 5. Procedure . . . . . . . . . . . . . . . . . . . . . . 14
Item 6. Exhibits and Financial Statements . . . . . . . . . . 14
A. Exhibits . . . . . . . . . . . . . . . . . . . . . .14
B. Financial Statements . . . . . . . . . . . . . . . . 14
Item 7. Information as to Environmental Effects . . . . . . . 16
<PAGE>
Item No. 1. DESCRIPTION OF THE PROPOSED TRANSACTION
A. Introduction and Summary of the Proposed Transaction
Allegheny Energy, Inc. ("Allegheny"), a registered holding
company under the Public Utility Holding Company Act of 1935, as
amended ("Act"), Monongahela Power Company ("Monongahela Power"),
a wholly owned combination gas and electric utility subsidiary of
Allegheny, Allegheny Energy Service Corporation ("AESC"), and
Allegheny Energy Supply Company, LLC ("Genco"),<F1> a wholly owned
generating company subsidiary of Allegheny (collectively,
"Applicants"),<F2> hereby file this application-declaration with the
Securities and Exchange Commission ("Commission") under Sections
6(a), 7, 9(a), 10, 12(b) and 13(b) of the Public Utility Holding
Company Act of 1935, as amended ("Act"), and Rules 43(a), 44, 45,
46, 54, 90 and 91 under the Act seeking authorization to: (1) form
and capitalize two corporations; (2) indirectly transfer
Monongahela Power Company's electric generating assets and other
rights and obligations to Genco; (3) issue notes; and, (4) enter
into leaseback, service, debt assumption, and operating
agreements. An order is requested not later than December 31,
2000. Closing the transaction is planned for not later than
January 15, 2001, assuming all necessary regulatory approvals have
been obtained.
As part of the ongoing restructuring in the electric utility
industry, Monongahela Power has filed restructuring applications
and / or compliance plans with the utility regulatory commissions
of the states of West Virginia and Ohio. The filings, among other
things, seek final authorization to separate (unbundle) electric
generation from transmission and distribution and transfer it to
an affiliate. In both states the restructuring plans have been
negotiated, contested, and/or the subject of regulatory hearings.
Each of the states has issued, or is in the final process of
issuing, final orders. In anticipation of those orders
Monongahela Power now seeks Commission approval for it and/or its
subsidiaries to: (1) form and capitalize one first tier single
member limited liability corporation ("MP Transferring Agent,
LLC") and a second tier corporation ("MP Genco") for the purpose
of transferring and / or holding electric generating assets,
rights, interests, and obligations; (2) to transfer the electric
generating assets, rights, interests, and obligations Genco; (3)
issue notes; and (4) enter into leaseback, debt assumption,
service and operating agreements. Monongahela Power's request is
consistent with earlier orders issued by this Commission wherein
Monongahela Power's sister utilities in the Allegheny system, West
Penn Power Company and Potomac Edison, received approval to
transfer electric generating assets, rights, interest and related
<F1> In File No. 70-9683 (filed May 25, 2000), Genco, among other
things, is seeking authorization to, directly or indirectly
through one or more exempt subsidiaries or intermediate companies,
engage in Rule 58 activities; acquire interests in, finance the
acquisition of, and/or hold the securities of, one or more Exempt
Wholesale Generators ("EWG"). Genco is not an EWG nor are there
any plans for Genco to become an EWG.
<F2> Monongahela Power and it wholly owned subsidiary the Mountaineer
Gas Company, along with West Penn Power Company and The Potomac
Edison Company ("Potomac Edison") collectively d/b/a Allegheny
Power, deliver electricity and natural gas to about 1.6 million
customers in parts of Maryland, Ohio, Pennsylvania, Virginia, and
West Virginia. Allegheny Power, together with Genco (which
operates and markets competitive retail and wholesale electric
generation and operates regulated electric generation for its
affiliates), and Allegheny Ventures (which actively invests in and
develops energy-related projects through Allegheny Energy
Solutions and telecommunications projects through Allegheny
Communications Connect ("ACC"), an exempt telecommunications
company ("ETC")), make up the Allegheny system.
<PAGE>
obligations to Genco.<F3> The proposed transaction is essentially
the same as the West Penn Power Company and Potomac Edison
transactions. Moreover, just as in the Potomac Edison
transaction: 1) Monongahela Power's generating assets must be
released from the first mortgage; and 2) at the end of the
transaction, the generation will be merged with the existing
affiliate generating company - Genco.<F4>
B. Background
Monongahela Power provides electric service to approximately
351,000 West Virginia customers<F5> and approximately 28,000 Ohio
customers.<F6> Additionally, through its West Virginia gas
operations and its wholly owned subsidiary Mountaineer Gas,
Monongahela Power provides natural gas service to approximately
224,000 customers in West Virginia.<F7> Monongahela Power is
headquartered in Fairmont, West Virginia. For the twelve months
ended December 31, 1999, Allegheny's revenues were approximately
$2.8 billion. Monongahela Power contributed $673 million or 24%
of Allegheny's revenues. As a public utility, Monongahela Power
is subject to regulation in each of the states in which it
operates. Additionally, the Federal Energy Regulatory Commission
("FERC"), under section 203 of the Federal Power Act, has
jurisdiction over the sale, lease, or other disposition of
Monongahela Power's utility assets.<F8> FERC also has jurisdiction
over Monongahela Power's wholesale power transactions.
West Virginia and Ohio each regulate a different "slice" of
the Monongahela Power's generating assets. The extent of their
jurisdiction, or the regulated "slice," is based on the portion of
the output of electricity delivered to end-users and capacity
committed from the power stations, or portions thereof, owned by
Monongahela Power. This concept is commonly referred to as the
"jurisdictional allocation" or "allocation." Monongahela Power's
generating assets are allocated as follows: 87% to West Virginia;
and 13% to Ohio.
<F3> See Allegheny Energy, Inc., Holding Co. Act Release No.35-27101,
Order Authorizing Formation of Subsidiary Company; Transfer of
Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999). See also Allegheny Energy, Inc., Holding Co.
Act Release No.35-27205, Order Authorizing Formation of Subsidiary
Companies; Transfer of Assets and Liabilities to Generation
Company; Issuance of Notes; Payment of Dividends; Intersystem
Service Agreements; Reservation of Jurisdiction (July 31, 2000).
<F4> States of incorporation for each entity is as follows: Allegheny
- Maryland, Monongahela Power - Ohio; Genco - Delaware, and
Allegheny Energy Service Corporation - Maryland. The
subsidiaries, which are proposed herein, MP Transferring Agent,
LLC and MP Genco. will be incorporated in Delaware.
<F5> In Holding Co. Act Release No. 27121 (December 23, 1999)., the
Commission approved Monongahela Power's purchase of the electric
assets and retention of gas assets of West Virginia Power. In
Holding Co. Act Release No. 35-27210 (August 11, 2000), the
Commission approved Monongahela Power's acquisition of 100% of
the outstanding securities of the Mountaineer Gas Company.
<F6> Monongahela Power's sister operating company, Potomac Edison,
also provides electric service to approximately 100,000 West
Virginia customers.
<F7> See Holding Co. Act Release No.35-27210 (August 11, 2000)
<F8> 16 U.S.C. 824b(a) (1994).
<PAGE>
Monongahela Power proposes to leave the generating business
in its entirety. To accomplish this Monongahela Power proposes to
transfer its electric generating assets, related assets, related
liabilities, and other rights and interests to Genco
("Transaction").<F9> Transferring less than 100% of the generating
function would result in reduced efficiencies due to the
complexities of the various standards and rules of conduct.
Moreover, as the generation assets are common assets it would be
inefficient to attempt to sub-divide the physical operations.
Monongahela Power holds undivided ownership interests in:
electric generating stations ("Generating Assets"); certain
generation related assets ("Related Assets"); and certain
generation related liabilities ("Related Liabilities").
Monongahela Power's undivided ownership interests in Generating
Assets consist of a: 25% interest in Unit No. 1 and a 20% interest
in Unit No. 2 of the Fort Martin Power station located at
Maidsville, West Virginia; 66% interest in the Albright Power
Station located at Albright, West Virginia; 25% interest in the
Harrison Power Station located at Shinnston, West Virginia; 27.5%
interest in the Hatfield's Ferry Power Station located at
Masontown, Pennsylvania; <F10> 25% interest in the Pleasants Power
Station, located at Saint Mary's, West Virginia; 100% interest in
the Willow Island Station located at Willow Island, West Virginia;
and 100% interest in the Rivesville Station located at Rivesville,
West Virginia.<F11>
Monongahela Power's Related Assets consist of current
assets, deferred charges, cash and temporary cash investments, and
the value of the investment in an undivided 27% ownership interest
in the stock of Allegheny Generating Company ("AGC"), a Virginia
corporation which it jointly owns with Genco. AGC owns a 40%
undivided interest in a pumped storage hydroelectric generating
facility and related transmission facilities ("Bath County Rights
and Obligations") located in Bath County, Virginia, 73% of which
ownership has already been transferred to Genco in the form of AGC
stock interests. Related Liabilities include accounts payables,
accrued taxes, tax deferrals, pollution controls bonds,<F12> and other
deferred credits. Related Liabilities do not include first
mortgage bonds. Monongahela Power is of the view that the
transfer of the Generating Assets but not Related Liabilities
would negatively impact the debt to equity ratios of Monongahela
Power and would be contrary to generally accepted cost allocation
<F9> In Holding Co. Act Release Nos. 27101 and 27205, respectively,
the Commission, among other things, authorized the formation of
LLCs formed to facilitate, hold, and then transfer all the
electric generating assets, rights, interests and associated
liabilities of Allegheny's wholly owned utility subsidiaries West
Penn Power Company and Potomac Edison.
<F10> In 1967, Monongahela Power applied for and received a certificate
of public convenience from the Pennsylvania Public Utility
Commission (Pennsylvania Commission) relating to the construction,
ownership and operation of its undivided interest in the Hatfield's
Ferry Station located in Pennsylvania. The certificate was limited
to the site of the station and precluded Monongahela Power from furnishing
electric service to the public without further Commission approval. The
Pennsylvania Commission has already approved the transfer of West
Penn Power's interest in this station to Genco. Monongahela Power
will take any necessary actions before the Pennsylvania Commission
requesting abandonment of this certificate.
<F11> The jurisdictional allocation is calculated as follows, for
example using West Virginia - the value of Monongahela Power's
undivided interest in the Fort Martin Power Station would be
calculated by multiplying the 87% West Virginia allocation by the
dollar value of Monongahela Power's 25% undivided interest in Fort
Martin.
<F12> Notwithstanding the transfer of the payment obligation to Genco,
Monongahela Power will remain liable for the pollution control
bonds by operation of the terms and conditions thereof.
<PAGE>
practices. Monongahela Power also has a 3.5% ownership interest
in the Ohio Valley Electric Corporation ("OVEC"),<F13> an investor
owned utility ("Other Rights and Interests").<F14>
Monongahela Power seeks authority to indirectly transfer to
Genco its undivided interests in its Generating Assets, Related
Assets, Related Liabilities, and Other Rights and Interests
corresponding to the jurisdictional allocation for West Virginia,
Ohio and the FERC. Finally, as more fully described in this
application, Applicants seek authority for MP Transferring Agent,
LLC and Genco to accept and receive Monongahela Power's
aforementioned undivided interests.
C. Regulatory Environment
1. West Virginia
On May 26, 2000, Monongahela Power and Potomac Edison filed a
petition seeking West Virginia Public Service Commission ("WV
PSC") approval for a transfer of their West Virginia generation
assets to an affiliate, [Genco]. On June 16, 2000, the Commission
issued an Order in that proceeding. In that Order, the Commission
found that the filing was unnecessary for the Potomac Edison
generation assets because the Commission had approved the transfer
of Potomac Edison generation assets on or after July 1, 2000 in
its order of January 28, 2000. The Commission made no such
finding with regard to the Monongahela Power generation assets and
dismissed the proceeding for both companies. Subsequently, the
Commission granted a Motion for Reconsideration filed by the West
Virginia Consumer Advocate Division and on June 23, 2000, the
parties filed a Stipulation wherein, among other things, the
parties agreed on a general outline of the procedures to be used
by Monongahela Power at such time as it sought to transfer its
generation assets.
The WV PSC adopted the Stipulation and ordered that at least
sixty days prior to any proposed sale, transfer or other
disposition of its generation assets in advance of the starting
date of customer choice by which retail customers in West
Virginia will be able to chose their generation supplier (the
"Plan"), Monongahela Power submit a petition seeking Commission
approval for such disposition. Such filing must, in accordance
with the Stipulation, contain a full and complete description of
the assets to be transferred and detail of the book value of the
transferred assets. In addition, such filing must set forth
Monongahela Power's agreement to adhere to the rate, consumer,
capacity, and tax neutrality protections in the Plan.
On August 15, 2000, pursuant to the WV PSC's order,
Monongahela Power filed with the WVPSC a petition for approval to
transfer its West Virginia jurisdictional generation assets.<F15>
<F13> Allegheny assigned 28% of its 12.5% ownership interest (and
corresponding power purchase interest) to Monongahela Power.
Allegheny's assignment of 28% of its 12.5% ownership interest
translates into a 3.5% ownership interest in OVEC (out of the
original 12.5%).
<F14> Applicants also intend to transfer contractual rights and
obligations corresponding to four jointly owned generation
facilities ("Joint-Owner Operation Agreements") and OVEC. The
jointly owned facilities are Fort Martin, Harrison, Hatfield
Ferry, Albright, and Pleasants - each of which is operated
pursuant to an operating agreement ("Joint Operating Agreement").
Each of the Joint-Owner Operation Agreements has a clause which
provides that "[t]his Agreement shall continue in full force and
effect for a period of 45 years from the date hereof and for such
longer period as the Companies shall by mutual agreement continue
to operate any of the units at the Station."
<F15> See Exhibit D-1, In the Matter of the Petition of Monongahela
Power Company for Transfer of Generation Assets (file August 15,
2000). As to its ownership of generation located in Pennsylvania,
see footnote 10.
<PAGE>
2. Ohio
In June, 2000, Monongahela Power filed a proposed stipulation
and agreement with the Public Utility Commission of Ohio ("PUCO")
for approval of a transition plan to competition, including the
functional separation of its generating assets from its
transmission and distribution assets.<F16> Among other things, the
Parties to the stipulation agreed and recommended to the PUCO that
the Monongahela Power be permitted and allowed to transfer its
generation assets at book value on or after January 1, 2001, to an
affiliate or other party without any further or additional PUCO
review or action necessary, including any review or action that
may have been necessary relating to the transfer of transmission,
distribution, or ancillary service provided by such generating
assets. An order addressing the stipulation is expected in mid-
October.
3. Federal Energy Regulatory Commission
Pursuant to Section 203 of the Federal Power Act, 16 U.S.C.
824b (1994), and Part 33 of the FERC's regulations thereunder, 18
C.F.R. Part 33 (1999), Monongahela Power and Genco filed an
application with the FERC on September 8, 2000.<F17> The application
requested FERC's approval to transfer: (1) Monongahela Power's
step-up transformers; (2) securities evidencing Monongahela
Power's ownership interest in AGC; (3) certain wholesale power
purchase and supply agreements, including those jurisdictional
agreements Monongahela Power may enter into between the date of
this Application and the date of the proposed asset transfer; and
(4) Monongahela Power's pollution control and solid waste bonds
associated with the transferred generating assets. An order is
expected within sixty (60) days of the date of application.
D. Overview of Requested Authorizations
1. The Transaction
i. Formation of Subsidiaries
Monongahela Power seeks authorization to form two wholly
owned subsidiaries - one a first tier and one a second tier
subsidiary. The first tier subsidiary will be a limited liability
company, MP Transferring Agent, LLC and will be formed for the
purpose of acquiring the Generating Assets, Related Assets,
Related Liabilities, and Other Rights and Interests from
Monongahela Power. The other, MP Genco, will be a second tier
subsidiary of MP Transferring Agent, LLC and will be formed the
<F16> See Exhibit D-3, Stipulation and Agreement In the Matter of the
Application of Monongahela Power Company, d.b.a. Allegheny Power
("Monongahela Power"), Pursuant to Ohio Revised Code 4928.31 for
Approval of Monongahela Power's Transition Plan and for the
Opportunity to Receive Transition Revenues as Authorized by Ohio
Revised Code 4928.31 to 4928.40 (June, 2000).
<F17> See, Exhibit D-5, Application of Monongahela Power to FERC
(filed September 8, 2000).
<PAGE>
purpose of acquiring the aforementioned Generating Assets, Related
Assets, Related Liabilities, and Other Rights and Interests from
MP Transferring Agent, LLC.<F18>
Legitimate business reasons exist for the formation,
capitalization and temporary existence of MP Transferring Agent,
LLC and MP Genco, because they are essential to minimize the tax
and transactional costs of reorganization and transition to
competition. Monongahela Power and Allegheny believe that these
advantages offset the need to create a temporary entity and are
consistent with prior orders. MP Transferring Agent, LLC will be
liquidated as soon as the transfers contemplated herein are
completed.
ii. Capitalization of Subsidiaries
As of January 1, 2000, Monongahela Power proposes to make an
initial capital contribution to MP Transferring Agent, LLC in the
amount of $200,000 in government collateralized repurchase
agreements. MP Transferring Agent, LLC proposes to acquire the
interests in MP Genco in exchange for an initial contribution in
the amount of $100,000 in government collateralized repurchase
agreements. Monongahela Power seeks authorization for MP
Transferring Agent, LLC to issue and Monongahela Power to acquire
all of the limited liability interests in MP Transferring Agent,
LLC.
Monongahela Power proposes to issue two non-interest bearing
promissory notes as additional capital contributions to MP
Transferring Agent, LLC. Monongahela Power proposes to contribute
a non interest bearing note payable to MP Transferring Agent, LLC
for approximately $201.7 million, which is the difference between
Related Assets ($52.2 million) and Related Liabilities ($253.9
million) ("Balancing Note").<F19> Monongahela Power proposes to
issue another non-interest bearing note to MP Transferring Agent,
LLC ("Liquidation Note"). The Liquidation Note will be in an
amount that is $20 million greater than the Purchase Note. The
Liquidation Note will be in the amount of $509.6 million. The
additional $20 million principal amount is necessary in order to
assure that the principal amount of the Liquidation Note is
sufficient to offset the principal amount of the Purchase Note and
expected accrued interest.
iii. Transfers
Assuming all necessary regulatory approvals are received, as
of January 1, 2001,<F20> Monongahela Power proposes to transfer or
contribute<F21> a total of 100% of its ownership interests in
Generating Assets, Related Assets, Related Liabilities, and Other
Rights and Interests to MP Transferring Agent, LLC. As of
December 31, 2000, the projected net book values are projected to
be as follows: Generating Assets - $456.5 million; Related Assets
- $52.2 million; and Related Liabilities - ($253.9 million).
<F18> MP Transferring Agent, LLC and MP Genco are necessary
intermediate entities for tax and other lawful business purposes.
<F19> Other Rights and Interests have, and are carried at, a zero
book value.
<F20> January 1, 2001 will be the effective date of the Transaction.
<F21> The contributions are set forth in the preceding section.
<PAGE>
In exchange for the Generating Assets MP Transferring Agent,
LLC proposes to issue to Monongahela Power an interest bearing
unsecured promissory note ("Purchase Note") for approximately
$489.6 million. The Purchase Note equals the sum of the net book
value of the Generating Assets ($456.5 million) plus the estimated
net book value of fuel, supplies, and inventory ($33 million)
(collectively "Inventory"). Inventory will also be transferred
using the Transaction structure described to move the Generating
Assets. Monongahela Power proposes to make a post transfer true
up to adjust the transaction to reflect actual net book values as
of December 31, 2000.
As of December 31, 2000, Monongahela Power projects it
will have approximately $210 million of outstanding first mortgage
bonds. Monongahela Power expects to obtain a release of the
Generating Assets from the lien of the first mortgage by
certifying or pledging additional bondable property to the trustee
in an amount not less than the net book value of the Generating
Assets. Monongahela Power's first mortgage bond indenture permits
Monongahela Power to transfer any of its property and the Trustee
under the bond indenture must release that property from the lien
of the indenture so long as Monongahela Power replaces that
property with other property that is not currently pledged or
certified to support another first mortgage bond issue. The
additional bondable property pledged is not specifically
identified in the pledge. Rather, a general pledge, by property
classification, covering gross property additions purchased,
constructed or otherwise acquired during a defined period of time
is given.
The release of Monongahela Power's Generating Assets is no
different than the transfer and release of a single piece of
Monongahela Power's property from the indenture. Since
Monongahela Power owns sufficient property to replace or
substitute for the Generating Assets property being released,
Monongahela Power's outstanding first mortgage bonds are not
impaired in any way. After the release of the Generating Assets,
these bonds are supported by the same dollar value of property as
before the release of the Generating Assets. The Trustee under
Monongahela Power's indenture and the Trustee's counsel have both
agreed with that such a transfer and release of Monongahela
Power's Generating Assets is in accordance with the terms of the
indenture and that the security for the remaining outstanding
bonds will not be impaired. Monongahela Power requests authority
to pledge those assets described above in order to obtain the
release from the Trustee.
MP Transferring Agent, LLC will contribute the Generating
Assets, Related Assets, Related Liabilities, and Other Rights and
Interests to MP Genco. The Liquidation Note and Balancing Note
remain at MP Transferring Agent, LLC as does the Purchase Note
obligation. After the transfers are executed, MP Transferring
Agent, LLC proposes to dividend MP Genco's interests, the
Balancing Note, and the Liquidation Note - net of the Purchase
Note - to Monongahela Power. Monongahela Power proposes to then
dividend the MP Genco interests to Allegheny Energy, Inc.
Thereafter, Allegheny proposes to merge MP Genco into Genco.
Upon completion of the Transaction, Monongahela Power's
Generating Assets, Related Assets, Related Liabilities, Other
Rights and Interests will have been successfully transferred to
Genco. Thereafter, Applicants propose to liquidate MP
Transferring Agent, LLC.
<PAGE>
2. Agreements
Subject to the WV PSC and the PUCO issuing final orders,
Monongahela Power may be required enter into standard offer
service as provider of last resort after the start of customer
choice. Monongahela Power has discretion as to how it arranges
for its tariff and standard offer service load. Monongahela Power
and Genco propose to enter into an energy supply agreement or
series of agreements with each agreement pertinent to an
individual jurisdictional supply obligation sufficient to allow
Monongahela Power to meet its continuing service obligations as
may be imposed in West Virginia or Ohio.
Monongahela Power and Genco propose to enter into a debt
assumption agreement under which Genco shall assume the obligation
for $100 million in outstanding debt. This assumption is designed
to recognize the fact that a portion of Monongahela Power's first
mortgage obligations indirectly relates to the Generating Assets
being transferred. The assumption is similar to, and consistent
with, the treatment of Related Liabilities. Additionally, the
assumption is necessary to comply with the Commission's debt to
equity requirements and the commitment made by Monongahela Power,
Potomac Edison and Allegheny not to engage in any transaction if
the result would be non-compliance with the Commission's debt to
equity requirements. Notwithstanding the assumption of the
payment obligation to Genco, Monongahela Power will remain liable
for its first mortgage bonds by operation of the terms and
conditions of the first mortgage bonds indenture.
In addition to the previously discussed debt assumption
agreement, Monongahela Power and Genco also propose to enter into
leaseback, service, and operating agreements to, respectively,
assure sufficient actual generation will be available to meet
Monongahela Power's service obligations, permit Allegheny's
service subsidiary to provide services, and to provide for the
continued operation of the facilities while licenses and permits
are transferred. Genco would be free to satisfy the standard
offer service load requirements either by dispatch of the
transferred generation facilities or by purchases in the market.
The leaseback agreement is made necessary to avoid double taxation
due to certain provisions in the West Virginia tax code which,
absent a leaseback from Genco to Monongahela Power, would result
in Genco being taxed on the electricity generated and Monongahela
Power being taxed on upon distribution of that same electricity.
The agreements would allow Monongahela Power to fulfill its
regulatory obligations in West Virginia and Ohio as required. All
agreements will be performed in adherence with the "at cost"
provisions of Rules 90 and 91 under the Act.
3. Capitalization Ratios
The Transaction, when completed, will not impact the debt /
equity ratios of Allegheny. Moreover, Monongahela Power,
Allegheny, and all the subsidiaries thereof, will not undertake to
issue any debt or engage in any transaction if such action would
result in either Monongahela Power's or Allegheny's consolidated
system debt / equity ratios falling below the Commission's debt /
equity requirement of 30% common stock equity. Additionally,
within sixty (60) days after the end of each financial quarter,
Monongahela Power and Allegheny will provide the Commission with
reports containing actual and pro forma capitalization ratio
calculations in the same format that was provided in the
confidential exhibit to this application for Allegheny on a
consolidated basis and for Monongahela Power.
<PAGE>
Item 2. FEES, COMMISSIONS AND EXPENSES
Fees and expenses in the estimated amount of $100,000 plus
ordinary expenses of approximately $500 are expected to be
incurred in connection with the preparation of this application.
None of the fees, commissions, or expenses is 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
The relevant standards for Commission review of this
application under Sections 6(a), 7, 9(a), 10, 12(b) and 13(b) of
the Public Utility Holding Company Act of 1935, as amended
("Act"), and Rules 43(a), 44, 45, 46, 54, 90 and 91 under the Act.
A. Sections 9 & 10
Section 9(a)(1) provides that unless the Commission under
Section 10 has approved the acquisition, 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." 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.
If the requirements of subsection (f) of this section are
satisfied, the Commission shall approve the acquisition unless the
Commission finds that:
(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
<PAGE>
or the interest of investors or consumers or the proper
functioning of such holding-company system.
The Transaction, for the reasons set forth below, satisfy the
standards of Section 10 of the Act.
1. The Transaction Complies With State Law
The Transaction complies with, or upon completion of the
record shall comply with, applicable state laws on the matter of
restructuring and the transfer of utility assets. Specifically,
Monongahela Power and Allegheny have structured the Transaction in
response to state laws and legislative mandates. The Transaction
puts into effect the state regulatory and legislative
determination that restructuring is in the public interest.
The Transaction is reasonably incidental, economically
necessary and appropriate to the operations of Monongahela Power
and the Allegheny system. Specifically, the Transaction will: (a)
allow Monongahela Power to continue to serve the needs of its
regulated customers while positioning the Allegheny system for
competition in the deregulated retail generation market; (b)
remove the Generating Assets from rate-regulated Monongahela
Power; (c) allow Genco to manage and operate the Generating Assets
with due regard to market considerations; and, (d) increase the
flexibility for financing activities on cost-effective terms that
reflect the costs of capital for each area of business activity.
2. The Capital Structure Is Not Unduly Complicated
The Transaction does not unduly complicate the capital
structure of the Allegheny system. The capital structure of the
Allegheny system on a consolidated basis will be essentially
unchanged. The Transaction will tend toward the proper
functioning of the Allegheny system in a partly deregulated,
partly regulated operating environment. The Transaction simplifies
the Allegheny structure and results in a more economical and
efficient system. The resulting increased efficiency of
operations significantly offsets any perceived added complexity
caused by the Transaction.<F22> For all of the foregoing reasons, the
Transaction satisfies the requirements of and is consistent with
the Act.
3. The Consideration is Fair and Reasonable
The consideration to be paid in connection with the
Transaction is fair and reasonable. Indeed, the WV PSC and PUCO
have determined that the price (i.e., net book value) to be paid
to Monongahela Power for the Generating Assets as fair and
reasonable. Moreover, in File No. 70-9483 and 70-9627, the
Commission reached a similar conclusion on the fair and
reasonableness of the consideration received in approving the
respective applications of West Penn Power Company and Potomac
Edison to transfer generating assets to Genco at net book
value.<F23>
The Commission's reasoning in those cases are equally applicable
to this Transaction.
<F22> See Wisconsin's Environmental Decade, Inc. v SEC, 882 F.2d 523,
527 (D.C. Cir. 1989); Northeast Utilities, Holding Co. Act Release
No. 25221 (Dec. 21, 1990); Entergy Corp., Holding Co. Act Release
No. 25 136 (Aug. 27, 1990).
<F23> See Allegheny Energy, Inc., Holding Co. Act Release No.35-
27101, Order Authorizing Formation of Subsidiary Company; Transfer
of Assets to Generation Company; Issuance and Acquisition of
Securities; Capital Contributions; and Service Agreements
(November 12, 1999). See also Allegheny Energy, Inc., Holding Co.
Act Release No.35-27205, Order Authorizing Formation of Subsidiary
Companies; Transfer of Assets and Liabilities to Generation
Company; Issuance of Notes; Payment of Dividends; Intrasystem
Service Agreements; Reservation of Jurisdiction (July 31, 2000).
<PAGE>
B. Section 12 & Rule 46
Section 12(c) governs the proposed dividends for which
authorization has been sought. Section 12(c) provides that:
It shall be unlawful for any registered holding
company or any subsidiary company thereof, by use
of the mails or any means or instrumentality of
interstate commerce, or otherwise, to declare or
pay any dividend on any security of such company
or to acquire, retire, or redeem any security of
such company, in contravention of such rules and
regulations or orders as the Commission deems
necessary or appropriate to protect the financial
integrity of companies in holding-company systems,
to safeguard the working capital of public-utility
companies, to prevent the payment of dividends out
of capital or unearned surplus, or to prevent the
circumvention of the provisions of this chapter or
the rules, regulations, or orders thereunder.
Allegheny expects that the distribution of the Ownership Interests
of MP Genco to Monongahela Power and, then, by Monongahela Power
to Allegheny, in each instance will be a dividend out of "capital
or unearned surplus" within the meaning of Rule 46 under the Act.
Applicants believe that, in the overall context of the
Transaction, neither shareholders, ratepayers nor the public will
be adversely affected. The distributions have been structured as
such in order to minimize the tax burden on the Applicants. The
distributions are fundamentally necessary to effect the transfer
by Monongahela Power of the Generating Assets to an affiliate in
the Allegheny system.
The distributions will be the final step in the reduction of
the capitalization of Monongahela Power and the reorganization of
the Allegheny system, in accordance with, and fulfillment of, the
regulations and legislative policies and objectives that
culminated in deregulation of and competition in electrical
generation in West Virginia and Ohio, as described herein. The
distributions are not intended to harm the interests of
Monongahela Power or, ultimately, Allegheny. The Allegheny system
will continue to own the assets transferred by such distributions.
The regulated parts of Monongahela Power's business (electricity
transmission and distribution, and natural gas supply and
distribution) not subject to deregulation and competition and will
continue to be owned directly by Monongahela Power. Monongahela
Power and the public which it serves will, to a large degree, be
protected from the uncertainties and possible losses affecting
generation in a competitive and deregulated retail environment.
For these reasons, the proposed distributions are entirely
consistent with the policies and principles behind Section 12 of
the Act.
<PAGE>
C. Section 13(b) Compliance
Section 13(b) of the Act provides that:
It shall be unlawful for any subsidiary company
of any registered holding company or for any
mutual service company, by use of the mails or any
means or instrumentality of interstate commerce,
or otherwise, to enter into or take any step in
the performance of any service, sales, or
construction contract by which such company
undertakes to perform services or construction
work for, or sell goods to, any associate company
thereof except in accordance with such terms and
conditions and subject to such limitations and
prohibitions as the Commission by rules and
regulations or order shall prescribe as necessary
or appropriate in the public interest or for the
protection of investors or consumers and to insure
that such contracts are performed economically and
efficiently for the benefit of such associate
companies at cost, fairly and equitably allocated
between such companies.
Any transaction between Genco and Monongahela Power, including the
Joint Owner Operating Agreements, and any other service agreements
related to the Generating Assets or for the operation of all other
Generating Assets, or the provision of other services, shall be in
compliance with section 13(b) of the Act and Rules 90 and 91 under
the Act.
D. Rule 54 Compliance
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 foreign
utility companies ("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. At March 31, 2000,
Allegheny's average consolidated retained earnings were
approximately $865.0 million, and Allegheny's aggregate investment
in EWGs and FUCOs was approximately $4.2 million. Accordingly,
Allegheny may invest up to approximately $432.5 million or an
additional $428.3 million (50% of Retained Earnings less existing
investment) in EWGs and FUCOs as of March 31, 2000. When the
Transaction is consummated, for purposes of compliance with Rule
54, Allegheny's aggregate investment in EWGs and FUCOs will not
exceed 50% of its consolidated retained earnings and the
provisions of Rule 53(a) will be satisfied.
Allegheny further states that for purposes of Rule 54, that
the conditions specified in Rule 53(a) are satisfied and that none
of the conditions set forth in rule 53(b) exist or will exist as a
result of the proposed Transaction. The conditions will be
unaffected by this Transaction. As a result, the Commission will
not consider the effect on Allegheny subsidiary that is an EWG or
FUCO, as each is defined in sections 32 and 33 of the Act,
respectively, in determining whether to approve the proposed
Transaction.
<PAGE>
Item 4. REGULATORY APPROVAL
To be filed by amendment
Item 5. PROCEDURE
It is requested that the Commission's order granting this
Application or Declaration be issued on or before December 31,
2000. There should be no recommended decision by a hearing
examiner or other responsible officer of the Commission and no 30-
day waiting period between the issuance of the Commission's order
and its effective date. Applicants consent to the Division of
Corporate Regulation assisting in the preparation of the
Commission's decision and order in this matter, unless the
Division opposes the Transaction covered by this Application or
Declaration.
Item 6. EXHIBITS AND FINANCIAL STATEMENTS
A. Exhibits
B-1 Fort Martin Unit No. 2 Construction and
Operating Agreement, dated December 30, 1965,
between Monongahela, Potomac Edison, and Genco
(incorporated by reference to File No. 70-9483).
B-2 Pleasants Power Station Construction and
Operating Agreement, dated as of September 15, 1977,
between Monongahela, Potomac Edison and West Penn
(incorporated by reference to File No. 70-9483 )
B-3 Hatfield's Ferry Power Station Construction and
Operating Agreement, dated April 20, 1968, between
Monongahela, Potomac Edison and West Penn
(incorporated by reference to File No. 70-9483).
B-4 Harrison Power Station Construction and
Operating Agreement, Dated as of March 31, 1971, between
Monongahela, Potomac Edison and West Penn (incorporated
by reference to File No. 70-9483)
B-5 Form of Assignment of each Joint-Owner Operating
Agreement (incorporated by reference to File No. 70-9627)
B-6 Form of Proposed Operating Agreement between
Monongahela Power and GENCO (incorporated by reference to
File No. 70-9627).
B-7 Inter-Company Power Agreement between Ohio Valley
Electric Corporation, Potomac Edison and the other
parties thereto, dated July 10, 1953, as modified
(incorporated by reference to File No. 70-9483)
B-8 Equity Agreement between Monongahela, Potomac Edison and
West Penn, dated June 17, 1981, as amended (incorporated
by reference to File No. 70-9483)
<PAGE>
B-9 APS Power Agreement between, Monongahela, Potomac
Edison, West Penn, And, AGC, dated August 24, 1981
(incorporated by reference to File No. 70-9483)
B-10 Form of Service Agreement to be entered into
between AESC and MP Transferring Agent LLC.
(incorporated by reference to File No. 70-9627)
B-11 Albright Power Station Construction and
Operating Agreement, Dated as of June 2, 1952, between
Monongahela Power and Potomac Edison (incorporated by
reference to File No. 70-9483)
B-12 Leaseback Agreement by and between Monongahela
Power and Allegheny Energy Supply Company, LLC.
(to be filed by amendment)
D-1 Application of Monongahela Power to WV PSC
(filed September 15, 2000)
D-2 Order of WV PSC
(to be filed by amendment)
D-3 Monongahela Power Stipulation filed with the PUCO
(filed September 15, 2000)
D-4 Order of the PUCO
(to be filed by amendment)
D-5 Application of Monongahela Power to FERC
(filed September 15, 2000)
D-6 Order of the FERC
(to be filed by amendment)
D-7 June 23, 2000 Order of WV PSC
(incorporated by reference to File No. 70-9627)
F Opinion of Counsel
(to be filed by amendment)
H Form of Notice (filed September 15, 2000)
Financial Statements
FS-1 Allegheny Energy, Inc. and subsidiaries consolidated
balance sheet, statement of income, and capital ratios per
books and pro forma (filed via Form SE September 15, 2000)
<PAGE>
FS-2 Allegheny Energy Supply Company consolidated balance
sheet, statement of income, and capital ratios per books
and pro forma (filed via Form SE September 15, 2000)
FS-3 Monongahela Power consolidated balance sheet, statement
of income, and capital ratios per books and pro forma
(filed via Form SE September 15, 2000)
Item 7. INFORMATION AS TO ENVIRONMENTAL EFFECTS
A. The authorizations applied for herein do not require
major federal action significantly affecting the quality of the
human environment for purposes of Section 102(2)(C) of the
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
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
MONONGAHELA POWER COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
ALLEGHENY ENERGY SUPPLY
COMPANY, LLC
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
ALLEGHENY ENERGY SERVICE COMPANY
/s/ THOMAS K. HENDERSON
Thomas K. Henderson
Dated: September 15, 2000
