FORM U-1
APPLICATION/DECLARATION
UNDER
THE PUBLIC UTILITY HOLDING COMPANY ACT OF 1935
_________________________________
Allegheny Energy, Inc.
10435 Downsville Pike
Hagerstown, Maryland 21740
Monongahela Power Company
(d/b/a Allegheny Power)
1310 Fairmont Avenue
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
Robert R. Winter, Esq.
Deputy General Counsel
Allegheny Power Company
1310 Fairmont Avenue
Fairmont, West Virginia 26554
Anthony Wilson, Esq.
Senior Attorney
Allegheny Energy Service Company
10435 Downsville Pike
Hagerstown, MD 21740
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TABLE OF CONTENTS
Page
Item 1. Description of the Proposed Transaction . . 3
A. Introduction .. . . . . . . . . . . . . . 3
1. Authorization Requested . . . . . . . . 3
2. Overview of the Transaction . . . . . . 3
B. Description of the Parties to the
Transaction . . . . . . . . . . . . . . . 3
1. Mountaineer Gas . . . . . . . . . . . . 3
2. Monongahela Power . . . . . . . . . . 4
C. Post Transaction Management and
Operation . . . . . . . . . . . . . . . . 4
D. Financing . . . . . . . . . . . . . . . . 5
Item 2. Fees, Commissions and Expenses . . . . . . 5
Item 3. Applicable Statutory Provisions . . . . . 6
A. Section 10 . . . . . . . . . . . . . . . 6
B. Section 11(b) . . . . . . . . . . . . . . 6
1. Integrated Public Utility System
Requirement . . . . . . . . . . . . . 6
2. The Transaction Satisfies the Commission's
Requirements . . . . . . . . . . . . . 10
C. Section 13(b) . . . . . . . . . . . . . 13
D. Rule 54 Compliance . . . . . . . . . . . 13
Item 4. Regulatory Approvals . . . . . . . . . . .13
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 .15
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Item No. 1. Description of the Proposed Transaction
A. Introduction
1. Authorization Requested
Monongahela Power Company ("Monongahela Power"), a wholly
owned combination gas and electric utility subsidiary <F1> of
Allegheny Energy, Inc. ("Allegheny"), a registered holding company
under the Public Utility Holding Company Act of 1935, as amended
("Act"), seeks authorization to acquire 100% of the outstanding
securities of Mountaineer Gas Company ("Mountaineer Gas")
headquartered in Charleston, West Virginia ("Transaction").
2. Overview of the Transaction
Mountaineer Gas is owned by Eastern Systems Corporation
("ESC"), a West Virginia corporation that is owned by Energy
Corporation of America ("ECA"). Allegheny, ESC and
ECA have entered into a Stock Purchase Agreement under which
Monongahela Power, as Allegheny's assignee, proposes to acquire
100% of the outstanding securities of Mountaineer Gas for
approximately $223 million in cash and the assumption of $100
million in long term debt. The purchase price is subject to
adjustment after closing based upon the closing date balance
sheet. Closing on the Transaction is planned for July 2000,
assuming all necessary regulatory approvals have been obtained.
B. Description of the Parties
1. Mountaineer Gas
Mountaineer Gas provides utility service to approximately
200,000 customers throughout West Virginia, including the cities
of Wheeling, Martinsburg, Beckley, Huntington and Charleston.
Mountaineer Gas' service territories are shown on the map attached
hereto as Exhibit E. Mountaineer Gas' principal place of business
is located in Charleston, West Virginia. Mountaineer Gas owns
Mountaineer Gas Services, a unregulated gas production company,
which owns an internest in approximately 375 wells and has gas
storage facilities under contract. For the twelve months ended
December 31, 1999, Mountaineer Gas had revenues of approximately
$174 million. Mountaineer Gas' regulated activities contributed
$162 million, or 94% of those revenues.
<F1> In Holding Company Act Release ("HCAR") No. 27121, the
Commission approved Monongahela Power's purchase of the electric
assets and retention of gas assets of West Virginia Power. See
Allegheny Energy, Inc., HCAR No.35-27121, Order Authorizing
Retention of Assets (December 23, 1999).
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2. Monongahela Power
Monongahela Power is a member of the regulated public
utilities family of companies d/b/a Allegheny Power. Allegheny
Power includes the West Penn Power Company and The Potomac Edison
Company ("Potomac Edison"). Allegheny Power, operating as an
integrated system, delivers electric and gas to 1.4 million
customers in parts of Maryland, Ohio, Pennsylvania, Virginia and
West Virginia. Allegheny has several non-utility subsidiaries.<F2>
Monongahela Power provides electric service to approximately
351,000 West Virginia customers.<F3> Additionally, through its
West Virginia Power division gas operations, Monongahela Power
provides natural gas service to approximately 24,000 customers in
West Virginia. 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.
C. Post Transaction Management and Operations
Mountaineer Gas will become a wholly owned subsidiary of
Monongahela Power. Consistent with the treatment afforded the
unregulated assets of West Penn Power in HCAR No.35-27121 and the
ongoing restructuring of Allegheny's generation, supply and
unregulated activities, Monongahela Power may transfer Mountaineer
Gas' unregulated production company, Mountaineer Gas Services, to
Allegheny Supply.
Monongahela Power will operate the gas and electric utilities
using shared resources, such as computer systems, billing systems,
buildings, trucks, equipment, labor, accounting and other central
services, to the greatest extent practicable. It is anticipated
that Allegheny Energy Service Corporation ("AESC"), Allegheny's
service company, will continue to operate Mountaineer Gas with
Mountaineer Gas employees. Employees will be given credit
for all service with Mountaineer Gas under all employee
benefit plans and arrangements maintained by AESC, or,
for union employees, to the extent permissible under the
existing Collective Bargaining Agreement and applicable law.
It is anticipated that gas will be supplied from the existing
gas supply agreements or as acquired under new contracts.
Allegheny has entered
<F2> Allegheny, through its wholly owned non-utility subsidiary
Allegheny Energy Supply Company LLC. ("Allegheny Supply"), is a
producer and marketer of electricity and other energy products.
Allegheny Supply operates and markets competitive retail and
wholesale electric generation and operates regulated electric
generation for the portions of Allegheny Power not yet
deregulated. Allegheny Supply operates over 4,100 MW of capacity
from 19 units in 11 generating plants, located in southwestern
Pennsylvania and West Virginia. Monongahela Power, Potomac Edison
and Allegheny Supply jointly own Allegheny Generating Company
("AGC"), which owns a 40% undivided interest in a pumped-storage
hydroelectric generating facility and related transmission
facilities located in Bath County, Virginia ("Bath Project"). AYP
Ventures, Inc. actively invests in and develops energy related and
telecommunications projects.
<F3> Monongahela Power's sister operating company, Potomac Edison,
provides electric service to approximately 100,000 West Virginia
customers.
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into a Gas Sales and Purchase Agreement with ECA ("Gas
Agreement"). The Gas Agreement provides for a contract
volume of up to 3.99 million Dth at indexed prices. Under the Gas
Agreement, which will be assigned to Allegheny Supply, Allegheny
may take gas for generation, to supply Mountaineer Gas and West
Virginia Power gas customers or for resale.
The acquisition of Mountaineer Gas strategically fits
Allegheny and Monongahela Power as: i) the acquisition is
accretive to earnings in year one (excluding transition expenses);
ii) it provides Allegheny with 200,000 additional gas customers
and the opportunity to cross sell electricity (when permitted by
West Virginia) to 160,000 of those customers; iii) return exceeds
Allegheny's cost of capital; iv) it is located in the state of
West Virginia where Allegheny is familiar with both the territory
and the regulatory environment; v) significantly expands
Allegheny's gas distribution business from 24,000 customers to
approximately 224,000 customers; and, vi) provides Allegheny with
11.7 bcf of contracted gas storage. Upon completion of the
Transaction, the gas utility operations of Monongahela Power will
consist of approximately 224,000 customers throughout West
Virginia, 11.7 billion cubic feet of contracted gas storage,
3,926 miles of gas pipelines, 375 wells in the Appalachian area,
790 square miles of service territory,<F4> with service centers
in Beckley, Charleston, Elkins, Huntington, Oak Hill, Palestine,
Hugheston, Hinton, and Wheeling.
For the period ended December 31, 1999, Mountaineer Gas had
annual revenues of $174 million. Gas net utility plant will
represent 16% of the total net utility plant of Monongahela Power
and 3% of Allegheny Power's combined net utility plant, whereas
electric net utility plant will represent 84% of the net utility
plant of Monongahela Power and 97% of Allegheny Power's net
utility plant. Operating revenues for the gas operations will
make up approximately 22.5% of Monongahela Power's operating
revenues and 7% of Allegheny Power's operating revenues. Electric
operations will contribute 77.5% of Monongahela Power's operating
revenues and, when combined with other companies in the Allegheny
Power family, will contribute 93% of Allegheny Power's operating
revenues. Gas customers will constitute 38% of Monongahela
Power's customers and 13% of Allegheny Power's total customers.
Electric customers will represent 62% of Monongahela Power's
customers and 87% of all Allegheny Power customers.
D. Financing
To complete the Transaction, Allegheny seeks authorization to
contribute to Monongahela Power up to an aggregate of $300
million, through December 31, 2005, through a combination of cash,
guarantees, medium term notes or loans. Monongahela seeks
authorization to issue debt or securities in an amount not to
exceed $200 million. Monongahela has filed a concurrent financing
request with the Ohio Public Utility Commission. Allegheny
proposes to use the proceeds as follows: $161 million for new
debt, $100 million for the assumption or guarantee of existing
debt and $39 million for working capital for operational
requirements.
<F4> The total area of counties within which service is provided
totals 19,500 square miles.
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The terms and conditions of the Guarantees will be
established through arm's-length negotiations based upon current
market conditions. Any Guarantee issued will be without recourse
to any of the Allegheny system operating companies to the extent
not authorized under Rule 52 under the Act.
Item No. 2. Fees, Commissions and Expenses
The fees, commissions and expenses to be paid or incurred,
directly or indirectly, in connection with this Transaction are
______________ (to be filed by amendment).
Item No. 3. Applicable Statutory Provisions
The relevant standards for Commission review of this
application are Sections 9(b), 10, 11(b), and 13(b) of the Act
and Rules 54, 90 and 91 under the Act. To the extent that other
sections of the Act or the Commission's rules thereunder are
deemed applicable to the Transaction, such sections and rules
should be considered to be set forth herein.
For the reasons set forth below, the requirements of Section
10(f) have been satisfied. Accordingly, the acquisition of
Mountaineer Gas satisfies the integration standards and there is
no basis for the Commission to make any of the negative findings
enumerated in Section 10(b).
A. Sections 9 & 10
Under Section 10 the relevant provisions are set forth in
subsections (b), (c) and (f). Section 10(b) provides that, if the
requirements of Section 10(f) are satisfied, the Commission shall
approve an acquisition under Section 9(a) unless 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 or the
interest of investors or consumers or the proper
functioning of such holding company system.
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Section 10(f) provides that the Commission "... shall not
approve any acquisition ... 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.
Finally, Section 10(c) of the Act provides that, notwithstanding
the provisions of Section 10(b), the Commission shall not approve:
an acquisition of securities or utility assets, or of any other
interest, which is unlawful under the provisions of Section 8 or
is detrimental to the carrying out of the provisions of Section
11;<F5> or the acquisition of securities or utility assets of a
public-utility or holding company unless the Commission finds that
such acquisition will serve the public interest by tending towards
the economical and the efficient development of an integrated
public-utility system.
B. Section 11(b)
1. Integrated Public Utility System Requirement
The Act generally confines the utility properties of a
registered holding company to a "single integrated public-utility
system," either gas or electric.<F6> Section (2)(29)(A) defines
an integrated public-utility system, as applied to electric
utility properties, to mean:
a system consisting of one or more units of generating plants
and/or transmission lines or distributing facilities, whose
utility assets, whether owned by one or more electric utility
companies, are physically interconnected or capable of physical
interconnection and which under normal conditions may be
economically operated as a single interconnected and coordinated
system confined in its operations to a single area or region, in
one or more States, not so large as to impair . . . the
advantages of localized management, efficient operations, and the
effectiveness of regulation.
<F5> No Section 8 issues are raised by this application
<F6> The limitation is intended to eliminate evils that Congress
found to exist "when the growth and extension of holding companies
bears no relation to . . . the integration and coordination of
related operating properties." Section 1(b)(4). Congress believed
that, "in the absence of clearly overriding considerations a
utility system should have a management single-mindedly devoted to
advancing the interests of its investors and consumers and not
engaged, through the means of the holding company device, in
operating other utility or non-utility businesses." See SEC v. New
England Electric System, 41 S.E.C. 888 (1964), rev'd, SEC v. New
England Electric System, 346 F.2d 399 (1st Cir. 1966), rev'd and
remanded, 384 U.S. 176 (1965), on remand, 376 F.2d 107 (1st Cir.
1967), rev'd, 390 U.S. 207 (1968). The "other business" clauses
of section 11(b)(1) further limit the nonutility businesses of a
registered holding company to those that are "reasonably
incidental, or economically necessary or appropriate to the
operations of such integrated public-utility system," on a finding
by the Commission that the interests are "necessary or appropriate
in the public interest or for the protection of investors or
consumers and not detrimental to the proper functioning" of the
integrated system.
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Section 2(29)(B) defines an integrated public-utility system, as
applied to gas utility properties, to mean:
a system consisting of one or more gas utility companies which are
so located and related that substantial economies may be
effectuated by being operated as a single coordinated system
confined in its operations to a single area or region, in one or
more States, not so large as to impair ... the advantages of
localized management, efficient operations, and the effectiveness
of regulation: Provided, that gas utility companies deriving
natural gas from a common source of supply may be deemed to be
included in a single area or region.
In view of the separate definitions and their differing criteria,
the Commission has traditionally held that gas and electric
properties do not together constitute an integrated system.<F7>
An exception to this requirement is provided in Section 11(b)(1),
collectively the "A,B,C Clauses." The Commission has stated that
the Act does not prohibit ownership of combination gas and
electric systems, but rather specifies the showings that must be
made by an applicant to justify ownership of such properties.<F8>
Section 11(b)(1) of the Act allows a registered holding
company to retain "one or more" additional integrated systems if
the Commission finds that:
(A) Each of such additional systems cannot be operated as an
independent system without the loss of substantial
economies, which can be secured by the retention of control
by such holding company of such system;
(B) All of such additional systems are located in one State,
adjoining States, or a contiguous foreign country; and
(C) The combination of systems under the control of a single
holding company is not so large (considering the state of
the art and the area or region affected) as to impair the
advantages of localized management, efficient operation, or
the effectiveness of regulation.
In its 1995 Report, the Division recommended that the
Commission "liberalize its interpretation of the 'A-B-C'
clauses."<F9> In recent years the Commission has been presented
with several opportunities to implement the Division's
recommendations as to the appropriateness of combination electric
and gas companies under the Act. Following the Division's
recommendation to liberalize interpretation of Section 11,
<F7> SEC v. New England System, 384 U.S. at 178, n. 7.
<F8> Id.
<F9> The Regulation of Public-Utility Holding Companies, Division
of Investment Management, Securities and Exchange Commission
(June 1995) ("1995 Report") at 74.
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the Commission has approved a number of convergence mergers,
clarifying that the Act "does not prohibit ownership of
combination gas and electric systems."<F10>
In approving the formation and acquisition of New Century
Energies, Inc., as a combination gas and electric registered
holding company, the Commission stated:
The Commission has previously taken notice of developments that
have occurred in the gas and electric industries in recent years,
and has interpreted the Act and has analyzed proposed transactions
in light of these changed circumstances. . . . The gas and
electric industries are converging, and, in these circumstances,
separation of gas and electric businesses may cause the separated
entities to be weaker competitors than they would be together.
This factor adds to the quantifiable loss of economies caused by
increased costs.<F11>
Most importantly, the Commission distanced itself from earlier,
more restrictive precedent stating:
In the 1960s, when the [New England Electric System ("NEES")] . .
. case was decided, utilities were primarily franchised monopolies
with captive ratepayers, and competition between suppliers of gas
and electricity, however limited, was virtually the only source of
customer choice and was thus deemed beneficial to energy
consumers. The fact that other gas utilities of comparable size
could operate successfully on an independent basis was evidence
that a gas system could also operate on its own, a desirable
result, without a substantial loss of economies. The empirical
basis for these assumptions, however, is rapidly eroding. Although
franchised monopolies are still the rule, competition is
increasing. Increased expenses of separate operation may no longer
be offset, as they were in New England Electric System, by a gain
of qualitative competitive benefits, but rather may be compounded
by a loss of such benefits . . . .<F12>
In WPL Holdings, the Commission applied the formula it had used to
calculate lost economies in New Century Energies. In addition to
examining the increased costs of the gas operations as calculated
in the applicants' study, the Commission recognized that "other
factors operate to compound the loss of economies represented by
increased costs." In particular, the Commission referred to the
retention of gas assets as offering applicants the ability to
compete more effectively in the
<F10> See New Century Energies, Inc., HCAR No. 26748, File No. 70-
8787 (Aug. 1, 1997). See, e.g., WPL Holdings, Inc., HCAR No.
26856 (Apr. 14, 1998), aff'd sub nom., Madison Gas and Electric
Company v. SEC, 168 F.3d 1337 (D.C. Cir. 1999); CINergy Corp.,
HCAR No. 26934, File No. 70-8427 (Nov. 2, 1998); Conectiv Inc.,
HCAR No. 26832, File No. 70-9069 (Feb. 25, 1998).
<F11> See New Century Energies, Inc., HCAR No. 26748, File No. 70-
8787, text & nn. 59-60 (Aug. 1, 1997). See also CINergy Corp.,
HCAR No. 26934, File No. 70-8427 (Nov. 2, 1998); WPL Holdings,
Inc., HCAR No. 26856 (Apr. 14, 1998).
<F12> See New Century Energies, Inc., HCAR No. 26748, File No. 70-
8787 (Aug. 1, 1997).
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emerging energy services market. The United States Court of
Appeals for the District of Columbia has upheld the Commission's
re-interpretation of the A-B-C clauses and Section 11.<F13>
In a series of orders related to applications filed by Sempra
Energy ("Sempra"), a San Diego, California based public-utility
holding company, exempt from registration under section 3(a)(1) of
the Act, to acquire either a direct or indirect interest in
several gas utilities, the Commission, after finding in each
application that the A, B, C clauses had been satisfied with
respect to the same state, region, source of supply, localized
management and effective regulation, approved Sempra's acquisition
of gas utilities in North Carolina, where Sempra was allowed to
acquire up to 90.1% of the outstanding shares of Frontier Energy,
LLC (a North Carolina partnership that was to construct, own and
operate a gas utility distribution system in North Carolina)<F14>
and in Maine where Sempra was authorized to acquire, through
Bangor Pacific, a Maine corporation, a 50% membership interest in
Bangor Gas Company, LLC, a Maine limited liability company formed
in 1997 to construct and operate a gas distribution system in the
greater Bangor, Maine area.<F15>
Allegheny and Monongahela Power support the Commission's
recent interpretations of Section 11, particularly the Sempra
decisions. From a policy perspective, the Commission's historic
concern underpinning its decision in NEES and other earlier
decisions where the retainability of gas properties by registered
electric systems was at issue - namely, of fostering competition
between electric and gas - is simply no longer valid given the
current "state of the art" in the electric and gas utility
industries. Since the Commission decided the NEES case, profound
economic and regulatory factors have caused fundamental changes in
the gas supply and electric generation industry. Specifically,
Pennsylvania has opened its electric markets to competition,
Maryland is scheduled to open its markets July 1, 2000 and the
West Virginia PSC is proposing to open its markets. These changes
have made the Commission's earlier positions regarding combination
utilities obsolete. Since combination ownership creates
efficiencies and no longer has the effect of eliminating
competition, there is no reason for the Commission to prohibit
combination ownership under the circumstances presented.
In HCAR No.35-27121, the Commission held that Monongahela
Power satisfied the Commission's integration requirements.<F16>
That finding is equally applicable here. In this application, a
determination is necessary that Allegheny's acquisition of
Mountaineer Gas satisfies the Commission's integration
requirements for a gas utility and the A-B-C Clauses. As set
forth in the following discussion, the acquisition of Mountaineer
Gas satisfies the integration standards for the following
reasons:
<F13> See Madison Gas and Electric Company v. SEC, 168 F.3d 1337
(D.C. Cir. 1999) (affirming WPL Holdings, Inc. and the
Commission's expansive interpretation of Section 11).
<F14> See Sempra Energy, Inc., HCAR No. 26976 (Feb. 1, 1999).
<F15> See Sempra Energy, Inc., HCAR No. 27095 (Oct. 25, 1999).
<F16> HCAR No. 35-27121 (December 23, 1999).
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(1) Mountaineer Gas and Monongahela Power operate in a
"single area or region" as both are located in West Virginia
and are within the five state region in which Allegheny Power
operations;
(2) substantial economies achievable through combining
functions in such areas as management, procurement, materials
management; customer service, finance, accounting, legal,
engineering, and construction would be lost if Mountaineer Gas
were operated in a stand alone capacity; and
(3) the area or region is not "so large as to impair . . .
the advantages of localized management, efficient operation,
and the effectiveness of regulation." To the contrary, the day-
to-day operations of Mountaineer Gas will be under the
direction of an on-site management team acting in coordination
with Allegheny Power 's utility operations in order to promote
efficiency.
Mountaineer Gas will continue to be subject to effective local
regulation by the West Virginia Public Service Commission.
2. The Transaction Satisfies the Commission's Requirements
(a) Potential Loss of Substantial Economies
As in New Century Energies and WPL Holdings, there are
significant economies and competitive advantages inherent in a
combined gas and electric utility as contrasted to a utility
offering only electric or gas. Monongahela Power presently serves
24,000 gas and 351,000 electric customers in West Virginia.
Mountaineer Gas serves approximately 200,000 customers. The
integration of operations and services provided to these customers
will result in substantial cost savings. Operation of Mountaineer
Gas on a stand-alone basis would result in the loss of these
economies and the resulting savings and other benefits. Lost
economies would arise from the need to replicate services such as
management, procurement, materials management, finance,
accounting, legal, customer service, engineering, and
construction. Additionally, there would be losses related to
economies of scale, the costs of reorganization, and other factors
- - all of which would be immediate and substantial.
Applicants estimate that the Transaction will result in
annual direct and indirect savings of approximately $10 million
per year. Specifically, annual direct savings will result from
savings in: General Operations - $1.5 million; Call Center
Operations - $1.2 million; Accounting and Finance - $1.2 million;
Executive Compensation - $1 million; Marketing - $750,000;
Information Systems - $600,000; and, Human Resources - $400,000.
Annual indirect savings will result from savings in: the Online
Service System - $1.5 million; Management Fees - $720,000; TCO
refund - $500,000; Materials and Supplies - $300,000; and,
Property Taxes - $100,000. Additionally, indirect savings
potentially can be derived from reconfiguration of call centers.
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Both electric and gas customers will benefit from real
savings expected to be achieved by consolidated Meter Readings,
Treasury, Legal and Auditing functions, Disaster Recovery (i.e.,
services to ensure that the system would be able to continue to
operate in the event of a disaster); Automated Mapping/Facilities
Management System ("AM/FM System"); Office Supply Purchases (i.e.,
as a stand-alone company, the gas system would also experience a
loss in advantage when bargaining for supplies, which would result
in increased costs); and Audit Fees. Substantial benefits are
expected to result from reduced costs associated with financing
day to day operations. Mountaineer Gas currently has a high cost
of debt. Allegheny and Monongahela Power have a lower cost of
debt. A refinancing of Mountaineer Gas' debt would result in
additional annual savings.
The Applicant's acquisition of Mountaineer Gas is part of a
trend by energy holding companies to organize themselves as energy
service providers, that is, providers of a total package of energy
services rather than just merely suppliers of gas or electricity.
The goal of an energy service provider is to retain its current
customers and obtain new customers in an increasingly competitive
environment by meeting customers' needs better than the
competition. An energy service company can provide the customer
with a low cost energy (i.e., gas, electricity, or conservation)
option.
This trend towards, and the need for, convergence of the
former separate electric utility function and gas utility function
into one energy service company was recently recognized by the
Commission in the Consolidated Natural Gas Company order. In that
order the Commission held that: "[i]t appears that the
restructuring of the electric industry now underway will
dramatically affect all United States energy markets as a result
of the growing interdependence of natural gas transmission and
electric generation, and the interchangeability of different forms
of energy, particularly gas and electricity."<F17> As with
Sempra, New Century Energies and WPL Holdings, the Transaction
gives Monongahela Power and Allegheny a way to compete more
effectively in the emerging energy services markets.
For the foregoing reasons, the Commission should find that
the standards of Clause A are satisfied.
(b) Same State or Adjoining States
Mountaineer Gas operates in West Virginia's southern,
northern and eastern counties. Monongahela Power operates
substantially in the eastern and northern counties of West
Virginia. As both utilities operate within the same state, West
Virginia, Clause B is satisfied.
(c) Size, Management and Regulation
Finally, acquisition of Mountaineer Gas satisfies the
remaining clause of Section 11(b)(1). Under Clause C, the
combination of systems under the single control of the Applicant,
including Mountaineer Gas' gas utility system, will not be so
large (given the state of the art and
<F17> See Consolidated Natural Gas Co., HCAR No. 26512 (Apr. 30,
1996).
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the region or area affected) as to impair the advantages of
localized management, efficient operation, or the effectiveness of
regulation. The Commission has determined previously that the
relevant consideration is not size alone, or size in any absolute
sense, either big or small, but size in relation to its effect, if
any, on localized management, efficient operation, and effective
regulation. The operation of the gas system of Mountaineer Gas as
a subsidiary of Monongahela Power would not adversely impact its
operations.
After the Transaction is completed, Mountaineer Gas will be
managed out of Charleston, West Virginia. Management will
remain geographically close to the service area as Mountaineer Gas
provides service virtually across the state. The resources of
Allegheny will be used to supplement and aid service efforts;
the gas system is expected to be operated by the employees who
currently perform those services. It is contemplated that in
the future all customers will have access to the Allegheny's
24-hour customer service center located in West Virginia,
providing customers with a single point of contact for all of
their energy needs. Additionally, the management of
Mountaineer Gas could be aligned and coordinated with
that of the existing West Virginia Power gas division.
Thus,the advantages of local management will not only be
preserved but will be enhanced by this Transaction.
With respect to regulatory effectiveness, the West Virginia
PSC has been, and will continue to, regulate Mountaineer Gas and
Mongongahela Power. Thus, the Transaction will not alter the West
Virginia PSC's regulatory effectiveness. The Transaction has not
raised undue regulatory concerns in West Virginia where
Monongahela Power and Mountaineer Gas have filed a joint request
for approval with the West Virginia PSC.
In summary, the Transaction does not give rise to any of the
abuses, ownership of scattered utility properties, inefficient
operations, lack of local management or evasion of state
regulation that Section 11(b)(1) of the Act prohibits.
Accordingly, the Commission should approve the Transaction.
4. 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
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for the benefit of such associate companies at cost, fairly
and equitably allocated among such companies.
Any transactions between Allegheny Energy Supply Company, LLC. and
Mountaineer Gas related to gas acquired by one or the other under
the Gas Agreement, 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.
5. Rule 54 Compliance
Rule 54 provides that the Commission, in determining whether
to approve certain
transactions by such registered holding company or its subsidiary
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. 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 none of the conditions set forth in rule 53(b) exist
or will exist as a result of the proposed Transaction. Therefore,
rule 53(c) is inapplicable.
Item No. 4. Regulatory Approvals
Allegheny's acquisition of the securities of Mountaineer Gas
is subject to approval by the West Virginia PSC. A petition for
approval of the proposed acquisition of utility assets has been
filed with the West Virginia PSC, and filings will be made with
the Department of Justice under Hart-Scott-Rodino. A filing will
be made with the Federal Communications Commission for transfer
of communication licenses incidental to operation of the utility
assets being acquired.
No regulatory agency, other than this Commission and those
mentioned above, has jurisdiction over the Transaction.
Item No. 5. Procedure
It is requested that the Commission's order granting this
Application / Declaration be issued as soon as practicable but not
later July 1, 2000, inasmuch as closing is anticipated for July
2000. There should be no recommended decision by a hearing 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. Applicant consents to the Division of Corporate
Regulation's assisting in the preparation of the Commission's
decision and order in this matter, unless the Division opposes
the Transaction covered by this application-declaration.
Item No. 6. Exhibits and Financial Statements
(a) Exhibits
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B-1 Stock Purchase Agreement (to be filed by amendment)
B-2 Affidavit of Peter J. Dailey (to be filed by
amendment)
D-1 Application to the West Virginia Public Service
Commission(to be filed by amendment)
D-2 Order of the West Virginia Public Service
Commission
(to be filed by amendment)
D-3 Hart-Scott Rodino Notification Filing
(to be filed by amendment)
D-4 Application to the Federal Communications
Commission (to be filed by amendment)
D-5 Order of the Federal Communications Commission
(to be filed by amendment)
E Map showing combined service territory of
Monongahela Power and Mountaineer Gas (gas and
electric)
(to be filed by paper on Form SE)
F Opinion of Counsel (to be filed by amendment)
G Financial Data Schedules (to be filed by amendment)
H Form of Notice - Filed Feb. 4, 2000
(b) Financial Statements as of December 31, 1999
FS-1 Monongahela Power balance sheet, per books and pro
forma (to be filed by amendment).
FS-2 Monongahela Power 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.
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SIGNATURE
Pursuant to the requirements of the Public Utility Holding
Company Act of 1935, the undersigned company has duly caused this
statement to be signed on its behalf by the undersigned thereunto
duly authorized.
ALLEGHENY ENERGY, INC
By /s/ THOMAS K. HENDERSON
Thomas K. Henderson
Vice President and General Counsel
Allegheny Energy, Inc.
Dated: February 4, 2000
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H Form of Notice
1. News Digest
ALLEGHENY ENERGY, INC.
A notice has been issued giving interested persons until
February__, 2000, to request a hearing on a proposal by Allegheny
Energy, Inc., a registered public utility holding company, to
acquire100% of the outstanding securities of Mountaineer Gas
Company ("Mountaineer Gas"), a West Virginia based gas utility
owned by Energy Corporation of America (Rel. 35-27***)
2. Notice
Allegheny Energy, Inc. (70-9***)
Allegheny Energy, Inc., ("Allegheny"), a registered holding
company, 10435 Downsville Pike, Hagerstown, MD 21740-1766, and its
wholly owned utility subsidiary Monongahela Power Company
("Monongahela Power"), 1310 Fairmont Avenue, Fairmont, West
Virginia 26554, have filed an application-declaration with this
Commission under sections 8, 9(a), 10, 11, and 13(b) of the Act
and rules 54, 90 and 91 under the Act. Allegheny proposes, and
seeks authorization, to acquire 100% of the outstanding securities
of Mountaineer Gas Company ("Mountaineer Gas"), a West Virginia
based gas utility owned by Energy Corporation of America ("ECA"),
a West Virginia corporation. ("the Transaction").
Allegheny and ECA have entered into a Stock Purchase
Agreement under which Monongahela Power, as Allegheny's assignee,
proposes to acquire 100% of the outstanding securities of
Mountaineer Gas for approximately $223 million in cash and the
assumption of $100 million in long term debt. The purchase price
is subject to adjustment after closing based upon the closing date
balance sheet. Closing on the Transaction is planned for July
2000, assuming all necessary regulatory approvals have been
obtained.
Mountaineer Gas provides utility service to approximately
200,000 customers throughout West Virginia, including the cities
of Wheeling, Martinsburg, Beckley, Huntington and Charleston.
Mountaineer Gas' service territories are shown on the map attached
hereto as Exhibit E. Mountaineer Gas' principal place of business
is located in Charleston, West Virginia. Mountaineer Gas owns
Mountaineer Gas Services, an unregulated gas production company,
which owns an interest in approximately 375 wells and has gas
storage facilities under contract. For the twelve months ended
December 31, 1999, Mountaineer Gas had revenues of approximately
$174 million. Mountaineer Gas' regulated activities contributed
$162 million, or 94% of those revenues.
Monongahela Power is a member of the regulated public
utilities family of companies d/b/a Allegheny Power. Allegheny
Power includes the West Penn Power Company and The Potomac Edison
Company ("Potomac Edison"). Allegheny Power, operating as an
integrated system, delivers electric and gas to 1.4 million
customers in parts of Maryland, Ohio, Pennsylvania, Virginia and
West Virginia. Allegheny has several non-utility
subsidiaries.<F18> Monongahela
<F18> Allegheny, through its wholly owned non-utility subsidiary
Allegheny Energy Supply Company LLC ("Allegheny Supply"), is a
producer and marketer of electricity and other energy products.
Allegheny Supply operates and markets competitive retail and
wholesale electric generation and operates regulated electric
generation for the portions of Allegheny Power not yet
deregulated. Allegheny Supply operates over 4,100 MW of capacity
from 19 units in 11 generating plants, located in southwestern
Pennsylvania and West Virginia. Monongahela Power, Potomac Edison
and Allegheny Supply jointly own Allegheny Generating Company
("AGC"), which owns a 40% undivided interest in a pumped-storage
hydroelectric generating facility and related transmission
facilities located in Bath County, Virginia ("Bath Project"). AYP
Ventures, Inc. actively invests in and develops energy related and
telecommunications projects.
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Power provides electric service to approximately 351,000 West
Virginia customers.<F19> Additionally, through its West Virginia
Power division gas operations, Monongahela Power provides natural
gas service to approximately 24,000 customers in West Virginia.
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.
Mountaineer Gas will become a wholly owned subsidiary of
Monongahela Power. Consistent with the treatment afforded the
unregulated assets of West Penn Power in HCAR No.35-27121 and the
ongoing restructuring of Allegheny's generation, supply and
unregulated activities, Monongahela Power may transfer Mountaineer
Gas' unregulated production company, Mountaineer Gas Services, to
Allegheny Supply.
Monongahela Power will operate the gas and electric utilities
using shared resources, such as computer systems, billing systems,
buildings, trucks, equipment, labor, accounting and other central
services, to the greatest extent practicable. It is anticipated
that Allegheny Energy Service Corporation ("AESC"), Allegheny's
service company, will continue to operate Mountaineer Gas with
Mountaineer Gas employees and offer employment to all employees of
Mountaineer Gas at closing - except for the executives who shall
become employees of ECA. Employees will be given credit for all
service with Mountaineer under all employee benefit plans and
arrangements maintained by AESC, or, for union employees, to the
extent permissible under the existing Collective Bargaining
Agreement and applicable law. It is anticipated that gas will be
supplied from the existing gas supply agreements or as acquired
under new contracts. Allegheny has entered into a renewable Gas
Sales and Purchase Agreement ("Gas Agreement") with ECA. Under
the Gas Agreement, which will be assigned to Allegheny Supply,
Allegheny may take gas for generation, to supply Mountaineer Gas
and West Virginia Power gas customers or for resale.
The acquisition of Mountaineer Gas strategically fits
Allegheny and Monongahela Power as: i) the acquisition is
accretive to earnings in year one (excluding transition expenses);
ii) it provides Allegheny with 200,000 additional gas customers
and the opportunity to cross sell electricity (when permitted by
West Virginia) to 160,000 of those customers; iii) return exceeds
Allegheny's cost of capital; iv) it is located in the state of
West Virginia where Allegheny is familiar with both the territory
and the regulatory environment; v) significantly expands
Allegheny's gas distribution business from 24,000 customers to
approximately 224,000 customers; and, vi) provides Allegheny with
11.7 bcf of contracted gas storage. Upon completion of the
Transaction, the gas utility operations of Monongahela Power will
consist of approximately 224,000 customers throughout West
Virginia, 11.7 billion cubic feet of contracted gas storage, 3,926
miles of gas pipelines, 375 wells in the Appalachian area, 790
square miles of service territory,<F20> with service centers in
Beckley, Charleston, Elkins, Huntington, Oak Hill, Palestine,
Hugheston, Hinton, and Wheeling.
For the period ended December 31, 1999, Mountaineer Gas had
annual revenues of $174 million. Gas net utility plant will
represent 16% of the total net utility plant of Monongahela Power
and 3% of Allegheny Power's combined net utility plant, whereas
electric net utility plant will represent 84% of the net utility
plant of Monongahela Power and 97% of Allegheny Power's net
utility plant. Operating revenues for the gas operations will
make up approximately 22.5% of Monongahela Power's operating
revenues and 7% of Allegheny Power's operating revenues. Electric
operations will contribute 77.5% of Monongahela Power's operating
revenues and, when combined with other companies in the Allegheny
Power family, will contribute 93% of Allegheny Power's operating
revenues. Gas customers will constitute 38% of Monongahela
Power's customers and 13% of Allegheny Power's total customers.
Electric customers will represent 62% of Monongahela Power's
customers and 87% of all Allegheny Power customers.
<F19> Monongahela Power's sister operating company, Potomac
Edison, provides electric service to approximately 100,000 West
Virginia customers.
<F20> The total area of counties within which service is provided
totals 19,500 square miles.
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